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 Monday, January 18, 1999 commencing at 9:05 a.m. --------------------- TECHNICAL CONFERENCE "Transmission PBR, Cost Allocation and Rates" VOLUME 5 --------------------- F A C I L I T A T O R : DAVID HARDY Board Technical Staff 523 A P P E A R A N C E S DAVID HARDY ) Board Technical Staff KIRSTEN WALLI ) in conjunction with: SUSAN SIMMONS ) Reed Consulting ANN BULKLEY ) Ontario Hydro DAVID CURTIS ) Services Company Inc. IAN MATHERS ) [SERVCO] GREG VAN DUSEN ) 524 ---Upon commencing at 9:05 a.m. MR. HARDY: We are waiting for our Board Staff and Consultants. Good morning. My name is Dave Hardy. I welcome you to the continuation of the rate order Technical Conferences. I am going to provide a fuller explanation of our procedure today in that we do have some new faces. Again, my name is Dave Hardy. I have been asked to facilitate the Technical Conferences. My role essentially is going to be to try to keep the agenda on track and to be concerned with matters of process and fairness. I'm just going to quickly describe where we are in terms of this overall set of Technical Conferences. We started off actually before the 7th and 8th, actually last December with educational conferences. On January 7th and 8th we had the overview, the corporate overview of range of issues. We moved into some of the details last week with issues related to assets and capital plans. On Tuesday we had a thorough discussion of transmission OM&A and revenue requirements. Today we're going to be talking about transmission PBR, then we will be moving on to transmission cost allocation and rates. We will be moving on Wednesday into distribution with distribution assets and capital plans and then Overview 525 (Facilitator) finally on Thursday, distribution OM&A and revenue requirements. For those of you who are new, there was a fax memo that was issued on December 18th and that outlined the schedule of Technical Conferences. There was also a set of issues that was identified that was highlighted in that December 18th memo. We have been keeping a list of outstanding questions and information that is being brought forward by Ontario Hydro Services Company. It's not a formal undertakings list, but simply a list of questions that we are anticipating some information be brought forward by SERVCO. I would just like to recap the procedure that I am following. I know there were a few questions at the end of the Tuesday session. I will do this before I introduce the SERVCO panel. But essentially we're trying to keep in as informal session, it's not a hearing. It is an opportunity for us to obtain information from SERVCO and certainly to test the information that we are receiving from SERVCO. It's also an opportunity for SERVCO to explain the rate application. There may be some information that, again, SERVCO will have that's useful to the application and subsequent filings that have been brought forward since the first of our sessions. You can approach SERVCO staff for that information. Overview 526 (Facilitator) There also has been some information that's been submitted by participants as well. There is a transcript available from Farr & Associates. It's important to the transcript that if you're going to be asking questions you come forward to the mikes and ask those questions so we can get it on the transcript. Each time you do so, please identify yourself to allow our reporters to know who you are. Also, there is a registration list and if registration is one aspect of receiving funding for participants it's really important that you do sign in. Okay, that's about it in terms of my introductory remarks. I would like to begin then by having SERVCO please just start by introducing yourself and then you have the floor. I think the way we will proceed this morning is we'll have SERVCO provide their presentation, we will have some introductory questions by Board Staff and then we'll open it up to participants. Yes? MR. BACON: Bruce Bacon, OCAP. I am just wondering what the status is of the questions. I know they are not undertakings, but I'm just wondering...? There were a number of questions that OHSC had. I'm just wondering what the status of those are? MR. HARDY: I think there is probably two parts. I am going to ask Kirsten Walli to explain what the status of the list is and then perhaps we can ask SERVCO to Overview 527 (Facilitator) respond. MS. WALLI: Certainly. The list for the first couple of days of this session has been provided, and we're working with it. I believe the first round of responses have come in from SERVCO and I believe that was on either Wednesday or Thursday. So if you have not received them yet, they were supposed to go to all interested parties. Please see someone in the SERVCO side. They were the first round, so to speak. There will be more coming, I'm sure. MRS. FORMUSA: Can I just add to that, David? I think weather has been a real problem with the distribution. So Kirsten is quite correct, but we've had some difficulties. The McShane report, for instance, we did get here on Friday late. I understand it went by overnight courier to the intervenors, but it's difficult finding -- we haven't had people at the office, so we are doing our best. I don't have copies here, but I will do my best to find out the status of where things are a little bit later in the morning. MR. HARDY: Thank you very much. Any other questions of clarification? ---(No response) MR. HARDY: Okay. David, why don't you introduce your panel. MR. CURTIS: Thank you. Good morning. My name is David Curtis and I am the Manager of Transmission Overview 528 (Facilitator) Regulation for the Ontario Hydro Services Corporation. As Dave said, this Technical panel for today is to address the performance-based regulation or PBR portions of our application. I have a brief presentation on the overview of the PBR and also, I think spawned by the interest shown last week in particular, I have a brief presentation on TPI or the transmission performance index. Before getting into the presentations, however, I would ask my colleagues on the panel if they would introduce themselves. MR. MATHERS: Good morning. My name is Ian Mathers. I work in the Regulatory Department of the Ontario Hydro Services Company. My title is Senior Advisor, Transmission Regulation and I'm here to help clear up any questions that you have on the framework for the regulatory proposal before us. MR. VAN DUSEN: Good among. My name is Greg Van Dusen. I'm Manager of Regulation. I'm on the finance side of the house. MR. CURTIS: Thank you all very much for coming out today and the interest that you are showing in our PBR in this application. We believe that it's a good proposal and that it makes sense for instituting it now for the people of Ontario. PRESENTATION BY MR. CURTIS: In my PBR presentation I will try to provide further clarification of some questions that have been Presentation 529 (D Curtis-SERVCO) raised about it in the earlier Technical panels. I will cover four areas in this presentation. The first is to address the questions of why should PBR be introduced now. The next area is a further development, an explanation around the PBR framework that is in our application. Then I want to cover the setting of the revenue cap, and conclude with some points on future direction. Now, why should PBR be introduced now? Well, as Rod Taylor said in the first panel, the genesis for PBR proposal is the government's "White Paper" which calls for the pursuit of more efficient regulation through performance-based regulation. Moreover, this PBR proposal is in support of the OEB's initiatives to develop more efficient methods of regulation. OHSC wants to be more efficient. Ron Stewart, in the first panel, talked about the asset management model that OHSC has introduced. Dave Barrie and Myles D'Arcey, in Panels 2 and 3, spoke about how this model is being applied within OHSC and the programs that are producing and will be producing productivity and efficiency gains. Now, the key to achieving these gains is the external driver provided by PBR. PBR will drive the culture and organizational changes and motivate efficient and innovative behaviour. PBR as the external driver will link and sustain the internal drivers of our asset Presentation 530 (D Curtis-SERVCO) management model. The resulting efficiency gains will be shared with customers through lower transmission rates. We have examined the impact of PBR in other jurisdictions around the world and we are convinced that PBR will provide the external commercial driver we need to be more efficient. Now, how does PBR provide the external driver for efficiency? In answer to this, I would like to review how alternative regulatory frameworks operate and use this comparison to answer the PBR risks and benefits questions that came up in Panel 1. As provided in section 5 and appendix J in the transmission rate order application, and at the risk of oversimplifying, there are two basic regulatory frameworks: cost of service, sometimes known as rate of return, and performance based regulation or PBR. Cost of service regulation allows a utility to recover its costs plus a fair return on its investment. This regulatory framework, however, is criticized for providing weak incentives to the regulated utility for improving the efficiency of its operations and investments. PBR, on the other hand, provides strong efficiency incentives by linking performance to profits. PBR sets efficiency targets and provides rewards; that is, in the form of higher returns, for exceeding a target, as well as risks in the form of lower returns to the company if targets are not met. Presentation 531 (D Curtis-SERVCO) The risk of not improving efficiency has shifted from the customer to the shareholder of OHSC by moving to a PBR formulation. Cost increases due to inefficient management decisions and actions are not passed on to customers under PBR. The risks associated with economic fluctuations are also shifted to OHSC, thereby providing customers with more stable and predictable rates. PBR is being used throughout the world for transmission companies that are being unbundled from generation. PBR revenue cap formulations such as the one that we've proposed are in use today in England and Wales, Scotland, Norway and Australia. In the United States, as transmission is being unbundled, PBR is starting to be used there as well. PBR sets an efficiency improvement target for the utility and, under a revenue cap formulation like the one we are proposing, it caps its revenues based on the target. The targeted efficiency improvement is represented by a productivity factor, generally referred to as the "X" value, as in our revenue cap formula. If the utility makes these targeted efficiency improvements, it stands to make what is considered a fair return on its investment. And in our case, that would be a 10 per cent return on equity. If OHSC improves its efficiency even more than Presentation 532 (D Curtis-SERVCO) the targeted improvement, it keeps the extra savings and improves its earnings for the current regulatory period. Now, on the other hand, if OHSC doesn't make the targeted efficiency improvements, it absorbs the extra costs and earnings would decrease; thus, the utility has a strong external driver to improve efficiency and reduce costs and be a proactive and responsible manager of its operations. The benefits of efficiency gains are shared with customers through lower rates in two ways. First, the customer is guaranteed the benefits of the productivity improvement target of the 2.4 per cent or the "X" value which is in our revenue cap formula. This savings is guaranteed regardless of whether or not OHSC actually meets the efficiency target. However, the benefits will not impact customer rates until after the rate freeze. Now, second, the efficiency improvements made in the interim period, including any made in addition to the targeted improvements, are expected to continue into the following control period. The customer will benefit from this when rates are set in the next period due to the continuation of these efficiency improvements. The customer also benefits from PBR because much of the risk of unforeseen costs increases is transferred from the customer to OHSC. This results in increased rate stability and predictability for the customer. Now, I would like to move on and talk about the next topic and that would be the PBR framework. Presentation 533 (D Curtis-SERVCO) Transmission revenues are initially set and indexed or adjusted each year for changes in inflation, productivity and growth. In this application, the revenue requirements are set for 1999 and then indexed for 2000. The revenue requirement is also adjusted for special events known as "Z" factors and these would be unforeseen exogenous events or special one-time events. Service quality safeguards are there to ensure quality is maintained and we are proposing to track and report on five performance measures as set out in the rate order in section 5.3.12 and discussed in the previous panels. Failure to meet the performance measure targets will result in OHSC having to explain this failure to the OEB and implement action plans to correct the performance inadequacies. We have been studying PBR for three years. We have considered the principles for implementing PBR both in Ontario and, as recently specified by the OEB, in other jurisdictions. We've examined PBR frameworks in other jurisdiction both through the literature that's available and through visiting those jurisdictions and we have consulted with PBR experts in Canada, Britain, Australia, and the United States. As a result, our PBR design is similar to the proven designs in the U.K. and Australia where they have had the most experience. As such, our design may be considered to be conservative. Our productivity targets are based on internal estimates and they compare Presentation 534 (D Curtis-SERVCO) favourably to external benchmarks. Inflation and growth indexes are uncomplicated and well known. In observing the reaction to other PBR proposals, we have chosen a comprehensive PBR revenue cap to encompass all regulated transmission services. Now, I want to turn to the topic of setting the revenue cap. The transmission revenue requirement for the year 2000 is set by the revenue cap formula shown in the middle of this overhead. As presented in section 10 of the transmission rate order application, the revenue requirement for the Year 2000 equals the revenue requirement for 1999 multiplied by a factor made up of inflation, productivity improvement, and growth. Now the focus of attention is generally on the setting of the productivity improvement factor or the "X" factor. Our proposed productivity factor was determined based on our internal forecast of productivity improvements and this was part of the discussion that you had with the Technical panels two and three last week. "X" for the Year 2000 was determined by forecasting the revenue requirement for the Year 2000, which included the planned productivity improvements. The value of "X" is then taken to be the change in the revenue requirement from 1999 to 2000 after considering the effects of inflation and growth and after adjusting for exogenous and one-time costs. There are a number of ways of testing the appropriateness of this productivity factor. The first is Presentation 535 (D Curtis-SERVCO) by examining our forecast revenue requirement for the Year 2000. And this was the topic and the subject discussed during panels two and three. The second is by comparing "X" to external benchmarks. If we look at the historic total productivity values, we have found our productivity factor of 2.4 per cent compares favourably with the total factor productivity for the Canadian economy of .07 per cent, the total factor productivity for the Ontario economy of minus .45 per cent, and the total factor productivity improvement for the Canadian electric power system sector of minus .96 per cent. Finally, "X" can be compared with the productivity factors recently used in transmission PBR schemes in other jurisdictions. These range from 1 per cent to 4 per cent for the transmission PBR schemes used elsewhere as was shown in Appendix J of the rate order application. We have included our proposal is comparable to that of other jurisdictions. The other factors of the PBR formula are inflation and growth. We have proposed to use the Consumers Price Index, CPI, for inflation. This is a familiar and externally determined index. For growth, we are proposing to use the system load growth in expectation that this factor will also be determined external from OHSC. And finally, in terms of future direction, in preparation for the next PBR review for the rate setting Presentation 536 (D Curtis-SERVCO) for the Year 2001 and beyond, we propose to carry out additional studies of PBR and its impacts, initiate a stakeholder consultation process, and continue to follow the development of PBR in other jurisdictions. I think, in conclusion, we feel that the PBR proposal that we have brought forward in this rate order application is full and complete and will provide benefits through this interim period to transmission customers within Ontario. I would like to have a few moments to talk with you about a subject that was discussed, I think, primarily last week in Panel 3 about the transmission performance index -- incentive, sorry, or TPI, as presented in section 9.1.2 of OHSC's transmission rate order application. I thought it might be helpful if I made a brief presentation this morning to address the questions that were raised. Also through this presentation, I will respond to the consideration Dave Barrie said that he would have looked into on the specific details of the transmission performance incentive or TPI. In this presentation, I will cover: the origins of TPI; specific details of TPI as contained within the transmission rate order application; why TPI in the rate order application is not an incentive scheme; why TPI is a necessary part of the rate order application; and concluding with further background information on the specific components that make up TPI in our proposal. We've had one form or another of performance Presentation 537 (D Curtis-SERVCO) incentive scheme for the transmission business unit within Ontario Hydro set each year for 1995 through 1998. These schemes were put in place because of the expectation we would have performance-based regulation and, as such, an in-house incentive scheme would promote awareness among staff of the commercial impacts of the transmission business, of its operational decisions. These past schemes were based on having an incentive portion of the transmission business unit's budget for various areas of the transmission business. This incentive portion was developed through inter-business unit negotiations and was generally set on the basis of the immediately preceding five-year rolling average of the costs incurred in each of these areas. If the transmission business unit's actual performance in a year was better than target, the full budgeted amount would not be paid out to other business units in accordance with the business unit agreement and this would be reflected in improved financial performance of the transmission business unit. On the other hand, poorer performance than target would result in a negative impact on the financial performance of the transmission business unit. Now, these schemes worked as incentive schemes for the transmission business unit from 1995 through 1998 because the schemes were developed and applied within one whole integrated corporation. This meant that the specific components of the scheme and the processes and Presentation 538 (D Curtis-SERVCO) mechanisms for