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 Thursday, January 7, 1999 commencing at 9:18 a.m. --------------------- TECHNICAL CONFERENCE VOLUME 1 --------------------- F A C I L I T A T O R : DAVID HARDY Board Technical Staff 2 A P P E A R A N C E S DAVID HARDY ) Board Technical Staff KIRSTEN WALLI ) in conjunction with: BILL HOPKINS ) Reed Consulting MICHAEL HARRIS ) SUSAN SIMMONS ) ANN BULKLEY ) RON STEWART ) Ontario Hydro ROD TAYLOR ) Services Company Inc. MALEN NG ) [SERVCO] DON ARISS ) MICHAEL GILLESPIE ) 3 ---Upon commencing at 9:18 a.m. MR. HARDY: Good morning. I apologize for our start this morning. We had to move -- the court reporters had to move some equipment from one board hearing room to another. Welcome. My name is Dave Hardy. I've been asked to facilitate the rate order Technical Conferences. I don't have a stake in the outcome of the conferences or the rate application. My role is going to be to keep the agenda on track and to be concerned with matters of process and fairness. Today and tomorrow will be the first of series of conferences between now and January 22nd. Now, each of you should have received a fax memo on December 18th from the Board outlining the schedule of the Technical Conferences. I'm going to provide a brief overview in about a minute. I understand there are some extra copies of that memo at the front desk. There are also separate meetings being held for the licensing side and those are running to current to the rate sessions. Board Staff I'm sure can provide more information on those for those of you who are interested. By way of background, there have been changes to the Ontario Energy Board Act and to the Electricity Act. The Ontario Energy Board Act requires that a transmitter or distributor of electrical energy must charge for services in accordance with an approved rate order which brings us here. Overview 4 (Facilitator) On December 7th, Ontario Hydro Services Company - I'll be referring to that as SERVCO - filed applications with the Ontario Energy Board for interim transmission rates and interim distribution rates. On December 14th and 15th, the Board held information sessions to enable interested parties to better understand SERVCO's application and to provide interested parties with an opportunity to seek additional information on the filing. At that time, we held off-line-by-line questioning of the application pending these conferences coming up starting now. A list of issues that the Board intends to consider in its review of the applications was prepared by the Board and is available as well through that memo of the 18th. It was distributed to SERVCO and parties as appendix A of that memo. Now, these Technical Conferences are going to occur on various days until January 22nd and I understand that parties are being asked to deliver comments on the application up to February 5th. I just want to give a brief idea of what's coming up. The overheads I'm going to go through. We move from a corporate overview for today and tomorrow of the technical items to a review of specific matters related to transmission costs, transmission rates, PBR, performance- based regulations for transmission, distribution costs and other distribution related items. As you can see, we have a list of items that Overview 5 (Facilitator) we'll be going through today and tomorrow. We continuously move through items starting next week as well, Monday and Tuesday. On the 18th, we move to issues related to transmission PBR proposal. The 19th we move issues related to transmission cost allocation and rates. On the 20th, we have issues relevant to distribution assets and capital plans and then the 21st, issues relevant to distribution OM&A and revenue requirements. There are panels associated with each one of these days, so again to repeat, it's a continuous technical conference starting with the overview today and tomorrow. The agenda today is going to involve an introductory presentation by SERVCO followed by Board Staff and Board consultants' questions. It will take us through a good part of the morning. We'll likely have a break after the introductory SERVCO presentation. I'm not sure how far the Board Staff and consultants' questions will go, but it could take us close to the noon hour. At that point, we'll be opening up the discussion and the questions to people who are also here who are interested in asking questions as well. We'll be continuing with the questioning all day tomorrow and I expect that the full two days will be taken up with the time allotted. To assist me in allocating time, I want to get a quick idea right now how many are here as observers and how many are here who intend to be asking questions. Can I have a show of hands for those who are Overview 6 (Facilitator) intending to ask questions of SERVCO. (Show of hands) Thank you, that gives me a good idea. Before I provide introductions or ask the Board Staff and SERVCO to introduce themselves, I want to explain the process that I'm going to be following as facilitator of the Technical Conferences. First, I want to keep the conferences informal. This is a conference and not a hearing. As such, it's an opportunity for you to obtain information and also to test the information that you're being provided by SERVCO. I know that some of you will be providing submissions to the Board and that the information you receive will assist you with these submissions. We'll be following the Issues List and keeping close to that, as I mentioned earlier was distributed on the 18th. This is also an opportunity for SERVCO to explain the rate application as well. So to this end, I'm going to be allowing a full examination of questions and issues. At the same time, I'm not going to be following any normal procedural rules that one might expect of a formal Board hearing. The second thing I want to explain is that there may be questions that SERVCO for one reason or another is not able to answer. I'm going to be noting those questions if SERVCO proposes to provide follow-up answers. Third, there may be information that SERVCO has that's useful to the understanding of the application but that has not been brought to the technical conferences. Overview 7 (Facilitator) If so, I'm going to keep a numbered list of items on a pad as undertakings or information that SERVCO may bring forward at some future date. Fourth, the conference will be transcribed, so you will need to use the mikes if you're asking questions. You'll need to state your name every time you use the mike. So for those of you who are at mikes now, if you are finished your questioning, my expectation is you'll move back a seat or two to free up a mike so that somebody else can also ask a question. Transcriptions of the meeting will be available from Farr and Associates. And finally, it's very important that you sign the registration list particularly if your attendance here is an aspect of financial support. Are there any questions or concerns about the purpose of the sessions, the Technical Conferences today or tomorrow or any questions about my role as facilitator? ---(No response) Seeing none, I'll proceed. There's a procedural matter that Michael Gillespie -- I understand that there's some information that you want to mention to participants. MR. GILLESPIE: Yes, thank you, Dave. Two things: There is a list of errata which will be left on the sill here at the side which you could pick up at the break. I draw your attention to that; secondly, a couple of organizations have contacted me about funding Introductions 8 arrangements. We will be getting back to you by the end of next week about the -- that's sort of a consistent format and form to fill out and -- so as far as those questions are concerned, we'll get back to you and we can pursue that process starting next week at the end of the week. So we will get back to you on that. Thank you. MR. HARDY: Thank you, Michael. Okay. I'd like to have a quick introductions and then we'll move on to the SERVCO presentation. Can we have Board Staff and then Board consultants -- starting with Kristen, could you introduce yourselves? MS. WALLI: Kirsten Walli, Board Technical Staff. MS. SIMMONS: Susan Simmons, Reed Consulting Group, Board consultant. MR. HOPKINS: Bill Hopkins, Reed Consulting Group, Board consultant MR. HARRIS: Mike Harris, Reed Consulting Group, Board consultant. MS. BUCKLEY: Ann Buckley, Reed Consulting Group, Board consultant. MR. HARDY: Okay, thank you. Could I have then the SERVCO representatives introduce yourselves and then you can get on with your presentation? MR. STEWART: Ron Stewart. I'm the Chief Operating Officer for the Ontario Hydro Services Company. MR. TAYLOR: I'm Rod Taylor. I'm the Executive Presentation 9 (Taylor-SERVCO) Vice-President of Planning and Development for OHSC. MS. NG: I'm Malen Ng. I'm the Chief Financial Officer for Ontario Hydro Services Company. MR. ARRIS: My name is Don Ariss. I'm the Manager of the Accounting Policy and Reporting Department at Ontario Hydro, OHSC. MR. HARDY: Thank you. Why don't you begin your presentation. MR. TAYLOR: Okay. Thanks, David. Good morning, everybody. If I -- do we need the lights off so that you can see the slides? Leave the lights on at the back maybe, Dave. Can you see the slides that way? And I have to stand somewhat in proximity to this microphone apparently, so I apologize to people on this side. PRESENTATION BY MR. TAYLOR: Okay. Well, to begin, thank you very much for your interest and your participation today. We're a new company and it's a new process for us and we very much appreciate your interest in participating, so thank you. What we would like to do this morning as Dave has said is make a very short series of presentations which we believe will set up the discussion for the balance of the day. I'm going to start off on some background and some direction, then Malen is going to do the financial architecture of the Ontario Hydro Services Company that we've inherited from the -- as the government structured the successors to Ontario Hydro, then Don Ariss is going Presentation 10 (Taylor-SERVCO) to talk about the financial policy and the allocation process that we've used particularly with regard to common costs, and then Ron is going to talk about the wires company operations and the way that we've set up the wires business, the regulated wires business itself. For my part, in spite of the fact that SERVCO is a very young company - in fact, about six weeks old - incorporated on the 1st of December, we made our submission as David said on the 7th of December and had our first and so far only board meeting on the 8th of December, so that's the sort of formal nature of the Ontario Hydro Services Company background. But in spite of that, many of the public policy activities over the last three years with regards to the electricity industry sector have had a lot to do with how SERVCO is set up. And what I'd like to do this morning is take a few minutes - hopefully we can two all these presentations within about an hour - take a few minutes this morning to talk to you about some of those background, some of those public policy events that have lead to SERVCO and have, in part, determined the way SERVCO is set up, starting, of course, with the Macdonald Advisory Committee in the 1996, with the "White Paper" proposal in 1997 and, of course, with Bill 35 last year, And then I'll go on to talk a little bit about how we have structured ourselves and a little bit about our future direction. As I'm sure almost everyone, if not everyone, Presentation 11 (Taylor-SERVCO) here will know, the Macdonald Committee which reported in June of '96 made a number of very important and somewhat prescient declarations about the nature of the industry which affect the way we have set up SERVCO. For instance, it was the first formal provincially-sponsored document to suggest splitting generation from wires. Generation itself, Macdonald suggested, should be split into a number of smaller pieces, but that concept of splitting generation from wires was in the Macdonald report. It established a system operator and it went on to say that the Transco, the high voltage grid part, should be an Ontario business corporation company. So Macdonald early on established the difference between the nature of the system operator more of a crown public policy role if you will from the transmission wires to be a normal OBCA type company with normal commercial opportunities networks. Distribution rationalization was also a part Macdonald's report. He recommended consistent with the law at the time, Bill 185, that Ontario Hydro or its successors should exit the distribution business and that there should be fewer number of utilities but they should be shoulder-to-shoulder county-sized utilities. As you'll see, I'll make a comment that that situation has changed a bit since the Macdonald period, but it was certainly consistent with the prevailing law, Bill 185, at the time. And of course, it went on to say that the Ontario Energy Board should regulate the wires Presentation 12 (Taylor-SERVCO) with an incentive-based regulatory scheme. Some 17 months later, the province responded to Macdonald with a provincial ""White Paper"" in November of 1977. In that ""White Paper"", they proposed effectively three successor companies: Genco, SERVCO as Dave has called us, the IMO to run the system, the system operator, but that the IMO would be both a PX, a power exchange that is a market operator, and the system operator together and, of course, the Ontario Hydro finance corporation to manage the debt. The "White Paper" was quite explicit about the nature of SERVCO in some regards. It said that OHSC would be a holding company with a number of businesses including transmission, distribution and retail. It went on to say that SERVCO, and Genco, would have the flexibility they need to make operating and investment decisions in each of their business lines and be free to engage in joint ventures and other strategic partnerships with both private and public sector companies. So there, again, reinforcing the commercial nature of SERVCO. The "White Paper" went on to define the role of the IMO which is to run the electricity exchange, dispatch power on lease cost bids and arrange financial settlements between buyers and sellers. In terms of distribution rationalization, the "White Paper" said rationalization in the distribution sector should proceed on a commercial and voluntary basis. Presentation 13 (Taylor-SERVCO) Now, this is quite different perspective than McDonald took with its -- in the previous law, Bill 185, which suggested that Hydro and its successor should exit the distribution business and move its assets over to county-sized municipal electric utilities on the basis of transferring it at book minus equity. The approach the "White Paper" takes is quite different here. It is that any rationalization should be on a purely commercial and voluntary basis between two commercial partners, whomever it is, an MEU or another entity on the one side and SERVCO on ours. Finally, the "White Paper" went on to say that any cost, again to the point of the commercial nature of SERVCO, that any cost related to economic development and social policies that are undertaken at government request should be funded by the government and not by the electricity customer. In terms of regulatory outlook that the "White Paper" expected, the government proposes to direct the Board, that is the Ontario Energy Board, to examine, advise on, and subsequently implement a performance-based approach to regulation to ensure sufficiencies are achieved and will not be passed to the industry and result in benefit to customers. Finally, in terms of the financial arrangements for the successor company, the new company is to be put on a sound financial footing. That part of the "White Paper" was reiterated in October when the government published Presentation 14 (Taylor-SERVCO) their financial and stranded outlook subsequent to the -- in October of last year. So those are some of the pertinent aspects of the "White Paper" that led to the creation of SERVCO. By June of '96, the government has introduced Bill 35, the Energy Competition Act, which, again, is quite explicit about the nature and the function and the objects of SERVCO and what it is intended to do. In terms of regulation, as Dave has said, the bill, the Ontario Energy Act reform in the bill says that the Board will make orders fixing just and reasonable rates for the transmission and distribution of electricity, but interestingly, also for the retailing of electricity in order to meet the distributor's obligations under Section 28. Section 28 is the default supply or the monopoly supply provision. So under the Act the OEB regulates not just the wires but the default supply. Then there are the two sections that Dave Hardy referred to that no transmitters shall charge for transmission except in accordance with an order of the Board and no distributor shall distribute electricity or meet its obligations under default supply except in accordance with an order of the Board, and of course that's why we're here. In terms of the explicit objects of OHSC outlined in the Act, the objects include, says the Act, in addition to any other objects, owning and operating transmission systems and distribution systems through one or more Presentation 15 (Taylor-SERVCO) subsidiaries of the corporations. So the wires may be in a single or more than one subsidiary. In terms of the structure of transmission distribution and what they do, I will take the second first, the bill says quite explicitly: 'The services corporation shall not own or operate transmissions systems or distribution Systems in Ontario except through one or more subs of the corporation' as we have seen. And then, importantly, a restriction which is more precise or more restrictive, if you will, than those on our fellow distributors in Ontario, the MEUs. And that is, Bill 35 says: 'A subsidiary of the services corporation that owns or operates a transmission system or distribution in Ontario shall not engage in any activities other than transmitting or distributing electricity.' However, we do have in common with the MEUs and all distributors the obligation for default supply. A distributor shall sell electricity to every person connected to the distributor's distribution system except a person who advises that they don't want wish to purchase electricity from the distributor. So the situation we are left with here is that SERVCO may not do anything in its wires business other than be in the wires business and, of course, as a Presentation 16 (Taylor-SERVCO) distributor it has got the obligation for default supply. So those are a quick review of some of the key constitutional statements, if you will, from the key public policy documents leading up to the formation of Servco and its incorporation on the 1st of December. What that has left us with is a sense of what the shareholders' objectives are for our company. They seem to be these three. Clearly, the shareholder is interested in establishing a competitive market and SERVCO has a role to play in the establishment of that competitive market in terms of open access to its wires. The shareholders obviously are very interested in the paying down of stranded debt to the Ontario Hydro finance company and setting up these corporations on a sound, financial basis. Finally, the shareholder seems to be interested in enhancing the value of OHSC; that is, these are commercial companies, SERVCO is a commercial company, that is being designed to have all the rights and privileges of the Ontario Business Corporations Act. Similarly, from those various constitutional documents, I believe Michael used this slide earlier session, we can derive SERVCO's intended position in the value chain. Clearly we are not in the bulk generation business; clearly we are not a power wholesaler and, with the creation of the IMO, we are not either the market Presentation 17 (Taylor-SERVCO) operator or the system operator. Our job is down-stream in the value chain. We are clearly in the transmission and distribution businesses, TNAM and DNAM, being acronyms meaning -- which we will probably slip into which mean transmission network asset management and distribution network asset management, and underneath that, the service company, the network services that supply services to those decision-making structures. Rod Stewart will get into that. Clearly we are in the retail business as well, both in terms of energy supply, which itself might be subdivided; that is, default supply and competitive energy supply, and in energy services in the future. Our near-term focus then at SERVCO is really three. First of all, to extend these constitutional statements, if you will, into the formal constitutional documents for the new company, which include the rate orders out of this process for transmission and distribution, the licenses from the process that David spoke about earlier, the IMO agreement, for instance, between us and the IMO in terms of how the responsibilities for running the system are going to be divided. A number of these -- credit rating, a number of financial documents like that, we call these the constitutional documents at the set-up which need to be in place before Ontario Hydro Services Company goes live which is planned for 1st of April this year. Presentation 18 (Taylor-SERVCO) At this point we don't have -- although we have a board and some officers appointed, the assets haven't been transferred and the formal control rests with the Ontario Hydro Board. So the first of our three strategic foci are in getting the constitutional documents embedded. The second is on operational excellence, and Ron will speak to this at some length. This is an opportunity for us in our new company to really focus on the business of being regulated, to focus on the business of being in the wires business. A focus that maybe wasn't as clear in a previous vertically-integrated utility. So operational excellence having to do with the most efficient use and deployment of human resources and capital and so on. Finally, growth, that we want to look at seeding new business leveraging off the core strength. In terms of growth areas on the wires, for instance, we expect to, and have made the proposition that in response to the market design committee that we should expand the interconnections by about 50 per cent by the year 2002. So an example of growth on the wires side. Our current organization, which I will have to do in pieces, looks like this. Michael, we think we will have copies of these slides later on. Remember, this is -- I stress "current" because there clearly will have to be some changes as we move to set up the two affiliates or subsidiaries that we are Presentation 19 (Taylor-SERVCO) required to have set up under the Act by the 1st of April; that is, the wires affiliate and the retail affiliate. But the current organization looks something like this with Eleanor Clitheroe as President and CEO; Joan Prior as General Counsel and Secretary; Tom Goldie at Human Resources; Malen, who is here, as the CFO; Kathryn Beaton as the CIO; and then underneath there is Rod Stewart, who has both the network asset management that I mentioned and network services. Under him effectively almost all of the assets and almost all of the people under the Chief Operating Officer reflecting the fact that over 90 per cent of our net revenue comes from the wires business itself. Then in the middle we have Gerry O'Hearn and Mike Miller, the two sides of the retail business, if you will. Gerry O'Hearn responsible for the monopoly supply part of the business and running the customer care centre today. Mike Miller, a very small shop of one looking at establishing the retail competitive supply side of the business when that business emerges once the market opens. New business under Ian London here and my shop in planning and development down the end. That's the way we look today. Another look at how SERVCO may look in the future, I will go through this in steps, is that we hold both regulated and non-regulated businesses. The regulated businesses of course including transmission and distribution in a wires box, if you will, Presentation 20 (Taylor-SERVCO) but also the retail merchant, that is, the monopoly supply until the market opens, and after the market opens default supply and remote communities, which we will speak to. Those are the 20-odd non-grid connected communities in northern Ontario where Ontario Hydro supplies the electricity supply and essentially 21 small vertically- integrated utilities, if you will. But also competitive businesses, non-regulated competitive businesses, and the retail merchant in the future as we watch to see the margins and the opportunities that emerge there in electricity and also new businesses. These may include -- these include right now our holding in a distribution company in Peru but may in future include interests in developing, for instance, a telecom business or others which are at the very nascent stages right now. So you can see here essentially a wires business emerging and a retail merchant business emerging. The relationship between the default supply and the competitive retail supply of course will depend on the kinds of codes and so on that are in the licences for both the distributor and the retailer. That brings me to the end of my introductory remarks. If we could, with your indulgence, move through the various presentations, I would be happy of course to answer all of your questions at the end. So thanks. MR. HARDY: Please proceed. MS. NG: Good morning. Presentation 21 (Ng - SERVCO) PRESENTATION BY MS. NG: During this portion of the presentation I will be speaking to the financial architecture for the services company which underlies our rate order application. As you all know, the financial restructuring of the successor entities to Ontario Hydro have been progressively announced by the province over the last year starting with the "White Paper" about a year ago and then the recent legislation. What I am going to do here is very briefly recap some of the key principles underlying the financial architecture. Pretty clearly stand-alone financially, commercially competitive, level playing field, pay proxy property, capital and income tax, like other investor-owned utilities. Also, pay dividends like any other commercial entities and, most importantly, self-financing without any government debt guarantee. In terms of the overall financial restructuring model, this shows a bit more how the financial flows would work. When you look at the entities, there is the services company, the generation company, the financial corp. and also IMO and electrical safety authority. Those would be the new entities created out of the old Ontario Hydro. Essentially what's going to happen here is the Ontario Hydro Financial Corp. will be holding all the Presentation 22 (Ng - SERVCO) existing debt obligations for Ontario Hydro. The operating assets would be transferred to the generation and the services company in return for debt inequity. The debt would be held by the Ontario Hydro Financial Corp. and the equity would be held by the province. In return, essentially there will be interest payments, principle payments, tax payments and dividend payments which will be flown up, ultimately going to the Ontario Hydro Financial Corporation to service and to pay down the existing debt for Ontario Hydro. MR. POCH: Excuse me, sorry to interrupt. I think I have determined that I am not only one who doesn't have any of the slides that we are seeing this morning. Are these going to be made available or can they be made available shortly to help us? MS. NG: I know it is a bit challenging to see. MR. STEPHENSON: Sorry, it is Richard Stephenson. This is almost impossible to follow without having the slides actually in front of you so you can follow it. I mean, leaving aside the fact that we can't read that, you need the piece of paper in front of you. I mean, is it possible to get them, like, in the next 20 minutes? Sorry, it is just makes the process impossible. MR. HARDY: First of all, is it possible to the move that