RP-1998-001 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. 2, Toronto, Ontario on Friday, January 8, 1999 commencing at 9:00 a.m. --------------------- TECHNICAL CONFERENCE VOLUME 2 --------------------- F A C I L I T A T O R : DAVID HARDY Board Technical Staff 171 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 ) 172 ---Upon commencing at 9:02 a.m. MR. HARDY: Good morning and welcome. My name is Dave Hardy and this is the continuation of the rate order Technical Conferences. Can I have an indication of anybody who is new who did not attend yesterday's conference? Could you raise your hand if you're new? (Show of hands) Okay, thank you. Given that, I will go through some explanation of the procedure and some of the rules and so on that we're following. My name is Dave Hardy. I've been asked to facilitate the Technical Conference. I don't have a stake in the outcome of the conference or the rate application, but my role is basically going to be to try to keep the agenda on track and be concerned with matters of process and fairness. As I stated, this is a second conference or a continuation of yesterday's conference and the conferences will go until January 22nd. People have received information before this conference on December 18th. There was a schedule at the Technical Conferences and also some background information and appendices. Yesterday there were also -- actually, over the -- between the 18th and yesterday, there were supplemental filings. They were provided to participants as well yesterday. Pollution Probe also provided a document book, so that was available to some participants. As well, there was a list of information that was to be brought Overview 173 forward by SERVCO, either through the Technical Conferences or other means or through other panels. We do have a list of issues that the Board intends to consider in the review of the application and that was part of the appendix A of the memo of December 18th. We are as closely as possible adhering to that list of issues. The upcoming Technical Conferences are going to be on specific matters related to transmission costs, transmission rates, PBR for transmission, distribution costs and other distribution-related items. There's also a parallel licencing series of sessions going on as well. For additional information, I'd suggest you talk to Board Staff. Today we're going to be starting with a brief information provision by SERVCO. We'll then move on to questions by Board Staff and Board Consultants and then open up the floor for questioning of participants and also testing of information received from SERVCO by participants. I'll continue going through today. So long as there's questions, we'll continue going and we'll let you drive the tail end of this particular agenda today. Before I have the first panel reintroduce themselves and go through the information they wish to provide, I'll just go through and reiterate some of the procedures I've been following. First of all, this is an informal session. It's Overview 174 not a hearing. It's a conference. It's an opportunity for everybody to obtain information and be provided -- and for SERVCO to provide information as well. It's to assist your efforts and as participants to also make your submissions to the Board and I believe that's before February 5th. There are instances where for one reason or another a question is not able to be answered or there's no more information that's going to be required. I've been keeping a list as have others of information that will be brought forward again either in other panels or by SERVCO through other means. This conference will be transcribed. It means that you do need to use mikes if you're going to be asking a question. At that time and each time, please state your name and speak into the mike and that will help our recorders be familiar with who is asking the particular question. I understand yesterday's transcript is available. Overall the transcripts are available from Farr and Associates, so you can receive them from them. Lastly, it's important that you do sign the registration list at the front and particularly if your attendance here is an aspect of Board support. That's all I'm going to say. At this point then, I'm going to ask SERVCO, the first panel, to reintroduce themselves and to provide the additional information that they wish. Overview 175 Ron, can you go ahead? MR. STEWART: Ron Stewart, Chief Operating, the services company. MR. TAYLOR: Rod Taylor, Executive Vice-President of Planning and Development. MS. NG: Malen Ng, Chief Financial Officer. MR. ARISS: Don Ariss, Manager Accounting Policy and Reporting. MR. TAYLOR: Thank you, David. Good morning, ladies and gentlemen. In looking at the transcript last night, there were three or four areas that we thought we could help the discussion today by commenting a bit further on. In fact, we can do three this morning. I'll just briefly tell you what they are and then Malen and Ron will speak to them. Larry Wu of Hydro Mississauga asked a question about the difference in appendix H of the supplemental filing, about the difference between the 4.3 and the 4.1, and Malen will speak to that. Ken Snelson asked a couple of questions. First, he introduced the Ontario Hydro 1998 to 2000 business plan summary and asked about the difference in the numbers related to OHSC in that summary from the application and Malen will speak to a very high level rationalization of that and then the individual panels can build it up from the bottom on a programatic basis. And also, in response to a comment from Ken, Ron made a number of comments about the nature of the customer Response to yesterday's 176 questions by SERVCO base and who pays transmission rates and we'd just like to briefly revisit that just to make sure that our position is clearer. So with your indulgence then Dave, Malen, would you speak to the 4.3? MS. NG: Sure. RESPONSE TO YESTERDAY'S QUESTIONS: MS. NG: In terms of the change from the 4.3 cents to the 4.1 cent from 1999 to Year 2000 on the energy component of the cost that's shown on supplementary filing H, essentially we have to make some assumptions about the overmarket cost for NUG. And what we have assumed for 1999 is that the market remains closed and the entire cost associated with the NUGS including the overmarket cost would form part of the energy cost. In Year 2000, we have assumed that the NUG overmarket cost will be picked up by the financial corporation through the CTC. So if you notice on the chart correspondingly there is an increase in the level of the CTC and pretty clearly, this is an assumption at this point in time because, in essence, how the NUG overmarket cost would be recovered is still under discussion, but for the purposes of illustration in this chart, essentially we have put them in two different places in 1999 versus 2000 which has resulted in a decrease. On the second issue, I think Ken Snelson raised the issue of last year's business plan. And essentially, when you compare last year's business plan, the table that Response to yesterday's 177 questions by SERVCO was specifically referenced in terms of the business unit net OM&A costs versus the numbers that was added up together from transmission and distribution rate order, the OM&A variance is somewhere in the order of about 258-million and the capital is in the order of 172. In terms of the OM&A, yesterday I believe that Don Ariss has spoken briefly about some of the work associated with the provision, about $100-million, which was actually included in last year's plan, but because of the provisions that were made in 1997, it was not explicitly included as part of the OM&A numbers, and these would include various things associated be it with the environment, be it with asset conditions, the vegetation management, process design, information requirement and things like that, these would be spoken to specifically by the panels on transmission and distribution as they go through the programs. There is another piece of it when we looked at it last night which forms a major difference, is the table that was referred to in last year's business plan is a net OM&A number. When it's net, it's net of all external revenues. For the purposes of the rate order application, the services company has actually chosen to show these very explicitly and transparently as external revenues and it's not netted against the OM&A cost and the difference there is over $100-million. And these revenues or these -- for external sales external to Ontario Hydro services company were things like servicing the Genco switch yard, Response to yesterday's 178 questions by SERVCO secondary land use, servicing, you know, other municipalities, municipal utilities with respect to wires and things like that. And again, I think all these will be spoken to as external revenues by the transmission and distribution-related panels. So if you look at those two, it adds up to more than $200-million. And another piece of the major difference is the surplus staff costs that were included in 1999 in the rate order application to the tune of about $35-million and it relates to the excecution of the wires-related work and it will be spoken to in terms of the excecution of work and the staffing and things like that during the transmission and distribution panels respectively. So in total, that will sort of give you the broad elements associated with the $250-million that was raised. In terms of the capital cost, the difference that was outlined by Ken was somewhere in the order of $170-million. A large chunk of it is associated with the wires capital program, be it asset restoration, interconnections, intercom and some remaining storm-related cost, and that will be the bulk of the incremental capital program costs and again, that would be spoken to by the transmission and distribution panels. Also included in there is some of the wires support system costs, such as having to clone the pay system from the existing Ontario Hydro in order to have that stand-alone, you know, pay system within the new services company. There will be support system costs Response to yesterday's 179 questions by SERVCO associated with it in the capital which will also be spoken to by the transmission and distribution panels as part of their support programs. MR. TAYLOR: Ron? MR. STEWART: Thank you. If I may, on page 141 of the transcript, I responded to, Ken, your question yesterday about who the customer is, et cetera, and I just wanted to kind of essentially reinforce my answer there and hopefully clarify a little bit. Upon open access, it is our understanding all participants in the wholesale marketplace will be assessed a transmission