incentive-based payments against actual performance could be negotiated and set in place. For the TPI in the transmission rate order application, I would first like to reinforce what is stated in section 9.1.2. TPI in this rate order application is not being applied as an incentive scheme. It is a place-holder for an incentive scheme. It is applied as a pass-through until the process details can be developed to make this an incentive scheme which will probably be done through the process of transmission rate setting for 2001 and beyond. Based on the 1998 TPI scheme, the TPI in the rate order application was developed. Now, the table that you see presents the specific details of the TTPI scheme that Dave Barrie said he would take under consideration at last Tuesday's technical panel 3. There are four specific components to TPI: Station service load, two components under forced and planned transmission outages, the first for payment for generation constrained off the transmission system by such outages and the second for the incremental losses created on the transmission system by such outages and the final component of TPI is for the provision of reactive support. I would like to talk a little bit more about the technical aspects of each of these components at the end of this presentation. From this table, TPI totals $23-million in 1999 Presentation 539 (D Curtis-SERVCO) and $24-million for 2000. Station service load is $6-million in each year. The component for constrained off-generation is $7-million in 1999 and $8-million in 2000. The component for incremental losses is $5-million in each year and reactive support is $5-million in each year. Now, why is TPI in this transmission rate order application not an incentive scheme? It is not an incentive scheme because it lacks the link between actual performance of the transmission business and the TPI payments. This state of affairs exists two reasons: The actual components appropriate for TPI will be set as part of the decision the Minister makes on MDC's recommendations and the processes and mechanisms in areas such as reporting, settlement and agreement negotiation for TPI await the setting and implementation of market rules. Given that TPI is not an incentive scheme in the rate order application, why is it still required as part of this rate order application? Well, there are two reasons for TPI being in this rate order application: The first is, that the components of TPI represent real costs incurred in the operation of the transmission system and would have to be recovered from customers; and the second is that the components of TPI can be incented to create improved performance and benefit customers once the marketplace rules have been put in place. Having TPI in Presentation 540 (D Curtis-SERVCO) this rate order application serves as a place-holder for its development as an incentive scheme. I'd like to conclude this presentation with some background on each of the components of TPI. Now, the first one is on station service load. The transmission business has station service load at its switching and transformer stations. In 1995, a study was conducted to determine the estimated total station service consumption to use as the budget for station service load in the TPI scheme for that year. This load amounts to about 150 gigawatthours per year. How is this applied as an incentive scheme? Well, for example, in 1998, the transmission business unit paid out of its budget based on actual needed consumption at sites with metering, and this is about 15 per cent of the sites, and on estimates for sites without metering in place at an agreed upon energy cost. Now, the next component is the forced and planned outages that result in constrained off-generation. This component is to compensate generators for energy bottled as a result of planned or forced outages on the bulk transmission system. In previous incentive schemes, the budget was determined based on an analysis of risks associated with these outages. Forced outages were categorized into two types: The first type is the forced outage considered to be inherent to the transmission business and within control of the transmission business, such as adverse weather and Presentation 541 (D Curtis-SERVCO) equipment failure; the second type is for forced outages inherent to the transmission business but are outside of its direct control. Examples of this would be tornado damage or ice storm damage. In 1998, the payment was based on the cost of replacement energy. It was assumed that bottled nuclear and hydro electric generation would be replaced by fossil generation and that fossil generation would be replaced by more expensive fossil generation, but a component of forced and planned transmission outages that lead to incremental losses, I'd first like to talk about the two types of losses that have been discussed at the previous technical panels which I will refer to as average system transmission losses and incremental losses due to transmission outages. Average system transmission losses occur because electricity is transmitsd using non-superconducting wires and these losses are a product of laws of the physical universe. These losses are dictated by the transactions of the marketplace that are executed within the constraints of system security. As such, the costs for these outages -- for these losses rather would be borne by the marketplace probably through an uplift charge. On the Ontario system, as Dave Barrie said in technical panel 3, the average system transmission losses amount to about 4 per cent of the energy delivered to customers. That is about 6,000 gigawatthours per year. Incremental losses due to transmission outages Presentation 542 (D Curtis-SERVCO) are those losses that occur incrementally whenever a transmission outage occurs because of increases to parallel path flows. Incremental losses amount to about 120 gigawatthours a year or less than .1 per cent of the total energy delivered. The final component is reactive support. Reactive support which is also sometimes known as voltage support or VARs is required for the operation of any transmission system. There are generally three possible sources for the active support - generators producing electricity, transmission devices like capacitor banks or condensers or generators operating in condensed mode. The payment for reactive support from generators producing electricity in past TPI schemes was to be -- was considered to be included in their energy payment. The reactive support provided by the transmission business was considered to be paid through the revenue requirements outside of TPI. It is the third component, the payment for generators operating in condensed mode, that makes up the reactive support component for TPI in this application. In the 1998 scheme, the operation of Thunder Bay unit 1 and various hydro electric units made up the cost of reactive support. I hope this presentation has helped to clear up some of the questions around TPI as well as addressing the consideration that Dave Barrie said that he would look into last week. I think we could move on now. Presentation 543 (D Curtis-SERVCO) MR. HARDY: Thank you, David. Okay. Well, we're going to begin with Board Staff and Consultants and we'll continue until there's either a break or we hit the mid-morning break, whatever comes first. Why don't we begin by Board Staff and Consultants reintroducing themselves and we can take your questions? MS. WALLI: Good morning, Kirsten Walli, Board Technical Staff. MS. SIMMONS: Susan Simmons, Reed Consulting Group, consultant to the Board Staff. MS. BULKLEY: Ann Bulkley, Reed Consulting Group. MR. HARDY: Okay, the floor is yours. QUESTIONING BY BOARD STAFF AND CONSULTANTS: MS. BULKLEY (Reed): Q. I'd first like to begin with the principles that were listed in the application. I believe they were on pages 40 and 41 of the application, the principles outlined for the PBR program. I was just wondering if you could explain to me how these principles are achieved by the PBR program that you've put in place. MR. CURTIS: A. The first principle, the PBR framework should address all the specific requirements of the legislation and regulations, we have Bill 35 before us and it talks about the transmission business providing, or assisting anyway, in terms of providing open access to its system for transmission customers and we feel that the PBR framework will provide incentives to the transmission [Questioning] 544 Board Staff/Consultants business for making sure that the transmission system is as available as it can be for the use of customers. The second one, the PBR framework should protect customers and result in prices for regulated services that are just and reasonable, I think we were listing some of the reasons for customer protection in terms of resulting in lower rates, also through the quality service components, the performance measures that are there. The PBR framework should discourage cross-subsidization between regulated and competitive services. The PBR framework that we're proposing would be applied to the regulated parts of the transmission business and would encourage that business to be internally more competitive and develop it in that manner. The fourth one is, the PBR framework should encourage greater economic efficiency by providing the appropriate pricing signals and the system of incentives to maintain an appropriate level of reliability and quality of service. This gets back to the balance that must be achieved within PBR. On one hand, PBR is directed toward improving the efficiency of the operation of the transmission system, and the tendency in that sense for management would be to cut costs which ultimately might impact on a lower level of reliability. And so the counter to that is the setting up of specific service quality performance measures that are in this application to ensure that service quality to customers does not degrade as a result of the application [Questioning] 545 Board Staff/Consultants of PBR. The fifth one is PBR framework should permit the utility an opportunity to earn a reasonable return on shareholder capital and maintain its financial viability. This is developed in terms of the specific parameters of the PBR formula and the one that we've determined is based on the capital considerations and the financial viability considerations that were outlined by Malen Ng in the first Technical panel; areas, for example, like a 10 per cent return on equity. The parameters in the PBR formula reflect that and if awarded as such would provide OHSC, I guess, with the assurance in terms of maintaining its financial viability. The PBR framework should be as simple as possible. This is often an awkward question to try and address for -- I guess for anyone initially looking at a PBR formula, like the one that we have put forward, may see this as a rather complicated and a rather difficult one to understand. What we found, though, is that it is reflective of the PBR formulations that are used in other jurisdictions and the tendency in that is to try and aim for simplicity from the perspective of providing transparency for customers in terms of trying to understand what is actually in the PBR framework. The other aspect of is that it applies across the Board to all transmission services. No. 7, PBR should allocate the benefits from [Questioning] 546 Board Staff/Consultants greater efficiency fairly between the utility, shareholders and the customers. We feel that we've done that through the productivity improvement factor, the "X" value, if you will. The productivity improvement is the amount that's transferred specifically to customers through this application. And at the same point in time it is structured so that it provides the return on equity that Malen talked about and this would be the return that would be appropriate for the shareholder. The PBR framework should be flexible and able to handle changing and varied circumstances. We feel that the one that we've brought forward meets this objective. We talk in terms primarily of managing the business risk associated with PBR and we feel that within this particular application that we do have a PBR formulation that the business can manage the risks around. Finally, the PBR framework should facilitate the use of efficient processes. And this I guess is yet to be proven, but the fundamental crux, I guess, of efficiency within PBR is that the regulated utility goes before the regulator to get an award under PBR that will be carried forward for a number of years. So there would be a number of years between rate hearing processes that would take place and that would relieve regulatory burden and provide more efficiency as far as the regulatory process overall. So I think in overview those are how we feel our PBR proposal meets each of those objectives. [Questioning] 547 Board Staff/Consultants Q. You mentioned that the benefit to customers is essentially in the productivity offset in the PBR mechanism. Did you compare that to some of the other utilities? I think they are in Appendix J. A. Yes. Q. What was the -- did it fall in the mid range, high, low in comparison to those? A. If you look at Appendix J, the "X" factors range from 1 per cent to 4 per cent. The 4 per cent appears to us to be somewhat of an outlier and it was awarded to National Grid. What we're putting forward is a 2.4 per cent and so we felt that this fell within the middle to upper, middle/upper part of the range of efficiency, productivity efficiency factors. MR. HARDY: Are you referring to Table J1? MR. CURTIS: Appendix J. MR. HARDY: The "X" factor offsets in the table. MR. CURTIS: I think if you did a strict mathematical calculation of just a straight simple average of those you'd come up with 2 per cent as the average of those. That's why I would say what we are proposing as 2.4 falls from the middle to upper part of the range. MS. SIMMONS (Reed): Q. Can you confirm how that 2.4 per cent is going to be going forward? It was unclear to me whether that 2.4 is just for the Year 2000 or whether that's something you think you can sustain post [Questioning] 548 Board Staff/Consultants 2000? MR. CURTIS: A. I guess I just want to clarify that. Are you talking -- we are talk about having an 2.4 productivity improvement running from -- to go from 1999 through 2000. And our belief is that we would be able to maintain that 2.4 per cent going forward, but that's not to -- I wouldn't want to suggest that as the productivity improvement factor for 2001 and beyond. Am I understanding your question? Q. That's my question. Are you going to guarantee that at least 2.4 per cent? You're basically saying that's only appropriate between now and 2000. Beyond 2000 we are going to take a look at it again and propose what the productivity improvement factor will be beyond that point; is that correct? A. What we're saying is that at the next review of our rates, our next rate setting, the value for 2000 would form the base year for the setting for the next regulatory period. So that would have captured the 2.4 per cent productivity improvement. Depending on what we bring forward as a proposal from that, the productivity improvement that occurred during 2000 would be available in terms of being carried forward. MS. BULKLEY: Q. In Appendix J the company evaluated three different PBR options and characterized [Questioning] 549 Board Staff/Consultants the cost of service regulation with incentives as sort of the least aggressive of the PBR options. Is it the company's position that all targeted incentives are not sufficient or would it consider going forward using some targeted incentives supplemental to this PBR mechanism such as maybe tying compensations to productivity? MR. CURTIS: A. I think the problem -- I don't know whether "problem" is quite the right term that would characterize this, but maybe the difficulty that we saw in specific incentive schemes is that they target specific areas of the corporation for improvement, and whereas the PBR formulation provides a mechanism for management to manage the business in total and improve the productivity of the business in total. So that was the reason why we were reluctant to bring forward a proposal that just relied on specific incentive schemes. However, having said that, I believe our presentation makes it clear that we are open to having specific incentives set up. And you talked I guess specifically about tying compensation to that and I would think that the company is very open to that. Q. Okay. On page 44 of the application, let's see if I can get an appropriate reference, lines 8 through 10 actually and 12 and 13, we sort of discussed various -- determining whether or not particular elements of the business were competitive and excluding those particular [Questioning] 550 Board Staff/Consultants elements. A. Yes. Q. Did the company conduct an analysis that determined no element of the business was competitive at this point and, therefore, should not be excluded? There is sort of a blanket statement in here that no elements of the transmission service are being excluded. A. I think Greg would like to respond to that question. MR. VAN DUSEN: Good morning. A. I think it has more to do with the fact that it was judged that there were, in terms of total magnitude, there weren't that -- the dollar value of the competitive businesses that we do have were small -- not that the businesses that we have that we deem to be competitive aren't competitive, it's just that they were small in magnitude. It was felt at this point in time going forward with the PBR scheme it would be more appropriate to have them all rolled in rather than to make the scheme more complicated by breaking out a portion which was regulated and then breaking out the unregulated which was such a small part of our business at this point in time. MS. SIMMONS: Q. Can you give an example as to going forward what you would exclude? I guess -- are you referring here to the recoverable work? I'm not certain what you mean by -- [Questioning] 551 Board Staff/Consultants when would you determine something is competitive and deemable for exclusion under this PBR mechanism? A. I'm struggling for the term which the gas companies use to refer to their competitive -- their competitive wings or competitive businesses. I think what you need to do is we need to probably sit down and take a look at the businesses as we are trying to evolve them and take a look at which businesses we would hope to be more competitive going forward. I think we would come forward with a proposal to the Ontario Energy Board saying that we deem the following businesses to be competitive aspects of our business that we feel should be outside of the regulated umbrella. I guess we would have to have the discussion in this forum with respect to the nature of them. We would put forward a proposal claiming the following businesses are competitive in nature and should be therefore excluded. MS. BULKLEY: Q. Moving on to the inflation factor. Can you explain to me why the CPI factor has been applied to total revenue requirements given that a significant portion of the revenue requirements are fixed? MR. CURTIS: A. That question was asked also at the educational session and our belief is that the answer is that the inflation factor does, in fact, apply across the business. For a business that is undertaking ongoing [Questioning] 552 Board Staff/Consultants investments, I think what gets referred to are the capital-related portions of the business that I guess in some context are termed fixed interest and depreciation expenses. However, looking at it from a total business perspective, for a business that is investing on an ongoing basis in its assets, inflation still acts on these investments. If