overhead a little bit forward to begin with? Okay. From a SERVCO -- what's the opportunity here to provide some overheads? Presentation 23 (Ng - SERVCO) MR. GILLESPIE: We're going to have these done right now? MR. HARDY: Okay. Can we proceed on that basis? MR. POCH: Yes, I think -- I'm not suggesting we break. I don't want to hold things up. It's just I think it will make people's questions a lot more succinct later if they can pinpoint what they're referring to and so on. MR. HARDY: Okay. So that's being done now. We have a clearer, I think, overhead, so why don't you proceed, please. MS. NG: Carry on? MR. HARDY: Yes. MS. NG: This will be a bit of a challenge for everyone here. Okay. So this essentially just looks at, you know, the financial flows and the last point that I've made is that there will be interest payments, principle repayments, taxes and dividends that would be paid from the services company to the Ontario Hydro Financial Corporation in order to service the existing Ontario Hydro debt, but this generally lays out some of the financial flows and the model. This overhead here summarizes the rate order application for the services company from financial architecture perspective. Essentially, the regulated assets will be at the book value, be targeting solid single-A credit rating for the self-financing, suggesting a 60 per cent and 40 per cent debt equity ratio for the Presentation 24 (Ng - SERVCO) regulated businesses. And, in essence, the regulated businesses, as Rod has shown, over the next little while will be primarily what there is in the overall services company. Over 99 per cent of the assets will be in the regulated side. The successor company will be assuming part of the historical debt which, in essence, means that the starting debt structure or the initial debt portfolio will be generally based on the debt structure of Ontario Hydro and any refinancing will be issued at market rates with a result of a composite cost of debt in 1999 and Year 2000 of about 7.8 per cent, and also proposing a 10 per cent return on common equity as part of the rate order application. What I would do is actually start to then go through each of these elements starting first with a little bit more the target credit rating of A and then also what does a rating agency look for in determining the credit rating and in talking to each piece of the debt ratio, the debt structure as well as the return on equity. The target credit rating was actually worked out and agreed upon between the province and the services company based on extensive advice from its financial advisors. First, the premise is the stand-alone parameter with no provincial guarantee in the future and the cost of capital to be incurred by the ratepayers essentially consistent with the risk profile, you know, of the business. And another important consideration is the Presentation 25 (Ng - SERVCO) continual need to actually access the market. There is going to be very significant capital market requirements over the next few years. While the services company take over over $5-billion worth of debt from Ontario Hydro and by virtue of the agreement with the province, the average term to maturity for this debt is about 4.2 years, which means that there will be significant refinancing requirements over the next few years and the refinancing requirements are high. Primarily considering the existing Ontario Hydro debt, its maturity payments, there's about in excess of $14-billion over the next five years. Also, it's reflecting the province's desire to actually reduce as quickly as possible the level of its guaranteed debt. So significant refinancing requirements probably in the order of about $7- to $800-million over the next few years is not inconceivable and there will be few Canadian companies who will be required to have this kind of financing requirements. So the notion is the need to have a solid credit rating to enable a continued access to the capital markets under various market conditions and also to ensure that there is sufficient access to institutional investors in order to broaden the market access at reasonable cost of capital. And looking at the need for an A credit rating, it's worthwhile to look at some of the perspectives of the credit rating agencies. Generally speaking, the credit agencies will look at qualitative and quantitative factors in making their rating assessments. Qualitative factors Presentation 26 (Ng - SERVCO) include the assessment of business and financial risk, be it the service area strength, be it competitive position, be it management capability, be it operating issues. And also in this case, because of the industry restructuring and the setting up of new regulation, there is going to be a significant interest in the regulatory environment and there will be perceived uncertainty until the regulatory environment is fully established, and from a quantitative perspective, obviously a lot of interest in looking at the financial ratios, in particular the interest coverage ratios. And looking at some of the financial and business risks, the service area, the underlying strength and diversity of the Ontario economy is obviously one of the pluses as well as the essential nature of the service that will be provided by the services company will be viewed as pluses. Operating issues. Obviously, the frequent exposure to adverse weather conditions, the age of the assets, the conditions of the assets, those would all be things that people will be looking at in assessing the business risk. Competitive position, potential competition and future interest of connection assets in terms of self-generation or any key substitution, those will all be viewed as some of the risks associated with the competitive position of the services company. Most importantly, because of the newness of the company, virtually it will be a new company, a new board, new Presentation 27 (Ng - SERVCO) management which really have not established a track record in terms of operating as a stand-alone independent entity. That will be considered as a risk. Overall assessment based on advice from the advices that we have is that the risk will be viewed as average or maybe slightly higher than those of those average utilities. In terms of the quantitative assessment, typically the rating agencies will be looking at the interest coverage ratios, the cash flow to total debt ratios and also the debt ratio. And in terms of the interest coverage ratios, they will be looking at the pre-tax coverage, the EBITDA coverage and the funds from operations interest coverage. The rating agencies from time to time would issue guidelines to guide really the assessment of the credit ratings. For example, the Canadian Bond Rating Agency essentially sets out some interest coverage guidelines for single As from 2 times to 3.2 times, Standard & Poor, 3.25 times for the funds from operations coverage and also, Standard & Poor set out some cash flow to total debt for single A which is 15 per cent. In this case, in the submission for the services company, our interest coverage ratios is in the order of about 2.6 to 2.8 and the cash flow to total debt is essentially at 14 per cent, so it's in line, maybe slightly weaker or more aggressive, than the ones that are specified in the guidelines. Presentation 28 (Ng - SERVCO) In terms of debt ratio, again, the rating agency guidelines, Canadian Bond Rating Agency, 50 to 65 per cent for an A, S&P 55 per cent, and Moody's, somewhere in around below 50 per cent. The debt ratio that we're proposing of 60 per cent is higher than the typical investor-owned Canadian electric utility which is around 50 to 56 per cent and it's also a little bit more aggressive than the ones that are being suggested as the guidelines, but we believe that it's probably still within the reasonable range. And with the strength of the service area, we believe that this set of information is probably reasonable to go in for proposal for a single A credit rating. Now, getting on to the costs of debt and the costs of equity, with respect to the costs of debt, just quickly look at the debt structure. As I mentioned, the debt is generally fashioned after the historical Ontario Hydro's debt and some of the principles that were established is that we'll be -- for simplicity purposes, some of the existing debt for Ontario Hydro was met and the notion is to refinance and repay with an average term of about 4-1/2 years and I think the last debt issue is about 2007. The maturity payments in 1999 is 650 and in Year 2000 is about 750. The initial debt will be $5.2-billion. There is no floating rate assigned and there is no foreign currency exposure assigned on the premise that the average term to maturity is already very short and also on the premise Presentation 29 (Ng - SERVCO) that the services company really doesn't have very much U.S. dollar revenue, so assigning any foreign exchange exposure probably would not serve its purpose. The initial debt in terms of the embedded costs of the allocated debt is close to about 8 per cent in both 1999 and Year 2000. The new debt which will be refinanced at market rates, the interest rates that we've used based on the single A credit rating is 6.3 per cent in 1999 and 6.1 per cent in Year 2000, which gives you a weighted average cost of debt of about 7.8 per cent in both years. In terms of the costs of common equity, the proposal is for a 10 per cent return on the book equity. This is consistent with the information that was used in the financial architecture that was established for the services company. We have hired some financial advisors to perform an independent assessment of the reasonableness of this proposed rate of return involving various techniques which is quite commonly accepted, such as the risk premium test, the comparable earnings test. And the conclusion of the consultant is essentially that the 10 per cent that's proposed by the services company is generally in line, although the number that was independently arrived at by the consultant was marginally higher. So in summary, and this is my last overhead, the capital structure that has been used, we believe, is consistent with the commercial basis, consistent with the stand-alone financial basis, the 60 per cent debt ratio as Presentation 30 (Ng - SERVCO) part of a proposed capital structure. The debt structure is generally based on the historical debt. 10 per cent ROE has been proposed and target is for a solid single-A credit rating to ensure that we can access the market under most market conditions at reasonable costs of capital and we believe that the business risk and the financial ratios are consistent with our proposal for a targeted single-A credit rating. And as Rod has said, I'm going to be pleased to take any questions at the end. MR. HARDY: Let's move on to the next presentation. MR. ARISS: Good morning. PRESENTATION BY MR. ARISS: I'm going to, as indicated, just be giving you a highlight of the allocation process that we undertook last year to deal with OHSC, the services that have been centralized at the holding company level, and as well touch on the principles that were further then applied to look at the similar types of expenditures that are incurred within the business units themselves. Just as indicated, we will be -- this will be focusing primarily on that overhead allocation, the policy and the principles. There are, of course, a number of other accounting policies that are inherent in the submission and we'll entertain questions on those as we go through this exercise. Okay. Just focusing on that, the functions that we're talking about have been centralized at the holding Presentation 31 (Ariss - SERVCO) company level. The purpose of that, the objective of having the synergy's efficiencies there of having those functions all together, this also provides for the opportunity to have allocation of these costs as we expect to move forward into non-regulated enterprises in the future, that, again, these activities will be providing support for that and we'll have a basis of getting the proper allocation to those activities. Business units, there are the functions that are support functions that are carried out at that level as well. In all of this exercise, we're trying to apply the same set of principles. You will see that we, in a detailed submission, additional information provided that in all cases we don't have the same drivers, but the exercise was certainly to adhere to those principles and to achieve the best matching that we could possibly have of the costs that were being incurred to the actual work that was being carried out. So at the end of this is then the supplementary material that was provided, that the objective was to get the cost from both of these categories invested in the most appropriate allocation that we could achieve to the transmission business and to the distribution business, which, of course, is the subject of the tariff submissions that we provided. The principles - I just want to touch on those - and then these were developed, really extracted from what is accepted in the regulated enterprise in general and Presentation 32 (Ariss - SERVCO) this was developed in consultation with consultants from Ernst & Young who assisted us on this exercise. And again, the way we're structured, there was an initial allocation to the business units. You've heard the reference to the asset management entity and to the services entity where the work is actually carried on, so there had to be a first level of allocation to get these costs allocated to those respective business units and then a secondary allocation was necessary to track the work that's carried on in the asset management and the services group in respect of the transmission business and the distribution business. The two primary principles that we focused on, first where we could find causality, a specific action event, whatever it may be that was actually causing those costs to be incurred, that that was used as the primary driver to try and match the service cost to that activity that was actually incurring the -- resulting in the cost being incurred in the first instance. In the absence of that we tried to see where and what activities within the respective business units were benefiting from those costs that were being incurred. So those were our primary considerations that we used. You will see as we go further on that in not all cases were we able to identify those drivers in which case we used a more general driver, but it is still inherent on the fundamental principles that we are trying to achieve. In going through the exercise, the first level of Presentation 33 (Ariss - SERVCO) examination of the cost was to determine what activities, what costs that we saw were actually being caused by the shareholder. Any activities that were primarily to the benefit of the shareholder we did not feel were appropriate to be allocated to the transmission and distribution business. Those were spun off and were not allocated. Those unallocated costs would, in turn, have to be funded through dividends that would be received by the holding company from the subsidiary wires company. As I indicated, the specific drivers were not possible or we could not find them or are simply our systems, again, having to put all of this in the context that this is not something that we haven't been doing in the past so our systems historically have not been set up to have this level of tracking of these costs to the specific drivers. This, of course, resulted in some difficulty in trying to find historical trend lines. So estimates had been use where it was possible or where we didn't actually have that historical data to look for. In the absence of the specific drivers, then we used a general driver that was reflective of the size and complexity of the business. A number of different drivers were -- measures of that were considered. We finally decided upon the net book value of assets was one that was appropriate under these circumstances. Again, having finished the exercise, we then had Presentation 34 (Ariss - SERVCO) Ernst and Young, again that external advisor come in, and review the process that we had gone through, the results that we had achieved, the estimates that we had used within, again, the confines of the available system and information that we have and the general conclusion that we received from that examination that under the circumstances that this was a reasonable basis that we had selected and used. If we move down into the next level of that allocation, the allocation then of the overheads to the transmission and distribution follow through those drivers. Having gotten to that first level to NAM, again that business units examined its activities and chose an allocation based on 65/35 split between transmission and the distribution business. Again, in looking at the relative size and complexity of their two businesses, what they chose as the measure of that was the net expenditures, cash expenditures, both OM&A and capital expenditures in a given year as a measure, an appropriate measure of the size and complexity of the activities going on in those businesses. Network in the services business because, again, that is where most of the people exist and most of the work is being carried out, had already or have in the process of developing an activity based, even more detailed activity-based costing system which would take all of these costs and allocate them in relation to direct labour hours that were carried out for specific work Presentation 35 (Ariss - SERVCO) programs. So that, again, in looking forward to 1999, it was based on their estimate of the split of direct labour hours between work activity that would be done for the transmission business and the distribution business. That split came out to 61/39 allocation between the transmission and distribution businesses. Having done that, there of course is both capital and OM&A work that is carried on. In the material that we did provide we wanted to show you the further allocation that takes place. Again, from a GAAP perspective we have to -- these cost are incurred not only for current activities, but they are being incurred to build projects that are going to provide benefits in the future. Therefore, it is appropriate to get an allocation both in capital and OM&A programs. Again, we were looking at the causality and the benefit to provide a basis for that, a network asset management, again, looked at an examination of the work activities that we expected to take place over the coming year and use that as the basis for splitting between capital and OM&A. What they expect will flow to the respective activities. Network services, again, because they had the more detailed activity-based process and, again, based it upon the labour distribution they felt would be split between both capital and OM&A type projects that would be Presentation 36 (Ariss - SERVCO) undertaken in the coming year. So that just gives you a quick overview of the process that we went through, emphasizing again that this is not the perfect model because we're moving into this type of a more detailed allocation, but with the assistance, again, of Ernst and Young and their assessment that this was as reasonable a basis that we could achieve within the information systems that we had and the historical information that was available to us. So that's just an overview and we will be happy to answer specific questions later. Thank you. MR. HARDY: Ron, you are the final presentation? MR. STEWART: I am the final presentation. MR. HARDY: Okay. So that will take us up to the break. Michael, have we had progress on the overheads? MR. GILLESPIE: Yes, I have copies of those. Do people want to pick them up at the break? MR. HARDY: I sense some people want them now. MR. STEWART: I'm not using any overheads, if that helps. MR. GILLESPIE: We will get them at the break then. MR. HARDY: That's fine. Thank you. Ron, why don't you go ahead then. MR. STEWART: Good morning. I would like to just take a few minutes and give you an overview of the operation. Presentation 37 (Stewart -SERVCO) PRESENTATION BY MR. STEWART: We have organized ourselves in the operation side to drive change. It is a change designed, as Rod indicated earlier, to achieve operational excellence, excellence which we believe will meet the customer expectation or exceed the customer expectation at the lowest cost practical. To this end we have developed a strategy that's been built on a business model that we call the asset management model. The model -- underlying the model, one of the primary dimensions of it is a strategy that separates the investment decision-making from the actual execution of the work. It is a business model that's been used by a number of utilities around the world to achieve their drive towards operational excellence. It has been use in the U.K., Australia, New Zealand, it has been used in the U.S. with a great deal of success. We have had a lot of interaction with a number of utilities who have, in fact, adopted this strategy. As I indicated, the underpinning of the strategy is to separate the investment decision-making, if you will, from the actual execution of the work, not unlike the business model that you see quite often in real estate where the owner of the property is quite distinct from the property manager - we've set up separation between the two. It sets up a smart buyer and efficient supplier kind Presentation 38 (Stewart -SERVCO) of a relationship. We believe that it will assist us in driving towards the excellence that we are looking for. In addition to separating the investment decision-making from the actual execution of the work, we have -- within the asset management, as indicated by Rod's chart earlier, we have also separated the investment decision-making between transmission and distribution. That's the organization, the TNAM, transmission network asset management and the distribution network asset management. So we have got an additional split. Two purposes for that. Clearly, one to meet the need of the consumer and the regulator with respect to providing transparencies around that decision-making and a separation between -- in that decision-making. It also permits us to capture what we believe to be significant synergies and efficiency gains that can be realized by combining the services side or the actual execution of the work. It is clearly the investment manager's role and responsibility to make the decisions and keep those separated, but the actual execution of the work itself, being mindful of trying to achieve low cost, is to somehow realize those savings and that's how we've done it. By combining all the network services of a single work force, management or the whole province, we were able to operate a large and provincially-managed work force and realize savings in essentially several different ways. First, just having the combined work force for Presentation 39 (Stewart -SERVCO) things like the lines maintenance and the forestry, et cetera, is better, you have greater work force flexibility. We have a greater ability to deploy the work force. And just as an example, this last fall when we had the major wind storm cut across Ontario, within one work force we are able to pull people from construction, from other parts and pull them all together from whether they were traditionally "transmission" power line maintainers or distribution power line maintainers, but we were immediately able to deploy them all to recover from that storm. The next major area of savings when having a combined work force managed provincially is obviously around the logistical support. One fleet of equipment, one fleet of trucks, one materials management system, one materials management process, one set of service facilities across the province strategically located, not having as we are inheriting, in fact quite often where we have service centres, two service centres in the same community, one for transmission and one for distribution. Lastly, as referred to in the cost allocation, just the infrastructure in the support systems, by being the common and shared services, common IT, common network services, common IT structure, et cetera. Just by being able to manage those, one management system, one management structure, clearly there are significant efficiencies to be gained through that. Presentation 40 (Stewart -SERVCO) I will just contrast that to what we have essentially been trying to pull together from the previous organization of Ontario Hydro. Traditionally the organization was organized geographically or separated by transmission and distribution and then organizationed geographically where the decision-making, the investment decision-making and the actual management of the execution of the work was largely within those geographical accountabilities. So you had district managers, area managers, regional managers, et cetera, who had both of those roles. That tended to create the perverse situation where you often had the decision-makers or a prime influencer on the decision-making being the same one who was responsible for the execution of the work and all too often it led to decisions that were, by a store, influenced significantly by available resources in that geography. This model, by separating and making a clear distinction and clear accountabilities between those, the investment decision-making and execution of the work, we hope to break that paradigm and move on from there. How successful we are going to be in the operations of the company in future is clearly going to depend on three, what we believe to be three significant dimensions of operational excellence. First, capital efficiency. We are clearly a very capital-intensive industry and the decisions that we make in terms of capital or investment are going to have a Presentation 41 (Stewart -SERVCO) long-term impact on and influence on our overall efficiency and our level of cost and level of tariff. So the investment decision-making clearly is vested with asset manager group and the accountability for that: What do we build? When do we build it? What do we replace? What level of maintenance do we provide? At what level do we operate it? What risks do we take predicting the future needs? Et cetera. We have two separate decision-making streams, one for transmission and one for distribution and clearly that's going to have a significant influence on our long-term goal for excellence. The second major area of operational excellence is clearly going to be around labour productivity. That is how well we actually execute, how efficiently we execute the work. I indicated that's primarily with the service provider, the strategy around that. The primary driver behind realizing that, of course, is being able to combine the work forces that we have and manage them as one, and they are, in fact, the efficiencies there are largely going to be as how well we can actually deploy that work force. It is not necessarily what the hourly rate is, clearly the larger part of that challenge is going to be around how well can we support that work force in getting work done. It's dictated by the competency of the work force, what tools they have available, how we actually provide the materials and the support for getting the work done, the management Presentation 42 (Stewart -SERVCO) systems that we have in place, the information that we have, et cetera. Those are all opportunities to prove labour productivity and the support of that. Clearly achieving some flexibility in the work force and how our ability to deploy it, move it where the work is, et cetera, is another feature of this model. So that's primarily the first two dimensions, neither of which are going to be of any value at all if we aren't able to meet the customer expectation or exceed of customer expectation, so clearly the third determinant of our operational excellence will be around how well we actually meet the need of the customer, whether we are meeting the expectation or whether we are falling short. And so that's the overall strategy for how we've organized ourselves in the operation and what the intent and what the goal and what the strategy is