charge clearly. The choice of how the charge will be administered will depend on the participant. And for those who are directly connected to the transmission, and there should be no confusion about who the customer is with respect to transmission, they are physically connected to the transmission system, but who they're billed by, our understanding is that if they're over 50 kV, they will be billed directly by the IMO for the transmission charge. For those connected to the transmission system through the distribution facilities at below 50 kV, it's our understanding they may choose to be billed from either -- for transmission either by the IMO or by the host distribution company. That's our current understanding of how the discussions and how the market rules seem to be evolving. MR. SNELSON: Can I just ask for a clarification Response to yesterday's 180 questions by SERVCO there, Ron, and that is, what I heard you say would imply that a current over 5 megawatt large user who is directly connected to the transmission wires but is currently a customer of a municipal utility would be a customer of the transmission system in the scheme of things. MR. STEWART: Well, it would be billed by the IMO. The issue of who the customer is is depending on what the service is. Clearly, for transmission, it's a service -- it's a customer of the transmission service, it's a customer of the transmission. That's not to be confused with who the customer is with respect to buying energy obviously. That's a choice. MR. SNELSON: I understand the difference. Thank you. MR. STEWART: Thank you. MR. HARDY: Certainly we will get back to any other questions of clarification in a few minutes. Why don't we start with Board Staff and Consultants with your questions. I think that's where we were leading off yesterday. Can you start by introducing yourselves. MS. WALLI: Actually, I'm just wondering as we have some new participants here today if perhaps in fairness they would like to go first before the Board Staff and consultants go into very detailed questions. MR. HARDY: If that's what you wish that will be fine with me. Okay. Why don't we open up the floor then to any [Questioning] 181 additional participant questions. If you do have a question please come up, take one of the microphones and chairs and... MR. BACON: I have some questions. Bruce Bacon from OCAP. Q. I think these are strategic questions and that's why I am asking this panel. There may be details. It that's the case we can pass it on to the next panels. But I am specifically looking at the revenue requirement for transmission and distribution. If you want to reference, the distribution revenue requirement is on page 43 of the distribution application and the revenue requirement for transmission is on page 137 of the transmission application. My question is, in distribution you have included losses and in transmission you haven't. I guess wondering what is the reason for that? MR. HARDY: Can I get the page reference again for the transmission. MR. BACON: Sure. The transmission, page 137. MR. HARDY: For distribution, that was page 43?. MR. BACON: 43, that's correct. MR. HARDY: All right. MR. GILLESPIE: A. May I suggest that that detailed -- that I suppose could be considered in a detailed question that goes into the components of the two specific applications, and would it be possible to address that because I think we will have the people who can get [Questioning] 182 into the detail of that better in other particular panels, Bruce. MR. BACON: Q. I don't have a problem with that, but from my perspective it seems to be strategic in my mind, but maybe not. Maybe it's -- like in one area of the business you are going to include it in the revenue requirement and the other one you are not going to. It seems to me -- it also seems to be a cost in the transmission system. It will relate to question how you are going to recover those costs. A. Yes. Q. I know that's a detailed question, but it seems like you have done two different things in two different pieces of the business. That would seem to be a strategic question. A. Let me just comment generally that I think that there are a number of areas where components of the two applications may differ, and I would prefer, and we had arranged to have the people who can speak to the rationale for why they are treated in a certain way in transmission and perhaps in a somewhat different way in distribution, speak to these on those two particular panels. MR. BACON: That's fine. MR. HARDY: I am wondering if the question was reformulated, perhaps more in a strategic way, I don't know if that would help at all, but other than that it [Questioning] 183 sounds like this information would be coming forward in subsequent panels. MR. BACON: That's fine. MR. SNELSON: At the expense of perhaps stepping out of line, maybe I can be helpful here, and that is that I believe that the MDC recommendations will recommend -- will likely recommend that transmission losses be considered as part of the costs in the wholesale energy market. And that is likely the reason -- and will be recovered through uplift in the energy market through a different mechanism and that's likely why SERVCO did not include transmission losses in their application because otherwise they would be charged twice. MR. HARDY: We can leave it at that. Thank you. Are there other questions? Well, can you now introduce yourselves please again and feel free to ask your questions. MS. WALLI: Board Technical Staff, Christine Walli. MS. SIMMONS: Susan Simmons, Reed Consulting Group, a consultant for the Board. MR. HOPKINS: Bill Hopkins, Reed Consulting Group. MS. BULKLEY: Ann Bulkley, Reed Consulting Group. MR. HOPKINS (Reed): Just to return to a couple of subjects that we may have covered yesterday, but I [Questioning] 184 Board Staff/Consultants wanted to see if we could clarify a couple of points maybe further. Q. With respect to the organization structure that's being put forward that we looked at yesterday and we talked about how do we move people from here to there, and I think you are going to give us some further guidance on that. But as we look at the structure it has a network asset management group functioning and a network services group functioning, but they are functioning over -- there is also a transmission enterprise and a distribution enterprise and I guess I'm not clear on how those enterprises are going to look after their own businesses individually because I didn't see that carved out in the organization structure. Would there be a distribution enterprise led by somebody who is looking at the distribution as a business as opposed to the transmission as a business? MR. STEWART: A. Clearly we view that as the role of the asset manager. The general manager of the distribution and the general manager of the transmission are, in fact, the enterprise managers and they have -- the decision-making for that enterprise. As I indicated yesterday, through the investment planning the maintenance levels, nature of it, you know, whether it's a liability centred maintenance program or whether it's a scheduled or what kind of replacements, et cetera. Those are all decisions of the asset managers. [Questioning] 185 Board Staff/Consultants So they are, in fact, using your language I would character that as the enterprise manager. They look to the network services much as you would look to a contractor for just executing the work. We actually set that relationship up with service level agreements. They would sit down and this is the work we want done and the network services actually makes the proposition and they enter into an agreement to get the work done; price, units, timing, all of this sort of thing. So the network services is not making decisions about the enterprise. They are doing the work. MS. SIMMONS (Reed): I would like to follow up on that. Q. I fully understand and appreciate everything that you have given us with respect to your asset management model, but I have a question as to how these two managers are going to balance the allocation of resources, available labour, between the two divisions. Isn't there a potential for competing need for time and resources on projects and who overall makes those decision in balancing transmission, distribution investments and activities? MR. STEWART: A. A really important point. It kind of emphasizes the point I was making yesterday about how important it is if we are going to achieve the efficiencies that the workload, in fact, dictates the [Questioning] 186 Board Staff/Consultants level of resources as opposed to what you have available and kind of trading off between it. So one of the things that we are striving for is the ability to do that. We have our own work force. Clearly there is priority setting that has to go on, but we have the ability to follow that workload. Things like the hiring hall, our ability to get additional services, et cetera. So, likewise, if the work is not there we are going to have to -- the contractor, he's going to have to do something about having surplus resources. Q. So are you saying that depending on critical projects, that the critical project list of most important and critical need gets done first based on that? I mean, I certainly understand in theory how this is going to work, but it seems that there are certainly potential areas where both transmission and distribution are facing critical projects and both transmission and distribution are facing projects that are development projects in terms of growing your business and meeting customers' needs and higher levels of customer service. How will, in the event there are situations where you have competing need or competing projects, is it going to be the budget that you receive or the revenue requirement that you receive that drives decisions as to what gets done? A. Yes. Clearly there is a planning process involved with both of them. I mean, it is the investment [Questioning] 187 Board Staff/Consultants manager or the asset manager who is responsible for doing those plans and getting them approved. Once approved and committed to, then it's up to the network services to meet the deadlines that have been agreed to, deal within the resource constraints, et cetera. Clearly there has got to be a lot of interaction between the two saying, you know, if you really want this done it means we are going to have to do this and, you know, do you want that. Those kind of questions. I mean, the purpose of setting it up the way we have is to get at that issue. It is as contrasted, kind of traditional way of doing it, which it really does mean that the priorities are more established by the availability of the resources than the