you are out to replace a particular circuit, the costs that the corporations incurs for new lines, for new poles and that, are not the same costs that were paid for when the line was first installed, they are costs that have been inflated or have gone up as a result of inflation. So we consider that applying an inflation index across the business is appropriate because we are an ongoing company and because we continually invest in new assets. One of the other aspects of it is that surveying other jurisdictions and looking at the PBR formulas that they put in place, most of them apply inflation as a factor that goes across the entire business. So we feel that we're, I guess, in conformance or in alignment with what goes on in other jurisdictions. MR. HARDY: I just wonder if I can return to Greg's response. You mentioned you need to look at what businesses are competitive outside -- versus outside the regulated umbrella. Were you proposing to bring something forward [Questioning] 553 Board Staff/Consultants in the next few days or is that universally something that would come forward in the future? MR. VAN DUSEN: No, I wasn't necessarily proposing to bring something forward in the next few days. I guess, when we come back for the next time in front of the Ontario Energy Board, if coming forward at that time we have deemed the following businesses X, Y and Z to be competitive in nature, we would bring them forward as being outside of the regulated umbrella, that's what I was implying. MR. HARDY: Okay. Thanks for clearing that up. MS. SIMMONS: Q. Before we get into more of the details, I have a few general questions on your PBR proposal, specifically in reference to some of your support you provided for this. One of the things you said you've done in developing this PBR mechanism that you propose to use to establish transmission revenue requirements going forward is to survey its use in other jurisdictions all over, throughout the world. I guess I have a question, given that Ontario Hydro Services Company is coming forward as a new company and this new responsibility for managing the transmission business in Ontario, I'm curious to find out whether the PBR programs that were implemented in other jurisdictions were implemented as part of a newly regulated company? I do understand some of them have gone through different degrees of restructuring and I'm curious to find out [Questioning] 554 Board Staff/Consultants whether there was a history of the business before regulators, before they moved to a PBR program? MR. CURTIS: A. I think generally speaking we have found that has occurred. There has been a fundamental restructuring of the electric utility industry in the jurisdiction, and as part of that restructuring, PBR has been applied. Certainly the most noteworthy example was in the U.K. with the break-up of CGB and the creation of National Grid out of that and the application of PBR on top of that. There was restructuring that occurred in the Scandinavian countries, in Norway, and part of that again was the application of PBR. The other areas that we've looked at have been in Australia; and the State of Victoria has been again another area where there has been restructuring of the electric utility industry and sort of hand-in-hand with that has been the application of PBR. And the whole nation of Australia is now going through a similar exercise, if you will, or similar restructuring. And again, PBR is being applied across the country. So from that perspective, we sort of, we see this as going hand-in-hand. There's been a broad sense in terms of restructuring the electric utility industry and to try and bring efficiency from an economics perspective that that implies as well applying efficient regulation and the efficient regulation model that's being brought forward and developed is PBR. [Questioning] 555 Board Staff/Consultants Q. In those cases that you cited, National Grid, which was formerly part of CBG I think you said, and you may be referring to VPX which is the Victoria Power-- A. Yes. Q. --Company who is under a PBR mechanism, previously were those companies regulated by their respective regulators in Victoria and by the Office of Electricity Regulation in the U.K.? A. Yes. Q. So they had previously been regulated, unlike you, who haven't necessarily been regulated by the Board; is that fair characterization? A. We have had a unique regulatory set-up within Ontario that we have had regulatory reviews by the OEB as the fully-integrated Ontario Hydro. However, the way it's been structured, it's been the Ontario Hydro board's decision at the end in terms of what's come out of those regulatory reviews. So that has been unique, yes. So, if you're talking about comparing to these other jurisdictions, there would be that distinction that's noted. I guess what I see happening in these other jurisdictions is that there's been a fundamental restructuring of the electric utility industry that's gone on, analogous to what's happening within Ontario. The fully integrated monopoly organization has been broken up and out of that breakup has been created a transmission business. And as part of that restructuring, PBR has been applied. [Questioning] 556 Board Staff/Consultants Q. I have a question as to how really you made a decision to pursue a revenue cap PBR formula and I certainly understand how it's going to work during this transition period and how 2000 would work going forward and how that formula would apply to 2000 and how you will only get those revenues that are deemed to come out of this PBR formula. But after 2000, I'm a bit unclear as to how this revenue formula works and I'm wondering if you can kind of go through and explain how your revenue cap PBR mechanism would apply going forward because I assume that you know if we were to approve this, this would be something that would be in place, possibly modified, but would be in place going forward and I don't really think we have a clear sense as to how that would work. So maybe if you could give an example of Year 2001/Year 2002 and how this would be calculated and how it would impact the transmission business and what would happen when your actual revenues were different from the PBR revenues. If you could just kind of go through an example as to when the formula would be calculated and we can kind of continue to go on from there? A. I think, first of all, I would like to preface it with what I concluded in the presentation. We feel that in terms of preparing for the written "X" rate order application, that we are going to have to continue study its development within other jurisdictions. We are going to have to stakeholder with market participants within the province in terms of developing the next [Questioning] 557 Board Staff/Consultants application, and we are going to have to I think continue to evolve our thinking around what it should be. However, having said that as the preface, I think our current view is that we would be aiming to apply it much the way that it is being used in the other jurisdictions that I've cited. So, for example, there's the regulated utility. We would come forward with a proposal to the OEB for a multi-year PBR revenue cap set- up, I think, and that would mean that there would be a formal cost of service type review of a base year which we would offer up as the Year 2000. And then the setting of the PBR parameters, the inflation rate, the "X" factor, and the growth factor, and those factors then would set what the revenue requirement would be for the subsequent years within the rate period. And we would be collecting revenues from customers based on that. There would be -- tomorrow we are going to be discussing the rate calculation or the rate-setting part of this process, and we would be, I believe, offering up, again, a structure, I guess, based on additional thinking and additional stakeholdering that would take place that would carry us through the rate period and that would set what the rates would be. Q. So in, say, for example, your PBR mechanism spits out, you know, 1.4-billion for some year-- A. Yes. Q. --okay? And you're saying that you're going to establish the formula but based on the parameters [Questioning] 558 Board Staff/Consultants likely it's going to be calculated based on CPI at a given point in a year. Under this, would rates be changing year to year? A. Well, they would because each year would have a different revenue requirement under the formula and following through the process for setting rates, there would be a recalculation or redetermination of rates for each year. Q. And if, in Year 2001 when we determine it should be 1.4-billion, but your rates actually collect for any given number of reasons, 1.45, what happens in the following year? A. Okay. I think you're getting into the rates true-up process. Q. Are you saying you're going to true it up and then we would -- those additional revenues would come back to customers? That's really what I want to understand. What happened when rates collect more than the PBR revenue requirement? I think that's kind of a basic question to this formula that you've set forth. A. Well, it is, and I guess what I would suggest, again, we haven't gone through the process of determining what should happen at that particular point in time, because again, we feel that it's part of the education process and part of the process of discussing with customers, but in other jurisdictions like the U.K., for example, there is an annual process that goes through to true-up based on variations as far as the actual [Questioning] 559 Board Staff/Consultants demand. And we would feel that there's probably some analogous set up that would occur here in Ontario to do that. But, you know, at this peculiar stage we don't have any specifics in terms of how that would actually take place or how that would actually happen. Q. And that's because you don't have any fundamental ideas that in the event revenues are less than that, we would be allowed to collect the next year and if they were over that we would share it back. I mean, you don't have any sort of policy views that can explain to us, you know -- on one side you're getting some benefits from this PBR mechanism, but I would think that when you talk about true-up, it should kind of be reflective of the underlying policy that is reflected in this PBR mechanism and so on? It's just unclear to me why you can't say more to that. Is it just because the nature of those true-ups are so complicated that -- I just...I'm-- MR. MATHERS: A. No -- Q. --trying hard to follow. Maybe I haven't investigated those other mechanisms to understand how the process is occurring there? A. No, the true-up mechanism isn't that complicated at all. We haven't proposed one because we don't feel we need one in this interim period. Going forward in 2001 we will need a rates true-up mechanism. And the way that it [Questioning] 560 Board Staff/Consultants would work, it doesn't readjust the revenue cap, the rates true-up mechanism, it's simply for under- and over- collecting based on the rates that you proposed for that year, because to set the rates you have to forecast the load for that year because the rates are so many dollars per megawatt, right? So if you made a mistake in setting the rate, if you made a mistake in forecasting what the peak was going to be for that year, you might have under- or over- collected from the customers. So you take that amount of money and you give it back in the next year. You readjust the rates so that you don't over- and under-collect. It's fairly simple. Q. Okay. Well, that's helpful. I guess I've another general question. One of the balances you talked about in explaining the principles was the fact that the company, and I'm probably not saying this correctly, but under this you mention that once you establish that, arguably, the company could make some decisions as to cut costs, and you mention that the performance measures are the quality safeguards, however we are referring to those measures that you set forward in here, are one mechanism to balance that and to ensure that you actually do continue to maintain your system and to achieve certain standards of reliability. In the previous days' discussions, and I know you weren't part of that, we asked a number of questions [Questioning] 561 Board Staff/Consultants regarding the need for particular capital programs and programs that you felt were necessary to maintain reliability and we continually heard that it was difficult to kind of estimate what not doing these programs would have on the reliability. And so, I guess what I'm just trying to understand is, on one hand, you're indicating that certain things that you do aren't necessarily reflected in reliability measurements and quality of standards measurements, but on the other hand, you're saying, here, that these are appropriate measures to achieve a balance between ensuring that you actually continue to implement the capital programs and O&M activities in order to maintain grid. I'm wondering whether you've kind of thought about this internally and whether you can comment on what I'm hearing to be somewhat conflicting views regarding how these measurements can really provide the Board an indication as to the reliability of your system, the condition of your assets and the impacts on maintaining the conditions of those assets going forward. MR. CURTIS: A. We have had a struggle within the company in terms of coming up with appropriate measures and I thinks it's reflective of this struggle that these measures aren't in this particular application tied to specific rewards or penalties. These are, I think, our best effort at the moment in terms of setting up specific performance targets and measurements to assure the continuation of reliability to customers within [Questioning] 562 Board Staff/Consultants Ontario. This will be a process that we will be continuing through this interim period and endeavour to refine and for the next rate setting would be bringing forward measures that we feel comfortable or confident in in terms of being able to link it specifically to performance and rewards and penalties within the rate order applications. MR. VAN DUSEN: A. The only thing I might add is that one other small contributing factor is, we're also waiting for some finalization of the market rules exactly as well. That also could have some impact on the exact measures we pick and whether and how we embed them in a specific PBR scheme as well. Q. Okay. In light of the fact that you've indicated to us it's unclear, it's not necessarily -- it's not a correlation between pursuing a particular capital program and seeing measurable changes in performance standards, would Ontario Hydro Services Company be open to providing some other indication to the Board in a transition period as to kind of a report on capital program activity, you know, in this transition period? I mean, if these performance standards -- or these quality of service safeguards aren't going to tell us whether you've performed any of the programs that you kind of have in your rate application, is there some other sort of process that can give us some degree of assurance during this period? MR. CURTIS: A. I'm not sure I'm understanding [Questioning] 563 Board Staff/Consultants what you're talking about in terms of -- are you asking for other reports from us in terms of -- Q. How can you demonstrate to us that you've actually undertaken the capital programs that you've included in this rate application? If we're not going to see -- A. Oh, I see. You're talking about that we would potentially come back every six months and say in the rate order application, we said we were going to do this capital work program and on this particular date this program was committed and we're 30 per cent complete in terms of the construction; is it something of that order that you ...? Q. Something like that. I'm not sure particularly what it is, but if these measures aren't going to it demonstrate to us whether or not -- and that's not to say they're not all going to, but if they're -- certainly if they're not particularly going to represent the quality of improvements in the assets that are going to occur as a result of doing these various capital programs, we're not going to see improvements in the reliability measurements or we're not going to see the reductions in not doing those programs, is there -- would you be open to discussing with the Board some other sort of basis to give us some indication until we come up with better performance measures? I'm just trying to figure out the openness if these are deemed to be not appropriate. [Questioning] 564 Board Staff/Consultants A. No. I guess first of all in referring you to section 13 in our application, we're committing to regular financial reporting and that would be reflective of where we are in terms of the implementation of, for example, the various capital work programs. I think we're -- we'd be very open to, I guess, entertaining any other proposals that might come from the Board in terms of how we might be able to assure the Board that, yes, indeed, we're putting these programs in place and reporting in terms of -- at what level we're at in each of these. MR. HARDY: David, you referred to a particular section and I missed that. MR. CURTIS: I'm sorry, it's section 13 in the rate order application. MR. HARDY: Is there a page number? MR. CURTIS: Page 199. It talks about the regulatory interface reporting and there are two components to that that we're putting forward, one around be financial compliance and the second around service quality. MR. HARDY: Thank you. Is this a good time to break? MS. SIMMONS: This is probably a good time to break and Thank you for your responses. MR. HARDY: I've got 10:25. We'll break for 15, 20 minutes and come back with participant questions and then we'll come back to Board Staff. Okay, we've broken. [Questioning] 565 Participants ---Recessed at 10:25 a.m. ---On resuming at 10:43 a.m.. MR. HARDY: Okay, why don't we come back to order? At this point I'd like to move from Board Staff and Consultants' questions into general questions from participants. And who wants to be the first questioner? Go ahead. QUESTIONING FROM PARTICIPANTS: MR. BACON: Bruce Bacon from OCAP. I have a number of questions, so if I'm way taking too much time, just cut me off and I'll stop. Q. Regarding your TPI, I'm trying to understand how it is not an incentive. Specifically, something I can relate to is the incremental losses and we talked about that a lot. MR. CURTIS: A. Sure. Q. You have $5-million of incremental losses in the TPI? A. Yes. Q. If you do better, if you can handle those incremental losses with $4-million over the two years, what happens to that $1-million? A. It goes back into the pool. That's really what the issue is, is that that $5-million under the current setup comes in from the revenue pool into OHSC and we pay $5-million back out to the pool. So it doesn't matter what happens as far as the amount that gets paid [Questioning] 566 Participants back into the pool. Our actual performance on incremental losses doesn't affect that payment. Q. Just to make it clear, OHSC receives 5-million -- $5-million goes into the pool and OHSC receives 5-million and pays out 5-million? A. Yes. Q. If the transmission group does better and only has to pay out 4-million for those incremental losses, does OHSC recognize a million dollars on their income statement? A. No, it doesn't. OHSC pays back the full $5-million to the pool. That's not -- it's a straight pass-through. Q. A straight pass-through. A. That's not to say that -- I guess what we're trying to present here is, through this two-year interim period, it is a straight pass-through. And what has to happen