around why we have chosen to do it the way we are and why we're driving it the way we are. Built into the rate into this submission is our estimates of the savings and the efficiencies to be gained and it is dependent on this strategy. It has been built from this strategy and over the longer term. Thank you. MR. HARDY: Thanks very much. We are going to be -- for those of you who have joined us since we began, we are finished now the SERVCO presentations. When we come back from the break we are going to 43 be starting with Board and Board Staff questions and then we'll open it up probably before or after the noon hour to the remainder of the questions. We'll be going the full two days. So a break now. I have just after 10:30. We'll break until about 10:45, 10:48 or so. ---Recessed at 10:30 a.m. ---On resuming at 10:50 a.m. MR. HARDY: Order then, please. Okay. I understand that there are -- not everybody's received a copy of the overheads. Michael, what's the status of that? MR. GILLESPIE: The sets are over here. I think we made enough, but if we have run out we'll get more. MR. HARDY: Okay. So the overheads are available on the side. Okay. As I explained at the outset, we are going to begin now with Board Staff and Board consultants' questions. That will take us up to close to the noon hour. We will have plenty of time for open questions from other parties. That will begin, likely, in the afternoon period and all day tomorrow so there's plenty of time for that, but this is the way that we are handling the structure of this part of the meeting. Okay. Why don't we begin then with the Board Staff and consultants questioning, and Bill, would you like to begin? [Questioning] 44 Board Staff/Reed Consultants MR. HOPKINS (Reed): Fine. Q. I would like to begin and my name is Bill Hopkins with the Reed Consulting Group and we've been assisting the Board Staff reviewing the filings of the both the Transco and Disco. And I would like to begin talking about issues relating to the organization structure if I could, sort of start at the top of the list. And also I would like to preface my statements if we are going to, this morning between now and the noon hour, going to run through, I think, some of the major items that we think we need clarification on, some additional details on or have particular major items that we have curiosity in. But in a sense we also anticipate that sometime later in the process after some of the other parties have had a chance to question that we'll come back with some more details, seeking some more details as well. So, if I could start, I'd like to and I guess it's Rod, is it? And I appreciate the organization charts that that you've provided and what have you and we've had -- we've had some of the supplementary material to review that maybe some of the other parties haven't. But clearly one of the overlying items that we see in this filing is how do we get from where we are to where we are going to be and what's happening to the operating structure of Ontario Hydro, realizing that you, in a sense, have been running an efficient or an effective, let's put it, electric utility operation here and suddenly the [Questioning] 45 Board Staff/Reed Consultants traditional boundaries of structure that we think of in terms of functional areas of activity within a utility structure do not appear on the charts that we see in a sense, so part of the puzzle is: Where are these picked up and how are they transferred from one to the other? And as we look to be sure that they are all there and then to understand whether or not the costs that are reflected in these are attendant with those that should be considered to be reasonable for that type of activity. So it's somewhat -- your chart that you handed out this morning or you've referred to this morning, the organization chart, I take it displays the business units that -- in organization segments that are going to exist going forward; is that correct? MR. TAYLOR: A: They are the ones that exist today, as I -- I think I said the structure is likely to undergo yet another evolution. We're going to have a wire subsidiary and a retail subsidiary probably by the 1st of April, but that is the organization chart that I handed out today is the way that we are currently organized, yes. Q. Okay. Well then, how would that look? How would that organization chart look after that taking place? A. Well, beyond the sort of broad conceptual outline that I gave you after the organization chart, I really can't go much further because that's a decision of the SERVCO Board and they'll be looking at that, obviously, before the first of April, probably, in the [Questioning] 46 Board Staff/Reed Consultants February/March type board meetings. Q. Well, to clarify, is it that the wire subsidiary would then have inherent in it the network asset and network asset management function and the network services function that we see here? A. Yes, yes, sir. Yes, they would. Q. So they would be inside of that boundary, is that -- A. That's right, yes. Q. Or would they have -- they have other activities then? A. No, I think -- Q. Beyond what would go with the wire business? A. No, I -- sorry. I think the concept is the wires business is exclusively a wires business. And while there may be some competitive activities, for instance, work that network services might do for a municipal utility as it does today and has done for some period of time, particularly the smaller utilities, income from that work would go towards reducing the revenue requirement on the wires, so largely it's a wires business. Q. I see. So they wouldn't be -- network services operations wouldn't be commercializing some of their capabilities to do things for other parties other than in the sense the type of work that you do now? A. That's right. There is some small increase in that, Ron, I believe in the year 2000 over '99, but [Questioning] 47 Board Staff/Reed Consultants it's in the neighbourhood of perhaps a couple million dollars. I don't think -- it's not larger than that. Q. With this chart that you have now shown us, is it possible for you to relate these pieces that are shown on this organization chart back to the existing staff, the prior -- previous existing staffing structure and show -- demonstrate how the various staff levels and competencies have been transformed into this chart? A. Yes. I think we could -- I'm quite sure we could draw a line between the structure that formed the basis of the submission and the chart that I put up this morning. The only really major differences are in some of the overhead categories. The sum total of those differences would be very minor in terms of their impact and their cost impact. Almost all of the allocation of the shared flask resources, for instance, whether they are the at the OHSC level or down lower are assigned to the wires business in any case and I don't think there would be any material difference in the costing. Q. You've presented in some of the supplementary material charts of staff levels for the OHSC organization-- A. Yes. Q. --and they show that the management organization will have some 400 and almost 500 employees and that the network services may have some 4,000 employees? A. Yes. [Questioning] 48 Board Staff/Reed Consultants Q. How can we -- are these new employees? I mean, do they represent any new employees? Do they represent any deletions for employees that now exist? I mean, how do you-- A. No. Q. --how do we see any relevant information on how these asset organizations are sized flowing from the nature of the business that you're now doing? MR. STEWART: Maybe I can help. A. The nature -- the organizations, the network asset management and distribution network asset management and the network services are simply a remapping of what we had previous -- in the previous Ontario Hydro organization which came from a business unit which is transmission business unit and the retail business unit. Clearly, it's been a year and there have been changes to that, but that's the essential mapping that exists. We're not doing anything new, if you will, over and above what those two organizations did previously. You know, we are hoping that we are doing it better and we are hoping to achieve sufficiencies with it but what you see is essentially a mapping from those two organizations. Q. Is something like that mapping available for -- so that -- so that in some way we can envision how the size of the organization has changed, if at all, by the results of this destructuring? A. I can give you a general assurance that it hasn't increased, but I -- but I -- I don't have specifics [Questioning] 49 Board Staff/Reed Consultants and I don't know whether that mapping really exists or not. I mean, we've gone through a pretty significant, a number of organization changes and so I'm not sure it's -- we would be able to recreate the trail all the way back to... Q. Another way to recreate the trail or recreate at least some detail on it would be to -- is there a more detailed organizational structural chart with staffing levels and positions within it relative to this organization structure that you have now prepared? A. Currently? Q. Yes. A. Yes. Q. That somehow indicates how the 400- and-some- odd in network asset management people are-- A. Yeah. Q. --distributed and how the network asset management -- excuse me, network services people are distributed and what responsibilities and functions they have? A. We have coming up Monday the general manager of Transmission and the general manager of Distribution following later, and on both of those panels will be representation from the network services as well and they can either speak to it directly or provide more detail. MR. HARDY: I've noted then that that information will be coming forward and it does exist. MR. HOPKINS: Q. Is there a -- you mentioned the [Questioning] 50 Board Staff/Reed Consultants wires business and then that there would be a transformation into the wires business. That wires business will have its own organization structure, its over chief officer, does it have a structure that you can relate to us at this point? A. Yes, mm-hmm. I have a team of a number of general managers and vice presidents we have organized around. Following the concept that we outlined, first there's general manager of the transmission network asset manager, he's the asset manager for the transmission organization. We have a general manager for the distribution network asset management organization. As well, we have a manager responsible for the remote communities because that, again, has been separated off as a separate entity because of the uniqueness of it. In addition to that, we have a general manager responsible for the -- essentially the power, the line maintenance organization. We have a general manager responsible for what we call commercial operations which is really partly a support function, operates telecom, central maintenance shops, metering and forestry. In addition, we have a general manager responsible for logistical support, which is responsible for the purchasing and materials management, the fleet management, all the real estate office facilities, service facilities, et cetera, around the province. In addition we have a vice-president responsible for customer service, whose sole accountability is with [Questioning] 51 Board Staff/Reed Consultants respect to customer service for across the operating group. And because of the significance in our operation of the health and safety and environment, there's also somebody reporting directly to me to assist in that area as well. So that's the management team. Q. And there's a structure underneath that that runs -- A. Each of those then in turn have organized to deliver on their purpose. Q. Is there then some chart beyond this that you could provide us with or? A. Yes. Q. With that organization? A. Yes, yes. Q. That would -- MR. HARDY (Board Staff): Q. Are we coming forward next week then on...? A. We can do that. Q. Would that indicate, you know, in a sense the number of people by various functional areas or staff positions or...? How much detail would that have involved in it? A. Well, we can provide the complete organization. I mean, the operating group does not have a lot of staff positions. I can generally describe the nature of each of those and the kind of people that -- the kind of competencies and kind of resources that are in [Questioning] 52 Board Staff/Reed Consultants each, but they're in the direct line of doing that work. Q. Is there any way that you could relate that to the staff that you now presently have involved in the tasks, for example, where, you know, your services functions will be to maintain and operate the systems' wires and...? You have a staff that does that now correctly? A. Yes. Q. And that staff consists of so many people and so many... A. Yes. I'm talking about the organization that we have and what they do, yes. Q. Okay. The staff level that you've proposed on the table, one of the supplemental information where you have the organization staff levels displayed by the asset management, the customer care service and those types of functions, do those staff levels include additions or subtractions from the present level of staff? In particular, the interest is whether or not you've incorporated some of the impacts of your-- A. Yes. Q. --what you were suggesting, I think, in the need to reorganize or the benefits of reorganizing in consolidating the staff. A. Yes, we have. I mean, the business plan, this is based on how it goes forward with some assumptions and goals and targets that we've established for giving effect to the savings. They're masked a little bit [Questioning] 53 Board Staff/Reed Consultants because at same time as the level of resourcing changes, the level of work has changed, is changing as well, so it's not a .... Q. Well, aren't they, in fact -- I mean, if we look at the network services organization, aren't they, in fact, maintaining or operating the same system? A. There's been a significant increase in the work in the last year and it's projected to go forward both in the transmission area and in the distribution area. There's a whole range of reasons. But if we go back to Rod's presentation, clearly we're looking at adding significant growth in the transmission through the interconnections and that changes level of work. We forecast specific areas of growth. There's been a significant effort particularly in the distribution side around our forestry. There's been an increased effort to get back on cycle with respect to our forestry program. There's also some asset restoration work that is referred to in the submission that's created a significant workload as well. So those changes are reflected in there as well. Q. Is there any way those changes can be quantified? I guess that's where -- sort of my bottom line is, can we say that -- A. Well, we've quantified this them in terms of dollars. It's very difficult to quantify them in terms of specific people per se. The business plan is based on an estimated amount of work to be done and that's translated [Questioning] 54 Board Staff/Reed Consultants into resources, but we haven't broken it out so that it's -- well, at least I'm not in a position to respond to that. Perhaps when you have the panel on they can give you more specifics. Q. We'll try to deal with the details on that a little bit further -- later. Just on one other matter in a sense, the current -- when I mentioned, you know, how is the current organization transforming it forward into the new organization ... the current organization, you keep your records in various systems of accounts, cost accounts, do you? A. Yes, and I must -- perhaps Malen may be in a better position to answer this, but just as a general comment, I mean, we are struggling with bringing essentially the two organizations together which had slightly different systems and different methodologies, et cetera, so generally yes, but with difficulty. Q. Well, I note that, you know, and maybe it is more a financial area than an organizational area, but in a sense, it's -- we're seeing, you know, new business program areas described in the materials that you've presented, sustaining, operating, customer caring and those types of functional descriptions of work, and how do those relate to and/or -- to your more traditional functional activities that you had that are part thereof, I guess, and how do you intend to keep your records on a going-forward basis and how have they been kept in the [Questioning] 55 Board Staff/Reed Consultants past is really part of my question here, if there's any details available on that, and we could wait on that issue if you'd like. A. I think that's best deferred to the panels who talk specifically about the programs and ... MR. HARDY: Okay. So I have noted that we'll bring forward that information on recordkeeping. MR. STEWART: Well, I'm suggesting that the panel would be the better one that would have the detail, I'm not sure. MR. HARDY: A future panel or this panel would have the detail? MR. STEWART: No, no, a future panel. MR. HARDY: A future panel, okay. MR. HOPKINS: Well, I think I'll pass it for a moment. MS. WALLI (Board Staff): Good morning. Q. I'd just like to pursue some questions on your asset management model. Thank you, you provided quite a bit more detail in your presentation earlier this morning than was in the initial application. Just to look at some more issues, what studies or analyses were undertaken to provide the basis for the new structure? MR. STEWART: A. The asset management model goes back to a couple of years ago when we created the transmission business unit and the retail business unit. And at that time, through some consulting and some looking [Questioning] 56 Board Staff/Reed Consultants at other utilities and how they're facing the challenge of restructuring, et cetera, we -- it was a strategic strategy development. I'm not -- I don't recall, but I don't think we have any specific studies or analysis sort of thing. It was a strategic choice that we made to adopt that model and looking at best practices, as said, in the U.K., in Australia, in the U.S, and proceeding there from that basis. It wouldn't be based on a study. Q. Well, is there, for example, any of the background material that you used that could be made available, for example other utility experiences? A. We could provide you other names of other utilities that have adopted - Boston Edison. In the U.K., Yorkshire. And you could approach them if that would be helpful. Q. Sure. Thank you. You had mentioned actually in your presentation that several utilities have embarked on this. Do you know of any utilities that embarked on this path and later reverted to other organizational structures? A. Perhaps there are. I'm not aware. Q. But perhaps not some of the ones you modelled on? A. No. Some of them very successful, I'm going to add, Boston Edison attribute that strategy to the significant premium that they realized on the sale of their fossil plants. It was based on that strategy and [Questioning] 57 Board Staff/Reed Consultants they were very successful in it. Q. And that's on the generation side? A. That was on the generation side. They've since adopted on the carrier side, the wires side. Q. Thank you. You mentioned in your application that this is a model that will be evolving over time. For example, what will be occurring prior to open competition? Will, say, the sourcing of services on a fully-competitive basis start before open competition and might they be hampered by existing collective agreements with limiting out-sourcing provisions? A. Clearly, it's going to take time for the full realization of it. The collective agreements that we've had, both the unions and ourselves recognize that the existing collective agreements and some of the rigidities in there are not -- weren't agreed to in this coming environment and we've already made some pretty significant steps towards moving that way to realize some of the work force flexibility. The last agreement that we entered into with the PWU, for example, created a "hiring hall" concept which gives us much more flexibility in terms of being able to resource to the work demand as opposed to demand meeting resources. You know, we're just in the early stages of implementing that, but we hold a lot of -- we believe that holds a lot of promise. We've made -- we've agreed to changes around how [Questioning] 58 Board Staff/Reed Consultants the work force is deployed and we've got -- made changes with respect to the apprenticeship program for example, so there's a clear recognition that this is both our challenge and we're working towards it. There are constraints obviously. I mean, the work force and the network services is what the asset is. That is the -- that is our capability and competency. So, you know, for example, on -- we have a purchase services agreement where if we believe we are not able to be competitive or we aren't competitive, we work with the union to either do something about that or we agree that that's something we're not going to be in and do. We've got to work those things through. Q. So it will be an evolution? A. It will be an evolution. I mean, clearly there are constraints to doing anything instantly in this regard. Q. Certainly. Now, you also mentioned the objective of the asset management model is to capitalize on any synergies. And again, in your presentation, you went through, I think, various examples, a combined work force, logistical support, materials management, et cetera. Can you quantify the estimated cost savings of implementing this model and going and identifying and capitalizing on these synergies? A. We could probably pull out examples of it, you know, some list of savings associated with some [Questioning] 59 Board Staff/Reed Consultants specific synergies, but generally -- I mean, we've used the synergies as our planning assumptions of putting together the plan in determining what resources are required to get the work done that we projected. So it would be very difficult to do on an overall basis, but I'm sure the next panels can give you specific examples of where we've realized significant savings by, for example, one set of service centres and facilities around the province as opposed to two. Q. As opposed to, for example, a more comprehensive benefits cost analysis of going to this model versus staying with the current or previous model? A. Yes. We didn't sit down and go through the existing in great detail and then compare what might be in great detail and kind of come up with a bottom line. It's been much more on a program approach. Q. Thank you. You've mentioned this model will create a smart buyer efficient supplier outcome. In some cases, could this actually lead to some duplication and perhaps overlapping responsibilities because, in essence, you're creating two parties to, in some sense, as a proxy commercial transaction within the same organization? A. Yes. I think it's a good point. I think there's a potential for that. I think it's really important in how we actually go about implementing those processes and interacting. You know, we've seen in other utilities the extreme where they've got very arm's length [Questioning] 60 Board Staff/Reed Consultants legalistic kind of commercial contracts and it's quite burdensome - it's an overhead in itself - and we've seen the other examples about a much more synergistic kind of partnership across, a little less formal and quite effective. It follows -- it's not unlike, you know, the industry generally where, you know, supplier/purchaser relationships are changing to partnerships for those kinds of reasons and there's some good lessons there. Q. Do you see then there will be the need for some internal cultural changes, something as basic perhaps as negotiation skills, training? A. Oh, clearly we have to acquire some new skills in a number of areas and there is need for cultural change. We have managers that think a little differently, a more accountable organization, a more accountable management team, more results oriented. By splitting these accountabilities, we're holding each other much more accountable than we have in the past. It's not kind of a 'I said this is what I was going to do and this is what I did'. MS. WALLI: Thank you very much. Those are all my questions on that asset management model. MS. SIMMONS (Reed): I am going to try to be brief. I just have a few questions with respect to revenues and cost flows. I'm sorry, I'm Susan Simmons from Reed Consulting Group for those of you who weren't here when we were introduced this morning. We are working with the Board [Questioning] 61 Board Staff/Reed Consultants Staff, as many of you know. Q. Traditionally in a typical rate filing you see something that gives you total current revenues. I do understand we are not in this looking for a rate increase, we are going to be receiving our revenues based on existing bundled rates. But I believe we have asked in the past and other people may have asked as well, we understand the revenues are going to come in from existing bundled rates, but there is no nowhere or maybe you can point to somewhere in the file in your supplemental materials where we have seen a calculation of what the total revenues are that the distribution companies can receive and then redistribute through the revenue pooling that is going to occur among the Ontario Hydro companies. We are wondering whether that information is available and whether any sort of proof of revenues exist so we can understand how SERVCO will receive and distribute its revenues, as well as to understand from the distribution company perspective whether the existing level of rights is reasonable or whether there is -- in some cases it is too low or too high and what happens in that situation, and should there be something then from a rate-making perspective. So I guess, first of all, is there somewhere where this information is available and can it made be available? MS. NG: A. I believe that in the supplementary [Questioning] 62 Board Staff/Reed Consultants material, A, there is some revenue flow charts, chart No. 3, which shows the external revenue as it is coming in now through the bundled rates. Q. Can you give me a tab A or page number or something like that? A. Tab A from the supplementary filing. Q. A as in apple? A. A as in apple in the supplementary filing. It is in chart 3. MR. HARDY: Just for my purpose, and I think probably some of the participants, where is the supplemental -- has that supplemental information been available from the Board or from SERVCO? MS. WALLI: That should have been distributed by SERVCO. MR. HARDY: It has been distributed by SERVCO? Thank you. MS. SIMMONS: Q. Can you show me where customers -- the rates that are currently charged to your retail and commercial industrial customers, the total revenues that are obtained as a result of that and start me on this process? I have looked at this and it is a bit confusing. MS. NG: A. This actually does not show you the total revenues that would be received by the existing Ontario Hydro. It would only show you the revenue flows that would be going into the services company. Q. Okay. A. So all the arrows coming in from outside of [Questioning] 63 Board Staff/Reed Consultants the dotted diagram would be the revenues that would be coming in to the services company. Within 1999, because it is still under a bundled rate, essentially it will be a revenue allocation process which would take the existing bundled revenue and allocate it. Parts of it would go to Genco and parts of it would go to the services company. So what you are really seeing here is the pieces that will be coming into the services company, be it from the bundled revenues primarily, and part of it is external revenues. For example, if there had been some services that network service is providing for the MEUs, those would be also be showing in as sort of one of those arrows that's coming in. To give you an example, if you look at the network asset manager box on chart 3, you will see transmission tariffs going in there, the 1327 million dollars. That's essentially at the end of a day the