other way around. Q. One more follow-up on that. So you have got these two enterprise managers that are really the transmission network asset manager, distribution asset network manager, whoever is highest up. Are their plans then approved by the SERVCO board? I mean where is their check and couldn't -- is there some sort of a -- if I am under some sort of performance-based incentive to grow my business, and I can't do a project, is that a part of it? Are they going to have drivers so that the transmission and distribution business strategies are met by these network asset managers, or is that really the SERVCO board who determines the overall strategy and [Questioning] 188 Board Staff/Consultants determines implemenation of that through these business plans? A. Just to add, the asset managers who are responsible for the investment plans have to get those approved and that has to be consistent with the overall strategy of the services company and it has to be approved by the services company. In turn, Rod can add to that, but I mean clearly they go to the Board. They are not the decision-maker in the sense of what the strategy is going to be. It has to be consistent and within the context of the overall plan. MR. TAYLOR: A. If your question is how do you choose among priorities in TNAM versus DNAM, there -- MS. SIMMONS: Q. That's the heart of it. If it's not the network asset managers, how is the Board going to make those decisions? What is going to be driver? Is it a financial driver or is it the revenue requirement? What drives that? A. I guess with so much -- it is evolving and it's probably going to be different even six months from now as it is today and then six months again from there. The real heart of the answer to your question I think depends on the nature of SERVCO as a holding company and the nature of its relationship to the affiliates and the wired affiliate in particular. As I said yesterday, the Board hasn't made decisions about the nature of that with the kind of [Questioning] 189 Board Staff/Consultants holding companying it is going to be, how intrusive it will be and so on. Those things are still outstanding. I can describe to you the way it has happened over the last year and is happening today and that is over the last year there was a single network asset management group with two divisions of it, TNAM and DNAM, if you will, and that single asset management group had a planning function that would help to prioritize between the demands of transmission and distribution. That group now in fact reports to me in a slightly different structure but is essentially doing the same kind of priortization work. As Ron says, our intent is to have the planning decisions below a certain materiality limit and that are non-strategic in nature happen at the asset management level. Those above a certain materiality limit would clearly require the approval of the SERVCO board just because of the size of the dollars or those that are strategic in nature will be done by a more centralized planning group. Whether that planning group ultimately ends up at the holding company level or is, in fact, once again associated with the wires company once it is established is an outstanding question that we haven't settled yet. MS. SIMMONS: Thank you. MR. HOPKINS (Reed): Thank you. Q. Just another subject relating to something we [Questioning] 190 Board Staff/Consultants discussed yesterday which I wanted to clarify. As we looked at the budgets that were put forward and we had cost categorized in these various categories of sustaining and developing and the program related type cost allocations, was it -- is it your intention in putting forward these kinds of activity based cost categories, is that the type of recordkeeping you're going to have on a going-forward basis? Are you going to be looking at keeping track of proposed expenditures in these kinds of categories and then result, you know, the actual results in that kind of categories as well? You've -- in the filing materials you've put forward your budget is broken down in this fashion and is that something that's going to be inherent in your records going forward? MR. TAYLOR: A. I think, maybe I can start and Ron can help me out. I think getting them in those broad categories of sustaining development and so on was a very good first step, as I said yesterday, to try and rationalize the principles behind those kind of activities in the two different businesses and bring them together so that there was an opportunity for planners and others to try and get a sense of commonality in an apples to apples kind of comparison. And we will be using those same categories through the next year or two. However, we recognize that in preparation for the next rate hearing, I guess in the year 2000 since it's a two year interim rate, that we'll have to work with the [Questioning] 191 Board Staff/Consultants OEB in terms of a standard system of accounts and to try to ensure that our information is as compatible as in the manner that the Board would like to see it so the relationship of getting it from the kind of broad categories as a kind of interim step to make them compatible between high voltage and low voltage and the ultimate system of accounts is ahead of us. Q. Okay. Thank you very much. On another -- MS. SIMMONS (Reed): Can I just follow up on that? Q. Given that, is there -- I'm just wondering how going forward, given this data, if the whole accounting system is changing are you going to go back and redo your books for this year so that going forward we'll be able to evaluate things going -- comparing your -- what you've presented in this filing versus what you presented in 2000, 2002. I mean, that's a problem we have right now and I'm concerned going forward that when that decision is made that we were able to look at some years of historical data to understand the trends and understand what's driving your business and what's driving your revenue requirements needs. MS. NG: A. The whole discussion about a system of accounts is currently taking place, as I understand it, involving not just the services company and the OEB, but also other stakeholders. And obviously part of the [Questioning] 192 Board Staff/Consultants discussion has got to be what and when and what else would have to be there, and I think that would be part of a discussion but there has been sort of no conclusions and finalization, as I understand it, in terms of all the specific details, but that would definitely be one thing that would be looked at. MS. SIMMONS: Okay. Thank you. MR. HOPKINS (Reed): Q. I want to -- MR. STEWART: A. Just -- sorry, just to add, as a manager, the work, the program work and the monitoring that clearly we need to be able to close the loop in order to manage. And so regardless of what the chart of accounts ends up to be, we will have a way of getting back to what was approved as work is packaged, work orders at service level agreements, et cetera, and our actual control system and our performance et cetera will be how well did we do in delivering on that. So that's the struggle in terms of what the chart of accounts is, but regardless of what the bookkeeping or the accounting system ultimately is, there will be -- have to be a way of doing that. Q. That kind of breakdown isn't necessarily indicative of some form of organization structure underneath-- A. Right. Q. --though, is it? A. No. Q. That was also sort something I was sort of [Questioning] 193 Board Staff/Consultants interested in there. A. Yes. Q. One of the elements of the structure we talked about briefly and I know it's a subject we're going to come up to later in the more detailed discussions was the remote communities, you know, that operation, it's set aside and what have you, and just briefly looking at the cost structure there, I was sort of struck by the fact that it was, as I understand, you know, as I understand the operation of that and maybe you could explain it further, there is a certain subsidy that's required as a result of your costs and your rates being fixed and that subsidy is -- well, I'd like to have you tell me where it comes from and where it's charged. And also I guess it's affected by the assumption that's in there that the cost of its debt, the cost of its financing is 100 per cent debt, and I wonder what the implication of planning issue is there, why that was chosen? A. You've got a couple of questions there, let me-- Q. Yes, I think so. A. --talk about remote communities. Q. If it's more appropriate to wait for the panel, I understand. A. No, we should be able to give you some sketch of remote communities, the 2100 of them and 3800 customers. And I contrasted to the way it has been done [Questioning] 194 Board Staff/Consultants historically to the way we are trying to set it up. Historically, when -- because remote communities were actually generating the power and distributing it and billing it as a retail customer, there's been three forms of subsidy essentially. The actual communities when they are set up, the capital cost of setting them up is underwritten by either the Federal government or the Provincial government originally. Then the arrangement there is that while Federal government puts up the capital for the original installation, we then become accountable for the ongoing operational costs and the replacement costs of those facilities. Should the community expand, the Federal government is responsible for the incremental capital cost associated with that expansion. So that's the first major subsidy that's associated with it. The second is there was a decision made that the actual cost, historically the actual cost of the generation side was put into the host, the bulk power pool, if you will, so that the costs attributed to the remote communities for generating electricity was at the average pool price. Clearly a very large subsidy associated with that when you think it probably costs in the order of 45-cents a kilowatthour to produce, and it's getting it out of the wholesale pool. That was another form of subsidy. The next form of subsidy was around the retail customer, the actual rate charged to the retail customer [Questioning] 195 Board Staff/Consultants was at the retail system average rate for a consumer so they are paying 8-cents for that and there was, as I said, it's costing a lot more than that to produce, but that was pooled into the retail distribution costs, if you will, and they got it that way. That was offset to a certain extent by an agreement with the Federal government and the Provincial government that they would, in fact, pay the actual costs of production plus a premium to help offset that subsidy and I'm not