is, the rules, the mechanisms and that all would have to be put in place in order to convert that into a true incentive where the actual performance of the transmission company would affect what gets paid back into the marketplace. That's really what we're waiting for. Q. So for 1999 and 2000, it's a pure pass-through? A. Yes. Q. Okay. ---[Fire alarm sounds] MR. HARDY: Let's just adjourn for a moment and [Questioning] 567 Participants I'll check to see if that's a fire alarm. ---Recessed at 10:46 a.m.. ---On resuming at 10:51 a.m. MR. HARDY: Okay. Sorry to have this interruption. Why don't we continue with your questions? MR. BACON: Bruce Bacon for OCAP. Q. Just continuing, I didn't think they were that tough, but anyway ... (Laughter) I'm referring to Table 10.1, page 171 of the application for my next few questions, so if you'd like to turn there, it's probably beneficial. I think it's a question for Greg. Specifically starting off with the year-end provision, and it comes back to a discussion that Ken and Susan had last Tuesday about this provision of bringing the previously written-off dollars back from equity and charging it to customers, and I guess my question really is, it's 59-million in 1999 and it's 36-million in 2000. First off, is this the same number that we talked about last Tuesday. MR. VAN DUSEN: A. Yes, it is. Q. I'm just wondering - my first question is - why has OHSC decided to write it off in this particular way or charge it to customers in this particular way instead of an even amortization of that particular cost? A. The flows that you see in 1999 and 2000 represent how the expenditures will actually be incurred [Questioning] 568 Participants by the transmission business in undertaking the provision work. Q. Okay, I understand. All right. The next question does get to the PBR process. You provided an errata - I think that's the right term for these things - that showed the staff provision for 1999 change from 13- to 15-million. A. That's correct. Q. Okay. Now, that would bring the sustaining transmission and revenue down to 1253; is that correct? A. Yes, that's correct. Q. From my understanding of how this process works, the productivity factor would move from 2.4 to 2.2 under those new conditions? A. No, I don't believe so. The impact on the productivity factor I would suspect would be negligible by that $2-million adjustment. Q. I calculated it would move down to 2.2. Now, you might want to check that and see because I calculated it on the weekend and most likely it would bring it down to 2.2. A. Okay. I've been corrected here. I don't believe the 1255 number has actually changed. I believe the errata just changed the 13- to the $15-million. Q. So the -- that 1327 or 1329, is that what you're saying? A. No. Are you saying these numbers don't add up if you put -- [Questioning] 569 Participants Q. Well, the 1327 minus 59 minus 13 gives you the 1255. I'm just putting the 15 instead of 13 and it brings the 1255 down to 1253. A. Okay. I'll check that over the lunch break to see whether the 1255 is actually correct or whether it should have been adjusted downwards as well. Q. Okay. My question revolves around the 12.4 and the 12.2. That's what I'm trying to get to. Essentially, the factor is an internally-generated factor to get to the revenue requirement? A. Sorry, the 12 -- Q. The 2.4 or the 2.2, whatever the number is-- A. Okay, I see what you're saying. Q. --is essentially an internally-generated factor to get to the revenue requirement? A. The 2.4 represents the productivity which is inherent in the change from 1999 to 2000 in the transmission business. Q. Okay. Let's refer -- A. In terms of calculation, if you're talking about the arithmetic and how that was derived, we forecast transmission revenues for the period '99 and 2000. Q. I understand. A. Our proposition is that the year-end provision and staff provision are "Z" factors and in trying to determine the "X" factor they were backed out of transmission revenue requirement. [Questioning] 570 Participants We then picked what we thought was a reasonable "I", what we thought was a reasonable growth factor and we then calculated the productivity improvements that are inherently built into the forecast. Q. So after you determined the revenue requirement, the productivity factor falls out? A. Yes, it does. Q. Thank you. Would you agree there really is little difference between the revenue requirement between 1999 and 2000 on the sustainable transmission revenue line? A. Yes, that's correct. Q. So a conclusion from that would be that there really isn't a lot of benefit from PBR to the customer if these -- well, I know this is revenue requirement, but there is not at lot of benefit from PBR from 1999 to 2000 on the revenue requirement numbers? A. It depends on what you consider to be not a lot of benefit for the customer. That change represents a 2.4 per cent productivity factor. As David indicated in his presentation, this productivity improvement is certainly in line with productivity improvements that we have seen, depending on whether you even judge it against external benchmarks or whether you take a look at other jurisdictions and the regulatory settlements that have happened in other jurisdictions. So, I would that is not insignificant. Q. Okay. I guess my point would be is that when [Questioning] 571 Participants inflation and the growth factor take away essentially the productivity gains, from the customers' perspective there probably is not a lot of benefit from -- when you put all the factors together. Now, we can argue about that, but I just put that as a point. A. I would not agree with that assertion. Q. Okay. In 2000, if OHSC was able to control its revenue requirements say to be below 1245 or whatever number that might be, say for some reason you are able to get down to 1200 and you have $45-million of savings, how would that $45-million -- what would happen to that $45-million? A. Under the example that you just provided, the $45-million would be retained by the transmission company under this current PBR scheme. But I hasten to add if the revenue requirement went up equally, the transmission company is at risk for that direction as well. Q. So back to if you actually are able to save $45-million, the customer wouldn't see any of that; is that correct? A. In this one-year PBR scheme the customer wouldn't see it in 2000. However, I think as David Curtis pointed out in response to a question from Board Staff, that would potentially reset the base for 2000 in going forward for next application looking at the 2001 and beyond period. So that when we came back in front of the Board with our application with Year 2000 as our base year going [Questioning] 572 Participants forward, if we had achieved significant savings I'm sure the Board would take that into consideration in setting the base going forward. Q. You said potentially. Will it? A. I can't speak for the Board. So you would have to ask them whether they would take that into consideration. I would certainly assume that they would. Q. Okay. I will skip that question. I get the sense that you're putting forth this PBR process and then giving the impression there is no risk to customers from this proposal. Back to our previous discussion that the 45- million, you know, potentially -- it can go up and down, I understand that, but if goes down the customer would not get any benefit from that until the next year, specifically in the regulated year. Also, we are essentially setting precedent with this if approval is giving to PBR and it comes into place, we are setting precedent for potentially a number of years. I guess from my perspective I think that potentially could be a risk to the customer. Any comments about that particular? MR. MATHERS: A. PBR actually lowers the risk to the customer by transferring the risk from the customer to the shareholder of OHSC, the risk of higher unforeseen costs and higher prices. Q. If you were to take the example of the U.K. in the first five years of its PBR implementation, would [Questioning] 573 Participants you -- and I think you said you studied it for three years or so, did you get an idea what the perception from the customers was on the U.K.'s PBR process in the first five years? A. I think the customers benefited from lower rates from the U.K. scheme. Q. That's possible. I guess the perception that I've noticed from readings in various journals is that the companies -- the grid company in the U.K. benefited greatly from the PBR scheme and that the customers' perception was that the company -- there had to be a change actually after five years to make sure the PBR scheme was a better one for the customer. Is that your understanding of it as well? A. Sure. That's the typical way the PBR scheme works; you incent the company, they make efficiency gains and then you share them going on to the next period when you reset the cap. Q. So you don't have any comments about the U.K.'s experience with the PBR scheme in the first five years, whether the customer perceived that actually the companies were gaining a lot of money as a result of them? A. Well, the NGC did make -- did exceed its expected productivity gains and made more money as a result of that. I think their "X" factors, and they initially started at a very low rate, I think around zero when they first proposed it, and they've been increasing ever since. [Questioning] 574 Participants So they are really driving the efficiencies. It's working. Q. Thank you. Are you aware of Central Maine's Power PBR scheme? Have you -- they have a PBR scheme at Central Maine Power, are you aware of that one? MR. CURTIS: A. Somewhat, yes. MR. MATHERS: A. Yes. Q. They have included factors such as customer satisfaction, customer service and reliability of service factors into their PBR scheme. I know that's complicated, but from the customer's perspective that might give some incentives for them as well. Have you considered putting those into your PBR scheme? MR. CURTIS: A. I think we've had look at those. This though, Bruce, I think is something that would have to be explored going forward in terms of I think looking at how examples like the Central Maine Application is actually worked out. And also I think in terms of our development in terms of going forward trying to identify those factors that are really critical and really important to customers and developing the appropriate measures and the appropriate incentive mechanisms to apply. Q. Based on that I agree with you. A. Right. Q. Would it make sense that those things should be done before a scheme is put in place? [Questioning] 575 Participants A. I don't think so necessarily. We're talking about a period in Ontario where customers are, I guess protected, if you will, by the rate freeze that's been applied. What we're talking about in terms of -- in this current discussion in terms of talking about specific incentive type mechanisms being put in place, I think our concern is that they have to be done carefully. It's an old adage I think about performance measures that once they are put in place you get the performance that you have asked for. That's why they're there. And I think for something -- when you talk about specific performance measures, I think there is the need to be very careful about applying them to ensure that you are incenting the company to work in the directions that really are truly in the full customer's benefit and that you're not introducing distortions within how the company operates that customers might later find that they didn't want to have happen. So we're I think very interested in looking at what the outcomes of applications are of these specific incentive schemes-- Q. Thank you. A. --moving forward. MR. MATHERS: A. Often when you see those customer incentive schemes and surveys, it is for companies that are still vertically integrated or also [Questioning] 576 Participants have distribution. Our customers are fairly large and sophisticated and tend to be able to take care of themselves and know what they want. In Central Maine I think it includes energy and distribution if I'm not wrong. Q. Possibly. I'm not sure exactly what applies. I think it does as well. But, you know, from our perspective the customer -- it would make sense to have some customer performance within the PBR. Anyway, we will leave that at that. Your proposal is a revenue cap. Distributions, I know they are not bringing forward a proposal, but their arguments are price caps. I'm just trying to understand the difference between your revenue cap proposal for PBR and distributions discussion on a price cap proposal for PBR. MR. CURTIS: A. I think we've looked at different schemes from a transmission perspective and the revenue cap application seems to be used by most other jurisdictions as far as transmission. Similarly, on the distribution side, most of the PBR applications are around price cap. And I think specifically when you're talking about distribution you get down to areas where there is more sensitivity around the individual prices and I think we have looked at it from that perspective. I wonder, Ian, when we were looking at them if you had any other comments around them? [Questioning] 577 Participants MR. MATHERS: A. With the price cap the revenues vary with the sales. OHSC is not accountable for energy sales. Often in a distribution company if it's included, the sale of energy is included in that, it's more appropriate because they want to grow their business and they want sales to increase. So within a transmission company for environmental reasons it's not considered a good idea to give the transmission company a reason to boost sales. It would also include disincentives for DSM. Q. Okay. I guess I'm confused because I thought the distribution would have a distribution tariff as well; much like the transmission tariff and the energy would be separate. So I guess I'm trying to understand that, is that you're saying when the distribution -- I know this is the wrong panel to talk to about this. MR. CURTIS: A. Right. Q. But when the distribution comes forward with their PBR that energy will be included in their PBR scheme? MR. MATHERS: A. No. I don't think that's the way it's going to work out. I think the MDC is saying that it's not going to be that way. Q. So if energy is out of distribution and they are in a price cap ... help me here. I'm trying to understand why -- your rationale -- [Questioning] 578 Participants A. My comments were in general on other distribution PBR's that you might have seen and why they have a price cap or a hybrid revenue price cap. We have a combination because some costs are dependent on energy and others aren't. Q. I won't take too much more time here, but I'm just trying to understand that distribution tariff for OHSC will -- for the distribution -- A. For the cost of service proposal that we've put forward for that. Q. So which is much like your transmission tariff because it's for the wires, and I'm trying to understand why you have two different mechanisms specifically in OHSC for PBR. A. Why do we propose cost of service for distribution? Q. No, no. Why do you propose price cap -- in the discussions for distribution you propose price cap for a PBR. It's not your proposal -- it's not in the actual application, but when you talk about how PBR should go forward in distribution you talk about price caps. And here in transmission you're talking about revenue caps. I'm just trying to understand why you had the difference? MR. CURTIS: A. I think one of the problems we're having, Bruce, is that's the distribution side and we are here to talk about the transmission side. Q. Okay. [Questioning] 579 Participants MR. HARDY: It seems like this -- I heard the question posed a couple of times now. It seems like this panel is kind of not able to provide I think the response. Can I suggest that perhaps later on in the week it be re-posed? MR. BACON: I guess, I can re-pose it, but it's more like a business question. If I'm going to ask the distribution people-- MR. CURTIS: Right. MR. BACON: --they're going to say -- MR. CURTIS: Right. MR. BACON: --well, this isn't the Transmission panel so... MR. HARDY: Is there another way that it could be rephrased to be relative to this particular panel? MR. BACON: Q. Why didn't you propose price caps? MR. CURTIS: A. I guess for transmission. I think it goes back to the response that I gave initially to this, is that in terms of looking at other jurisdictions and looking at the PBR applications in other jurisdictions for transmission, the revenue cap has been the preferred choice. And my understanding is that it's around the concept that you've got very large fixed costs within the transmission business and not subject to a lot of variation. I suspect if you were talking to our distribution colleagues that they would talk in terms about the smaller amount, if you will, or the more [Questioning] 580 Participants component-oriented costing within the distribution business. Q. Okay. Now, I'm going to leave it. I will put the point forward that knowing a little bit about the distribution system-- A. Yes. Q. --I would say they have as much fixed costs proportionately as transmission does so I'm trying to understand this, but I'll leave it at that and we will go forward. MR. HARDY: Why don't we move on. MR. BACON: Thank you. MR. HARDY: Okay. Again, if there are any follow-up questions we'll come back. Next? Will you introduce yourself as well. MR. KLIPPENSTEIN: Yes, good morning. My name is Murray Klippenstein and I'm legal counsel for Pollution Probe and I want to ask a number of questions about one area. Q. First of all, just to, I think, confirm the obvious, you're asking for approval for interim rates effective April 1 of this year; is that right? A. I think there's probably a little issue about when they will actually be effective. It may be -- maybe we need to have some clarification internally around that. I think my understanding is that they would be effective as of the beginning of the year. Q. I see. [Questioning] 581 Participants A. But I don't know. Greg, do you have a more...? I think our understanding is that they would be effective the beginning of this year. Q. I see. Okay. Now, what is the relationship between the PBR mechanism you're seeking for approval now and the permanent rates that will succeed the interim rates? Will the PBR automatically determine the permanent rates or will there be another rate hearing to determine the permanent rates? A. Okay. I'm having a little problem with your term "permanent rates". Q. Sorry. A. Are you talking about -- Q. The rates that will -- A. --post-2000? Q. Yes. A. Okay. What we're putting forward here is a rate order application that would cover 1999 and 2000. And what would happen is that sometime during 2000 we would bring forward another rate order application to cover the period 2001 and beyond. Q. And in that application, can you give me some idea to what extent the PBR mechanism will determine the rates post-2000. Do you expect it to simply fall out of the PBR mechanism based on the evidence in that, or is there more variability than that? [Questioning] 582 Participants A. Well, our expectation is that we would follow, I guess, a PBR application. We would have the Year 2000 as the base year, or in, I guess, PBR vernacular, the R-naught year, the base year. There would be a scrutiny of the costs within that base year, a presumable cost-to-service type review of those costs. Then we would bring forward arguments for what the PBR parameters we feel are appropriate to carry that scheme forward through the rate order period, whatever that might be, and then the application of those parameters to the base year 2000 would determine what the revenue requirements