amount that will be going in would be very much depending on the outcome of the rate order. But on the basis of the proposal, the 1327 is the total revenues that is consistent with this rate order application. So that's the external revenue that will be coming in but that will be an allocated amount depending on whatever the OEB issues in terms of the rate order. Q. I guess I am kind of interested in finding out what's coming in in total as you are going to be the [Questioning] 64 Board Staff/Reed Consultants distribution company who still is providing default supply and prior to retail competition you still will be receiving those dollars initially and then processing them through the revenue pool. I may be not describing the process as clearly as it is going to occur. Prior to this, someone in the revenue pool giving you this 1327 for transmission, what are the total dollars that you are current rates are collecting right now, just to help us understand overall -- the fact that the transmission or distribution rate revenue requirements may change doesn't -- just means some other element of the process, Genco or Finco, some other element, gets a different pot of revenues. We understand this is a transmission/ distribution rate filing, but you are also a distribution company and provide bundled service to retail customers. We also need to understand the reasonableness of those rate levels and how they are impacted by this filing. So have those calculations been made? A. Yes. I believe that those calculations are available except that you're not exactly seeing it on this chart because, for example, the retail revenue would be net of the cost of power. Q. Okay. A. Which means you will not see the generation charges. Obviously one issue still being worked through is how much revenues would be provided to the generation [Questioning] 65 Board Staff/Reed Consultants reflecting, you know, the discussions of the market power mitigation scheme in terms of the specific rates that would be manifested. My understanding is that those discussions are still going on. So when I say that some numbers are available it is probably more available for the services company because of the -- not too deal with the energy cost aspect of it. I assume that at the end of the day when that piece of it is nailed down, then you can probably look at the overall revenue allocation and you can look at how much will go to the generation, but that discussion, as I understand it, with respect to the generation company is still ongoing. MR. HARDY: Can I just jump in here?. Q. Are you proposing that that be made available through these Technical Conferences or at some other conference or is -- sorry, you mentioned that that information was available but... MR. TAYLOR: David, I think Malen is saying is that the whole negotiation around the market power mitigation at a different table between the NDC and Genco and I guess energy is under way. The outcome of that would influence what the total pie is. MS. NG: If you make an assumption about what the outcome would be you can obviously provide some table that shows how the total revenue looks like and how it gets allocated, but whatever we'll be doing we'll be making an [Questioning] 66 Board Staff/Reed Consultants assumption about the outcome of that discussion. MS. SIMMONS: Q. Could you do it and simply document that you have made this assumption? I am kind of more concerned on the distribution side and your level of, you know, retail rates and to the extent that any of the existing rate levels are deficient. And if I looked at -- whatever the cost of power and CTC ends up being and add back a transmission piece and a distribution piece, are those rate levels sufficient? What happens on that side to those customers? I understand things are in flux, but the Board is concerned with this issue and with understanding whether there are any excesses or deficiencies in your current bundled rate levels. MR. TAYLOR: A. We understand the problem. I guess I would like to take it under advisement as to how we could respond to you. Q. Okay. A. Clearly we will to make a whole bunch of opening assumptions on the thing, but I think we can probably -- we will have to take a look and how see how that would work out and get back to you. MS. SIMMONS: Okay. Thank you very much. That's primarily the bulk of my questions. MR. HARDY: Can I just have you hold for a second. Supplementary information, who doesn't have the supplementary information? Does everybody have a copy of the supplementary [Questioning] 67 Board Staff/Reed Consultants information or at least can have a look at it. MR. POCH: Just to be helpful, there were two batches. One was sent out in the December I think. I have it. I assume most people have it. There was one I see was filed January 4th which Richard has, but I don't. MR. HARDY: Okay. MS. GILLESPIE: Let me suggest to you that we make extra copies of the supplementary material as soon as possible and provide it in the room for people who don't have it. MR. HARDY: That will happen today? MR. HARPER: I do have a limited number of copies of both here. If you could maybe just raise your hands again I can see whether or not we can satisfy everybody here. Okay, no, because actually what I have is about 12 to 15 of each here with me now. Over the lunch hour we can arrange to get more printed up. MR. GILLESPIE: Would that be tomorrow? MR. HARPER: First thing tomorrow. MR. HARDY: If you could distribute what you have, but I think there is quite a need for that supplementary information. I realize it is a critical sort of discussion here. MR. HARPER: Okay. I will go down and get the copies. MR. HARDY: I'm sorry to interrupt. MS. SIMMONS: No, I am finished. I think I am [Questioning] 68 Board Staff/Reed Consultants going to hand it back to Bill to discuss some cost allocation questions. Thank you. MR. HARDY: Sorry, I have a question there. MR. BARRETT: Excuse me. I think some confusion arose to the last discussion about the market power mitigation proposal that I would like to respond to. MR. HARDY: Unfortunately, I'm going to let the panel go through their questions first. So I am going to have to ask you to hold that. MR. BARRETT: I thought it would be helpful to people, but if it's not... MR. HARDY: Sorry, I am just going to have to ask you to hold that. MR. HOPKINS (Reed): Q. I guess I would like to get into some general concepts with respect to the cost allocation process that you explained and you have put forward in the materials that have been shown. I know we discussed -- I think you discussed this morning a bit about how the overheads are to be assigned between network asset management and network services and then flowed down perhaps to the business entities. All the phrases are somewhat difficult to deal with, what's a business segment, what's a business unit. We have phraseology here which may overlap and underlap or something. But I would really like to walk through the allocation process with the concept in some fashion that we are starting with an entity that has a traditional [Questioning] 69 Board Staff/Reed Consultants utility structure. You know, it has assets recorded on its books and cost accounts that it keeps its records in that have what I would call the uniform system of account structure which has a functionality, generation, transmission, distribution, customer services, marketing, sales, et cetera, administrative and general, general plant and tangible plant, transmission plant, distribution plant. Is there some way that you can help us see that process from that structure to the allocated structure you are coming up with here? For example, how does the asset plant flow from the traditional accounts into the asset manager accounts and the sub parts thereof? Then there is parts of the asset structure which might be the general asset structure that gets allocated as well. There is nothing in this filing per se that shows those numbers and it going forward in that fashion; the present facilities being transformed into the new structure, so that there is no way, there is no apparent way to validate that the costs included in the new structure or pieces are proper or appropriate. I guess I am seeking your help in following that process perhaps from the present to the new structure from an allocation standpoint. I mean, certain facilities have been assigned, and I understand that. Certain transmissions -- what was [Questioning] 70 Board Staff/Reed Consultants transmission is put in the transmission asset pool. What is distribution is put in the distribution asset pool. Is there -- what we have in this filing is an amount of dollars that represent those pools supposedly -- reportedly, but there is no reference to find how those dollars represent what now exists. MR. STEWART: A. I'm sorry, I am not completely following. If the -- Q. Where are the records of what now exists and how do these new numbers relate to those? MR. ARISS: A. If I might try to clarify the question. I mean, looking at -- in the submission we have provided to you there the sets of the financial statements for transmission, distribution. If we look at the individual items that make up that rate submission, and you could start with things like the fixed assets, the depreciation costs that flow through, so those link back to the plant accounts, the records that we have for the individual fixed assets that are there. So -- Q. That's basically what I'd like to see, some more detail on it if were it available, is there is a closing balance in the plant accounts as of last year or this year and those asset amounts represent in those plan accounts what now is being accumulated in these other categories. Is there a tracing available of that so that it can be viewed as the pieces -- all of Ontario Hydro is not coming into the SERVCO; pieces are coming out as you go [Questioning] 71 Board Staff/Reed Consultants forward. What pieces are coming in and where are they coming from? A. I think Ron had mentioned this earlier that the remapping that there have been a number of reorganizations, restructurings that have taken place over the last few years. So that is where some of the difficulty, again with our historical records, is in terms of that type of mapping. MR. TAYLOR: A. I'm sorry, Bill, could I try perhaps another tack on this? Q. Sure. A. There are as we -- just your last sentence twigged it to me. As we move the assets from old Ontario Hydro to the new successor companies there will be transfer orders. Q. There will be transfer of orders? A. Yes. Q. And those details will show in those transfer orders where the materials are -- A. Yes. Q. -- and equipment are coming from and -- A. Yes. Q. -- and for what reason they are being assigned? MR. STEWART: A. What assets, some kind of description and where they are being allocated. Q. Well, I think -- [Questioning] 72 Board Staff/Reed Consultants MR. TAYLOR: A. Is that the kind of thing -- Q. That might be helpful if you could perhaps provide an example of how that would be detailed? MR. TAYLOR: A. Yes, all right. Q. Maybe that would help move it ahead for us-- A. Yeah. Q. --in this process to understand -- A. Yeah. Q. --what type of details will be available; because, as I pointed out, right now you sort of have a lump sum total which doesn't in a sense relate to anything that you can say, oh, this is all of this or part of this and -- that now exists. There is no reference to the present in this new number. I mean you have a 1999 number and a 2000 number. I don't disagree with the fact that you have those numbers, they are there. But what brings them forward to those totals -- A. Yeah. Q. -- are not well demonstrated. MR. TAYLOR: A. Perhaps we could show you a example of the nature of the transfer order of -- on a set of assets that's coming from old Hydro to OHSC so you can -- you can get a sense of the illustrate -- of how they are being illustrated. MR. HARDY: I've noted that that will be coming in the future technical conference, an example of that transfer. MR. TAYLOR: I can't give a date, David, but [Questioning] 73 Board Staff/Reed Consultants we'll do it in the course of these proceedings. MR. HARDY: Okay. I've noted, then, that that will be coming forward. MR. HOPKINS: Q. Would that be part of the work -- the totals that we see now have been added up from something. There are work papers underneath the totals that we see now in some fashion? MR. STEWART: A. I mean there's... Q. Let's think of assets for the moment. A. Certainly there's accounting detail to support all the assets, you know, poles and transformers and buildings and trucks and all the rest of it. There's, you know, endless amounts of detail that will -- would come to those -- to those totals. And you know, certainly, we can consider how best to, I mean, how many layers -- how best to summarize that and provide it to you. Q. Is that something that we could cover in the transmission and distribution -- A. Yes, certainly in more detail and more knowledge as well. MS. NG: I think the assets and capital panels on the transmission and distribution probably would be able to provide you with more information underlying all the assets level category in the filings. Q. Thank you. MR. STEWART: A. And speak specifically to the changes from what the opening to what's in the proposed in the material. [Questioning] 74 Board Staff/Reed Consultants MR. HARDY: Is that a question that can be posed by the panel? MR. HOPKINS: Yes, I think so. I think we'll do that. I think we'll try and maybe Michael... MS. SIMMONS (Reed): Q. One question I did have in relation to that, you've given us in your supplemental material which everyone hasn't seen on details some of your allocation of the shared costs to network asset management and network services and then beyond to transmission distribution and you've shown two ratios in your presentation 65:35 and 61:39. Are there any work papers? I mean, I know and I'm not quite clear in my mind and I haven't done the calculations to try to come back to those numbers, do you guys have work papers somewhere to show us where you came up with those allocation factors? Just kind of a small request. MR. ARISS: A. Okay. Those two specific allocation factors were, of course, done at the specific business unit level because the work had now been allocated, the dollars allocated down, so it was -- and I think that perhaps the two successor panels when they are discussing the actual levels of work and as they split their work and carry out both transmission and distribution activities would be better able to give you a summary of the kind of analysis, the kind of examination that they carried out to look at then to estimate how the respective work activities were going to be carried out between transmission distribution and then between the [Questioning] 75 Board Staff/Reed Consultants capital and the OM&A type of work programs, but it was really -- it was based upon the judgment of the people at that work face level looking at the work that they expect to be doing over the -- over the coming year -- Q. Okay. A. -- to drive that particular allocations. Q. So that's based on someone's forecast of work almost. I thought one was based on net book value and OM&A and I was just wondering whether there was something that based on the file levels you could tie back to 65 percent based on the rate base and O&M levels set forth in here? A. Yeah, the 65:35 was based upon the predicted net -- or gross, I think it was, the expenditures, the -- in the coming years, so it was -- that information should be available because it was based upon the capital and OM&A expenditures. But I'm saying it, again, you have to forecast how that work was going to be split between the TX and transmission and distribution. And then the -- I've forgotten the other exact ratio, but for network -- the services -- Q. 61:39, I think. A. Yes, again, was based upon a projection forward of the actual allocation or how their direct labour hours were going to be spent on the different work programs. Q. Okay. So there isn't anything that I can tie back to numbers in the filing to come up with that. I [Questioning] 76 Board Staff/Reed Consultants mean, is there -- there's no work papers. It seems that it -- it's a critical allocation factor you've used and I'm just wondering, you've given me a verbal description, but it sounds like there's numbers to support it. Is there work paper available or can a work paper be prepared or can you direct me to the person I should ask that to? A. Again, I think that would be on the supplementary -- or not supplementary, rather, but the specific panels on TX and DX, that they'll be able to -- to give you any further information specific details that they looked at to support those -- those specific allocations for us. MS. SIMMONS: Okay. I'll try to take it up then. Thank you. MR. HOPKINS (Reed): Q. I guess, just before we close off, I think one of the staff members has a question and I had one other thought that I might bring forward. You mentioned that, I think, in the presentation the allocation processes that you've used have been studied by Ernst and Young, was it? Yeah. Is that analysis, their report, on what you should do and how you should do it available as a background piece of information? MR. ARISS: A. We did obtain from Ernst and Young a written opinion on their look at, their assessment of our process, so we do have that available. Q. But to what -- you know, did it consider alternative methodologies in a way that propositions of which way to go and why. [Questioning] 77 Board Staff/Reed Consultants A. The specific written document we have doesn't go into that level of detail. We had discussions along that line with them during this -- the process that we went through. And as I think I've indicated, that some of our drivers are not the preferred, they are not our absolute best drivers that we would like to have and we would like to see, but they were the best ones that we had available within our existing systems and information processes that were there. Q. Is that something this Ernst and Young document describes, that that's the reason, they comfirm that that's why you should be using these methods? A. Acknowledging that they agree that this is the acceptable or the best within the -- that's essentially the opinion, the view that they provide in this that they agree that this is the best within the -- or it's the optimal one within the systems that we do have available. Q. I guess I'm wondering if it says anything more than that, and not to be too facetious, but does it -- does it describe, you know, in further detail the rationale behind that and if it is -- if it does, I guess in any event, is that something we could have access to? A. I think that -- I believe that that's available so we could see within an appropriate time -- I don't have a copy of that with me right now, but -- MR. HOPKINS: Q. I understand. I understand. MR. HARDY (Board Staff): Q. Just need a [Questioning] 78 Board Staff/Reed Consultants clarification then, it's, certainly you've mentioned a written opinion is available, but Bill's been asking for the detail behind the written opinion, and are you suggesting that that's available as well? MR. ARISS: A. Well, the written opinion, I mean, the detail behind the written opinion would be whatever was in E and Y's working papers themselves, the exercise, and I mean, we don't have access to that if that's what you're asking for. Q. Thank you. A. I think our basis is what's actually been provided in the supplementary information. MR. HARDY: Thank you. MR. HOPKINS (Reed): Q. I would be surprised that you didn't have access to it. I mean, you paid them for it, did you not? MR. ARISS: A. Well, in terms of their papers that they have prepared, I guess, I have not in the past actually -- actually went out and asked the consultants for the working papers that they have done. We have, through the discussions, obtained the information from them as to what their views are and where the deficiencies were and so we have that information. We received it in the discussions and the meetings with them, but what we wanted was the written opinion from them, was the product that we were looking for out of it as well as the knowledge that they could bring to bear on the exercise that we were carrying out. [Questioning] 79 Board Staff/Reed Consultants Q. I understand that. I just want, you know, they had a detailed view of your records and your costs and the available information and in the short period we have to review your application, we do not have that detailed view, so that, in a sense we'd like to take advantage of any of their analysis that they made in arriving at their conclusion that this is the best method from the available detail. And I guess anything you can provide would be helpful. Thank you. MR. HARDY: Okay. Thanks. MR. HARRIS (Reed): Q. I would like to turn to cost of capital. I have a few questions. And my name is Mike Harris with Reed consulting group. In both of your applications in Appendix 7 and the distribution location and in Appendix U, you provide an opinion letter from your financial advisor with regards to your proposed cost of equity. Is this letter your sole support for your proposed cost of equity? MS. NG: A. There is actually a more detailed paper that was prepared by Ms. McShane from Foster and Associates which, I think, at the point when we were filing the material, a lot of it was very much verbal discussions and working papers. I think actually, at this point in time there is a report being finalized which would provide sort of some of the documentation and support, you know, for the information that is in the Appendix U. Q. Can we have access to that work report? [Questioning] 80 Board Staff/Reed Consultants A. I -- I would think so. I just have to go back to the office and check whether it has been finalized -- Q. Okay. A. -- or whether there is still some -- Q. But what you're saying is once it is finalized you have no problem providing us access to the report? MS. NG: Yeah, yes. MR. HARDY: Can you give me a title of the report you said or an author, spell the name of the author, please. MS. NG: The author will be Kathy McShane from Foster and Associates. It's the same individual that's listed in Appendix U. It's Kathleen C. McShane who is the vice president with Foster and Associates. MR. HARDY: Thank you. MR. HARRIS: Q. Do you have a sense for when that might be finalized? MS. NG: A. I would think probably within the next week or so. Q. Was that the same financial advisor that you are relied on to determine that the A rating was appropriate for the company? A. No, actually, the A rating was something that was extensively discussed between the province and the services company in looking at the whole financial architecture and you probably -- people are probably aware [Questioning] 81 Board Staff/Reed Consultants that the province has been has retained Goman-Sachs as well as Wood Gundy as their financial advisor. And Ontario Hydro has retained Merrill Lynch and Scotia Capital as their advisor and services company also have Nesbitt so there are a number of financial advisors in this process. Q. Okay. On page 86 of your distribution application and on page 166 of your transmission application, you -- you state or comments from the letter of the financial advisor and you indicate that the financial advisor, or you state the financial advisor has indicated a 10 percent return is conservative in light of the business risk financial structure and capital market conditions faced by the regulated business. In your presentation, you've identified a number of business risk, for example, service area business risk related to the economy, operating issues such as variable -- weather variability age and condition of assets and also a competitive position, you mentioned self-generation or the threat of self-generation. And I believe, I might have missed this, you said something about substitution and that's -- A. And also new customer connections. Q. New customer connections, and also I think the final one was, it's a new company, the management does not have a track record with this new company. I'm going back to what's in the applications themselves and that statement specifically about business [Questioning] 82 Board Staff/Reed Consultants risk. Is the financial advisor referring to the same business risk that you referred to in your presentation? A. Specifically, if -- Kathy McShane's paper would actually go through some of the description of the business risk as well as, I think, the information from Nesbitt and Scotia have also advised on their assessment of the business risk from the financial markets and credit rating perspective. A. Yes. And essentially, I think they've come to pretty much the same type of conclusion in terms of agreeing with the underlying strength, for example, of the Ontario economy and the diversity, you know, as one of the pluses but also listed a number of the other ones that I mentioned as the potential risk that the rating agencies will be looking at. Q. Have you read Ms. McShane's report or at least in the term document? A. I have read an earlier version. Like I said, the report is still being finalized, so I -- you know, I .... Q. Yes, I understand. A. Yes, the earlier version I've read did go into details on the business risk assessment. Q. Okay. Then are you aware whether Ms. McShane actually identified other components of business risk in addition to those that you've identified or ...? A. I think the one that I've identified which [Questioning] 83 Board Staff/Reed Consultants didn't come into the conversation just now is the regulatory regime risk which is one thing obviously for regulated utilities the rating agencies will be looking at pretty closely. Q. So other than regulatory regime, is there any other business risk that you're aware of that Ms. McShane has identified? A. Those are the major ones, I mean, based on my recollection. Q. Okay. Good. You mentioned going back to operating issues as a source of business risk variability -- excuse me, I meant to refer to competitive position and the potential for self-generation and a substitution if I had that term correct. Did the financial advisor or has the company conducted any analysis to determine what the actual potential threat is from those two sources? A. I don't believe I've seen any quantitative analysis. Q. Any qualitative analysis? A. Yes. It's essentially raising those as issues that the rating agencies would be looking at. Q. But just identifying the issues, not conducting an analysis of whether they're a real threat or not? A. I have not seen any qualitative assessments in detail. Q. And you also touched on the new company [Questioning] 84 Board Staff/Reed Consultants aspect; that is, that management does not have a track record with this new company, but I assumed that the same management of the services company is the same seasoned management from the old Ontario Hydro just in a new company; would that be a correct characterization? A. I think the notion is really it's a new company, new board, new everything, operating in a new environment as an independent commercially stand-alone entity. That was the aspect and there's no track record in that. Q. Okay. Also, in your presentation, you've indicated that you and your financial advisor determined that the services company's overall risk is average and maybe you even said slightly higher than average relative to the average utility. Did I capture that correct? A. Yes. Q. Is the overall risk in the services company equivalent between the transmission and distribution businesses? A. The advice is, yes, they are probably quite similar. Q. Did you or your financial advisor have a specific proxy group of utilities in mind to relate to this average set of utilities? A. I think actually in the work that was done and I think you'll see in Kathy's paper when you get it, is there is a another number of peer groups being looked [Questioning] 85 Board Staff/Reed Consultants at both in Canada and in the United States. Q. Okay. So you do have some proxy group. At least it will apparent in the report. A. (Nods) Q. Okay. As