sure what the schedules referred to, but it's a special rate schedule where they end up, in fact, paying about 87-cents a kilowatthour. So the issue there is that it had to be a Provincial or a Federal bill service and clearly there's been a shift away from, okay, we'll make it a -- we'll make it a community service and we are not paying the whole thing so that subsidy is going down. And the last one, of course, was that because the customers were receiving and being treated as rural retail customers, they also received the rural rate assistance on year-round residential, so there was whatever that added up to as well. Going forward, I am under the understanding that we're a commercial company and that if there is any subsidies to be associated with these things, it should be a government subsidy. It's the reason we are setting it up and trying to keep track of it as an independent kind of enterprise. We've agreed that all the costs associated [Questioning] 196 Board Staff/Consultants with going -- would go into the cost of serving those customers including the generation and the fuelling costs and all the connection costs and distribution costs and retailing costs and then it would continue to be a bundled rate, if you will, and we are negotiating a special regulation to get our -- exempt them from open access criteria, and that the net subsidy arising from that would be covered in rural rate assistance or remote community assistance and that that would become recovered in whatever mechanism is used to recover rural rate assistance, probably either as an uplift or a special surcharge on transmission. So that's the contrast going forward with the present. Hopefully that helps. I'm sure there was another question? Q. That does help, but thank you for the background as well. It sort of leads to a better understanding. That uplift charge, has that been included in the transmission costs? I mean, what comes from the rural rate requirement program here? Is that then put into your transmission costs some place? A. I'm sorry, I don't know exactly how it's treated in this application. MS. NG: A. Yes, in the application if you look at supplementary filing A, chart 3, it shows a rural -- remote community subsidy, for example in 1999 $17-million going into the OHSC dotted line diagram. [Questioning] 197 Board Staff/Consultants Q. Okay. So -- A. So essentially it would be through the uplift and coming in as one of the sources of revenue. It's at the top. It's the second one on the top line. Q. I see, I see. Yes, I see, that's a source from the outside revenue? A. Yes. Q. But where is it? You indicated perhaps that that revenue was going to be coming from part of the transmission charge uplift or some other source. It's just -- what you're just saying is it's been left out at this point then? MR. STEWART: A. Yes. Q. It's not part of any rate? A. Yes, I didn't mean that it would be bundled into the transmission charge, it would be -- Q. Added on. A. Added to it or come on through the uplift or something. Q. That helps. Is there a reason behind the 100 per cent debt financing cost in the -- well, you know, in your approach to this? MS. NG: A. I think it is really some discussion between the folks in the remote communities, the services company as well as the Ministry of Finance. And the notion is, if there is a subsidy, then maybe the notion is it should not be trying to earn a return on equity. So [Questioning] 198 Board Staff/Consultants the 100 per cent debt finance, given that there is a subsidy mechanism, is probably more appropriate. Q. I see. Okay. Thank you. MR. STEWART: A. It's hard to rationalize an equity. MS. SIMMONS (Reed): Q. I know you're trying to get us information based on some things that we said yesterday, so you are getting this information to us and I do appreciate it, but I just wanted to turn to try to find out whether information exists with respect to trying to come up with total revenues that are going to be generated by your existing bundled rates. And if I look at appendix 10 of the distribution filing, I see all your retail rates for residential and various categories of industrial and commercial customers and what I'm really trying and wondering what's available is, are there consumption figures that support these that we could use to create and understand what the total revenues are there that are going to be received from these various rate categories? I have to believe that at a minimum, there's some year end numbers that would be available that we could use if there isn't forecast or normalized numbers that you would traditionally expect to see in some rate filing. MR. TAYLOR: A. We're still trying to figure out how to respond to your question yesterday and I think we -- if you could just give us a couple days to make a proposition on that, I think we could probably try and get [Questioning] 199 Board Staff/Consultants you a sense. If we have to use the gross assumptions we were talking about the other day, we will, but we'll try and illustrate the total revenue somehow. Q. Okay. MR. HARDY: So that will come forward in another panel or would that be just a response or ...? MS. SIMMONS: It's in follow-up to my previous question and-- MR. TAYLOR: It really is, yeah. MS. SIMMONS: --we'll kind of see what comes forward. MR. TAYLOR: We're hoping sort of midweek next week we'll know how we can best respond to it. MS. SIMMONS: I was just trying to come up with maybe other sources of data that, you know, to the extent you can't do the processing, we can do the processing of, so thank you. MS. BULKLEY (Reed): I just had a couple of questions on the designation of asset boundaries and costs. Q. I guess first probably what I'm looking for is for you to give me a sense of how the assets -- what the delineation of assets was and what criteria were applied in order to make the cuts that you made. MR. STEWART: A. There was a supplementary filing - it's at tab L - asset boundaries. It is a discussion of asset boundaries between the transmission and distribution and again between transmission and [Questioning] 200 Board Staff/Consultants generation. I'm not sure -- I'm not in a position to add a lot of detail to that. It's been covered off by the respective panels about that, but I can -- certainly that covers the essence of it. Q. Well, we're actually looking for some more detail to the table that was provided there. Is that something that could be provided by the other panels? A. By the panel themselves if you want that level of detail. Q. Okay. MR. HARDY: Sorry, was there a specific table that you're referring to? MS. BULKLEY: Actually, yes. It was this appendix, the appendix B that you have right here. MR. HARDY: Okay. So this is the supplemental filing of January 4th-- MR. STEWART: Tab L. MR. HARDY: --tab L, appendix B? MR. STEWART: Yes. Just to make sure I understand the ... yeah, appendix A is a listing of the actual assets and appendix B -- sorry, I don't have an appendix B. MR. HOPKINS: Do these assets have dollar values to them that you could put forward for us? MR. STEWART: Yes, in fact, I don't know what the status of that is, but clearly they do. MS. BULKLEY: Q. What we're actually looking for [Questioning] 201 Board Staff/Consultants is to be able to trace from the total value of both T&D in the OH structure to the values that have been placed in the initial filing on pages -- I think it's 48 of the distribution filing and 77 of the transmission filing. You've broken down the total value of the assets in the split that you've created. We're looking to just trace those, those values back from the original total and to get a sense of where you've transferred assets between transmission and distribution, what assets have been transferred and the values associated with that. MR. STEWART: A. Okay. Oh, I'm sorry, appendix B is the list of the actual assets and you're looking for the dollar value associated with that? Q. Right. We're really looking for being able to follow the dollar values from the old structure to the new structure and to be able to see where assets were transferred across between transmission and distribution we'll be able to follow those costs through to arrive at these 3.6 and 7.7 numbers. A. Without committing all the bookkeepers, I think we can do that, but we'll take it under consideration. MR. HOPKINS (Reed): Q. You have your six principles that you've used in doing this, the guiding principles put forward here in this application in a sense and I presume a major one is really how the asset is utilized; is that my understanding? MR. STEWART: A. Yes. Clearly -- and offset by [Questioning] 202 Board Staff/Consultants some of the other principles. The general rule is that above and below the 50 kV mark is the demarcation line and this is -- but there are a lot of other assets that have -- that are clearly serving a distribution function and that at least part of the asset is above 50 kV. It's a difficult thing to do. Q. It's an evolving structure of how this is done in North America here as we go into restructuring the industry and breaking it up and certainly I agree that there's been a lot of discussion about where things go, but certain principles seem to be coming fairly clear. I know in the United States, the FERC set forth several tests to understand whether or not facilities were serving a transmission or distribution function, how they were functioning and that those tests didn't necessarily relate to just a voltage class. Did you give that consideration? A. Yes. Those are the kinds of considerations that go into considering those principles. I mean, on the transmission side, clearly there's reliability counsel implications and what's the impact of this facility, et cetera. So those are the kinds of considerations that have to go into making the actual decision and it's not -- it's going to be a challenge for the municipal utilities in the province as well because they're not just distributing utilities. Q. Yes. And in your process of looking at [Questioning] 203 Board Staff/Consultants facilities, where you had bundled service, you had generation, transmission, distribution bundled services, you are casting some of the costs up into the generation -- or supply side of the business as well; is that correct from the -- what might have been otherwise functionally called transmission? A. We've set out -- Q. Or is that something that the panel will be ...? A. The other panel can talk specifically about it, but there is an agreement as to what the physical boundary between the generating station and the transmission facility has been and that's been essentially on a -- either on a group basis or a plant-by-plant basis. Q. It was