would be for the succeeding years within the rate order period. And similarly, we would be bringing forward proposals on how rates would be derived from that revenue requirement for each of the years. Q. I believe your application mentioned that one of the goals of the PBR structure was to incorporate all of the specific requirements of the legislation and it was addressed so some extent earlier this morning-- A. Yes. Q. --is that right? A. Yes. Q. And I think that's also one of the suggestions, if you will, in the OEB Staff report called Performance Based Regulation Framework for Electricity Distributors. I saw a reference in that report saying that the Board believed that the PBR framework should [Questioning] 583 Participants address all specific requirements of the legislation and regulations. Did you happen to notice that in the Board Staff report as well? A. Yes, yes. Q. Okay. I just want to refer you to one of the specific requirements of the legislation as I read it. The first reference is in the Electricity Act, 1998, the first section dealing with the purposes of the Act and one of the purposes is "to facilitate energy efficiency"; have you seen that? A. Yes. Q. And if I look at the Ontario Energy Board Act, 1998, in the first section, one of the objectives to guide the Board with respect to electricity is "to facilitate energy efficiency"; have you seen that? A. Yes. Q. Okay. So just following up on that, I don't see in your present PBR proposal that that specific requirement is addressed in a sense that your PBR proposal doesn't have any component that links your profits to the company's success at DSM programs that would reduce customers overall energy bills. So I don't see that being -- that way of addressing that specific legislative requirement; am I correct in that? A. You're correct in the sense that there aren't explicitly stated DSM programs that are in our application. I think what comes out of this though is that the application of PBR, and I think specifically a [Questioning] 584 Participants revenue cap PBR as Ian was describing earlier, goes in long measure to address the energy efficiency issue because through a revenue cap application of PBR, the utility is not incented to try and increase demand for its product. So the utility, in essence then, isn't out there striving to increase customer demand for its product. So inherently within the PBR scheme that we are bringing forward is that driver for energy efficiency. One of the other components, I guess of energy efficiency that we talk about is the internal energy efficiency within the organization. And I hope that my discussion this morning around TPI brings out that that is a component that we have within this current application, and we are just in this interim period, this transition period where the specific mechanisms to make it an incentive scheme are not in place, but when they are in place, then I think going forward we would see that driving internal energy efficiency within the organization. Q. Okay. That's helpful. Let me take the two parts of your answer and just distinguish them. You mentioned the absence or removal, if you will, of an incentive to increase demand. A. Yes. Q. That's one. And then you mentioned internal energy efficiency. I'd like to additionally ask about measures to facilitate external energy efficiency if you [Questioning] 585 Participants will by which I mean, again, reducing -- actually reducing customers' overall energy bills and I ask that in the sense of a positive incentive on the company to reduce that because the legislation says that one of the objectives is to facilitate, not merely to not undercut, so it's a positive sense or direction to this, so -- but would it be fair to say that your PBR plan doesn't have a positive incentive built in for the company to increase customers' overall energy efficiency? A. Well, it is my understanding that last week when you were talking with Panels 2 and 3 that you talked about specific work programs. And I believe the characterization that was given to you at that point in time is that, as a company, we are always open to DSM proposals in terms of incorporating that within the work programs where they are economically justified. And the way this particular PBR formula has been constructed is, it's been built on the programs that we're putting forward for both 1990 and for 2000, so embedded, if you will, within the PBR formula is any of the DSM program characterization that was discussed at last week's panels. Q. All right. Thank you. One of the other points made in the OEB Staff report that I mentioned earlier talks about alignment of incentives and rewards across companies and sectors and maybe I can just read to you one sentence from the Board Staff report on page 7. It says: [Questioning] 586 Participants "Non-alignment of PBR or regulatory plans for gas distributors, electricity distributors, and OHSC, both transmission and distribution, can create winners and losers. To the extent feasible within the time frame for implementing the new regulatory scheme, these PBR plans should be aligned with similar incentives and rewards". Now, I don't know to what extent you're aware, but in a recent settlement conference involving Enbridge Consumers Gas, the company and all the intervenors agreed to put in place a mechanism which would, in fact, link the company's profits with DSM programs to designed to reduce consumers' overall energy bills in the form of what was called a shared savings mechanism or an SSM, which positively incented the company to reduce customers' bills by sharing the savings that would result. Would your company be willing to modify your PBR plan to build in some such mechanism to maybe increase the compatibility with other companies in the sector as mentioned in the -- MR. HARDY: Mr. Klippenstein -- MR. KLIPPENSTEIN: Yes. MR. HARDY: I know in previous panels we've been somewhat cautious about moving into both DSM and also into other situations that albeit are parallel, but this panel may not have knowledge of, so I'll leave it up to the panel how they wish to respond to that question, but if they wish not to respond, it would be something I'd [Questioning] 587 Participants perfectly accept. I'll leave it up to the panel how they wish to deal it. MR. KLIPPENSTEIN: Yes, I wasn't going to beat them up if they didn't answer. MR. HARDY: Okay. MR. CURTIS: I think there's been a fair amount of previous discussion that's gone on within the natural gas sector around promoting DSM. It's -- I think, it's my understanding that it's been incorporated into their traditional cost of service application for some period of years. I think that they have probably have a greater understanding than I personally have at this particular point around those schemes. I think we'd be very interested in learning more about it and I think philosophically we are in agreement with what's been put forward in the quote that you read as far as the OEB Staff report in terms of symmetry across industries. I would suggest, however, that it would be, I think from a practical point of view, something that would go into our next PBR application, the one for 2001 and beyond. MR. KLIPPENSTEIN: All right. That's helpful. Thank you very much. MR. HARDY: Thank you. Who is next? Richard, go head. MR. STEPHENSON: Richard Stephenson for the PWU. Q. I wanted to understand the nexus between two items that were discussed earlier: One is the use of the [Questioning] 588 Participants growth factor in establishing the -- or its use in the PBR formula and the other is the use of actual load in terms of a rate true-up in subsequent years. I appreciate that because of the way that you calculate unit revenues, that actual growth will determine your actual revenue and, therefore, you have to go back and look at -- or sorry, actual load -- you have to go back and look at your actual load to determine whether or not you've, in fact, exceeded any revenue cap or not. MR. CURTIS: A. Right. Q. But what is the -- are you measuring the same thing there or are you measuring different things before the fact and after the fact? A. Well, before the fact all you have and is a forecast about what -- Q. I understand that. I understand the difference between ex post and ex anti-- A. Yes. Q. --but are you -- I mean, are you measuring the same units or are you measuring -- A. Yes. Q. And so, in the sense of -- insofar as a PBR scheme is designed to allocate risk for example, the growth factor is, I take it is, a neutral factor in items that risk allocation. You put it in at the front end, but you true it up at the back end if your forecast is wrong? A. Yes, yes. Q. Okay. So you're not taking any risk on your [Questioning] 589 Participants growth forecast, your load forecast? A. Well, again, I think we're talking about carrying this PBR formulation over into the next rate setting and under that particular circumstance, there would be symmetry around that, yes, that if we undercollected, there would be a true up. Q. Then why is it in there at all, is the question? If you true it up at the back end, why do you put it in in the front end at all? A. Well, to identify that component, to try and add transparency if you will to the PBR formulation so that you know what portion of the revenue requirement is as a result of growth. Q. But it's just an assumption that doesn't actually affect the winners and losers under the scheme. A. I guess I'm just having a little bit of trouble with your terminology. These are all important factors. They're all important parameters in terms of -- Q. It's not an important parameter at all. It's a completely irrelevant parameter, isn't it, at the end of the day because you multiply it going in and then you subtract -- or you add it going in and you subtract it going out comparing actual versus predicted, or do I just misunderstand it completely? MR. MATHERS: A. I think maybe you're confusing the rates true-up with a revenue cap true-up. The rates true-up mechanism is not to adjust the revenue cap that has been set at the beginning of the period. It doesn't [Questioning] 590 Participants readjust it and set that later so that our profits would be different. The rates true up, it's just a mechanism for over and undercollecting from the customer. The revenue cap sets the maximum allowed revenue that the company is allowed to collect in one particular year. We've got to go out and collect that from the customer and the way we collect it from the customer is the rate which is based on the customer's peak. So we have to set these rates ahead of time for the following year. We have to guess what the peak is going to be and then we go out and we collect it. And if we guessed wrong in the peak, we would have collected more or less than we were allowed to collect under the revenue cap. Q. Right. I hear that. A. So in the next year, we'll just fix that up, but we're not adjusting the revenue cap that we're allowed to collect. So the GAF in the revenue cap formula is very important and it applies and it's a mechanism for adjusting the amount of revenue we're allowed to collect due to growth. Q. Well, we all -- I mean, we know -- A. And that's not -- we're not proposing to true up that GAF fact or each year in the revenue cap and reset the revenue cap. It's forecast at the beginning of the period and then that sets what we're allowed to collect each year. If it was variable -- if you think about it, if [Questioning] 591 Participants it's variable, it turns into a price cap or a revenue yield cap. Q. We know that load forecasting is as much an art as a science and is often wrong. Let's just start here. What's SERVCO's current view about the duration of the next rate hearing -- or the next rate period; are we talking three years, five years? Do you have any current view on that matter? MR. CURTIS: A. I think we'll be aiming for five years. Q. And five years is plenty of time for load forecast to go awry. I think historically we know that. What do you do when you reach year four and you're well off the mark in terms of the load forecast either up or down, anything, or is that a "Z" factor for you? A. What, you mean if in terms of the growth actually not taking place or the other way around-- Q. Yes, or grossly exceeding your estimate, yeah. A. or if it happens? Q. Like, just take the early '90s as an example. A. Sure. The feature, I guess, of PBR is that risk is taken on by the utility around factors like growth. Now, there obviously is an extent to which the company could not sustain that risk and often there are within the PBR formulation different mechanisms that would [Questioning] 592 Participants be put in place, like off-ramps, in order to -- if that particular situation occurred that would take you out for another review at that point in time. And I think those are the sorts of features that we'd be talking about for the next rate order application. We certainly don't expect to be in that circumstance for this two-year application, so the OHSC is willing to absorb that risk certainly within the two-year period. But going forward, in terms of the next rate order application, I'm sure that we would have features like that. Q. I want to turn to system reliability indicators. A. Right. Q. And I think you've indicated some tension or at least flexibility to be looking at putting in financial consequences on those items when you come back again in 2000. Do I understand that correctly? A. Yes. Q. The question I heard from Board Staff was indicating that -- or seemed to indicate that there is a protection, a lack of nexus between work programs on the one hand and system performance on the other hand. And correct me if I'm wrong, but I understand that the nexus or the difficulty with the nexus is essentially -- on the transmission business is due to the lag time, that you won't necessarily see the consequences [Questioning] 593 Participants of a particular work program in terms of system or reliability whether in terms of promoting it or avoiding degradation until a passage of time. A. Yes. I think that was the explanation that was provided in panels 2 and 3 last week. Q. And indeed, a lot of the effects of either underworking or working at the right level is cumulative over time? A. Yes. Q. In terms of your reliability indicators, are the reliability indicators that you've referred to here, and you've got five of them, is it your view that those five will -- two years hence will be a sufficient package of indicators to base a financial reward penalty system upon? Are they going to be effective in tracking your performance or are you going to have to come up with additional ones in order to do a financial penalty or reward scheme? A. I would think at this particular stage, that we would probably be bringing forward either modifications to the existing -- to the five that we're bringing -- proposing now and/or additional measures. Q. I think I heard from a prior panel that in terms of the five measures that you're currently using or proposing to be using, that although Hydro hadn't specifically tracked them historically, they did have all the historical raw data behind those figures. A. Yes. [Questioning] 594 Participants Q. Am I right about that? A. Yes. Q. Have you gone back and essentially on a historical basis tracked your actual performance based upon those measures? A. I guess I'm not quite understanding that. What's reported in the application is the actual historical experience on each of those performance measures. Q. Such as it is, there's virtually nothing in here about the question -- these -- if we asked you to say annually provide us with your performance on those five indicators for the last ten years, that's something that you either could do or have done already -- A. Yes, that is in the rate order application. MR. MATHERS: A. Look at page 54 as an example, the chart there of frequency of delivery point interruptions. It goes from 1988 to '97. There's a chart like that for all five of them. MR. CURTIS: A. Yeah, there's ten years of actual performance on each of those measures in the .... Q. Some of them you give individual years and some of them you give an average over the ten-year range I think; isn't that right or am I wrong about that? A. No. I think for each one of them there's an annual figure provided. Q. All right. Thanks. I just want to return -- one of the items that Mr. Klippenstein asked you about was [Questioning] 595 Participants the - and I think you agreed that it was a good thing - that there would be essentially consistency across PBR schemes for different utilities, that that is a favourable objective. There seems to be at least two things that you're not including in your PBR scheme and there may well be more in terms of actual financial impact: one is on the DSM issue that Mr. Klippenstein mentioned; another one is on the system reliability issue, and there may be others, that do not have direct financial rewards and penalties based in there. Do you consider there to be any danger in essentially putting in place at this stage a scheme which, shall we say, is incomplete, that it doesn't -- it's not -- it does not provide the same kinds of financial incentives for the different aspects of your enterprise? A. First of all, I think I'd disagree with your characterization as it being incomplete. There are examples of PBR formulations in other jurisdictions that don't have the specific performance links financially within the organization and I've -- I think I've talked several times already this morning about the risk around doing that, because whatever you link, whatever you create as an incentive, that's what will be, that's what will happen, and -- Q. I agree with you. Let me stop you right there. A. All right. [Questioning] 596 Participants Q. The one thing that you have incented is financial performance. Don't you think that the danger is that that's the thing you're incenting and that by doing so, you'll ignore the other aspects? Isn't that the very danger that you pointed out that you've created for yourself? A. Well, I would suggest that, no, that will not happen. First of all, we're talking about a two-year period, right? Q. No, but I mean, philosophically you say that's the problem with identifying and incenting specific items. A. Yes. Q. That's what you've done, isn't it; you've identified and incented yourself on a specific item? A. Well, I'm not sure that I would agree with that because overall what we're trying to do here is incent the company to operate more efficient efficiently; and is that a -- Q. Financially, correct? A. -- is that a specific area? Q. Financially. A. But hand in hand with that, we've laid out these five specific performance measures and we're committed to maintaining or bettering the target level on those. Q. Right. A. And by doing that, that provides the [Questioning] 597 Participants reliability assurance to customers. Q. But you haven't seen fit to incent yourself financially on those items. MR. HARDY: I've heard this question a couple of times and I've heard it a couple different -- actually, I have heard a different response -- MR. STEPHENSON: Well, you haven't heard the answer yet, is the problem. MR. HARDY: Well, let's see how far we get with this then. MR. STEPHENSON: That's enough for now. MR. HARDY: Do you have other questions that you wish to ask? MR. STEPHENSON: That's enough for now. MR. HARDY: Okay. Go ahead. MR. FISHER: James Fisher appearing on behalf of AMPCO. Q. The PBR mechanism proposed in the application is a revenue requirement. Was this revenue requirement approved by the board of directors of SERVCO? MR. CURTIS: A. I think I'll defer to Greg to talk about that. Do you know what the status is as far as approvals for this? MR. VAN DUSEN: A. I think it's