proposed, both the transmission and distribution companies are guaranteed their revenue requirements. Once it's established, it will simply be paid to the respective companies; is that correct? A. Sorry, can you repeat your question? Q. Yes. It's my understanding that as proposed, both the transmission and distribution companies will be, more or less -- not more or less -- will be guaranteed their revenue requirements. If you determine that the revenue requirement for distribution is $500-million, that that's the money that will flow to the distribution company; is that correct? A. Let's talk about the period under the rate freeze and before open access. Under the bundled rate, the revenue allocation scheme that is being discussed, yes, will have the revenue requirement for the services company allocated from the bundled revenue to transmission and distribution on the basis of whatever the OEB would set as the rate order. Q. Okay. So they are guaranteed their revenue requirement? A. Once it's set, yes, the revenue allocation would essentially be flowing in that fashion. [Questioning] 86 Board Staff/Reed Consultants Q. Okay. Do any of the utilities in the proxy group that your financial advisors constructed enjoy that type of a benefit; that is, do any of them -- are any of them guaranteed their revenue requirement? A. I'm probably not in a position to comment on the details, but I would also -- I would just also say that I've sort of premised my statement by saying that's a case under the revenue allocation which is probably within the next year and a half. So when you look at an overall business risk when you are trying to borrow on 10- or 30-year markets, you probably would have to look beyond the next year and a half in terms of the regime. Q. I understand. Just a few more questions. I would assume that you would agree there is a tradeoff between maintaining an advantageous credit rating and setting a reasonable return on equity, would you not? A. You're saying that there is a balance. I would think that the access and the return on equity are probably pretty much, you know, hand in hand in terms of the return measuring the risk of the business. If you don't have continued access to the market, that sort of increases the risk, you know, of the company which would inadvertently, you know, affect the risk associated, you know, on the equity. Q. I guess what I was getting at is that there is a tradeoff between what return you're granted and what credit rating you can obtain. A. Yeah, there is a direct relationship. [Questioning] 87 Board Staff/Reed Consultants Q. Has the company or your financial advisor performed any analysis to determine the implications of the cost on incremental issues of debt if the services company is not granted or if the services company's rating falls short of an A rating? A. I think there definitely has been a lot of dialogue in terms of what if there is not going to be an A credit rating and there has obviously been advice to the level of concerns that could be there in terms of the continued access to the market especially under some specific market conditions, for example, like those that we have experienced in the summer where there is a flight to the quality. In that case, it's not even a question of the reasonable cost of debt. It's probably even the issue about the access to the extent of a single A credit rating is not being maintained. Q. So if your rating fell one rating below an A, then it's your position that you would have difficulty accessing the capital markets? A. The advice from the financial advisors would sort of -- has at the end of the day, you know, lead to some of the financial architecture conclusions that were reached by the province, is that if you are rated at a triple B, it certainly will restrict your market access especially if the market conditions are turbulent. And also, a lot of institutional investors would probably not be allowed to purchase any debt below a certain credit rating. [Questioning] 88 Board Staff/Reed Consultants Q. Okay. You mentioned you've had dialogue, but has there been any quantitative analysis conducted to determine what the impact on costs would be keeping aside this issue of access? A. Yeah, I have not seen any quantitative analysis that specifically quantified the impact of things like that, but the advice we've been getting is that given the financing requirements that we have and given, you know, sort of the need to continually access the market, that a single A credit rating is what we should be targeting for. Q. Okay. Along those same lines, has the company or the financial advisor done any analysis to determine the impact on customers, on customers, if the proposed equity return was lowered? That is, I think we both agree that there's some inverse relationship between return on equity and your bond rating. Have you conducted any analysis to determine what would happen if that equity return was lowered and there was a corresponding impact on your debt rating and your cost of debt, and more specifically, what would be the impact on your overall revenue requirement and, therefore, the impact on the customer? A. No, but I think the advice we've been getting is that the 10 per cent return on equity is probably reasonable, you know, from the various tests that has been performed and probably at the end of the day, given the need to access the market on a continuous basis and the [Questioning] 89 Board Staff/Reed Consultants associated risks of the business and the costs of debt, that the overall weighted average cost of capital is probably a reasonable one. Q. Okay. But no specific analysis of what happens if the return is lowered and what the corresponding impact on overall revenue requirement -- A. I have no detailed quantitative assessment that I have seen. Q. Okay. Good. Just a few other questions if I... MR. HARDY: Okay, Michael, we will be going until 12:30, so continue. MR. HARRIS: Okay. Q. You've indicated that the debt structure of the successor company is generally based on Ontario Hydro's. Can you comment maybe briefly on what you mean by generally? MS. NG: A. Generally based on is, in essence, that the Ontario Hydro financing -- financial corp. would be taking overall the existing Hydro liabilities. And as I mentioned, that they are going to have significant maturity payments, you know, within the next five years. So essentially what they have done is to look at the existing debt and try to keep the debt and use that debt as the basis for saying what the services company's maturities and interest rates should be. Now, when I say "generally", it's because it's [Questioning] 90 Board Staff/Reed Consultants subject to two considerations: The one consideration is obviously you still have to make sure that the total amount of financing is within reasonable bounds even for an A rated company, so you're not going to suddenly throw 5-billion in one year or whatever; the second consideration is obviously to ensure that the coverage ratios, the interest coverage ratios that will result will still fit within what is judged to be a reasonable basis for targeting for a single A solid credit -- a single A credit rating. Q. Okay. You might have answered my next question in your previous answer. The application indicates that your weighted average cost of debt is going to be about 7.8 per cent. Do you have a sense about what the weighted average cost of debt of Ontario Hydro was prior to the assignment of that debt? A. I believe it was somewhere around 9 per cent. Q. This should be a fairly easy question for you: Can you point in the application where we can determine how that 7.8 was derived? A. Yeah. I think there is a financing section in the main submission which goes through the general discussion and then there is an appendix which actually highlights all the existing bond issues and the .... MR. HARDY: Sorry, main submission - transmission or distribution? Which case ...? MS. NG: I think you can take either one of them [Questioning] 91 Board Staff/Reed Consultants because they would -- MR. HARDY: Okay. Which? MR. HARRIS: Q. Would that be appendix 6 in your distribution application? MS. NG: A. That would be page 164 where it goes through some of the description. The 932 and 933 go through some of the description in terms of the basis for the cost of debt. And then if you go to appendix -- there is an appendix that actually lists all the existing debt portfolio. I believe it's .... MS. WALLI: Is it appendix N in the transmission document? MS. NG: Yes. There it is. Yeah, you're exactly right. It's appendix N which actually goes through all the specific inherited debt issues which will be owed to the Ontario Hydro financial corporation. MR. HARRIS: Q. Okay. Can you explain what this bond selected column means in appendix N and ...? MS. NG: A. Oh, okay. The first column here is essentially the amount of debt that is existing Ontario Hydro debt and the maturity of those debts. And the bond selected, essentially one means that the whole amount would actually be allocated to the services company. Where you look at, for example, under the maturities under 2001, there is a $1-billion bond issue, only 34 per cent of that was attributed to the services company because obviously, I mean, you cannot have a [Questioning] 92 Board Staff/Reed Consultants maturity in a year that's like a billion dollars. So in some cases when they were attributing the bond issues, they have to attribute a partial bond issue in order to meet those considerations about the financing cap. Q. Sure. So in calculating the 7.8, does one simply take the coupon and multiply it by your notional per year -- A. Yes, yes. Q. Okay. A. And also, the 7.8 per cent also include the new refinancing for 1999 and Year 2000 which we've explained about the interest rate that was used so on and so forth, so if you take the new financing and the existing bond and composite them, that would give you the existing 7.8 per cent. Q. Do you have a schedule of refinancing? A. Yes. The refinancing is essentially the amount that you're seeing here. For example, look at the notional per year. The 650 is essentially what will be refinanced in year 1 and the 749, if you add up the numbers under Year 2000, that's essentially all the maturity payments that will be needed in Year 2. Q. Okay. Thank you. Just one last question: How is short-term capital cost reflected or incorporated in your cost of capital? Does the company conduct any short-term borrowing, less than a year, and if so, how is the cost of that debt determined? A. Given that our term to maturity is already [Questioning] 93 Board Staff/Reed Consultants just four years, the intent is to actually refinance using a combination of 10 and long Canadas and I think our intent is actually to stretch out the term and not to -- you know, stretch out the term as much as we can. MR. HARRIS: Thank you. That's all I have. MS. SIMMONS (Reed): I just have a couple of really brief questions that we had scheduled for this panel. Q. One is some explanation, more explanation of the reference to unrecovered year-end costs. I guess I can refer you to page 39 of the transmission application where there is a discussion under the transmission OM&A expenses reflected in the filing. It would be the third paragraph. And I am about a bit confused with this relative to discussions regarding post employment benefits and those accruals regarding -- I don't know if this is referring to that or referring to some other year-end charge to income. It appears I think in both transmission, distribution and we just kind of wanted to get that out of the way today. MR. ARISS: A. Can we just check the reference again. That was page 39? Q. I'm sorry, page 139. A. Okay. Q. Sorry. A. Again, if I can answer this. This is the [Questioning] 94 Board Staff/Reed Consultants paragraph starting at line No. 14 that we are talking about? Q. That's correct. A. To put the context, as we are indicating here, in 1997 Ontario Hydro did write off substantial amounts on its -- from its financial records. There were, as part of that over $6-billion write-off there were losses that were recognized that were in accordance with generally accepted accounting principles. Those losses related to known staff surpluses that existed at that point and costs that were going to be incurred over -- estimated to occur over 1999 and 1998. So in accordance with GAAP, those losses should be recognized and were recognized in 1997. As well there are some other costs involved with facilities that we were going to be exiting that would be surplus. Some of the buildings at Kipling and within the retail system. Again, some of the -- we would be vacating some of those buildings, but we would not be able to dispose of them for some period of time, again, normal marketing of those facilities. So there would be costs incurred to maintain those facilities over that period of time. Again, in accordance with GAAP, once you had a known decision to surplus those facilities, then you should be recognizing all of the loss associated with it and those further incremental costs were all part of that loss calculation that took place or that was included in. [Questioning] 95 Board Staff/Reed Consultants As well, there were substantial amounts of write-offs in '97 that were done under the rate-making authority of the board of directors, but this is referring specifically to those GAAP-related write-offs. As we request go forward -- in 1997, that was charge was taken against retained earnings. They were not factored into our cost nor recovered from our customers at that point in time. As we were looking forward now to 1999 and to the year 2000, these costs will be incurred. There are staff surplusing costs, the cost for these buildings. If we did not factor them into this rate submission to recover them, then the cash flow for those would have to be financed out of borrowing and effectively would never have been able to be recovered from customers. So this was an exercise to factor those back into the rate submission to ensure they were recovered, they did relate to the business activities that had taken in place in the past. Therefore, we felt this was a fair and appropriate basis of recovering those costs from customers. Q. Are they in one particular cost category or are they kind of spread out among the sustaining development operations or do they appear in transmission support? It wasn't clear where they actually fell. A. I'm not -- Q. Dealing with what the total level was. A. I can give you an indication of what the [Questioning] 96 Board Staff/Reed Consultants total level was. I'm not absolutely certain where those -- which of the line items they were included in the submission. I imagine they were in that transmission support because they don't relate to any of the other specific work programs. So I expect that's where they would be, but that could be double checked with one of the successor panels who could tell you exactly where they were. Q. Okay. A. The amounts that we were looking at in 1999 for distribution total approximately $17.5-million and for the year 2000 approximately $3-million. For transmission we were looking at approximately 6-million in 1999 and about $2-million in the year 2000. Again, split between the staff costs, surplus staff costs and those costs of maintaining those buildings that we have already decided that we were going to be exiting from. Q. Is there a letter or is this stated in Ontario Hydro's books? Do you have a letter from your accountants stating their opinion as to the appropriateness of this treatment? A. What specific aspect of the treatment? Q. yes. You referred to -- in accordance with generally accepted accounting principles you took this charged income in 1997 based on something -- there is various factors. Was there an opinion issued by your accountants [Questioning] 97 Board Staff/Reed Consultants or auditors? A. When we prepared the necessary submission going to Ontario Hydro's board of directors which had to approve that right off, that is reviewed by the external auditor, all aspects of it, and opinion is given on that that it is in accordance with that and that assurance is provided to our board before they are actually asked to approve that. So it is in the actual board memo itself. Q. Okay. Is there anything we can get a copy of and can you also determine whether -- were all of these simply related to the transmission or distribution businesses or were there other write-offs associated with the total Ontario Hydro business as it existed in 1997? A. The write-offs that occurred in 1997 covered all the various businesses, aspects of Ontario Hydro, both the generation, transmission and distribution. MR. HARDY: Sorry, I need to be clear. Is there some paper coming forward that you are asking for that support? MS. SIMMONS: If we can. I do understand it was a different corporation. I'm not sure of the availability of the data to be provided in this forum. MR. ARISS: The actual financial statements, the audited financial statements for 1997 and the note disclosure there provide an appropriate summary of that. All you would see in the actual Board document is simply a line item that has that statement that Ernst and Young is in concurrence with this treatment as being in [Questioning] 98 Board Staff/Reed Consultants accordance with GAAP. You wouldn't see anything more than that. That's our normal process and, of course, the auditors are providing that assurance directly to our Board. MR. HOPKINS: Do they detail the amounts? MR. ARISS: The amounts are detailed in the financial statements which are a public document. MS. SIMMONS: That's fine. MR. HARDY: You are not expecting that to come forward? MS. SIMMONS: No, we can obtain copies of those financial statements if we choose. MR. HOPKINS (Reed): I have just a question on depreciation if I might to tie it up here. Q. Throughout the document there is reference made to your depreciation organization that's been an ongoing I guess process of your -- I think it is called the DRC; is that right? MR. ARISS: A. Depreciation Review Committee? Correct. Q. It has been an ongoing undertaking, I understand, from Ontario Hydro throughout its -- most of its life I guess. I just wondered to what degree the policies and practices of that committee are going to be -- what are they, you know, in a sense, and then are they to be continued and in what fashion? [Questioning] 99 Board Staff/Reed Consultants What policies and practices has Ontario Hydro pursued and will it continue to do so or is it considering any alternatives to it? If so, what are they? A. The policies and practices, as you indicated, have been consistently followed for quite some number of years. Certainly at all the hearings that I have been involved with the Depreciation Review Committee and the practices that have followed have been -- they have been carried on consistently through the intervening years. The actual process is one of calling upon experts from different areas of the corporation, bringing that committee of experts together to challenge the estimates of the service lives in different parts of the organization so you have both the technical engineering people, you have financial people from all the various business units getting together. The cycle is one of trying on at least a -- well, not trying, it is a definite cycle on a five-year basis to have reviewed all of the plant accounts. The process is one of having the respected business units that are accountable for the assets to look at those individual plant accounts, and plant accounts being the actual types of assets, to assess what has been the experience over the intervening years. In other words, have they had more retirements, less retirements, have the estimates of the service lives increased, decreased, has there been technological [Questioning] 100 Board Staff/Reed Consultants changes, economic changes, all the various factors that are brought in play. Submissions are presented to the committee, those submissions are challenged by the experts that are on that committee and recommendations then come forward from the committee itself for any changes in the service lives for the individual plant components that are being reviewed. So that's just an overview of the policy and the process that they go through. Q. Is that going to continue in the proposed new structure of the corporation? A. As we go forward that is something that still is under consideration. We can have the option of course of continuing that process. We would not be able to draw upon the expertise of engineers from the generating side of the business which would have a -- we would lose something in that process. We have that one option. The other option, of course, is to use external consultants, external expertise to come in and do an independent review. Of course, our third option we might have a hybrid and have some combination of both of those; a committee drawing upon our experts, then also drawing upon external experts. That is under consideration. A final decision hasn't been made yet as to what process we will use on a go-forward basis. Q. The practices as well might change or -- it [Questioning] 101 Board Staff/Reed Consultants isn't apparent from the filing what the practice is. Is it a group life basis, is it a remaining life basis? What practice is being utilized in determining depreciation rates and changes in those rates? Is that something you can share with us now or is that under review as well? A. The depreciation policies are on a straight life remaining. Book values are amortized over the remaining life of the individual assets. We use pooled depreciation for various categories of assets. It depends upon the nature of them, if you are talking about lines, if you're talking about polls, the methodology using the Iowa curve approach and all the statistical analysis that goes along with that has been the basis used for some time. So it is a mixture of a number of different processes. But, again, this has not changed. This has been consistently applied by Ontario Hydro and it formed the basis of the service life adjustments that are presented in the submission to you. Q. I see. Well, the reason for asking is really because in a regulated utility here we would have had a history of these types of studies being presented and results contested and what have you and approaches discussed. You come forward with a method which is not really on the table. What is the method that you are using, and also I guess, you know, we would like to, if -- and this [Questioning] 102 Board Staff/Reed Consultants may not be the appropriate panel to ask again, but I think we would like to see the results of those studies that have been made in some fashion to see where the accounts have been analyzed and what rates are used for them. Is that something, first, the general practices that are being followed, a statement of those as you said, straight remaining life basis or whatever, the bases, factors and approaches that you are taking consist of and what the results of that is. Realizing that is rolling over once every five years, but what is now the present state of those rates that are being used. Is that available? A. The extracts I believe, I am not quite sure where, but I understood that we have included in the submission... Q. Perhaps I missed them. A. There was an extract from the Depreciation Review Committee report for the changes in service lives for 1999 and 2000. We can find that for you. Q. I realize that, but that represents only a group of pieces of your enterprise that they were looking at at that point in time, does it not? A. That was the slice for that 20 per cent of the activities. Q. To get the total picture you would have to go back four more years and there are reports -- A. There are reports. This has been done every year. I mean, this is a consistent process that is done [Questioning] 103 Board Staff/Reed Consultants on a regular basis. There are reports for, well, the last five years. If you wanted to see that similar extracts from those reports for the transmission/distribution assets for that time, one of my staff did a quick scan through that just to see if there had been any significant changes that had taken place over that time. And as you saw in this slice for that past year, there were not substantial changes in the life as to what you would expect as the new history rolls through. We could consider whether perhaps, if that's what you are looking for in terms of the similar kind of information for the last five years -- Q. For the other pieces of property that weren't considered in the current filing or the review committee's report. One-fifth of the -- a slice of one-fifth of your property was considered there, and, sir, and there may or may not have been substantial changes in that one-fifth, but what are the other -- what are the other rates? I think it's incumbent upon us to the extent we can take a look at the rates that you're now charging throughout, throughout the entirety of the process -- program and we'd like to have some detail of what those are. MR. HARDY: So I assume that that will come forward, that information will come forward. MR. ARISS: We can see if we can obtain that information and we'll get back to you. I did just want to make sure -- you had said in terms of the process and what's on the table that, again, reminding that this [Questioning] 104 Board Staff/Reed Consultants process has been reviewed and reviewed extensively back, I think -- I'm not sure of the exact date, but we did have some years ago, the entire DRC process was reviewed by an external consultant, and I believe it was Mr. Brightling (phoen). That was some years back when that was reviewed with the OEB and the findings were there I think that our process certainly was acceptable and perhaps more extensive than even at some of the other regulatory environments that he had been involved with or seen. So this is not an new process or it's not certainly one that hasn't been tested and vetted thoroughly before the OEB in the past. MR. HOPKINS: Q. If you have that, you know, reference to that particular undertaking or order or decision I would like that as well because that would be helpful. Anything that would be helpful. MR. ARISS: A. I'd have to get back to you on that. My memory is a little vague in terms of when that was done. We'd have to check and see if we still -- whether that is available. MR. HARDY: Okay. I understand that information may be coming forward. You're going to check on that second aspect. We have time for maybe one, maybe two questions before we call a break. So if I can ask you to start to wrap up, please. MS. WALLI (Board Staff): Just turn very briefly to the area of income taxes. [Questioning] 105 Board Staff/Reed Consultants Q. Will you be able to provide us with a detailed calculation of your income and other taxes; for example, your calculation of a federal large corporation tax, how it displaces the the federal surtax, and also perhaps some detailed description of your deferred method for computing taxes as opposed to more flow-through method. So essentially, will you be able to provide us with more detailed tax calculations, your working papers for them? MR. ARISS: A. Okay. That information, of course, is available, I think we have included in the submission the various rates and as you've indicated how the surtax -- the surtax is allowable to offset the large -- I almost forget the terminology -- but the large corporation tax. That -- there are working papers for that. The last part of your question, I wonder if you could just expand upon that. I'm not quite sure I understood what you were asking for. Q. Certainly. Appendix M -- I think it's fairly high level -- Appendix M in the transmission document and they are not necessarily the same for distribution, gives a high level look at income and other taxes. What we'd like you to show us is the next level down, more detailed working papers on your -- on your income tax calculation? A. I will check to see what we have available for that and get back to you. [Questioning] 106 Board Staff/Reed Consultants Q. That would be very helpful. And