a certain breaker as I understood-- A. There's a certain breaker, yeah. Q. --the discussion and the facilities that lay on either side of that -- A. And the agreement as to who owns the land and who owns the buildings, et cetera. They've all been plant by plant or a group of plant and the panel will be able to go through that in some detail. Q. Recently in Michigan they got into a fairly protracted revision of their costs at FERC based upon also what they call generation -- generator lead lines which, you know, may not have been, you know, not right at that breaker. Did you at all look at that? [Questioning] 204 Board Staff/Consultants A. I'm going to defer to the panel who were in on the discussions. MR. HOPKINS: That's fine. MR. HARDY: Purpose or participants, are you referring to the guiding principles on the supplemental filing at tab L starting at page 7, that's where the principles are? MR. HOPKINS: Yes, I was looking at -- yes, page 7 and 8, going over into page 8 that they used for separating the costs because the cost separating function here, as I understand it, we talk -- and there is some more details provided about how the overhead services functional costs were allocated, but in the grand picture of things, that several hundred million dollars is a small part of really the total. The bigger side of how costs fall within the two applications is based upon your directions here that flow from this kind of asset separation and I think we're going to be looking into the details of that on a going-forward basis with the various panels. MR. TAYLOR: Could I just add that the market rules speak to this as well and the Board no doubt will want to have that in mind when it takes a look at how they've been put forward here. MR. HOPKINS: Yes very much so, thank you. MS. SIMMONS (Reed): I have another series of questions relating to trying to get a handle on understanding how you guys actually came up with [Questioning] 205 Board Staff/Consultants distribution filing and transmission filing and to the extent you're going to provide this information to us based on previous questions, I do appreciate that. Q. But similar to understanding how you broke the assets up, it's really difficult to get a handle on how under your asset management model you came up with, you know, going forward, you know, O&M budgets, OM&A. And if I look at the filing, I believe someone yesterday said that the total number is approximately 774 of OM&A dollars. I think on page 87 you'll see distribution is at 343 of the distribution filing. And on transmission, there's 441 as shown on page 138. You've already provided us information to show the split between shared services and there's 72 to distribution and 115 to transmission, but that still leaves me with approximately 600-million of OM&A costs going forward that you've split up between the two and I really don't have any basis on which to understand how you split them up. You provided us here proposed capital projects. You know your labour costs better than I do. Is there any document that goes forward and breaks down how you've come up with the distribution versus the transmission? I mean, you've got the same organization. You've got network services and materials that you tell me can go and be used for both functions, so that tells me that the split can be ambiguous unless certain criteria are decided to say this person is going to work on transmission today or work on distribution [Questioning] 206 Board Staff/Consultants tomorrow. Maybe it's not as ambiguous, but can you clarify that for us? MR. STEWART: A. I can perhaps clarify in terms of the basic structure. The distribution manager and the transmission manager as has been indicated define the work to be done. That's negotiated with -- and ends up being negotiated with the network services as to a work order, service level agreement, et cetera, very specific 'X' number of hours, 'X' materials, et cetera. The network services organization doesn't care whether it's OM&A or capital. They've got a work order and they execute that. And from that follows -- we know definitely what work order they're working on and for what. It's been either one of the other managers. It's not a combined work order between the two and the system tracks that. That work order, in turn, it tracks the allocations and the burdens on top of it and based on whatever the driver is and I think referred to yesterday was direct hours and -- so that's what goes back to the asset manager. The asset manager and the accounting around that is what defines and determines whether it was an operating program or a capital program and that was defined in the first instance, so that's how you end up with the split. The panels themselves will be able to talk in some detail about, you know, how we manage work orders, how we manage the service level agreements and *what the [Questioning] 207 Board Staff/Consultants monitoring system is behind that, but it's quite -- the basic process is quite clear and quite transparent as to whether it's transmission or distribution. Q. So what's in this filing, is that based on some -- I mean, if you've been doing this for the last year and maybe you haven't, how did you come up with 1999 numbers if -- unless you're telling me all the work orders for work that's being done are completed already? I mean, I understand the process you're coming up with, but help me understand approximately 600-million of O&M costs that were split between T&D; based on work orders or ...? A. No. Those are the planning -- programs that they plan to execute or plan to undertake, so they're based on estimates of getting that work done through the process. Q. So is there any additional documentation that shows me how you took your plan, your plan projects, that could go through and say 'this amount of labour is in that and that amount of materials is in that'? A. When the panel is on and you're talking about specific programs, those kinds of estimates can be made. Q. Okay. And do you have an internal accounting document that describes how people go and assign costs between the two and work orders are made? Is that the network asset manager's responsibility? It sounds like you've got some good processes so that costs can be tracked going forward between transmission and distribution. [Questioning] 208 Board Staff/Consultants Is there a protocol or an ABC guide to this? A. I'm sorry, I'm not sure exactly what's available in terms of a guide. Clearly, the system itself is in the process of being converted from old work management systems to a new one. The system documentation is there. I have to defer to somebody else. MS. SIMMONS: Okay. Well, that's fine. Knowing the process is there is helpful to know that going-forward costs will be tracked to the appropriate categories for these regulatory requirements. MS. WALLI (Board Staff): Good morning. I'd like to revisit some areas, particularly income taxes, depreciation, et cetera, some of the items we discussed yesterday. Q. You mentioned that you and your accounting advisors had identified a number of situations where various utilities had converted from using a taxes payable method to the normalized method of reporting and vice versa. Can you provide us with a listing of those precedents and also can you provide us with the number of utilities that you reviewed that are currently using the taxes payable method and the number of utilities which are using a normalized method? MR. ARISS: A. If we can undertake to -- if I can check on that and get back to you. We had a number of discussions on this and I have a number of listing of things that we looked at. So we could check on that and [Questioning] 209 Board Staff/Consultants see what information we can provide back to you. Q. That will be fine. Also, looking briefly at depreciation, you mentioned that several years ago when the Board had advisory powers the Board reviewed your depreciation process and policies. In that filing, were all of the process and policy details summarized, and can you confirm that you are still following those same policies today as you go forward? A. We are still following the same policies as we go forward. Certainly over the various hearings that took place in the past, all the accounting policies would have been reviewed. As part of the request that you had yesterday -- or the request that was there for the additional information on the Depreciation Review Committee, we will see -- right now we are working on putting together a package that will provide a summary, both of the depreciation reports over the last five years, as well as to give you a starting point as of the end of last year what all of the plant accounts and what the service lives were as at the end of December 1998 so that you can see the delta for the information that we provided. We can see as part of that summaries were certainly prepared in the past when the DRC undertook its activity, the members there, because they weren't all accountants as well, to give them a summary of the various [Questioning] 210 Board Staff/Consultants accounting policies and procedures you were mentioning, the pool depreciation, as well relating to things like minor fixed assets. So there are some summaries that had been prepared in the past and we are just digging those out right now and we'll see if we can put those all together as a package for you. Q. Thank you. That will be very helpful. Looking to your accounting policies, now in the transmission document, I believe that's Appendix H, and I believe it is a parallel section in the distribution document. Could you identify all the OHII revenues and expenses? You mention in your accounting policies that OHII would be consolidated up through OHSC. Would you be able to provide us with information on what the OHII numbers are? A. The OHII numbers are included in the accounts. If -- that information, we can check on whether that's available. It is not obviously in this material because it's outside of any of these rate submissions. That is in the non-regulated part of the business. MS. WALLI: That would be helpful. MR. HARDY: So I can get clarification, that was a supplemental filing of tab H, was that what you were referring to? MS. WALLI: Actually, that would be the original filing of December 7th and that would be Appendix H. I [Questioning] 211 Board Staff/Consultants believe it is titled "Summary of Significant Accounting Policies" and there is a parallel document in the distribution filing. MR. HARDY: Thank you very much. MR. WALLI: Q. Also looking to accounting policies, training costs aren't usually capitalized as they generally aren't part of bringing an asset into service. However, it is certainly