safe to say that the revenue requirement component here has not received formal approval from the OHSC board of directors. [Questioning] 598 Participants I think, as you recall, the timing, the board of directors was appointed effective December 1st. I believe the first board meeting was December 8th, coincident with the filing of this application. Were senior management aware of the exact details and the exact numbers in this application? Absolutely. No question about that. Q. Was there any review by the Ontario Hydro board of directors of this requirement since it was pre-SERVCO board of directors? A. I do not believe so. MR. CURTIS: A. No. Q. Okay. The Ontario Energy Board held two workshops on PBR in the latter part of September and the second one the end of October. The instructors at these workshops retained by the Board were deemed to be experts by the Board and most of the questions that I have are based on the information provided by these experts at those workshops. First off, were there any representatives from Ontario Hydro at those workshops? A. Yes, there were. Q. All right. From the transmission business? A. Yes, there were. Q. All of the PBR examples shown during these workshops were plans of three to five years in duration and included provisions for the regulator to adjust the plan if results proved to be significantly divergent from [Questioning] 599 Participants the initial assumptions. What is SERVCO's basis for a one-year plan? A. The legislation. The legislation permits for the interim period for the Ontario Energy Board to grant rate order application and licence for up to two years. That's what this application is for. Q. Right. But do you think you are really going to see the benefit of a PBR plan for one year? A. Yes. Q. How is that as compared to all the other jurisdictions that use them are three- to five-year plans? A. What we are showing here in terms of our application is productivity improvement of 2.4 per cent, I guess subject to some clarification around the calculation, and moving from 1999 to 2000. And although because of the rate freeze customers aren't going to see that directly on their bills, that productivity improvement would carry forward into subsequent regulatory periods. So they would see it in terms of improved productivity over this interim period, but carried forward into the future regulatory period. Q. As far as the equation for the revenue cap is concerned, I have several questions related to the values or assumptions made for the various factors. It should be kept in mind as well that the "White Paper" of November '97 proposed that PBR be part of the regulatory scheme. [Questioning] 600 Participants As far as inflation factors are concerned, the experts mentioned above indicated that the CPI, which is the highest inflation index, is not appropriate for PBR scenarios and a better index would be the gross domestic producer price index or one related to electric utilities input price that is available from Statistics Canada. The data that was provided at these workshops indicated that using 1986 as a base year at 100 points, that the electric utility input price index in '96 was 105 where the CPI was 135. So one of my questions is: Why were these indices rejected and what's the justification for using CPI given that the experts said it wasn't appropriate? A. I think in terms of what I talked about earlier this morning, one of the reasons why we picked CPI is that it is a well-understood or commonly-understood measure for inflation. The other aspect of it is that if you look at other jurisdictions in terms of what they've used for their inflation index, they've generally used something comparable to a CPI. So it is in fairly wide use in other jurisdictions. I think we're certainly open in terms of I guess future examinations to changing what the inflation index is because certainly from an economic perspective, linking the inflation factor to input as opposed to an output measure is probably more appropriate. But for this particular application we felt that [Questioning] 601 Participants following what's gone on in other jurisdictions and also utilizing an index that's fairly well understood within Ontario would be more appropriate. Q. Yes. I guess even though the experts are all saying it's not the right one to use, it is going to be advanced because it is well understood. This is what consumers paid for products, not what the utility input prices are? A. No, that's certainly true but, again, I guess these similar sorts of arguments I think have been brought forward in other jurisdictions and yet they use -- I'm not going to say universally, but in many instances they use the comparable index for their jurisdiction. Q. Right, but I guess the gist of it is that, you know, we are trying to learn from the mistakes made by other jurisdictions and improve on it. That's why I'm wondering sort of what research was undertaken to determine that a weighted index was not readily available as you indicate on page 45 at line 15? So did you do that sort of research to figure out that you couldn't use this? A. As I said, we looked at different indices that were possible in terms of PBR formulation. And, again, you end up with a series of criteria that you use in terms of making the ultimate choice or the ultimate pick. The ones that I think we relied on most heavily were the criteria around having something that's fairly [Questioning] 602 Participants well understood outside the utility and also following precedent that has occurred in other jurisdictions and that's why we ended up picking CPI for this particular application. MR. MATHERS: A. I would disagree that experts think that CPI is not the correct measure to use. I think it has been used in more cases than anything else. It's supposed to be an approximation of our input prices. So the perfect measure for that would be if we came up with a measure ourselves that were based on all kinds of our input prices and escalation factors for all those individual pieces. Regulators have dismissed that because the company can manipulate that and it's under its control. It's not an external measure. Q. But there are -- Statistics Canada has available electric utility input price index. Did you look at that and determine that, or they also have information on increases for cost of labour, cost of capital as input -- A. We did look at them all. Again, it is hard to say which one is a better measure of our input prices. Who's to say that CPI is not the best one of the batch? We ended up going with CPI because it is so understandable or readily available, timely. The consumer can definitely understand it and relate to it. Q. As far as the productivity index, on page 45, line 19, it states that the transmission industry's specific index was not readily available. [Questioning] 603 Participants The Ontario Energy Board workshops, examples were discussed from approximately 20 utilities where PBR was used. What research was done by SERVCO or previous Hydro to determine that the transmission industry productivity index was not readily available? MR. CURTIS: A. We looked at I think what has gone on in different jurisdictions in terms of the productivity indices that they had available. We also looked at what was available within Canada. Again, although we realize that there are some of these indices that are available, the criteria that led us to pick CPI over those were around the area of making sure that people understood what we were putting forward, something that was available and commonly understood. Q. This is productivity index I'm referring to, not CPI. A. Sorry. MR. VAN DUSEN: A. I think with respect to the productivity index, I forget exactly who was questioning me before with respect to this, but the productivity factor that was calculated here as determined was the implicit productivity that we built into the Year 2000 revenue requirement and the number that pops out, once you determine the growth factor, once you determine the inflationary factor, was this 2.4 per cent. So did we pick a productivity index called "X" and did we assess it compared to productivity index "Y"? No, we didn't do that in terms of coming up with the [Questioning] 604 Participants productivity factor for this submission. Q. Why was that? A. Sorry, why did we choose to approach it -- Q. No, why didn't you -- A. Well, this is the method we chose for putting forward our application. This is the way we determined "X". What we did do is we did do the external benchmarking and that was discussed by David in his presentations and there is two bases of the benchmarking, to look at total factor productivity indices and we also took a look at "X" factors that had been determined in other jurisdictions. And based on those two comparisons, the value of 2.4 certainly is an extremely reasonable productivity factor. Q. Now, the SERVCO application proposes that the productivity index is based on the change in the revenue requirement between 1999 and 2000; is that correct? MR. CURTIS: A. Yes. Q. That's what this factor is? A. Yes. Q. Okay. So that's the decrease is a measure of the productivity. The decrease in the revenue requirement is -- A. Well, I think as Greg was explaining, the productivity improvements are reflected in the work programs that make up what we're putting in for the [Questioning] 605 Participants revenue requirement for the Year 2000. So, yes, the "X" factor then is a reflection of the productivity improvement over that period. Q. Right. I guess what I'm trying to understand is that most of the cost component for these programs are front-ended in 1999 and, therefore, the costs of 2000 are lower. So how can it be said that this is a demonstration of increase in productivity? MR. VAN DUSEN: A. That was discussed on Panel 3. Susan Frank gave specific evidence with respect to productivity improvements. She also provided information with respect to the magnitude of those improvements that were embedded in the transmission program. I believe Dave Barrie talked about the specific initiatives in the programs. Q. The experts at these board seminars I mentioned stressed that given the fact that the regulator has no way of knowing management's moral commitment to improve efficiencies, it becomes extremely important for productivity factors and benchmarks to be based on external measurements and these are in widespread use in North American utilities. And on page 46 of the application at line 9, it is mentioned that the productivity factor could be based on Ontario Hydro historical data or external benchmarks, but the info was -- information was not readily available. When was this research undertaken to make that determination given this information that these experts [Questioning] 606 Participants had mentioned that all this information was available? MR. CURTIS: A. Okay. If you look at that line 9 that you're referring to, it's based on historical company data, not -- and hopefully it's been communicated appropriately through the first three panels. The company that we're talking about, OHSC, is being created, there is this period of transition. This has been a problem in terms of being able to relate what's gone on in 1998 and before, to what will happen in 1999 this year in going forward. So if you are talking about productivity improvement information that's company-specific, the problem that we would have is that the company doesn't exist, so there isn't that historical data around all of the components of productivity. Q. But all the activities have? A. Well, I think what we were bringing forward is that all of the activities necessarily haven't gone on and there's been, for example, fairly lengthy discussion about the institution of the asset management model and the separation of the decision maker and the service provider that this is something that's fundamentally new in terms of the corporate set-up and would lead to a difference appearing in terms of the productivity improvement. MR. MATHERS: A. Finding external benchmarks in productivity that are applicable to our company is not that easy a thing to do either. The one that David gave [Questioning] 607 Participants this morning was the Electrical Power Systems Industry in Canada and it goes from 1989 to '95 and is .07 per cent. People would argue that there was more productivity gains or less made in the last few years than there was that this measure goes to. And the question of are they applicable to our company because our company is quite different, you might have American benchmarks and they don't reflect Canadian issues. Or you might have a company that just restructured the company compared to others that are still vertically integrated, so it is difficult to find appropriate benchmarks. Q. As far as the growth adjustment factor is concerned, the data and the bar graphs in the application show that the GAF is fairly flat, and we also know that connection costs will be paid by the beneficial users. In addition, information submitted to the MDC indicates that the transmission system is rarely constrained and therefore has surplus the vast majority of the time. Who is doing the forecasted growth for the peak demand and how is that being determined given this...? MR. CURTIS: A. Well, the particular growth factor that -- growth adjustment factor that we've used has been based on, I think -- I think we have to refer to the specific appendix and then -- and I think it ended up being in the supplement. MR. VAN DUSEN: A. Yes, on the material filed on January 4th in Appendix K. Q. What appendix was that please? [Questioning] 608 Participants A. Appendix K in the material filed on January 4th. MR. HARDY: Is there a specific table? MR. VAN DUSEN: It's called Trends in Ontario Electric Energy and Peak Demand. MR. FISHER: Okay. I'll have to have a look at that. MR. MATHERS: Just clearing up something you said that there that customers would be paying for connection costs, that's not so in the interim period. MR. FISHER: Q. Are there any proposed connections to be constructed during the interim period? MR. MATHERS: A. Yes. Q. With respect to the "Z" factors, the previously mentioned experts indicated that "Z" factors were those events outside of management processes and control. And no mention was made of so-called special one-time events referred to on page 48, line 10, those being year-end provisions and staff provisions. What's your justification for including these given the fact that these were management-related decisions and nothing to do with severe climate events or changing in tax laws, GAAP, regulatory legislation? MR. CURTIS: A. If you applied these one-time events it tends to distort the one year that they happen to be in, and it makes it then difficult to apply the parameters set in the PBR formula and come out with an appropriate number for the succeeding years. [Questioning] 609 Participants So for example, if you have a large one-time cost in your base year and you determine what the -- you set, then, the PBR parameters to carry that base year forward, you are, in essence, carrying those one-time costs forward into your future years. We saw this as an appropriate method of correcting that distortion or potential distortion. MR. MATHERS: A. But we are not planning to add any more special one-time costs in the control period. If you look at the costs, they are actually higher in 1999 then they are in 2000. So if you did include them, that would give the impression that our "X" factor is even bigger than what we are saying, so we didn't want to give that mistaken impression. Q. Finally, with respect to quality of service and system reliability, the proposed targets are within the range of the historical data for a 10-year period. A couple of questions there. I'm just wondering why weren't targets based on external best practices information? MR. CURTIS: A. I think we're perhaps a little puzzled. I think Dave Barrie and I think it was Technical Panel 3 offered up external benchmarks that were used or that were considered in terms of justifying the -- I think probably we'd have to check back in terms of what went on in Panel 3. MR. HARDY: Sorry, before we move on, just that I want to be clear on what you're asking for and if they are [Questioning] 610 Participants going to check back, and presumably something is coming forward. MR. FISHER: Well, my understanding is that from this information we've just received that Dave Barrie did provide external benchmarks or discussed them in some way and they are just going to find the reference, I guess, and come back to us on that. MR. CURTIS: Yes. MR. HARDY: Just if I can go back, I also heard you ask about who determines system peak and we referred to Appendix K of supplemental information. I'm not sure if I -- did you hear a response? I was not so sure I heard a response. MR. FISHER: Yes. MR. HARDY: You did? MR. FISHER: Yes. MR. HARDY: Okay. That's fine. So you'll be coming back to us with -- MR. CURTIS: Yes, we can come back after the lunch break. MR. HARDY: That's great. MR. CURTIS: And we'll have that information. MR. HARDY: Okay. And do you want to complete your questions? MR. FISHER: Just one more I have. MR. HARDY: Okay. MR. FISHER: Or maybe two. Q. The last question relates to not meeting or [Questioning] 611 Participants exceeding performance targets. The information at these Board seminars I referred to strongly suggest that there be rewards and penalty mechanisms to create incentives and that the penalties must be serious. What are the penalties that are proposed in this formulation? MR. CURTIS: A. I think we're fairly clear that the penalty is that we'd have to go before the Ontario Energy Board if we didn't meet the target and explain why we didn't meet the target and also bring forward what our remedial programs would be to address that-- Q. And you see that as a penalty? A. --for this particular application over the next two years. Q. And you see that as a penalty, do you? A. Speaking personally, I certainly do. Q. Oh. A. I wouldn't want to have to do that. Q. Oh. What is the last if the PBR scheme is rejected by the Board? A. I'm sorry? I didn't understand. Q. What happens if in this application the Board decides that this PBR scheme is not appropriate at this time? How do you see that's going to impact? A. Well, as I discussed this morning or presented this morning, it would then -- the external driver, that external link to the productivity improvement [Questioning] 612 Participants initiatives that have been presented in Panels 2 and 3 would not be present. MR. VAN DUSEN: A. I think we also have before us an opportunity to learn about some of the intricacies and some of the application and some of the administration of PBR. There's been various questions this morning about 'Have you considered the following mechanism?' and 'Have you considered the following indices?' and we can take a look at how this PBR scheme which we claim is a legitimate and good proposal and fairly robust stacks up against had we done it some other ways. Balancing that is the fact that we don't see this as being a large risk to the customer, to the Ontario Energy Board or to the transmission company because of the short duration. So we believe it's valid and very important in that context as well. MR. FISHER: Okay. Those are my questions. Thank you. MR. HARDY: Okay. Thanks. I think we are going to break here. Just for those of you who have joined us, we want to get any participants able and invite them to ask questions of this panel. There are chairs available here for anybody who wishes to come forward and ask questions. We'll break now until 1:15. Okay? And then we'll be back at that point. Thank you. ---Luncheon recess at 12:10 p.m. [Questioning] 613 Participants ---On resuming at 1:17 