secondly, just the latter part of my question, some description of the deferred method for calculating taxes that you've used? A. Okay. When you say the deferred method, we have, in this rate submission, assumed that we were going on a tax allocation or a normalized basis so that we have included in the rate submission the taxes based upon -- not on the taxes payable basis but based upon, as they would be appearing under generally accepted accounting principle basis on our financial statements. I think the difference that you see is already presented in the deferred tax line item or the deferred tax debit in the case of, I forgot now, exactly transmission -- one ends up with the deferred tax debit, the other ends up with a deferred tax credit so the effect of that is presented in the submission, if that's what you're referring to. Q. Certainly. Can you provide a further explanation or some more detail on it? That would be quite helpful to us. A. We'll see what we can find in the way of -- just to show you the actual breakdown of that calculation. MS. WALLI: Great. Thank you very much. MS. SIMMONS (Reed): Q. And I think we are also interested in knowing as to why you chose that method? Maybe we weren't aware that that was required of you in some sort of act or a decision by the finance minister, why are you using that method versus a flow-through cash [Questioning] 107 Board Staff/Reed Consultants method? A. We considered the various alternatives and realized that this is a subject that is debated in regulatory environments. In looking at the pros and the cons and we've had discussions with, again, with our advisors, Ernst and Young as to the rationale for it. Our view and why we're purporting it and supporting it here is that our overall accounting framework in the way we are recognizing costs, we are trying to follow generally accepted accounting principles is in the best way of matching the cost with the respective time periods. The tax is based upon a taxes payable basis which, of course, is based upon depreciation as opposed to the capital cost allowance. In our view, provides the best matching of those costs that are being -- and for the tax costs that actually are going to be incurred, that tax expense, with the time periods in -- with respect to the the economic use of the assets in that time period as opposed to having it deferred into -- into some future time for collecting when we are actually having to pay it to the -- on the taxes payable method. And as well, I think we will consider the application of a level playing field. Other entities in their reporting their financial results are doing it on the basis of generally accepted accounting principles, their net income results are based upon showing the taxes on a taxes payable basis as opposed to the -- sorry, on a tax allocation basis as opposed to a taxes payable basis, [Questioning] 108 Board Staff/Reed Consultants so again, that provides our financial results on a comparable basis. Q. When you made your decision, you said you looked at pros and cons and this is my last question. Did you look at, when you or your advisors made this decision, I understand you're saying it's for financial reporting purposes, was a driver in making that decision and consistency in your financial reporting purposes, your consistency with the treatment of taxes by other regulated utilities within Ontario and within -- within Canada overall, and is your approach consistent with that? A. My understanding from, again from what we had received from our advisors is that there has been, over time, quite a range of different practices, both tax allocation there have been entities, regulated entities have switched back and forth, or at least have switched from a tax allocation tax payable basis. That there are precendents on both sides out there right now and they're varying, as I indicated at the outset, I understand there's -- this is the subject of some debate. So there are precedents both ways. We were basing it on what we felt were the correct principles and we want, again, to be applying a consistent basis of using GAAP as the basis -- to provide the best basis of recognizing our costs within our time periods. So following that consistently is again one of the criteria that -- probably more the prime criteria that we're trying to adhere to in making that decision or putting that forward as our recommendeded position. [Questioning] 109 Board Staff/Reed Consultants MS. SIMMONS: Thank you. I think that's all we have for this morning. MR. HARDY: Thank you. I'm going to call a break at this point. If we could come back at 1:30, please. And when we come back the floor will be open to all parties and the Board and Board staff consultants as well. Okay. So we'll be back at 1:30. ---Luncheon recess at 12:30 p.m. ---On resuming at 1:32 p.m. MR. HARDY: Why don't we get going? We are going to be going until about 4:45 or so. I'll have a break around 2:30 to 2:45. Gentlemen, gentlemen, we're back in order, please. Thank you. Okay. I want a straw vote now just to see who has -- I know some people have said they have some time constraints. Can I have a quick show of hands if somebody has a time constraint? Five. Okay. What I intend to do is, I'll work with the four people first as a first order of questions and then we'll have -- I'll keep a speakers list at that point. I again remind you, if you are at the mike and if you don't have a question, if you would just move back to allow other people to come forward. And, sir, you there and the other person, if you want to come up now - you said you had a time constraint - [Questioning] 110 General audience yes, come up to the mike so we get you up here, please. Also, I'm going to do my best to allow you to answer -- or ask all your questions, but if it does go on, I'm going to try to make sure we allow as many questions as we can from a variety of people today. So if I'm rude, I'm going to apologize now. Okay. Why don't we start? Identify who you are and let's get your questions out. GENERAL QUESTIONING FROM AUDIENCE: MR. GIBBONS: Hi. I'm Jack Gibbons. I'm here on behalf of Pollution Probe. We have an interest with respect to your DSM or energy efficiency programs of SERVCO. Q. And as you know, it's in the Act 1 of the objective -- or purposes of the new act is for the utilities to promote energy efficiency and as you know, the gas utilities that are regulated by the Ontario Energy Board have been promoting energy efficiency or DSM as a result of an OEB mandate since 1993. I'd like to ask you -- and I have a handbook that I've produced, Pollution Probe's Handbook for the technical conference to hopefully make our questions a bit clearer and to help focus the questions and I've given them to the Hydro panel and to some of my colleagues here. If anyone else wants copies, I've got them here. And if we could turn to page 1 of our handbook and first focus on the Consumers Gas Company's DSM just to sort of set the stage a bit. Consumers Gas' DSM programs are reducing [Questioning] 111 General audience their customers' bills by about $108-million. Their 1999 DSM budget is $7.2-million. That's about 1.4 per cent of their revenue requirement. And in terms of volumes, their DSM programs in '99 will reduce gas sold by about 32-million cubic metres which is about 0.27 per cent of their total throughput volumes. So that, you know, gives us a bit of a comparison. And then if we go further down, I've shown if Ontario Hydro SERVCO was to achieve similar levels of budgets and DSM targets what the implications would be. Your budget would be -- if it was 1.4 per cent of your revenue requirement would be $32-million and your savings in terms of it gigawatthours would be about -- well, it's about 441 gigawatthours. I've got the wrong number at the last paragraph, but it's 360 plus 51 Now, I'll ask you, given that context, what is your DSM budget and what are your DSM targets in terms of savings? MR. TAYLOR: A. Well, Jack, I'll take a shot at it. OHSC does not have a formal DSM policy as OHSC yet. I can give you, though, perhaps some preliminary thoughts about DSM if that would be helpful to you. I've realized this isn't on the Issues List, so I don't want to rag the puppet, if I could take a couple minutes maybe just to respond. MR. HARDY: That would be fine and I'll respect that it isn't on the Issues List.. MR. GIBBONS: I believe it is on the Issues List [Questioning] 112 General audience under revenue requirements and other things, capital program O&M. MR. POCH: Let's not get bogged down in it perhaps since we're not seeking a ruling. Can we just hear the answer? MR. GIBBONS: Yeah, sure. MR. TAYLOR: We do in OHSC are very interested, of course, in internal energy efficiency. I mean, part of our business is line losses, an important part of our business, and we want to reduce line losses to the degree we can. In terms of internal energy efficiency over the last four years, we have spent funds and realized about half a million gigawatthours in internal energy efficiency. So, there is certainly an interest in the business in realizing those savings particularly around line losses. In terms of DSM itself though, our marketing department is as nascent as I said it was in my opening comments. We haven't developed a kind of a load management policy or approach or a marketing approach per se. We do, however, look at DSM, I guess, in two-ways, Jack, one as a planning issue and one as an energy services issue. On a planning issue, we could look at it very much like in the same way that we might look at distributed generation; that is, it is a wires alternative. And as local integrated resource planning [Questioning] 113 General audience goes forward and so on, DSM when we are and have in the past in our old incarnation have considered the most cost effective and where DSM is involved, that has come to the fore. That will continue in our planning. As far as a part of an energy services list, just as we may have interest in the future in district energy and distributed generation, we would also be interested in putting on that list DSM and load management initiatives as part of a customer service. MR. GIBBONS: Q. Would that be just for your customers who get their electricity commodity from you or would that be for all your customers, the transmission or distribution customers? MR. TAYLOR: A. Well, the energy services part of our future organization will, in fact, be in the competitive arena and will be competing against other energy services suppliers. Q. Because, you see, with the gas utilities, they've already gone to competition more than ten years ago and their DSM program is as focused on reducing their customers bills by making the customers more energy efficient and it's open to all their distribution customers whether or not they actually buy their commodity from the Consumers Gas Company or Union Gas. They can buy their gas commodity from Sunoco and still get distribution, energy efficiency services from Consumers Gas to reduce their bill and make them more competitive. And I guess you say your marketing program is [Questioning] 114 General audience nascent, it's just in the beginning phase, but I'm wondering, given that you don't seem to be fundamentally opposed to doing DSM, I'm wondering if there's a way that SERVCO can work with Pollution Probe and other intervenors here to agree on an appropriate DSM budget for 1999 and appropriate DSM targets or -- in order to get sort of some kind of consensus position or are we just going to go to the position where we have to make our submissions in February and your position is we're doing nothing maybe or have no budget and then we make a submission about what it should be and that's just sort of an adversarial approach and I'm wondering if there's some way for us to get a joint agreement on what would be appropriate for 1999. A. Well, I think the proposition for '99 and the Year 2000 is before the Board, but we would certainly be happy to discuss with intervenors where we might take a DSM program; however, I don't want to commit to a process that would get us into committing to targets and so on. Q. Well, maybe about committing to make -- actually spending some money on it and developing a program. We're also going to -- we're going to be talking about the PBR proposal in the next few days and, you know, getting the gas utilities, the PBR proposals which include shared savings mechanisms to incent them from a shareholder perspective to do DSM and -- it will be nice if you could have a similar PBR proposal which could actually reward you, increase your shareholder value if you successfully reduce your customers' bills, but I mean, [Questioning] 115 General audience it's sort of hard to do that if you don't first have at least a budget and some staff who are going to do DSM. A. We'd be very glad to hear the proposition and as part of the PBR discussion if you'd like, but I don't want to commit, Jack, to budgets or targets for '99. Q. But at least commit -- A. Sir -- Q. -- the budget would be more than zero I mean. MR. HARDY: I've heard a question and a response, so is it possible to move on to your next question. MR. GIBBONS: I'll quit there then. Thank you. MR. HARDY: Are you finished? MR. GIBBONS: I can be finished if you'd like me to be. MR. HARDY: Just again, DSM is not on the agenda. I've heard a question posed and a response, so -- I'm assuming the next question is not related to DSM. MR. GIBBONS: Well, no. I mean, I will stop there, but I mean, it's our position that DSM is implicitly on the Issues List. I mean, you can say the same thing, there's -- in the filing, there's stuff about how much money they're going to spend on PCB question and that's going to be a legitimate question. I don't think you'd rule that out of order even though PCBs are not on the Issues List. Sorry. It's our position that DSM is implicitly on the Issues List, but I'll stop there. MR. HARDY: Do you have a next question? MR. GIBBONS: No. [Questioning] 116 General audience MR. HARDY: Okay. Thank you. I had two other people -- three people here that -- I'll get to you in a second. MR. POCH: Perhaps I'll just go ahead then. I'm David Poch on behalf of the Green Energy Coalition. Since I'm also concerned about some of the same issues that Jack has spoken to, I'll try not to duplicate. Q. You've indicated earlier, just in terms of the organizational structure question, that it's an OBCA company now. Can I take it from that then, just in terms of -- given that you've proposed no budget, you're going to be bottom-line driven, can I -- is it fair to say that for matters like DSM, which some would say are kind of optional, you're going to need either some direction from this Board or an incentive as part of incentive regulation to enable you to do that? MR. TAYLOR: A. I don't think -- at least the way I'm looking at it, David, is that it's not necessarily so. I mean, it seems to me that DSM can be entirely a commercial proposition. I recognize its history suggests that there are -- have some difficulties. Q. I'm sorry, I should have been clearer. I meant that DSM addressing efficiency opportunities that -- where there's market barriers where the avoided costs -- the costs to be avoided are not located in one player's pocket if you will-- A. Okay. [Questioning] 117 General audience Q. --yours or anyone else's. For someone to capture those, if it's to be your job then, you'd be -- is it fair to say you'd be looking for clear direction from the Board and perhaps an incentive if we're presuming we're going towards an incentive-based regulation? A. Yeah, I would have to say that the starting point from OHSC probably reflected by the filing that we've made is that we're interested in DSM in its commercial applications. If there are to be noncommercial, like -- sorry to use that word, but-- Q. I understand. A. --if there are to be directions to go beyond what the marketplace itself would offer, then, yeah, I think OHSC would like to hear those comments from the Board. Q. Okay. In another area you've indicated you gave some strategic directions and I think the third one was growth earlier today and I'm just trying to understand in the context of this application how you see that -- how is that being regulated? Is approval of a growth strategy and the growth plan part of what you seek approval for here first of all? A. Yes, to the degree that the capital for growth such as for increasing the interconnection is in the application, then it is a part of this proposition. Q. Right. Now, we're all in the new ball game here and there's obviously some interplay between this [Questioning] 118 General audience regulatory process and, for example, the environmental assessment process for capital items such as that. I take it there is no environmental assessment process that has yet been initiated for the interconnection aspect of capital budget? A. I believe the parts that are involved in this application, David -- I should check my notes on this, but I believe are covered under a class environmental assessment. Q. All right. So then the -- what I'm concerned about is, I have -- perhaps you can point me to it. I've missed it - but I haven't seen any rationale offered for the need for this capital expansion apart from - I think the MDC said - it would be a good thing for competition; is that fair? A. The MDC certainly did say that. I think Dave Barrie in the transmission panel will be able to speak to the business case underlying the parts of that expansion which are included in this application. Q. Okay. We can come back to it then. Thank you. Now, another area just in terms of understanding the ambit of this application is the remote communities item. I take it that is -- the structure of the Act is that's part of the distribution, there's a formula for how it gets subsidized, but some of it gets charged to those customers and some of it gets charged to all customers. I don't want to get into the details of the formula, but [Questioning] 119 General audience that's an area where I think you've described it as a vertically integrated operation, correct? A. Yes. MR. GILLESPIE: Can I just point out, I believe that the remote communities are specifically on the Issues List for January 21st. MR. POCH: Right, and I don't want to get into the detail of remote communities. I understand that. I just want to -- I'm just trying to understand. And consequently, it's part of this application. Q. In the context of remote communities, if we have concerns about the DSM aspects of that because there clearly is still integrated, should we deal with the remote -- would the remote communities people be the ones to deal with that or does that fall -- or do you treat that as a corporation or are you treating that as DSM and we've already spoken to it? MR. STEWART: A. I'm not sure I entirely understand the question, but clearly, the economics or the commercial case for DSM in remote communities is far more positive than it is elsewhere, so there has been in the past and there will continue to be pursuit of alternatives, DSM kinds of alternatives. Q. I'm sorry, I was just asking, who do I ask questions about it to? A. Oh, I'm sorry. Q. Is that something that you see will evolve as a competitive pursuit which is really outside the ambit of [Questioning] 120 General audience this application or is it something that you see as part of the current distribution budget for the remote communities? A. Part of the current distribution budget. Q. All right. So if I have specific questions, we should just deal with it now then. A. I will give you .... Q. Thanks. In the area of -- really more to direct me, I have seen some numbers for capital budget in the materials. I appreciate there will be subsequent panels and, in fact, I have just gotten some of these. I'm struck by the changes proposed on budget. I am just wondering, how can we get a split between what is a maintenance component and what is new capacity. Is that broken out how the -- MR. TAYLOR: A. Yes. Q. What would be the catch words I should look for to isolate what is the new capacity component of -- A. Yes, it is David. One of the things -- it came up a bit this morning and I didn't have an opportunity to comment on it. One of the things that we have done in this application, which has been quite helpful to us, as well as facing the issues of trying to get the organizations kind of aligned between high voltage and low voltage, is that we have cut both the capital and the OM&A programs into identical subsets in both distribution and [Questioning] 121 General audience transmission with the same kinds of definitions to the degree that we can given the different nature of the work. So it does in fact split between capital that's being spent on sustainment versus being spent on development. Q. Okay. So development is new. Sustainment is what we used to call maintenance. Okay. Thank you. I had just the one figure where they were combined and that is helpful. Give me one sec. MR. HARDY: David, I can come back to you, if you wish. MR. POCH: That's fine. I think I might be done. I'll perhaps come up later... MR. HARDY: Go ahead. MR. O'DONNELL: It Is Bob O'Donnell with the Electrical Contractors Association of Ontario. I just have a couple of extremely fundamental questions. Q. The first goes right back to the beginning of the day, is just clarification of who is actually making this application. Is it SERVCO the holding company or is it SERVCO the holding company on behalf of proposed wire subsidiaries or a combination of both? MR. TAYLOR: A. SERVCO is not yet a holding company in that the subsidiaries have not been formally established yet. When the subsidiaries are established, when the wire subsidiary is established then it will be the successor to whatever is received in this application. [Questioning] 122 General audience Q. So at the end of the day the rate order will apply to the wire subsidiary? A. Yes. Q. Okay. In both the transmission and distribution applications contain both expected revenues and costs dealing with recoverable work, competitive work. Earlier in the day you confirmed that Bill 35 states that these wire subsidiaries are not allowed to do work other than distribution and transmission. Can you explain why that's even in the application. MR. STEWART: A. The nature of the recoverable work that we are talking about is transmission. It is an extension of what we do in transmission and distribution. It is leveraging off of the existing business. So it's not something that we are not doing -- it is not a new business in the sense that it will be something else that we would get into. If we were to do that it would be a non-regulated business. Q. Is it in competition with others, contestable work? A. It could well be in competition with others. I mean, yes, it could be. Q. So the SERVCO interpretation though is that that is a wire distribution and transmission work? A. That's certainly our understanding. MR. TAYLOR: A. Could I just add that the revenues from any of that kind of work go to reduce the [Questioning] 123 General audience revenue requirement. Q. I am just questioning why it is actually in the application. That's the fundamental question. MR. HARDY: Do you have another question? MR. O'DONNELL: Just one more. Q. Dealing with the asset management strategy, you have likened the asset manager to a smart buyer. What kind of limitations are there on the smart buyer when they only have one choice of provider network services? MR. STEWART: A. First off, I don't think it is fair to characterize it as we only have one choice. Clearly we do have for the moment a very large services organization, but that doesn't mean we don't buy some things outside of the services company. Also, we have and provisions are in the collective agreement that they are subject to a market test where we can, in fact, if we consistently -- we can't meet the market then that's a challenge for our work force. We either agree to use -- go to the market or we do something about those costs. So we are not limited in that sense. We don't have a prohibition from buying services. MR. HARDY: Thank you. Sir, you have to come up to the microphone. Yes. MR. WU: Lawrence Wu representing Hydro Mississauga. Q. I have a question on the supplementary filing, H, that was issued on December 23rd. It is [Questioning] 124 General audience regarding the breakdown of 7.2 cents per kilowatthour. In table 1 -- MR. HARDY: Which page are you at? MR. WU: There is only one page. MR. RODGER: The very last page of the filing. MR. WU: The filing page. MR. HARDY: Okay. MR. WU: Q. Table one under the energy, in 1999 the table has a figure of 4.3 and in year 2000 you dropped to 4.1 cents per kilowatthour. I also understand that this energy component actually includes the transmission loss. I have two questions. The first question is what is the component of the transmission loss, and then the second question is what is the rationale behind the reduction of the energy cost component from 1999 to year 2000? MR. TAYLOR: A. Larry, I don't think we can find them right here right now, but we will certainly get those two answers to you. Q. Okay. I have another question. It is on the same page actually. On table 2, under the distribution cost for the Ontario Hydro retail distribution in 1999 is .91 billion and in year 2000 is .78 billion. So there is a reduction in the cost for Ontario Hydro retail distribution. Whereas in the MEU in 1999 it is .94 billion and in the year 2000 it is 1.04 billion. So my question is, [Questioning] 125 General audience what's the rationale behind this assumption? It seems that there is a reduction in the cost component for the Ontario Hydro retail whereas there is an expected increase of cost component for MEU. What is the rationale behind these assumptions? MS. NG: A. The information under the Ontario Hydro retail distribution is consistent with the information that has been included in this filing. The MEU as you notice that we have put in the bracket "assumed" because in the absence of knowing exactly what the numbers would be, essentially what we have done is used the publicly available, you know, numbers at this juncture and essentially have not made any assumption about what would happen within sort of the new regime. So that's why there is that big bracket in terms of assumed. Q. Okay. At first I thought it was just an expectation that the cost of the MEU is going to increase. So that's not the assumption, right? A. No, we basically have just used whatever that's publicly available. Q. Thank you very much. MR. HARDY: Thank you. I think those are the questions of people who have time constraints. All right. At this point I'll start to maintain a speakers list. Who wants to go first? Go ahead. MR. RODGER: Mark Rodger appearing as counsel to Toronto Hydro. I just have a few questions given the [Questioning] 126 General audience questions of Board Staff earlier today. Q. First, one question of clarification perhaps to Ms. Ng, when you described this morning the significant refinancing charges that you anticipated that SERVCO would have to face over the next four to five years, I just wanted to confirm the numbers. Did you say between 14 and 15 billion dollars which is the amount that SERVCO intends to refinance for 1999 and 2004? MS. NG: A. No, that reference is really to the existing Ontario Hydro debt maturities. In terms of SERVCO, the refinancing requirements is $650-million in 1999 and $750-million in year 2000 respectively. Q. Thank you. Now, I missed getting a copy of the organizational chart, but I do recall seeing when it was on the screen, I thought I saw that Ian London was one of the officers of one of the new businesses. Can I take that to mean that SERVCO has inherited the assets of the former Ontario Hydro Internationalal? MR. TAYLOR: A. Yes. Q. And has SERVCO inherited all the assets of international entirely or have other assets gone to other Hydro successor companies? A. It is the whole thing. Q. Holus bolus. Can you tell us what amounts of debt and equity the inheritance of those assets represents or that interest represents? MS. NG: A. I don't have the precise number [Questioning] 127 General audience here, but