allowed under GAAP under certain circumstances. You do mention under your fixed asset policy that the costs of training initial operating staff are included in the capitalized amounts for fixed assets. What are your decision factors for capitalizing training costs? MR. ARISS: A. The policy to introduce -- this was a change in policy that was put in place back I think it was in the early '90s. It was that policy at that time and, again, as these relate -- as a carry-forward from the overall Ontario Hydro policies, the primary driver for that at the time was the large nuclear stations coming into service and that we were having to build up a labour force, training substantial amounts of new operators. So we are talking in the order of literally hundred of millions of dollars that were required, as I recall, to train because it was quite a lengthy process to build up that labour force. So the primary driver was that these were brand [Questioning] 212 Board Staff/Consultants new staff that were coming in incremental to our existing labour force and, again, that they were material on substantial amounts of training that were involved for them. Now, as we go forward and we're looking at OHSC's at that point, we are not contemplating training costs right now being built in. That very well may be one of the policies that as we go forward and revamping that we can simply delete that from the policy framework for OHSC's on the view that it wouldn't be relevant given the nature of our business as OHSC forms and as its new operations. MR. HOPKINS (Reed): Just as a follow-up to that capitalization process. Q. In your filing you have a fairly significant cost for demerger expenditures and that type of thing in restructuring your company. Have you given consideration to any capitalization of those? MR. ARISS: A. I believe those costs, we did not see those as being a capital expenditure. They were built into our cost recovery structure, not for capitalization. Q. I know, but they appear as an operating expense, I understand that. But is there any choice in that matter? A. We didn't see within the application of generally accepted accounting principles for the nature of the activities that we were taking forward that this was an option that we saw was available to us. [Questioning] 213 Board Staff/Consultants Q. I see. That is sort of an establishment in the business cost and I didn't know whether that would be capitalized or not. I'm not an accountant, so... But you are following the advice of your accountants, I take it? A. That's correct. Q. And GAAP in that area? MS. WALLI (Board Staff): Q. Just returning to the fixed assets side, are reserve equipment items non-service included in your fixed assets? MR. ARISS: A. Reserve equipment that are not in service according to our -- the definition in the framework we had that they were still considered part of the fixed assets, that's correct. Q. Would you see that change then going forward or would you stick with that policy? A. Well, again, reserve equipment that is within this that was not in operation but is still considered a valuable and useful asset that has potential for future would still be part of the asset base. It's only in circumstances where it's clear that that asset will not have future -- that does not have the potential providing benefits in the future, and then the policy of requirements would be to identify that as a surplus asset and to recognize the cost or the loss in that at that point in time. Comparable to what I was indicating that we did in '97, we were recognizing certain of our buildings and [Questioning] 214 Board Staff/Consultants facilities that were no longer going to be used, they were going to be surplus. So we recognized the loss and the value of those assets and that was the provision that we made for those in the incremental cost. Q. And those are the buildings out at the Kipling site? A. Some at the Kipling site or some of the retail buildings as well. Q. Thank you. Let me see. One or two other questions in this area. In your application software, what is your capitalization threshold for application software? A. Two million dollars. Q. So, for example, if you're implementing an SAP system was $3-million that would be capitalizeable, but if, for example, you are buying "x" thousands copies of WordPerfect that would be over 3-million or 2-million, would that be capitalizeable or not? A. Sorry, "x"...? I didn't understand the question. Q. Oh. Say, for example, if you are installing a significant system, say an SAP system, and its initial costs were say, $3-million, that would be capitalized? A. Yes, That's correct. Q. But say, for example, if you are going to purchase many copies of a WordPerfect, many units, that the total would be in excess of 2-million, would that be capitalized or not or would that be expensed? [Questioning] 215 Board Staff/Consultants A. I would want to just double-check because when you are dealing with the application software as it relates to PCs, local network systems, this is within the area of our minor fixed assets and it's a different materiality rule that applies for that. I believe -- and again, I would want to just check on this, that's a level of detail that the materiality is at a much lower limit. When we are talking about the $2-million limit, we're talking about major application comparable to the SAP systems that you are referring to. We're not really talking about individual pieces of software for individual network systems. There are different rules that apply there. MS. WALLI: Thank you. MR. HARDY: Sorry, can I just get clarification. So you are going to bring that forward? MR. ARISS: Yes. I will have to just double- check that on what the materiality limit of that was. It was changed and that's really at an operating and applicational level. MS. WALLI: That would be helpful. Q. One or two follow-up questions on the income tax side. Q. Now, I understand you will be paying proxy incomes tax and, in effect, remitting to Finco, but that being said, your undepreciated capital cost would equal the company's book value of the depreciable assets, [Questioning] 216 Board Staff/Consultants starting off? MR. ARISS: A. As we start off the undepreciated -- our initial values in our capital cost allowance pools, the undepreciated capital cost will be equal to the net book value of the assets that we have at effectively day one. Q. Obviously after that point it will be changed? It will be -- A. That's correct. Q. As a matter of interest, have you approached Revenue Canada for any advanced tax rulings or effectively are you working with income tax assumptions rather? A. There are and have been a number of discussions. This, again, is in our tax department and the initiatives there to deal with the whole question of taxes as we go forward. That obviously is not something that we've had to focus on in the past. These discussions are in conjunction with other members of the electrical association, to entertain the possibility of different capital cost allowance treatment for some of our asset categories where we have not had to pay taxes in the past, therefore, there haven't been the need for focusing on that. At this point, those discussions are still very preliminary and we expect that those, as any another commercial we now are focusing much more as other commercial companies looking to obtain what we feel are [Questioning] 217 Board Staff/Consultants fair treatment in various categories comparable to other entities that we would see ourselves on wanting to be on a level playing field with. So discussions of that nature are under way, but they are still very much in the initial stages. We have no indication as to whether those will be successful or not. Q. Would you, for example, be looking at getting a ruling on your apportioning of your assets to various UCAS categories? A. The apportionment, the initial apportionment is something that has been the discussion with the Ministry of Finance. As you indicated at the outset, this is proxy tax. The indication is that we should be in accordance with all of the aspects of the Incomes Tax Act of Canada, but in the negotiations with the Ministry of Finance, there were some exceptions. There is the provision in the Act that there will be additional regulations that will be put in force and discussions have been undertaken as to what those exceptions, if any, will be. One of them in terms of the Category A or -- sorry, Category 1 or Category 2 in terms of the timing for the acquisition of assets. Obviously if we were starting off with a strict application of those rules, all of our assets would be considered acquired as a brand new company as of April 1, 1998. [Questioning] 218 Board Staff/Consultants We have received concurrence from the Ministry of Finance staff that we can continue to use the Category 1 and Category 2 assets that were acquired prior to 1986, I believe. I may be a little rough on the details, but we have received concurrence that we can continue to use those categorizations when we are doing -- calculating the proxy tax payable obviously to the province. Q. Thank you. That clearly -- CCA has never been claimed on any assets to date, but you will be transferring to OHSC; is that correct? A. That's correct, yes. MS. WALLI: Thank you. I believe those are all my questions. Now, just looking time-wise -- MR. HARDY: At this point in time I'm going to be calling a break. MS. WALLI: Great. Thank you very much. MR. HARDY: And when we come back, again the floor will be open for questions from participants and then we'll move back into subsequent questions by Board Staff, Board Consultants. Okay. We'll break for 15 minutes and that, on my clock, brings us to about 10:30. ---Recessed at 10:15 a.m. ---On resuming at 10:30 a.m.. MR. HARDY: Can we come back to order, please. Okay. Why don't we come back to order and why [Questioning] 219 Board Staff/Consultants don't we begin. At this point we'll begin with, if there are any questions from participants, now's the time to bring them forward. Okay. Seeing none, why don't we continue with -- MS. SIMMONS: We have a question over here. MR. HARDY: Do you have something you wanted to say? MR. TAYLOR: Could I just -- could I just respond to Bruce Bacon's question about why the losses are in the -- in the distribution filing and not in transmission? Unfortunately, Bruce isn't here but, for the record, there's a fundamentally, of course, different nature to the distribution system. It's losses on distribution are essentially controllable in a way that they're not on the transmission system. There are different configurations that can be used in an essentially radial system. They can