p.m. MR. HARDY: Why don't we resume the afternoon session? I would like to -- we have some additional information as a fallout from this morning to be provided by Dave Curtis. I propose to hear that and then continue with participant questions and then move into the Board Staff and Consultants' questions. Dave, would you like to share with us the information that you have? MR. CURTIS: Sure. Thanks very much, Dave. I think this morning there was the issue around benchmarking and the use of benchmarking and I made reference to material that had been provided by Dave Barrie at last week's session, and this was in Panel 2, and he talked about in his presentation the International Comparison of Transmission Performance Study that was done and he showed two overheads. One was on unsupplied energy in terms of transmission on delivered energy and the second was transmission OM&A plus CAPEX per megawatthour/ kilometre. And I guess if that material hasn't been picked up by some of the Reed Consultants, we can make -- or some of the intervenors rather, we can make it available. Just maybe to clarify an issue around this, we haven't been using benchmark information to set specific targets because it's our understanding that under the Energy Board Act, that we're charged with maintaining the [Questioning] 614 Participants historical levels of performance and so that's why we have looked at our historical performance as a basis for the target setting. We have been looking at benchmarking with the perspective of best practices. And another point I think that was discussed this morning was around the consultant information that was presented at the Ontario Energy Board educational sessions on PBR. There was a discussion around looking at different productivity indices and inflation indices. And I wanted to state that we have looked at quite a number of these indices ourselves; for example, we've looked through all of the indices available from Statistics Canada and we haven't been able to find a specific transmission index relating to Canadian experience in terms of this search. I know at the educational sessions that the OEB ran, Johannes Bauer presented an electric industry productivity improvement factor of .07 per cent. It was, again, my understanding that this particular index doesn't apply uniquely to the transmission system. It's broadly based across the electric industry in the U.S. So that's been really the issue in terms of trying to associate specific indices with our PBR parameters. Thanks, Dave. MR. HARDY: Thank you, Dave. Okay, why don't we begin with participant comments. Why don't we -- do you want to lead off? [Questioning] 615 Participants MR. BARRETT: Thank you, David. Good afternoon, panel. My name is Andrew Barrett and I'm here representing Genco, soon to be OPG. I've just got a couple of questions which I'd like to go through with you. Q. To start, I'd like to clarify a discussion that took place just before the luncheon break and it's essentially -- I'm trying to understand what would happen in the circumstance where the OEB does not approve a PBR regime for the company as part of this application. Would it be your expectation or desire that they approve a second-year revenue requirement separate from the PBR in that circumstance? MR. CURTIS: A. I don't think that we've had those, those strategic conversations within the organization, so I'm not really in a position to suggest what we would like as an alternative if we didn't get the PBR approved for this particular application. Q. Would you be prepared to undertake to consider the question and respond at a later time? A. I think maybe we'd like to discuss this maybe internally before we give you a response. I'd find that difficult to know what we'd like to provide as a response to it at this point. MR. HARDY: Fine. I'll note that we may or may not have something coming forward. MR. CURTIS: Yes, we'll come back. MR. BARRETT: Thank you. [Questioning] 616 Participants Q. Again, looking at a high level understanding of how the regime would work, in the event that the Board was to make adjustments in the base year, the 1999 year, i.e., reducing the proposed revenue requirement to a lesser amount than you've applied for, do you feel -- do you see that adjustment flowing through to 2000 using the formula as proposed? MR. CURTIS: A. The formula that was developed, I think, as was explained this morning, Andrew, is the productivity improvements are included in the work programs that are specified in the Year 2000 and ... so the productivity improvement factor that is determined then is based on that change from 1999 to 2000. Based on that, if 1999 was adjusted downward, I would believe that the other factors in the PBR formula would have to be recalibrated. Q. So the "X" factor is the spring that takes those adjustments then? A. Well, 'spring' isn't quite the right -- do you want to -- MR. VAN DUSEN: A. It may or may not be depending on the direction which ultimately came from the Board. Q. Yes. A. If the Board's direction was, we do not see the validity in program "X" and program "X" is removed from '99 and 2000, the impact on "X" may be nothing. If the Board's direction was an arbitrary [Questioning] 617 Participants reduction of 10 per cent or zero, if I could call it that, then I would say that, yes, there would be an impact in the Year 2000 PBR parameters, particularly "X". MR. CURTIS: A. I mean, fundamentally, Andrew, in terms of bringing this forward to the Board, the Board has the right to rule on not only what is appropriate for 1999 but also, what are the appropriate parameters for the PBR formula. Q. Yes, that's correct. I accept that. Okay. Thank you. That's helpful. If I could ask you to turn to some of the customer commitment performance measures which are featured in the application. I think it's section 5.3.12.1 at page 52 as an example. And I have kind of a generic question which would apply to the various measures which are featured in the application. Maybe the best place to look at is page 54. That may be easier. Here you've provided a history of one of the measures and then you've provided your target under the formula. And what I had difficulty understanding is how that historic data has been reflected in setting the target and I wonder if you could help me with that? A. Yes. I think if ... I think it's a couple of pages earlier. Q. Okay. A. It's the top of page 52. Q. Yes? A. 'OHSC intends to achieve performance that is [Questioning] 618 Participants better than the minimum threshold defined by the experience over the past ten years.' So, if in the example that you're looking at-- Q. Yes. A. --frequency of delivery point interruptions on page 54-- Q. Yes? A. --better performance is a lower number-- Q. Okay. A. --for this particular one. Q. Yes. A. So the way the target was determined is to take the worst year out of that historical performance and that's the 2.31 that you'll see in the year 1991. Q. Okay. Yes? A. And the target then is set based on the next value-- Q. Okay. A. --which is the 1.93 that occurred in 1996. So that -- and that's used, that methodology then is applied to the other indices. Q. Okay. That's very helpful. Thank you, Dave. A question with respect to the "Z" factors featured in the formula and there's some discussion around those factors on page 48. And on page 48, there's discussion around factors or events that the company will bring to the Board's attention during the PBR period and essentially there's a discussion around what I take to be [Questioning] 619 Participants a materiality test. You'll only bring forward events which have a material impact on the company's income and a return on common equity. What I'm trying to understand is, what in your mind constitutes materiality around one of these "Z" factors? A. We've left it open-ended, Andrew, in terms of this particular application as far as materiality is concerned. We really didn't envisage coming back over the next two-year period because we couldn't see that there would be events that would happen materially that would affect what we've got in our rate order application and this would be -- going forward we would set those. Q. Okay. As I understand your proposal, "Z" factor events could work both ways: they could be events that have a negative impact on the company or a positive impact on the company? A. Right. Q. Is there an opportunity in your regime for others outside of the transmission company to identify a positive "Z" factor event; and if that was the case, how would they bring that forward for consideration under the PBR regime that you have proposed? A. Well, I would believe that it would be brought forward at a rate review hearing. We would be bringing forward what our proposal would be for our rate order application and included in that would be the "Z" factors that we felt would be appropriate for full [Questioning] 620 Participants consideration within the hearing and -- but I would see that as part of that, that other proponents could bring forward suggestions, too. Q. So in terms of timing, these "Z" factors would be brought forward at the end of the PBR period rather than during the PBR period itself? A. No. The "Z" factors are brought forward for the upcoming rate-setting period and are reviewed by the regulator and approved by the regulator. That's why we're saying that we have specifically identified two "Z" factors - the year-end provisions and the staff provisions. Both of those are open for review and scrutiny at this particular review, if you will, or Technical panel sessions. Q. Perhaps I've misunderstood this part of the application. I had always understood the "Z" factors to be essentially off-ramps for the formula. In the event that something happened after the PBR regime was launched that wasn't anticipated, there could be an interim adjustment. MR. MATHERS: A. Maybe if we thought of an example, we could clarify it there. Let's say that you're looking for something that would not favour the company, to -- Q. Let's say there was a significant reduction in income tax just as an example. A. Yes, let's say there was a big reduction in income taxes in the middle of the period, I suppose that [Questioning] 621 Participants this would affect our revenue requirements and reduce them for that period that it was effective for. You're asking who would bring forward this "Z" factor then? Q. I have two questions: One, how would those "Z" factors be brought forward, would it be during the interim period or at the end; and is there an opportunity for others to bring forward those kind of events? A. It would be during the interim period. Some of them might have to be a little bit looking backwards to make sure they applied over the proper period. And deciding when to collect it in the next period, making it fair, that would be a decision I think that -- we'd make a proposal and the Board would approve. And can somebody else bring them forward? I think with something like the income tax, I think the company has a responsibility to bring that forward itself. As far as somebody else bringing it forward, I don't see why not. MR. BARRETT: Thank you for that. David, that's all my questions. Thank you. MR. HARDY: If there are other participant questions before I move on to Board Staff and Consultants. Go ahead, sir. MR. ROBERTSON: Thank you. Ed Robertson representing OCAP. Q. In his very recent reply in regard to Poch questions, Mr. Curtis made what I think was the following [Questioning] 622 Participants statement in regard to why they haven't used benchmarks and I just want to check if my notes are correct. I think you indicated that you hadn't used benchmarks especially because there were certain sections of the new Act which charge you with maintaining historical levels of performance. Did I get that correct? MR. CURTIS: A. I guess first to clarify, we have used benchmarks. What I think this is directed at is in terms of setting the bench -- the target levels for the specific performance measures that we're talking about in this rate order application. The setting of those targets, we understood under the legislation that we were charged with maintaining the level of quality of service to our customers. And so based on that, the appropriate targets -- method of developing the targets would be to look at our historical performance in terms of reliability delivery. So for that particular area that -- I wouldn't want to leave the impression that we haven't looked at benchmarks because we have. Q. Thank you for that. I wonder if as a supplementary to that I might perhaps through you ask your counsel if they could make up for us a reference to the particular sections of the act which you're taking into account in that reply. A. Okay. MR. HARDY: Do you want some time, counsel, to [Questioning] 623 Participants respond to that question? MR. CURTIS: I would like to have a little bit of time to find the reference. MR. HARDY: I have noted that, Mr. Robertson. MR. ROBERTSON: I've got one other actually. Q. I am going back to what another intervenor Mister -- who just departed, page 48 of the transmission application. In particular, line 10 which deals with "Z" factors. You've mentioned that there are two proposed "Z" factors on special one-time events; namely, year-end provisions and staff provisions. Can you give me an indication what you mean by staff provision as a possible "Z" factor? MR. CURTIS: A. Probably Greg is in a better position to answer that. MR. VAN DUSEN: A. The staff provision costs are explained in a little bit more detail up on page 170 of the transmission application. Just reading what it says here: 'The staff provision is associated with severance costs for declared surplus staff within the transmission business.' So essentially as part of the restructuring and transitional costs of moving from the old integrated Ontario Hydro into the OHSC, there were staff declared surplus and the costs associated with that are being treated as a transitional cost and included. [Questioning] 624 Participants Q. Thank you. That's clear enough. Just perhaps a small follow-on. You state in the page 48 reference that the proposed "Z" factors are these two. I can take it, moving over to 170, that you really are anticipating such costs as "Z" factors, are you? A. Yes. Not only are we anticipating them, but they are built specifically into this application. Q. Into the application? A. Yes. The staff -- the year-end provision is built into the specific transmission OM&A programs and they were discussed by Susan Frank and Dave Barrie the other day and the surplus staff costs are in the transmission support OM&A category. Q. I was involved in that discussion, but I simply wanted to link it to the material that showed up here. Thank you for those answers. MR. CURTIS: Yes, I was wondering, maybe just to follow on with I think with your first question, if you refer to page 51 of the rate order application there is a footnote at the bottom under the "Quality of Service Safeguards": 'The Ontario Energy Board Act of 1998 specifies that one of the objectives that will guide the OEB is to protect the reliability and quality of electric service.' And it is our interpretation that that means maintaining historical levels of reliability. [Questioning] 625 Participants MR. HARDY: Mr. Robertson, you are looking for a particular section of the Act? Is that sufficient or do you...? MR. ROBERTSON: No, we can look at that. Q. I take it that refers to a section of the OEB Act itself? MR. CURTIS: A. Right. I feel like I will find the specific reference. Q. It's not terribly important. We will find it from there. Would you accept, however, that there is possibly an alternative reading of those few words there "to protect the reliability and quality"? Protect doesn't necessarily preclude improve, does it? A. No, I wouldn't say it precludes improve, no. MR. ROBERTSON: Thank you. MR. HARDY: Thank you. Other questions? Go ahead. MR. CHANDE: Hi there. My name is Nikil Chande and I'm here representing Toronto Hydro. Just a couple of quick points for clarification. Q. First of all, you said earlier that one of the benefits of your proposed revenue cap structure was that the risk of higher unforeseen costs would be transferred from the customer to the shareholder to the company, and I wanted to get you to clarify that statement in light of the proposed "Z" factors. Do the "Z" factors not, in fact, do the exact [Questioning] 626 Participants opposite; that is, do the "Z" factors not transfer the risk of higher unforeseen costs on the customer himself -- itself, as opposed to the shareholder? I just wanted you to clarify that. MR. MATHERS: A. That's right. But what it does transfer of the "Z" factors are the exogenous factors that are out of management's control. Anything that is under our control is something that can be unforeseen and we take the risk for that. Q. So is it correct to say then that under your proposed structure the risk of increase in costs which are beyond the control of management will be on management -- on the customer; whereas, the risks of costs which are within the management's control will be placed on the shareholder, on the company? A. Right. That's the theory. I mean, income tax is a good example of the cost that we passed on to the customer because it is out of management's control. Q. So do you -- am I right in saying that an unforeseen cost is something that's beyond management's control? A. No. The unforeseen word I think applies to when you're setting the revenue cap. At this point we can't foresee whether income taxes are going to go up or not, but the fact that it is out of management's control is the important thing. Q. Could I get you to turn to I think it's Table J1 on page 109. Sorry, page 111. No, no, that's not [Questioning] 627 Participants right either. I guess I was right in the first place, page 109. Do you have it there? A. The table? Q. The table describing the various -- MR. VAN DUSEN: A. Yes, it is Appendix J. Q. Appendix J, that's right. I noticed that you can see by the summary here various jurisdictions that have used revenue caps and other PRBs. Some have incorporated a growth factor, whereas others have not. And I wonder if you have any view as to why certain jurisdictions a growth factor was chosen? Sorry. I know I'm asking to get your mind into the minds of other people, but maybe if you could surmise as to why in certain cases growth factors were used and in certain cases they weren't and, secondly, why you thought it was appropriate to use a growth factor in this current application? MR. MATHERS: A. Sure. It can be confusing in looking at these formulas here. One of the things that does confuse people a lot is in these jurisdictions that call it a price cap and it is because they do cap the price, but what they do is they also forecast and predict the growth that's going to be in the system ahead of time. They don't let that vary. So, in fact, it's not really a price cap at all because that's fixed and it turns into a revenue cap. So the growth factor is in there even though it's not [Questioning] 628 Participants explicitly in the formula. It's in the fact that they made it a price cap and they predicted the growth and fixed that at the beginning of the period. Q. So an example, would the last jurisdiction be an example of where that has occurred? A. Well, the Scottish Power is one where it has occurred. Q. The Scottish, okay? A. The Australian Victoria Power Net is another example. Q. Mm-hmm. So then if we look at the Scottish and Australian examples, am I right in saying that growth is accounted for in their "X" factor as is done with the U.K.? A. The U.K. is a little bit different again. The U.K. used to be the same as the Scottish and Austrailian formula