essentially when you look at the regulated versus non-regulated, given that the competitive retail merchant was really a one-person shop, really the bulk of the non-regulated is in the form of OHII. My recollection is it is something around $80-million. Essentially for non-regulated business, the debt equity ratios is significantly different and I think some of the assumptions that have been made by the Minister of Finance at this juncture it would be primarily financed through equity. Q. So there is really no debt associated with that interest? A. Essentially when you look at the whole debt that was attributed to SERVCO, it's essentially all attributed to the regulated businesses. Q. Now, the new -- or under the organizational chart, what Mr. London now heads up, is that under the category of the new business that was identified in your materials? MR. TAYLOR: A. Yes. Q. Okay. And were the former Ontario Hydro international assets, are they one of the shareholder costs that you referenced in your presentation this morning? Is that an example of a shareholder cost? MR. ARISS: A. Any costs that were -- if you go through the table that we did provide in the supplementary you will see that there was some allocation of costs there. Those were the non-regulated activities. So it is [Questioning] 128 General audience split. I would have to double check into that chart whether it is the shareholder ones or it is the simply the non-regulated component, but either way it doesn't get layered on to and have no effect upon the transmission or the distribution overhead costs that are allocated. I think diversified operations, if I recall, is part of the ones that are considered to be funded from dividends. They stay to the benefit of the shareholder. Q. And have you made any assessment or conclusion about where the capital may come from for future Ontario Hydro International type investments under this new organizational structure? MR. TAYLOR: A. Any of the non-regulated growth would come from retained earnings. MS. NG: A. It would be primarily, as I mentioned, about the significantly higher, you know, equity ratios. It is essentially going to be financed as Ron said through retained earnings. Q. I believe it was Ms. Ng put forward a chart, financial restructuring model. If, for example, and I understand that the former Ontario Hydro International had a interest in Peru, if, for example, that investment was to yield dividends or capital gains, what happens to those monies in terms of your chart? Has there been a new regime, for example, of a virtual capital gains tax or are there any direction on the monies that you received from those investment in [Questioning] 129 General audience terms of paying down the former Ontario Hydro stranded debt? Those kind of issues. A. From two aspects. One is obviously under the proxy tax regime. Q. Yes. A. Whatever that -- the gains or income will be taxable under the proxy tax regime and the proxy taxes will be directed to the financial corporation to pay down the stranded debt. Also, similarly, to the extent if there is any dividend or to the extent if there is any gains upon sales or whatever, it will be on the basis of commercial dividend pay-out ratios in keeping with other commercial entities. Q. All right. A. And agin that dividend would be going towards the payment of the debt. Q. I take it there has been no direction or no mechanism in place which prescribes that any income or profits from the former Ontario Hydro International automatically all goes to help pay down Ontario Hydro's debt outstanding? A. No more than whatever that is in keeping with other commercial entities from a tax regime and from a dividend pay-out perspective. Q. So the bottom line is that SERVCO could retain some of those funds from an OHII type of divestiture and reinvest it in other new businesses [Questioning] 130 General audience potentially? A. It would be on the premise on whatever dividend policy that would be approved. Q. I am wondering, and maybe you can refer me to the area of the pre-filings, but with respect to these new businesses generally, and perhaps the Ontario Hydro International asset specifically, how can the Board be satisfied that there is the appropriate prohibitions in place to avoid cross-subsidies between those new business activities and new regulated businesses that are transmission and distribution? What can we look to in the applications that might help us with that? MR. TAYLOR: A. I look to my advisors to tell me if there is something in the applications. I think, Mark, the answer is that we are going to rely on the licence process to define the kinds of codes between both the wires and the retail merchant between the -- potentially the two parts of the retail merchant, the default supply and the commercial supply and other any other commercial activities that happen. Q. So it is really an affiliate relationships codes type of issue. A. That's correct, yes. Q. Okay. Just one further question with respect to the new transmission infrastructure that was talked about. Perhaps maybe more appropriately this question [Questioning] 131 General audience maybe should be directed to my friend Mrs. Formusa. But under the new Ontario Energy Board Act, and just for the record it is Section 90, there is a new requirement that essentially states that no person will construct a new transmission line without leave of the Ontario Energy Board. We have heard your information this morning where you have indicated about adding significantly new growth to the transmission system, specifically the interconnected system. My question is do the applications that are currently before the Board for consideration, do they encompass this new required leave to construct or do you anticipate filing down the road a different application to satisfy the leave to construct provisions of the new legislation? MR. GILLESPIE: We'll have to, we can get back to you specifically as how... MR. RODGER: Because I really just wanted to clarify if what is before the Board, you're seeking the revenue requirement to be met which incorporates this new infrastructure but it's not necessarily the express application for those -- for that leave to construct. That would be helpful to have that clarified. Q. Just really another point of clarification regarding the rate of return. There was discussion from questions from Board staff about Ms. McShane's study that she had done on the rate of return. Can I take it that [Questioning] 132 General audience that one of the fundamental messages that you're asking the board to take away with respect to rate of return is that the 10 per cent after tax rate of return is reasonable but it's certainly is not the most aggressive rate of return that could be justified given your businesses; is that fair? MS. NG: A. It's always very difficult to say what is the point form estimate of a right rate of return. What we believe is that the 10 per cent based on the tests that have been performed by Ms. McShane and based on some of the comparable information represents a reasonable point within that range. Q. That was a rate of return that SERVCO is comfortable going forward with at this time? A. Yes. Q. Are you able to tell me what you think the highest range, the highest rate of return that could be justified given your business is? A. I think based on the work that was done by Ms. McShane, I think the number that she finally concluded on was that 10.75 is a fair rate of return, but again, as I said, there is always a range and we believe that, you know, given all the, you know, information and observation, the 10 per cent does not represent an unreasonable point within the range. Q. Okay. Just a couple of other points. I guess just one point of clarification. There was reference made to the market power mitigation agreement earlier in [Questioning] 133 General audience the day and I just wanted to maybe have Rod confirm, my understanding that that agreement is not, to date, in effect nor will it come into effect until the new market is actually up and operating which, at this time at least, is speculated will be the summer or the fall of the year 2000; is that correct? MR. TAYLOR: A. Yes. Q. Okay. Now, I just wanted to follow up on one issue. And this really falls under the category of common issues, the Market Design Committee Recommendations and it really goes to the, I suppose, the consistency of the proposal for charges associated with your retail monopoly supply which will ultimately become the default supply obligations and just maybe to give a little bit of context, at this point, to boil it down in a nutshell, the Market Design Committee is recommending that for the default supply it be an essentially a regulated price, that the high volatility and the low volatility will be removed. It will be a smooth spot pass through and that the provider of that commodity will be allowed to charge an administrative fee in connection with that service. And the administrative charge hasn't been set yet. Now, if we could go to page 152 of your distribution rate application and it's table 20-7 and there's a chart entitled Retail Monopoly Supply Administrative Costs. MR. HARDY: Okay. Mark, if you could just give those numbers again, please. [Questioning] 134 General audience MR. RODGER: It's page 152 of the distribution rate order application table 20-7 entitled Retail Monopoly Supply Administrative Costs. And I want to just first understand this cost. In 1999 we have a series of costs relating to retail and monopoly supply, and in 2000 these costs become the costs associated with the default supply. And the costs in total for 1999 are 61.7 million and 65.8 million. And I guess my first question, just to clarify, is those two figures are really the administrative charge that you're seeking approval for by the Board for this particular service. MR. GILLESPIE: Can I just note that we had intended to address retail monopoly supply consistent with the Board issue. There's a current January 21st and we'll have people -- MR. HARDY: You're going to have the use the mike, to begin with Michael. MR. GILLESPIE: I'm sorry, I keep forgetting. May I just suggest that we had intended to have people who had addressed the retail monopoly supply on January 21st where the issue is on the issues list for the panel for that day. MR. HARDY: I guess my rule of thumb here is if you prefer to put that answer to that particular panel, that would be fine with me. Is that what you wish? MR. GILLESPIE: That would be our wish. MR. RODGER: Thank you. So do you want -- sorry [Questioning] 135 General audience Rod, did -- MR. HARDY: You're going to have to bring, I think, bring forward that question to that particular panel. MR. RODGER: Would it be helpful if I set the context for SERVCO. MR. HARDY: That would probably -- yes. MR. RODGER: Q. So I guess it's really, really three points. The first point is are the 61.7 million in 1999 and 65.8 million in the year 2000, are these the administrative charges, if you can categorize it that way, that you're seeking approval for, that's the first question. Secondly, if you look at items 5 and 6 in that table 20-7, we see that between taxes and net income in 1999, there's -- if you can think of it as a $16.5 million pretax profit associated with this commodity transaction, and in the year 2000 it will be 14.1 million of pretax profit for that commodity transaction. I guess I'm thirdly and finally wanting to know, what's the basis of going forward that these, first of all the overall administrative charge and that these profit levels are consistent with the Market Design Committee recommendations, so I'll leave it with that -- MR. TAYLOR: A. Okay, yeah, thank you. Q. -- but that's the context? MR. HARDY: Thank you. MR. RODGER: And those are all my questions. Thank you, David. [Questioning] 136 General audience MR. HARDY: Thank you very much. Next? Ken? MR. SNELSON: My name is Ken Snelson, I'm representing AMPCO. Q. And the first question that I was going to ask is relative to the part of your application which is requesting approved transmission rates for application after the market opens in the year 2000. And my understanding is that the market development committee will be producing a final report towards the end of this month and maybe the early next month, and that that may include recommendations to the Ontario Energy Board regarding transmission and distribution rates. It may have recommendations regarding how transmission and distribution costs should be pooled for cost recovery and who should pay them, such as dividing transmission lines into connection lines and network lines and the question is by proposing a specific rate design at this stage, recognizing that you're not proposing a specific rate design for distribution, but you are for transmission, then how is this consistent with being able to incorporate the market development committee recommendations and with the Ontario Energy Board being able to incorporate the MDC recommendations when they become available? MR. TAYLOR: A. There was a lot to that, Ken, so let me -- let me try different bits. In terms of the, I think, while the -- you're quite right that the MDC report is not out yet, from the [Questioning] 137 General audience discussion that's been going on at the MDC, I think the kind of rate structuring that we've put forward in the application is quite consistent even though the MDC may well recommend three pools, a transmission pool, a connection pool, and a network basic use pool. Basically, what we've done has been to lump two of them together so I think you can -- while it's not exactly consistent, it's directionally consistent with where the MDC is going. In terms of timing, we felt it important and I believe our shareholder felt it important that even though the sequence wasn't perfect in all regards, that we should come with a transmission application for a number reasons. First of all, to to get a transmission rate on the table to the degree that that's required for external generators and for Ontario generators with a FERC licence. I think there are a number of ancillary benefits to doing -- to making a transmission application such as the one we've made. For instance, the preparation for the one in the year 2000, some experimentation, if you will, around certain PDR principles and not least because we will be charging for transmission in this interim period and the law says that the -- you can only do that with a Board order. In terms of a process for adjustments, given any material differences that come out of the Minister's acceptance or otherwise of the MDC report, I'm -- I guess I would look to some others to advise us on that. Perhaps I could -- perhaps I could take that [Questioning] 138 General audience under advisement and give you further thoughts later. Q. Thank you. Following up along the line of the transmission rate after market opens, then I have a simple question which could not be answered at the information sessions and I hope it can be answered today and that is who are or who will be the customers of the transmission system? I presume that the municipal utilities connected at above 50 kV will certainly be customers of the transmission system and that the current direct industrial customers of Ontario Hydro who are connected at above 50 kV will also be transmission customers, but the questions revolve around some that are in a more gray area. Will the current large users of municipal utilities, those above 5 mega watts who are connected at above 50 kV, but they are still customers of municipal utilities, will they be customers of the transmission system once the market opens? Will the municipal utilities who are connected at below 50 kV be customers of the transmission system and will the current direct industrial customers of Ontario Hydro who are connected at below 50 kV be customers of the transmission system. So there's three categories there. The large users of the municipal utilities connected above 50 kV, the municipal utility connected below 50 kV, and the direct industrials connected below 50 kV, will they be customers of the transmission system? [Questioning] 139 General audience MR. STEWART: A. Ken, if I may, you're talking about after -- when we actually have open access? Q. When we have open access, when this transmission rate that you're proposing would apply. A. We, I can't answer your complete question because I don't know, but clearly, we are -- there is an issue in the gray area around the large -- or the industrial -- direct industrial customer who has served below 50 kV and the 220 plus municipal utilities that, in fact, are served below 50 kV. And clearly, in fairness, there's going to have to be some kind of a charge or a tariff for the use of the distribution pool, if you will, to getting electricity to them. I don't think it's been worked out yet and I think it's going to have to be. There is an issue there. On the large direct industrial customers, or large users rather, that are customers of the municipal utilities, again, I don't think we have any clear guidance from market rules on that yet either. Again, I don't think we have any clear guidance from market rules on that yet either. It's going to have to be answered before we have open access. Q. Sorry -- MR. HARDY: If I can be clear on that then, is that something for another panel or is that something that ....? MR. STEWART: It's something that's not resolved as far as I'm .... [Questioning] 140 General audience MR. HARDY: Okay. MR. SNELSON: Q. Now, I have a whole of detailed questions about the future transmission rate which I will hold to the appropriate panel, but given the answer we've just heard, that we have rates being proposed and we don't know who the customers are who will pay that rate, then it starts to suggest that maybe the application is somewhat premature and I'd like to ask the question as to what would be the effect on SERVCO if the OEB were to decide as a result of this application not to approve at this stage the specific design of the transmission rate following open access? MR. TAYLOR: A. I think the major loss, Ken, would be in the opportunity to have the OEB and intervenors address the rates that have been put forward here now. You're suggesting that this -- I take from your question that you're suggesting that this application would -- should wait for the MDC, should wait for the Minister's response to the MDC, should wait for the market rules to be finalized. Q. Well, there's a question of how long. You obviously can't wait indefinitely. The rate has to be set a decent time in front of market opening. And clearly, for your rate, as I understand your application, it's critical that you have an approved revenue requirement prior to the corporatization of SERVCO and its act -- of it becoming an active corporation on April the 1st next year and that's necessary, for instance, for establishing [Questioning] 141 General audience your credit rating and so on. You have taken the approach on the distribution side of not asking for a distribution rate after the market opens and essentially, the question is: Well, why if you can manage without a distribution rate design being approved at this stage given that there are also issues to be settled on the transmission side, what would be the effect of adopting a similar procedure for the transmission ... ? MR. TAYLOR: A. Obviously the difference between transmission and distribution is that there are close to 300 distribution providers and the OEB has expressed a desire to use a different approach for the distribution rate rather than ... in Ontario there are two transmission providers. So clearly, we can get much further along in the transmission sector than we can in the distribution sector. I think that's a material difference. Q. Okay. A. As I say, we also need it for the out and through transactions. MR. HARDY: Ken, do you have -- MR. SNELSON: Yes, I have some more questions. MR. STEWART: Sorry, just to add to my previous comment or thinking about the implications of it, what I said with respect to the distribution would hold and that's the customers below the 50 Kv, but if you're talking about a large user inside of a municipal utility and whether that's the customer of the municipal utility [Questioning] 142 General audience or the customer of the transmission system, it would be the same. The actual impact is not likely to be very much. It would be either charging them directly or charging them through -- charging the municipality the same thing or the PUC. MR. SNELSON: Okay. Q. You made an answer -- here it is. You answered a question asked by the Board consultants regarding revenue allocation - and this is a much smaller question - but the answer you gave didn't make any sense to me, and that was that we were discussing the revenue allocation scheme and how it applies to Genco and to the financial corporation and whether or not those figures would be available. And your answer was that the revenue to Genco is being negotiated based on a market power discussion and I don't understand the answer because, as I understand it, the revenue allocation scheme ceases when the market opens and the market power concern really only starts once the market opens and so I don't see the revenue allocation scheme and the market power issues as being operable in the same time frame, so -- MR. TAYLOR: A. Yes, that's right. I had thought the question was being asked once the market had opened. Q. I think the question is being asked about revenue allocation prior to the market opening-- A. Yes. Q. --as I understood it. [Questioning] 143 General audience A. Yes. Q. And I think there are other participants who would be interested to know either the actual numbers or the principles upon which the revenue allocation to the other components are being settled. And also, what happens to the revenue allocation scheme if the Ontario Energy Board approves a revenue requirement for SERVCO, either transmission or distribution, different to the proposal; does that mean that more money goes to Genco or more money goes to the financial corporation or where does it go? MS. NG: A. The revenue allocation scheme is something that is being worked out between Ontario Hydro and the Ministry. And essentially, because the units will all be corporatized as of April 1st, there is a need to establish a revenue to the various entities that's consistent with the whole financial architecture. So the notion is, once all the revenue has been allocated to the respective entities, there will be a residual amount and the residual amount would actually go to the financial corporation as well. So in the case to the extent if the rate order application and the outcome are different, the residual -- it would actually increase or decrease the residual payment to the financial corp. Q. Thank you. That clarifies that. I also want to clarify one other question which the Board Staff asked that I had also intended to ask and I wanted -- this is, I believe, an accounting question to [Questioning] 144 General audience Don Ariss, is it? And that's with respect to what I consider to be resurrected costs and this is the costs that were written off in 1997 net income as an extraordinary item and there was some references to which costs were being brought back in and you gave numbers of 17-1/2 million for distribution in 1999, 3-million in 2000 and similar but slightly smaller numbers for transmission. And your answer to that was related to surplus staff costs and buildings and so on. And I've got the news release in which Ontario Hydro announced these write-offs in 1997 and in total, there was a category of $830-million for non-nuclear future expenditures and $147-million for restructuring costs. Now, the $147-million covers the items that were discussed this morning such as estimated staff reduction costs and write-offs related to certain buildings and the equipment. The $830-million includes $340-million associated with remedial work on transmission assets, increased frequency of tree trimming and a number of other items to do with environmental contingencies and so on. And the question is, are we -- did your answer this morning imply that none of this $830-million items are being resurrected as I put it for cost recovery under the rates that you're seeking approval for in this process? MR. ARISS: A. No, that's not correct. The items that we were talking about were simply in the reference in the -- to the text was to those write-offs [Questioning] 145 General audience that you had referred to that were part of the 147-million that were GAAP-related provisions. Those components of the 830-some-million again that you're referencing were non-GAAP related write-offs that were taken in 1997. Those costs are still part of the work programs that are scheduled to be undertaken as we go forward in 1999 and the Year 2000. The costs may have changed, the estimates work have changed, but the nature of those costs will still and are in -- is still in this rate submission. Those costs were provided for -- they were never paid for by customers. They were simply written off at that point in time as you would have seen from that throwing us into a significant deficit position in our financial results. Q. To follow up on that, can we have the numbers of how much of these resurrected costs are in the application currently in front of the Board and what cost categories they're in? A. Again, I think that would be an appropriate question when you deal with the transmission -- the distribution and transmission panels would be able to give you the specific details of what elements of those costs and exactly what line items that they appear on. Q. There's a sort of a common sense feeling in not being an accountant, but there's a common sense feeling here that if some costs have been dealt with, either rightly or wrongly, as having being written off - they've been recorded in the books as having been written off - the news release talks to these costs be generally [Questioning] 146 General audience as being expenditures that should have been made in the past as -- and so are effectively costs of past operations which I presume was the rationale for writing them off in the first place, then there's -- the question that really arises is, how can that be justified to be brought back into the revenue requirement and to be charged as a cost of future operations? A. Again, a number of elements. I will try and touch on all the points that you've raised. The last one first, that they were part of -- I think you were suggesting that they were part of the rates in the past which is not correct. They were not part of the rates -- Q. No, no. They were accepted and written off as costs to retained earnings or -- A. That is correct. But, in fact, then they're not actually built into any rate for recovery from customers at that point. Now, in terms of the cost from an accounting perspective and -- it probably is important to understand the context. If you were to obtain a copy of our financial statements for 1997 in there, you would find the context explaining what the Board was dealing with when it addressed these types of costs and the need because of the constraints or the SDR requirements, the rate freeze that we were operating under, et cetera, that decisions had to be made about dealing with that and that all precipitated and lead to the decision to provide for those costs in 1997, so that that context is all there and it's available [Questioning] 147 General audience in the notes to the financial statements. The other essential point is that as we move forward, recognizing that OHSC is a new company that's coming into existence as at April 1, these are -- were not -- they represent future costs. They're not costs that were incurred in the past that we're now recognizing. They represent future expenditures that will take place. When I say that these were non-GAAP, that's what I mean by that. When we provided for those, we had to do that under the ratemaking authority of the board of directors at that point in time. Under normal GAAP applicable to a commercial enterprise, those -- that loss would not -- could not have been recognized