be metered and so on, and we felt it was appropriate that that was the right place to assign distribution losses. It's really the difference between that and the transmission system, and of course, you know, on transmission the market rules are suggesting that they be recovered through the IMO uplift. Thanks. MS. SIMMONS (Reed): I just want to ask you to clarify. Q. Did you say on a distribution system you feel losses are controllable on distribution and not so on [Questioning] 220 Board Staff/Consultants transmission? Maybe I didn't hear... MR. TAYLOR: A. Yes, they are fundamentally different. On the transmission system the right answer to transmission losses is marginal pricing of -- and Ontario intends to go that way if it adopts the Market Design Committee reports. So transmission is one thing, why are they included on the distribution side, because fundamentally they are a different nature. MR. STEWART: A. I -- perhaps measured would be better than controlled. Q. Okay. MR. TAYLOR: A. Metered. Q. Metered. Okay. Because I was -- he probably anticipated my next question. You've asked for a transmission performance incentive associated with losses and I do plan o take that up in detail with the plan because it's a bit confusing as to how losses are going to be recovered and what this transmission performance incentive does with respect to recovery of losses. Can you give me a sense, overall, if you know it, what's the total -- what I would refer to total system losses, the level in distribution seemed to be about 8 per cent and then I was wondering what, from transmission, it looked a little high relative to the systems I'm familiar with, but it certainly can be explained. Does anyone have a sense as to what the average transmission losses are? A. Okay. I just want to -- oh, just transmission? [Questioning] 221 Board Staff/Consultants Q. Transmission. I mean, I know, distribution appears -- A. Or systems? Q. Systems -- distribution appears to be 8 per cent, is it, you know, what's the transmission and what is therefore then the -- A. It's in the 400-million range. Q. In cost? MR. HARDY: I sense that there's somebody back there who has something to say. So if you want to take a second and just clarify that -- those remarks, that would be fine with me. Go ahead. Introduce yourself as well, please. MR. BARRIE (SERVCO): I'm Dave Barrie. I'm the transmission network asset manager that's being referred to constantly and I'm going to be here on Monday. But specific to the percentage loss question, to compare the 8 per cent on distribution, transmission would typically be run about 4 per cent. But as Rod pointed out, the nature of the transmission loss is very different in that it is dependent upon flows across the system which can vary tremendously, even on a day to day basis, as different generators are available either remote from the low centres or close to the low centres. So when I give you that 4 per cent figure, it's with that caveat. MS. SIMMONS: Thank you very much. I am familiar with that -- [Questioning] 222 Board Staff/Consultants MR. BARRIE: Thank you. MS. SIMMONS: -- system and how sensitive it is to losses. I'm -- MR. HARDY: Thank you for helping us. MS. SIMMONS: Q. Since you brought it up again and you are referring to the Market Design Committee, it would be helpful to understand from your policy perspective what you feel -- how you feel you will take the recommendations of the Market Design Committee; is it fair to say you will adopt all recommendations of the Market Design Committee and would you characterize your filing as being in compliance with the Market Design Committee recommendations or reports. MR. TAYLOR: A. Yes. We characterize it that way. The Market Design Committee has yet to report, finally, and it's a report to the Minister and the Minister has to decide whether to accept some or all of the recommendations, but I think our filing is quite consistent with where both the previous reports and where we believe the final report is going. Q. Can you tell me, because I've read many of the Market Design Committee reports or sections, but probably not in its entirety in one sitting. What aspects of the filing do you think could potentially change as a result of the final Market Design Committee report which may be finished or may be due very shortly? A. Because of where we are in the process, and that is, there's a workshop on Monday and Tuesday to try [Questioning] 223 Board Staff/Consultants and settle on the Market Design market rules, it's a little difficult for me to answer that just now. I don't anticipate anything major. Q. Okay. You don't anticipate anything major. Will SERVCO or OHSC come forward and give a supplemental filing to the extent anything does change? Are you going to finalize anything in respect to transmission pricing as a result of that? A. Because I don't know exactly when the Market Design Committee report is going to be issued, I think it's the end of January. So if we are still in process here, we would -- could certainly come back on paper with a commentary about the final report and any impact that it might have on these applications. Q. And one more question with respect to the market design committee and your -- what you've set forth in transmission and a question was -- arose yesterday in the afternoon regarding why you've proposed transmission rates. Is it OHSC's intention that ultimately you will have a separate transmission tariff and are the rates being proposed in anticipation of a -- an open access similar to a FERC proforma transmission tariff? And if so, are those rates being, you know, asked for approval by the Board or will that tariff be filed with the Board for approval? A. I think you can derive from this application what's necessary to have a FERC compliant tariff. I guess there's a -- once again, we're into a time difference [Questioning] 224 Board Staff/Consultants between what happens before open access and what happens after open access. And of course, it's our intention to be back in the year 2000 for the next transmission rate hearing. Q. Maybe I didn't follow you clearly. I just really wanted a very basic answer. Are you going to file -- between now and then you can have an open access tariff and not have retail access. The open access tariff is to support wholesale transactions wheeling across Ontario, Quebec to Michigan, and additional supplies or exports from that by parties other than Ontario Hydro generation. A. Right. Q. Is there going to be a tariff that's filed between now and 2000 or has a decision been made to file a separate transmission tariff for a third party use within the province of Ontario? A. In advance of open access? Q. In advance of open access, to facilitate wholesale competition in this region? A. I think I'll have to consider my answer to that and get back to you. MS. SIMMONS: Okay. MR. HARDY: No further questions? MS. SIMMONS: That's going to close my questions for this panel. MR. HARDY: Are there other participants' questions? Ken. MR. SNELSON: I have three, hopefully quite, [Questioning] 225 Audience simple policy type of questions that perhaps should be directed to this panel. Q. The first one is with relation to the NUG manager and I notice that in the supplemental material under tab A on page 3, there are 20 people in the NUG manager unit and given where the market is going and the role of SERVCO then managing NUG contract seems to be somewhat out of place as an activity of SERVCO. And I understand that Ontario Hydro has issued a request for proposals to restructure the NUG contracts and to possibly buy them out. And I also notice on -- in tab -- under tab A of the supplemental materials on chart 3 that there is a $3-million management fee coming into SERVCO with respect to that function. And the first question is who pays that $3-million management fee? MS. NG: A. As it pertains to chart 3, the $3-million NUG management fee would be coming from the revenue pool, the overall bundled revenue pool and that essentially will be compensating for the cost of managing the contracts. Q. Okay. That would be for 1999 and up to open access in the year 2000, assuming that open access happens part way through the year 2000, then do we know where the money comes from the latter part of that year? A. This is an issue that, in my understanding, is that is still being worked out by the Ministries. In essence, in terms of what exactly, where exactly will the NUG management liabilities lie, pretty clearly in terms of [Questioning] 226 Audience the above NUG market cost and the liabilities associated with that, is all part of the overall financial restructuring considerations by the Province. At this point in time for the purpose of the rate order application, one of the, sort of, place holders that was, in essence, being used is someone has to manage the NUG contracts. And my understanding is that the financial corporation may not necessarily want to have directly manage it, so on a neutral cost recovery basis the $3-million has been assumed to cover the cost of the existing contract management group which currently resides within the services company. As to, in essence at the end of a day, how this would actually be done, even before open access or after open access, is still some matter that is under discussion by the Province. Q. And I just wondered if you could comment on the intent of the request for proposals to restructure the NUG contracts. Is that to try and sort of buyout the NUG contracts so that they don't have to continue this management function? A. I can only speak to it on a very high level. The notion is obviously within looking at the overall financial restructuring, have to look at all the existing liabilities. And part of the purpose of the RFP is obviously looking to see whether there is any renegotiation or buyer or whatever form that can help either reduce or crystallize the size of the liabilities. [Questioning] 227 Audience I'm not sure, depending on the outcome of the RFP, how exactly it will effect the nature of the contract management, but pending the outcome of that process and pending some of the discussions and decisions that still has to be made by the province, the rate order application essentially just have a cost neutral 3-million in and 3-million out placeholder in order to make sure that, you know, this thing doesn't get lost. Q. Okay. Moving on to a different area. In Rod Taylor's presentation yesterday, he discussed distribution rationalization as proposed by the McDonald Committee and that they were proposing shoulder to shoulder distribution utilities. Now, that is not a part, as you mentioned, of the proposals under the white paper, but it