and provided for in 1997. So as we look at ourselves as OHSC as a new entity going forward, these are costs that have to be -- are planned to be incurred because of the need and the nature of the work. The requirements for them, the environmental, the asset condition, those requirements are still there. Dollars are going to be spent. Then the question is, how are those and who is going to pay for those dollars -- or sorry, exactly who is going to pay for that work that has been taking place? As a new entity going forward with all those responsibilities to carry out that work, then it's appropriate that those be paid for by the customers of transmission distribution business and that's really the bottom line as to why they've been included in this rate submission. If they're not recovered in that manner, then [Questioning] 148 General audience they would have to be debt financed and again, you're putting the entire entities into a deteriorating financial situation. Q. Presumably when these costs were written off, then the net book value of the company was reduced correspondingly? A. That is correct. Q. And is SERVCO not being capitalized at the net book value of the assets that it's taking over? A. Again, just for clarification, when you're saying the net book value, those losses did not relate -- the specific ones that we're not talking about, the GAAP ones, did not relate to specific assets that were on the -- the book's physical assets that we were writing down. They represented future expenditures that we were setting up a provision for. So when I say it reduced the -- I'm thinking of the overall net book value of Ontario Hydro since it did push us into -- a retained earnings into a deficit position. So overall, that was a reduction, but we are picking up, OHSC as we go forward, the value of the specific assets that are being transferred from Ontario Hydro. Those assets, as we talked about this morning, relate to all of the physical assets, the inventories, all of the other components. Those assets that are still a value and those are -- that's all part of the corporatization, the balance sheets that the new entities are being -- that will as part of those transfer orders that we talked about this morning. [Questioning] 149 General audience So those assets are still a value and that constitutes really the starting point for that new entity, the new corporation. Q. Okay. Well, let's move on from there. I don't think we necessarily agree, but you have explained your position. MR. HARDY: I am moving towards a break. Also, I want to make sure -- we have a couple of other people asking questions and then come back to you. Do you have -- is this the completion of this line of questioning? MR. SNELSON: This is a actually good point because I do want to ask a couple of questions with respect to the '98 to 2000 corporate business plan. If the witnesses have not seen it recently and they may want to just have a glance at it I can tell them which particular lines I'm going to ask about. MR. HARDY: Why don't we do that over the break. Also, coming back from the break though, I will probably entertain questions from somebody else and then I'll come back to you. MR. SNELSON: Sure. MR. HARDY: Why don't we break now. I have 2:40. Fifteen minutes brings us up to 2:55 or so. ---Recessed at 2:40 p.m. ---On resuming at 3:00 p.m. MR. HARDY: I am going to -- there was one question that came up before the break. [Questioning] 150 General audience Gentlemen, please. Ben, Randy. Thanks. Bill. Okay. There was a question that Mark Rodger asked before the break that in the break Hydro has an opportunity to clarify or SERVCO has. Rod, can you explain what the question was and provide that response. MR. TAYLOR: Here is Mark now. Mark, you were asking about Section 90. MR. RODGER: Yes. MR. TAYLOR: Whether or not, in fact, having the capital in there we were putting forward as leave to construct and the answer -- we reserved on that the answer is no. We recognize that we would have to come back for leave to construct. I feel that having the dollars in there is nonetheless appropriate because we want to register that that's what the program is going to say. MR. RODGER: Rod, do you have any sense at this time of when the first leave to construct application will occur? MR. TAYLOR: No, I can't tell you right now. MR. RODGER: Thank you. MR. HARDY: Okay. Next questions. Go ahead. MR. BACON: I am Bruce Bacon from Econalysis Consulting Services. I am representing the Ontario Coalition Against Poverty. And just for the record, we also have retained Michael Janigan from the Public [Questioning] 151 General audience Interest Advocacy Centre as lead counsel and he may appear if we need him. Q. I have quick few questions. On the capital structure of 60/40, is that consistent with the LDCs in the province? Do we know? MS. NG: A. Yes, I don't have all the numbers in front of me. My recollection is that we have compared it to a number of other benchmarks. For example, Canadian A rated electric utilities is somewhere around 55 per cent. I believe all the Canadian gas is somewhere around 60 or 61. I think that also in Kathy McShane's paper you are going to see references to U.S. utilities who have divested off generation which is I think somewhere around 50-odd per cent. So we believe that it is reasonably consistent. Q. My understanding of Consumers and Union's rate of return equity, it is around 9.5 and 9.6 per cent. Do you have any idea how you can justify the 10 based on those two? A. As I indicated that we have essentially the independent expert perform the risk premium test, as well as the comparable earnings test to look at the appropriate ROE. And, again, I think it is in part in the previous response that I had that in essence there is going to be a range, you know, of return on equity. We believe that essentially the 10 per cent is a reasonable point on the [Questioning] 152 General audience continuum. Q. My next question I guess is to Ron. You mentioned some measures that you are planning on putting in place to measure the network services success. You mentioned three. Do you have an idea what those measures are, how you are going to measure success in the three areas you mentioned? MR. STEWART: A. In terms of capital efficiency and -- Q. Capital efficiency. A. --productivity and customer responsiveness? Q. Yes. A. We are going through a process right now of actually identifying as part of the planning process very specific measurements, metric system around that. We are introducing a balance score card for the overall services company and cascading that down through the organization. We will also be measuring it along with a number of change initiatives in place and a number of programs to actually give effect to the change, and we are identifying what those milestones are and qualitatively and as well as time lines. We are actually -- performance and success will be measured along those metrics. It is not fully developed yet, but it's a work in progress. Q. Do you know when it will be developed? Before these proceedings are done or...? [Questioning] 153 General audience A. It is a matter of weeks before it is signed off. Q. Would that be available to us to see? A. I'm not sure about the time lines, I'm sorry. Q. My next question actually is related to structure, but it is also related to the retail monopoly supply so I will ask it and if it has to be bumped to the next panel that's fine. Under the retail energy services there is four functions. I wonder if someone could explain what each of those four functions perform? A. Sorry, where are you looking. Q. On the org chart. Under Gerry's organization, what each of his functions do. A. I think I can give you a general answer and you may want to pursue it further with additional panels. But retail sales is essentially the policy and analytical group that would be responsible for the programs; rates, customer classification, customer service policies, that type of thing. Customer care services would be the call centre and the operation of them actually producing a bill, a customer bill. And power purchasing would be the analytics in terms of either the cost allocations under the current process and looking to the future as to what are the options, et cetera. NUG management is the non-utility generation and it is the administration of the NUG [Questioning] 154 General audience contracts. Q. Okay. Thanks. I am looking at page -- I am looking at the cost of administering the retail monopoly supply. It is a question actually following up with Mark's question. It looks like the cost there regarding the structure -- MR. HARDY: Do you have a page number that you are referring to? MR. BACON: 151. MR. HARDY: Of which? The rate order? MR. BACON: Distribution. MR. HARDY: Distribution. That's table 20-6. MR. BACON: Sorry, it is table 20-7, 152. Q. In my reading of this it look like it covers the retail merchant cost or the retail sales cost and power of purchasing cost. My question is with regards to customer care. This looks to me like it is for retail monopoly supply costs currently moving into default supply costs when the market opens. My question I guess is: The customer care cost which is for billing and call centre doesn't seem to be part of default supply. It looks like it is in the distribution business which could form the wires charge down the road, and isn't there any billing and call centre costs associated with providing default supply? MR. STEWART: A. Yes, I am going to defer for [Questioning] 155 General audience the details on it, but I believe there is an allocation between default supply and distribution. The call centre in fact serves both purposes. I am not sure what the exact split is and what the details around that. Q. I will defer that to the next panel. Thank you very much. MR. ROBERTS: I hope I can follow my colleague with one question. MR. HARDY: Your name please. MR. ROBERTSON: Robertson, ECS also. Q. My question in a sense is very general, but could be more specific depending upon the answer. It was mentioned in a reply that you are under certain difficulties or restraints in regard to existing labour contracts. MR. STEWART: A. Yes. Q. I wonder, in fact, if you could in fact say just a little bit more about what the nature and extent of those restraints, restraints in terms of the actual degree of restructuring you can carry out? A. I'm not sure I'd refer to them as restraints. Both with the society and with the Power Workers Union we have a collective agreement and it has evolved over a number of years. Some of the specific things that we have achieved in the last year kind of going forward from that to work with them to get some greater flexibility are some of the [Questioning] 156 General audience things that I mentioned. One of the problems we've had in the past is a very rigid or constraining ability to actually size the organization according to the workload in terms of downsizing or layoffs or exits, et cetera. Through recent negotiations we have made some movement on that and we have some greater ability to actually move people around and, if necessary, downsize and there is a better process for that. In fact, just by getting separate collective agreements for the new businesses confines it and makes it much more operational than it has historically. Some of the other areas that -- the notion I talked about, about being able to staff or resource according to the workload as opposed to the other way around, the introduction of a hiring hall where we can get temporary people in to deal with peaks and to deal with fluctuations in the workload is clearly a breakthrough I think that's both in the union and employees and in the company's benefit. The purchase -- there are some questions around our ability to contract out and we don't have a no-contracting out clause per se. We have a purchase services agreement with both the Society and the Power Workers Union and both parties have had some difficulty in the past in actually making that work to the point where we have been for some periods of time quite at an inability to contract out and an inability to actually [Questioning] 157 General audience administer the provisions of that purchase service agreement. Through the last round of negotiations, I think we have got a process and an arbitration process, et cetera, whereby if we can -- we had a business case where it is just more economic to meet the -- to use the marketplace for -- to outsource, at least we have a process for establishing that and if we can establish the business case and if we can satisfy an arbitrator with kind of labour mitigations, the human impact of that, then we have got some flexibility there. So it is a constraint on the one hand. It is a process that we have to go through, but it is has been opened up from what it was. Q. Just as a follow-up to that, do I understand from your answer that you have the ability to negotiate new collective agreements with the new groupings that are coming in to being by reason of the restructuring? A. Yes, that's correct. Q. Have you done so? A. We went into the last negotiations, which was in the spring with the Power Workers Union, and just more recently with the Society, as Ontario Hydro and with the existing collective agreements. Part of that agreement that came out of that was separate collective agreements for future negotiations. So the stage has been set, the process has been established and we will be going into separate [Questioning] 158 General audience negotiations for a separate collective agreement for the Ontario Hydro Services Company. MR. ROBERTSON: Thank you. MR. HARDY: Mr. Robertson, can I get your first name as well. Your first name? MR. ROBERTSON: Edward. MR. HARDY: Other questions? MR. STEPHENSON: It's Richard Stephenson for the Power Workers Union. I am not following up on any of that! Let me ... (Laughter) Q. Let me just ask in follow-up to a question I think from this morning from the Electric Contractors Association and it related to the so-called contestable business that network services has been doing and is doing and will be doing essentially, I take it, engaging in the supply of maintenance and construction work for other utilities in Ontario. One of the parts of your business structure is the new business area. I take it that that business is something that as you move to open access is going to be something that you are looking towards as a new business area? MR. STEWART: A. Network services is not -- I wouldn't consider that a new business area in the same sense as the investment in Peru. Q. Yeah, I wouldn't consider it in that sense either, but I guess -- I guess the point is that whether it's done under the head of network services but the [Questioning] 159 General audience business of providing, shall we say, electrical contracting type services to third parties is a potential new business area as you move into open access, I take it? A. Potentially. I just didn't want to confuse the terms about new business. We would -- we contemplate going forward and doing network services or providing network services to other utilities or large industrials or in the marketplace. It would, the revenue, it would be still considered as part of the regulated business and the revenue for that would be credited back to the regulated business. It wouldn't be -- unless we were to take it right out of the -- some piece of it or something that we were -- that we were particularly competitive at may, you know, would have to be taken right out and set up as a non-regulated business and that isn't what I was referring to. Q. Well, I was just wondering if that indeed was a possibility. Leaving aside -- forgetting about whether you have actual employees allocated to it, but I was -- obviously the scale of this at the moment is not significant in terms of the entire enterprise, but if circumstances evolved where the scale changed, wouldn't -- from the perspective of dealing with the enterprise as an unregulated versus regulated components that you may, in fact, move that line of business into an unregulated area for the purposes at least of -- A. Yes. Q. -- accounting and regulatory review? [Questioning] 160 General audience A. I think clearly down the road that that -- that that's a possibility. We haven't reached that bridge, but that's a possibility. Q. One of the things -- this is another area -- one of the things you were asked this morning about was more information in terms of organizational charts and matching some of the staffing level information that you provided to the organizational charts. And I guess, following up on that, what I was hoping was I have seen in the past that Hydro used to provide that kind of information in terms of, I think they did it by way of representation is what I think they called it, was that there was a certain number of management function type employees and a certain number of society employees, et cetera, et cetera. Is it possible within your organizational chart matching up your compliment of employees to engage in that kind of breakout? A. Yeah, we are having a look at that and just seeing what we've got available and how readily we can put something together to respond to the earlier questions this morning and we've got that under active consideration. MR. STEPHENSON: That's fine for now. Thanks very much. MR. HARDY: And I've made that note as well. Ken? MR. SNELSON: Yes, this is Ken Snelson again from AMPCO and in the break I showed the witnesses the [Questioning] 161 General audience pages I wanted to deal with which are taken from the -- a document, Ontario Hydro, it's 1998 to 2000 corporate business plan dated February 17th, 1998. Q. And first of all, dealing with OM&A, on page 37 of that document there is a line showing the planned operations maintenance and administration costs by unit of Ontario Hydro. And one of those units is the services company which I believe has very similar responsibilities to the OHSC that is currently applying for transmission and distribution rates and perhaps you can confirm that the responsibilities are generally similar. I mean, there may be some small changes, but I think they are generally similar? MR. TAYLOR: A. Yeah. Q. And the line shows net OM&A by business unit for the services company in the range of 526 million to 570 million. The $570 million is for the actuals for 1997. 526 is the planned number for 1999. And I've compared that number -- well, the reason for looking at this in the first place, perhaps I should put a bit of background here, is that we are trying to get a sense of some comparison of the gross numbers on both OM&A and capital and do they make sense in terms of past practice, in terms of the trend and the -- of past expenditures. Apart from the submission which tends to build up from the bottom, program by program, to come to a total and by looking at the gross number you tend to make some [Questioning] 162 General audience broader judgment with respect to its continuity with the past and perhaps to its affordablility in total in the way in which perhaps the Ontario Hydro Board of Directors might have looked at it when they were looking at their business plan in 1998. And so I've compared the 1999 planned OM&A expenditure and this is the plan that was drawn up less than a year ago of $526 million with the sum of the OM&A expenditures in the two submissions. The transmission OM&A expenditure which is on page 64 is $441 million for 1999, and the distribution OM&A which is on page 43 of the distribution application is $343 million which gives the total of 784 million dollars. And the question really is why have we got $258 million of additional OM&A expense compared to what Ontario Hydro had planned to spend in these areas in their plan, say, drawn up less than a year ago? MR. ARISS: A. I can just make one linkage certainly, and it's back to the discussion that we just had about the items that related to the provision, those asset condition assessments, the environmental costs, the list that you had -- where we were referring to in the press release from 1997. Certainly there was approximately 100 million plus, I don't have the exact number in front of me, but it was certainly, let's say, around in the order of $120 million or thereabouts which would have been the estimate for 1999 OM&A costs that were included in that provision that was set up in 1997. [Questioning] 163 General audience So that -- that in itself, would account for 100 plus million dollars of the difference that you're referring to. I think when we -- dealing with the very detailed explanation of the 1998 OM&A over what were -- the plan is, that that again is something that the specific panels on transmission and distribution would be able to assist you with. And it's the sense of the affordability as well since the affordability is a function of the overall revenue requirement, but again, the specific panels are the ones that would be better able to deal with that discussion on the overall revenue requirement that is for transmission and distribution. Q. Can I just follow up from that. On the same table, the last item before you come to total corporate is an item which is called corporate adjustment which is a negative number for 1999 at $558 million. And the note to that says corporate adjustments include charges to 1997 rate ruling accrual for NAOP expenditures in 1998 to 2000, and bottom line adjustments 1997. I had presumed that was where, in this accounting, the reduction in the overall OM&A requirement due to those past provisions was in fact made. MS. NG: A. My recollection is that the treatment of the services company related OM&A provision is different from the ones that was in nuclear. One is being capped within the services company level, but the nuclear one was specifically identified separately for specific monitoring purposes. So the footnote, really, as [Questioning] 164 General audience you can see, primarily referred to the MAOP expenditures which is the nuclear related expenditures. Q. Well, it does say and bottom line adjustments and I thought maybe that had covered it but if you're telling me otherwise then -- A. My distinct recollection is that the services company, one was being controlled and held at the company -- services company level, as such the accounting representation was different when you look at the OM&A numbers. When you actually start to look at the financial statements for Ontario hydro, all these things will be treated -- has to be treated consistently because there would have been sort of a provision made in 1997 so everything would be backed out. Q. Okay. And I think there is, though, the affordability question which perhaps should be dealt with at the policy level. The people who talked about individual programs can clearly say, yes, I have a transformer here that's 50 years old and it's good practice that I should replace it at this time or there's an increasing danger that it might fail and so we should have it in this year's budget. But senior management tends to have the role of looking at the overall expenditure that comes from adding up all the things that would be nice to have and maybe quite justifiable in their own right on the individual basis and say is this consistent with the amount of money that we are prepared [Questioning] 165 General audience to spend this year. I mean, when I'm looking at my house, sometimes I decide to -- I'll put off changing the windows next year because I can't afford to do it this year. And overall, senior management has to take the view on what is affordable and what isn't affordable and I'm just wondering if you've got any comments to make in that regard as to the affordability of what's currently in front of us. MR. STEWART: A. Just to comment on that specifically, Ken, I think the board of directors have made that judgment. They've made it obviously on a number of factors and a number of considerations. I think you find when you analyze this, that most of the variance is explained by a few large decisions; for example, some of these -- this provision work, some of the growth areas, et cetera, capital expenditures as well and the need to catch up, for example, on the forestry and the vegetation management, when making those decisions, clearly affordability is part of the consideration. I mean, can we -- how can we save elsewhere, et cetera, and those are obviously part of the consideration of the Board at the time? So I think both the transmission panel and the distribution panel will be able to provide you some descriptions and some substance and some background around those specific few major decisions that were put on there. I would like to assure you that the board and the [Questioning] 166 General audience executive, in fact, we very much consider the affordability when we're making those decisions realizing they're incremental decisions from what we've had. Q. Is it possible to have a -- you say the difference is the explainable by a few large decisions; is it possible to have those enumerated? A. They're in the programs that the transmission and distribution will speak to specifically. MR. HARDY: I've already made one note, Ken, of something that will be coming forward as the explanation of the cost. MR. SNELSON: Q. Moving on to the same kind of question with respect to the capital program, the capital program from the business plan is on page 38 and the actual capital expenditures for 1997 by the services company are shown as being $298-million, the planned capital expenditures for 1999 are shown as being $377-million and the transmission -- the capital from the transmission application on page 82 is shown as $346-million on transmission alone with distribution capital from page 52 of the distribution application being $203-million giving you a total of $549-million which is $172-million above the planned capital expenditures a year ago of 377 and considerably higher, $250-million higher, than the actual capital expenditures in 1997. Again, there's the question about why are we seeing a very large increase in capital expenditure, how is it justified in a gross sense and is there something [Questioning] 167 General audience that is affordable? A. Well, when I answered the question, I was -- it was a general answer, OM&A and capital. Most of these decisions were, in fact, tandem. MR. HARDY: Ken, you were referring back to the 1998 report. MR. SNELSON: 1998 to 2000, the corporate business plan, yes. MR. HARDY: Sorry, could you state that clearly? MR. SNELSON: The 1998 to 2000 Ontario Hydro corporate business plan dated February 17th, 1998. MR. HARDY: Thank you. MR. SNELSON: I think my other questions can best be left to another panel. Thank you. MR. HARDY: Another panel, okay. Thank you. Are there other questions? If so, please come forward and grab a mike. ---(No response) Okay. Seeing none, we are going to be still meeting tomorrow. We have Reed staff with quite a few additional questions and have thought that it would be best if we start tomorrow with the Reed and Board consultant and Board questions. It also gives us some time to review some of the information which I know some of you received today, if that's okay. We may have a short day tomorrow, but we will be starting again at nine o'clock tomorrow, okay? Thank you. 168 ---Whereupon, the Technical Conference proceedings were adjourned at 3:29 p.m., to be reconvened on Friday, the 8th day of January, 1999, at 9:00 a.m. 169 I N D E X o f P R O C E E D I N G S Page No. Overview (Facilitator) 3 Introductions 8 SERVCO Presentations: Mr. Taylor 9-20 Ms. Ng 21-30 Mr. Ariss 30-36 Mr. Stewart 37-42 Questioning: Board Staff and Consultants 43 ---Luncheon [12:30 p.m. - 1:32 p.m.] 109 General audience 110-168 Parties who questioned: J. Gibbons . . . . . . . . . . Pollution Probe D. Poch . . . . . . . . . . . Green Energy Coalition B. O'Donnell . . . . . . . . . Electrical Contractors Assn. of Ontario L. Wu . . . . . . . . . . . . Hydro Mississauga M. Rodger . . . . . . . . . . Toronto Hydro K. Snelson . . . . . . . . . . AMPCO B. Bacon E. Robertson . . . . . . . . . Ontario Coalition Against Poverty R. Stephenson . . . . . . . . . Power Workers Union JB/MC/LL [ Copyright 1985].