still is a fact that many municipal utilities are islands within the SERVCO distribution system and this gives SERVCO a lot of power over the restructuring of distribution into larger utilities with contiguous service areas. And I'm wondering if you can make any comments on what SERVCO's policy will be with respect to distribution restructuring and the formation of these -- cooperation with municipal utilities in forming larger more commercially viable utilities, distribution utilities with a contiguous service territories. MR. TAYLOR: A. OHSC is very interested in being an active participant in distribution rationalization in Ontario. I think almost every study has shown that there [Questioning] 228 Audience are significant economies to be obtained through distribution rationalization, as you say, Ken, because of our unique position in the province, covering essentially the 630,000 square miles of the province in a way that no other distributor does, electricity distributor does. Obviously, we are going to be involved as distribution rationalization proceeds. The point I was trying to make yesterday is I think it's quite a different outlook for OHSC now than under Bill 185 which encouraged SERVCO to turn over its assets at book or less than book to municipalities that wanted to expand to their municipal borders. In some ways that point of view was the way that Ontario Hydro was running a purely residual system. We take quite a different view now with Bill 35, that we are in the distribution business, we're in the distribution business to stay and will be -- and can be an active participant in the distribution rationalization which, as I say, most studies have called for. So our view is that we will be looking to offer the owners of the municipal systems, who are the mayors and the councils, to meet with them and discuss with them a whole menu of options that could range from joint ventures or partnerships or service level agreements if you will to, in some instances, acquisitions or, in fact, divestitures, our sales to them. The opportunities seem essentially unlimited now. It's to happen on a commercial and voluntary basis as the "White Paper" said and we're [Questioning] 229 Audience certainly looking at that as an opportunity for us. Q. So distribution revenue requirements would be adjusted at some future point if acquisitions or divestitures were to take place? A. Yes, that's right. The funding of any acquisition would come out of retained earnings, but ultimately -- of course that there are rules under Bill 35 as to how those kind of things would happen anyway requiring OEB approval and so on and so the adjustments would have to be made. Q. Okay. And the last area also relates to your presentation yesterday morning and it comes back to a statement you made that the "White Paper" suggested that -- or said that economic development and social policy expenditures are to be funded by government and not by electricity customers. And at least in our view, remote community subsidies and rural rate subsidies are for social policy or for economic development reasons and I'm just wondering if you can comment on how those are going to be dealt with and whether, in fact, they will be dealt with by charges to electricity customers or to charges to government. MR. STEWART: A. It would be hard to comment. They wrote the bill and wrote the regulation, so .... Clearly -- I mean, from our perspective is to act commercially and to be held harmless in an economic sense from the cost of underwriting that service. It's the shareholder's prerogative as to how that's realized, an [Questioning] 230 Board Staff/Consultants apparent contradiction. MR. SNELSON: Thank you. MR. HARDY: Thank you, Ken. Are there other questions from other participants? MR. HOPKINS: We have one more. MR. HARDY: We have other questions from our Board Staff consultants. MR. SIMMONS (Reed): Q. While I have this Policy Panel here, I would like to pose an issue that is scheduled for later in our panels and that's the issue of PBR. And I would just like to kind of put the question out to the panel that's here to kind of get your thoughts as to why you feel PBR is important at this time and how you can justify the reasonableness of the PBR given the transition you're facing as an organization and the need for the Board to establish a just and reasonable level of revenue requirements going forward. MR. TAYLOR: A. Yeah, I could take a stab at it. I think many of the quotes that I put up yesterday from the various policy documents leading up to the formation of OHSC and to the change in the power sector generally certainly predicted and intend clearly some kind of incentive-based or performance-based regulatory scheme. We felt quite strongly that as we were coming to put these interim applications before the Board, that it was a very valuable opportunity, a kind of a laboratory test if you will or an opportunity to do some research [Questioning] 231 Board Staff/Consultants into the nature of PBR and to have some discussions around the various elements of it, what makes -- what's a responsible "I" inflator index, what's a responsible productivity kind of index, how do you define the "G" factor and so on in a more sort of generic way. We believe by putting forward the application the way it is with both '99 and the Year 2000 there, there's an opportunity to show how the PBR mechanism would work against the Year 2000 numbers and I guess some simply felt that it was too good an opportunity to miss to get the ball rolling on PBR at least in a conceptual way and, in fact, would have liked to have gone down that path in distribution as well but recognized the Board's needs since there are so many more distributors in Ontario to take a different course for setting distribution rates in the future and we're looking forward to participating in that series of sessions as well. Q. While I agree that, you know, conceptually you've gone through this exercise, can you, please, comment as to the extent that PBR is approved on a conceptual basis and not applied, how would that impact your business operations? A. Well, we'd like to see it applied obviously. Q. Does it create greater risk? Does did reduce risk? I mean, what is it going to do? How is it going to change what you're doing over the next couple of years in this transition time? MR. STEWART: A. Maybe I could comment in terms [Questioning] 232 Audience just from an operating perspective. Clearly, one of the things going forward is to change the culture of the organization to be more commercially oriented, to be more -- recognizing -- accountable for the results. PBR has the element of incentive in it in consequence and we think that it would be valuable to the organization in the context of expectations and help drive the change in that kind of behavior, how we organize, how we manage, how we accomplish things, et cetera. So the sooner we get started at that and the sooner we start living that I think is valuable just to drive the changes necessary in an open access environment. MS. SIMMONS: Okay. MR. HARDY: Thank you. We are reaching a conclusion of the questions. Before I ask finally whether there are other questions of participants and the Board Staff Consultants, I wondered, are there other comments that this panel wishes to make before I do that? MR. TAYLOR: I don't think so. MR. HARDY: Thank you. Are there any other questions of participants? MR. STEPHENSON: Richard Stephenson. Q. This is just a process question: There have been a number of matters that have been taken under advisement or they're going to get back to us. I just want to understand how it's foreseen that we will receive that information. [Questioning] 233 Audience Is there going to be -- is this in writing somehow? Are they going to get some sort of a -- essentially undertaking responses in some package at some point in time? How do you propose to deal with those matters that have been left outstanding that haven't been specifically deferred to a later panel? MR. HARDY: I certainly have been keeping a list of items that were outstanding. What I'm proposing is to put my list together, compare it with the list that I believe have been kept by Board staff as well to have a comprehensive list and have that list -- I'm not sure if we'll have it available. I'll have to leave that up to Board staff as to how they wish to make that available, but that's what I was going to do in any case. MR. STEPHENSON: Well, that gets us halfway home. I'm more interested in the answers than the questions to be honest with you. How are we going to get the answers; in what form and when and that kind of thing? MR. HARDY: Fine. We'll pose that to the panel. MR. STEPHENSON: Yes. Maybe Laura has the answer to this or Michael. MR. GILLESPIE: Hi. May I comment on that? A. Basically the answers will go on the record. Either they will be brought forward in subsequent panels, in which case they'll be on the transcripts, or they'll be put into writing to the Board and that will be available to the parties. [Questioning] 234 Audience MR. HARDY: Okay. Other questions? Go ahead. MR. BAKER: Just one last question. Bruce Bacon, OCAP. Q. You mentioned the PBR process and I understand it quite well, why you'd want to go to 2000, have PBR in 2000, but from the customer's perspective, what's the benefit of going to PBR in 2000, transmission? MR. TAYLOR: A. I think the greatest benefit, Bruce, is the experience with seeing how the formula works. Q. So just getting your feet wet with the process and seeing how it moves forward would be what you're saying I guess? A. I'd would characterize it a little as more important than that implies, but yes. MR. BACON: Okay, thanks. MR. HARDY: Any other questions then? ---(No response) The record can reflect that I see no other questions. Are there any other questions from Board Staff or Consultants? ---(No response) Again, I see no other questions. Then I'd like to adjourn this first panel. Thank you very much, panel, for your information and your responses. Thank you very much for participating. 235 ---Whereupon, the Technical Conference proceedings were adjourned at 11:31 a.m., to be reconvened on Monday, the 11th day of January, 1999, at 9:00 a.m. 236 I N D E X o f P R O C E E D I N G S Page No. Overview (Facilitator) 172 Introductions 175 Response to yesterday's questions by SERVCO panel 176 Questioning: Audience 181 Board Staff and Consultants 183 Audience 224 Board Staff and Consultants 230 Audience 232 Parties who questioned: B. Bacon . . . . . . . . . . . Ontario Coalition Against Poverty K. Snelson . . . . . . . . . . AMPCO R. Stephenson . . . . . . . . . Power Workers Union JB/MC/LL [ Copyright 1985].