up until the last time it was changed was just two years ago I believe it was. MR. VAN DUSEN: A. Yes. MR. MATHERS: A. It used to be a price cap as well. It caused all this confusion. People thought it was a price cap when it really was a revenue cap. I guess I'm speculating on why they changed, but I think that was one of the reasons why they changed. They did not include a specific GAF in their formula. What they decided to do was put that in the "X" factor and account for it there rather than have it [Questioning] 629 Participants separate because they didn't have it before and they didn't want to add it. Q. Right. Earlier on you said that -- I think a question was asked by one of the Reed Consultants as to where you felt the proposed productivity factor of 2.4 per cent, where it fell in terms of the scale compared to other jurisdictions. And I think your response was that it was in the medium to high range and you cited 2.0 per cent as sort of an average of those other jurisdictions that had been used as your comparing group. When you got that 2.0 per cent and when you made the assessment that your 2.4 per cent was in the medium to high range, did you consider the fact that some of those other "X" factors may be slightly lower as a result of having been discounted by including a growth factor inside the "X" factor, inside the productivity factor? A. No, that was a pretty rough calculation David did I think for you. He just looked at the -- MR. CURTIS: A. I just looked at the numbers that are in that column and take the simple arithmetic average and come up with about 2 per cent. Q. So in light of the fact that some of the "X" factors may be slightly lower than they actually are in real -- in terms of predicting the level of productivity that the company is trying to achieve, would you rephrase your assessment of 2.4 per cent being in the medium to high range as compared to these other jurisdictions? [Questioning] 630 Participants A. Yes, it would be a little difficult to be able to do that because that would imply us knowing what the growth factor absolutely was in those jurisdictions and being able to back that factor out of the calculation. MR. MATHERS: A. We can make a rough estimate based on our growth factor which is .1 per cent. The difference it would make on the 2.4 would be 2.3. Q. So your answer is no? MR. CURTIS: A. I don't think we are capable of doing this I think is the answer. MR. MATHERS: A. It does make a difference, yes, but in our case the difference is fairly small. Q. Thank you. MR. HARDY: Is that your questions? MR. CHANDE: Yes. MR. HARDY: Thank you. MR. HARDY: Richard, you can go ahead, please. MR. STEPHENSON (PWU): I just have a couple other points to cover off. Q. One of the items that was raised by, I think, one of the Board Staff was about whether or not certain competitive activities were going to be excluded from PBR consideration and talking about some of the work done for, I guess, Genco or third parties. One of the other external sources of revenue for SERVCO is, SERVCO hopes revenue coming out of Peru through OHII, I gather, and you've got, I think, $19-million or some number in there on that as a projection. Is that [Questioning] 631 Participants part of -- does that count towards your revenue cap? MR. CURTIS: A. No. Q. And if so -- A. No. Q. Okay. And how do you take it out? A. I guess Greg... No, it isn't included in the revenue cap because it's not part of the regulated part of business. Q. Well, I always have difficulty trying to figure out where the regulated part of this business ends. That makes sense to me, obviously, there shouldn't be no cap on whatever amount you derive from your -- that investment? A. Right. Q. But I take it the work for third parties is part of the regulated business and therefore it is part of the revenue cap? A. Correct. Q. If the Board was to determine that it was not prepared to approve a PBR scheme that did not have financial penalties and rewards for system reliability performance and you were given the choice of either going and inputting financial rewards and penalties for system reliability or, in the alternative, simply deferring PBR, what's your choice in those circumstances? A. I think I'd like to defer to the way it was posed to us a few minutes ago, and I think we require some internal discussions before we provide a response to that. [Questioning] 632 Participants It's rather speculative and we haven't sort of gone through that strategic... MR. HARDY: I'm hearing a really formulated question I heard earlier and I think that's fair to allow this panel to take the time to determine whether or not they can provide a response to that particular question. MR. STEPHENSON: That's fine. Q. And I just wanted to clarify this point that when you were talking about the benefits now, going to PBR in this as a result of this proceeding, one of them, I think, that was referenced was the fact that there is this you feel an efficiency improvement which is reflected in, I think, your 2.4 number-- A. Yes. Q. --am I right about that? A. Yes, you are right. Q. The thing I don't understand about that is you derive 2.4 as an output of this, of your assessment of revenue requirement. Presumably that assessment was quite independent of PBR. I mean, isn't that -- isn't your -- I mean aren't you saying that your revenue requirement for the Year 2000 is what it is? A. No. Q. It doesn't depend upon you getting a PBR scheme through, does it? A. Well, it does, I think, in terms of the presentation that I gave to start this session. The PBR formulation provides that external driver to link up with [Questioning] 633 Participants the efficiency improvements that we've talked about in the previous panels that have come about from such initiatives as setting up an asset management model. So I -- what we've tried to do in this particular application is reflect those productivity improvements in work programs for the Year 2000, and so then the financial numbers that you see here for the Year 2000 reflect those productivity improvements. And as a result, the "X" factor is derived from that basis. Q. But I'm assuming that you're satisfied, to use the asset management model as an example, that that's a good idea? You guys think it's a good way to run a business and it will -- it's something you want to do. I take it that's true regardless of whether there's PBR? A. I'm not necessarily sure of that because the decisions in terms of implementing an asset management model were based on our understanding the direction coming from the "White Paper" of the type of regulatory framework that we would be put under; namely, performance based regulatory scheme. Q. And -- A. There may be, what you'd have to do is if there's an alternative regulatory framework that is put in place, there may be a more applicable model for the management of the transmission business under that. Q. And just to be clear, here, I'm not talking about never PBR. I'm talking about whether it's [Questioning] 634 Participants implemented in 1999 or whether it's implemented sometime after the Year 2000. Let me just be clear about that. A. Oh, well, all right. Q. Yes. I mean, let me just ask you straight up. I mean, if the Board says that they are not prepared to approve PBR this time around, does that mean that you're not going to adopt your asset management model? A. That we're -- I'm sorry? Can you repeat the question? Q. What I thought I heard you say there was that if the adoption of your asset management model as a business structure-- A. Right. Q. --was premised upon an expectation of the adoption of PBR-- A. Right. Q. --and I'm saying, if the Board decides that it's not going to approve PBR this time around, it's going to defer it, does that mean you revisit the question of the asset management model? A. I guess it's your premise that PBR would be introduced at a later date. That's probably the critical one here. Q. Well -- A. The requirement is for some external productivity driver to sustain the asset management model. That's what we've been talking about here. Now, the longer -- the sooner that that's imposed, obviously the [Questioning] 635 Participants better the asset management model will work and the productivity gains that will be derived from that will materialize sooner. That's probably the issue that we're talking about here, is if that external link, that external productivity driver is not there through PBR, then it's more difficult under an asset management concept to realize those productivity improvements. I wouldn't say that -- Q. I understand that point and I appreciate that. I guess -- A. Okay. Q. I guess where I'm going is simply that neither you nor I can predict the future and if the Board determined in its wisdom that it didn't think that PBR in this time around was a good idea, neither you nor I could predict what they might do next time. I mean, at most we have the direction given us to us by the "White Paper" and the legislation-- A. Right. Q. --and that's all we have-- A. Right. Q. --but there is some uncertainty for it in the future. And I guess all I am wondering about is that it's at least possible that the Board will decide that PBR isn't appropriate at this time on the basis of this proposal. A. Yes. [Questioning] 636 Participants Q. And the question is: How does that affect your business in the next two years? I mean, it sounds like you may revisit your entire business structure. And it seems to me that that's something the Board might be interested in. MR. HARDY: Again, I think I'm hearing a third kind of reformulation of that initial question. MR. STEPHENSON: Anybody else want to know the answer to this question? It struck me as rather fundamental. MR. CURTIS: I think what we've said is that we'd like to have an opportunity to go back and discuss this internally. This isn't -- I mean, this panel wasn't set up to provide you with alternative strategies as far as what OHSC is going to be doing. MR. STEPHENSON: Q. And that's fair enough. I'm happy to hear whatever you'll tell me in due course. A. Okay. MR. HARDY: Thank you. I'm ready to -- if there are no questions from other participants, I'm ready to go back to the Board Staff. Would I do that then? Okay. To Board Staff and Consultants, are you ready for any additional questions? QUESTIONING BY BOARD STAFF AND CONSULTANTS: MS. SIMMONS (Reed): I just wanted to clarify, kind of a follow-up to a question I asked this morning, Q. And one was: What's going to happen with the [Questioning] 637 Board Staff/Consultants 2.4 per cent? And one of the things you said is that the 2.4 per cent, at least, will be reflected -- or at least will be there as kind of an inherent productivity gain that's reflected in all future years? MR. CURTIS: A. Yes. Q. And I guess my question is, is that when you talk about coming back, you talk about coming back in at least the starting point, there's a, you know, a cost of service sort of analysis of the starting rate year. And I guess I would like you to clarify that in the event, under this PBR mechanism, your projected expenses or your actual expenses are higher than your projected expenses, are you telling us that when we start out and look at the cost of service basis for that starting year that, to the extent you didn't achieve that 2.4 per cent, you will still reflect your starting revenues with that 2 per cent in there? Do you follow? A. Yes, yes. I think what we've stated is that if we didn't achieve the productivity improvement contained within the 2.4 per cent for 2000 that the OHSC would absorb that cost. And the starting point then for the coming rate-setting period would be that basis then. Q. Okay. So there would be -- to the extent your year-end numbers were higher, there would be an adjustment so that when we started off, you would at least be starting off with the 2.4 per cent achieved for Year 2000? [Questioning] 638 Board Staff/Consultants A. Well -- Q. I'm not sure how else you tell me that you're reflecting it? A. Well, all right. The -- it sounds like Greg would like to... MR. VAN DUSEN: A. Well, I guess to the extent that we've achieved the numbers exactly as they are in here, we'll start the basis of 2000 with a 2.4 productivity improvement. If costs - let's take both sides - are lower than that, the costs are $40-million lower than our revenue requirement that we put forward here, it seems to me that we are not tied to bringing back a number to you which is the 2000 revenue requirement less 40-million exactly and bringing it forward. We would bring back another number. But it seems to me that under a PBR scheme the whole basis is to reflect the productivity improvements in the starting basis to go forward. That's how the scheme benefits the customers. If there was some extraordinary reason why we thought we could not include the full amount, then I suspect we would have to justify it in front of the Board. But I think our anticipation is we would bring back the savings that were achieved, that were driven by the PBR scheme. Conversely, if the costs were much higher, then once again, I don't think we are necessarily bound to bring you back the 2000 number we have here plus $40-million, let's say. I think we would have to, once [Questioning] 639 Board Staff/Consultants again, demonstrate why we weren't bringing back in front of this Board the precise number that we put in front of them and the benefits from the PBR scheme that we said that we were going to bring forward. I think -- I would anticipate and hope that we would be able to achieve the productivity savings and bring them back and show the benefits of the PBR scheme. Q. I appreciate that response and I recognize I'm asking you to speculate on something a year-and-a-half from now and I appreciate your candor in that. One thing that came to mind as we were going through discussion on CPI and the use of CPI and I was curious since I'm not aware of the specific elements of your agreements, of your collective bargaining agreements, are there any elements of those agreements, any triggers tied to CPI that illustrate to us that the use of CPI is appropriate because your changes in wages and labour costs are also dependant on CPI? A. We'll have to take that under consideration I'll not exactly sure. Q. Okay. MR. STEPHENSON: The answer is yes. MS. SIMMONS: I'm sorry? MR. STEPHENSON: The answer is yes. MS. SIMMONS: Are they year to year? MR. STEPHENSON: Yes. MS. SIMMONS: Okay. Well that's helpful. MR. HARDY: Well, I'm going to just keep it as [Questioning] 640 Board Staff/Consultants the panel will provide -- (laughter) -- MS. SIMMONS: I have one other question and I would like you to comment on before I turn it over to my associate. Q. One of the things that I've heard from other intervenors as well as a concern or question that I have is that you refer to the 2.4 per cent as representative of some sort of inherent productivity in your Year 2000 numbers. And I guess in those -- I got a puzzled look from you. The 2.4 per cent, while being derived from the Year 2000 costs, those 2000 costs reflect some productivity improvements in specific programs that, you know, you think you can achieve or you project to achieve. Additionally, in the discussion of those capital programs and, you know, various O&M activities that you plan to undertake for the coming year, many of them associated with the capital programs, there were changes in the programs that were not necessarily driven by productivity and, in fact, I'd say there's probably only - I don't want to say how many areas, but there were productivity areas -- productivity related changes in the cost levels for only a handful of the programs. So I guess one thing that's hard for me personally to understand is, that 2.4 per cent, since it's derived internally based on the change in revenue requirements less certain one-time factors, does it not reflect simple changes in cost levels that may be simply [Questioning] 641 Board Staff/Consultants representative of your activity program levels for a given year, some of which may be driven by productivity improvements, some of which may be driven by simple cycle changes in replacement and refurbishment of particular equipment and facilities? And so, does the 2.4 per cent really reflect productivity changes or is it kind of just a catch-all number for change in revenue requirements and projected expenses between the two years? A. First of all, the 2.4 per cent is real and to the benefit of the customers. Let's be very clear about that. If revenue requirement comes down, customers benefit. So, there's no questions of benefit to the customer, but we're calling that the productivity improvement year over year in revenue requirement. That is how the revenue cap proposal for performance-based regulation defines it as we're putting it forward. Does it include gives and takes as you indicated? Absolutely there are some program changes which -- program levels which reduce '99 to 2000. There's unquestionably that. But I do have to bring you back, though, to testimony that was given by Susan Frank. She indicated - and I stand to be corrected on the numbers - that the productivity improvements in 1999 built into the transmission OM&A was in the range of 15- to 20-million and I think she indicated there was an additional 25 to 35 around that range. I stand to be corrected on the exact numbers, but they're certainly in the range. So there are real productivity improvements built [Questioning] 642 Board Staff/Consultants into the programs and as I understand, she detailed them a bit in terms of where they occurred and, like I say, she talked to the ones that were in the support area and I believe Dave Barrie talked to the ones that were in the program area. Q. And I do appreciate that and thank you for reminding me about those numbers, but I guess one of the things that makes it -- would make it easier for us is, since you do have those quantified productivity improvements, why weren't those numbers used to derive the "X" factor that you've kind of set forth here? It was internally generated and maybe it would -- maybe because that's simply the easiest way to do it, but since you have projected certain productivity levels, you were able to quantify us, couldn't you have derived "X" based on those numbers in some fashion? A. I think this goes back to, and I'll let Ian add to this response, to the difference between a revenue cap performance-based regulatory scheme and targeted incentives. We could have brought forward an O&M targeted incentive program. We did not. We think there are pitfalls to that. We think the revenue cap is a much better approach. So that would be my first level response. MR. MATHERS: A. The way the productivity factor, I guess, is defined is, it's applied to the whole revenue requirement. So all the changes that we anticipate from year to year are reflected in whatever "X" [Questioning] 643 Board Staff/Consultants factor we bring forward, so we have to live with that. So the way that we calculate it was, we projected our 2000 costs based on all the productivity improvements that we thought we could make - it's pretty ambitious - and calculated it backwards and this is what the "X" turned out to be. You're right, changes in cycles of whether you're spending more OM&A money or whether you're spending more capital, that all does affect that "X" factor. I think that's why it's important to have a look at each specific company when you're trying to determine the "X" factor and not just take an external benchmark because different companies can be going through different cycles and phases and have different concerns at different times. MS. SIMMONS: Okay, thank you. MS. BULKLEY (Reed): I just wanted to take a minute and go back to the growth factor. Q. Can you describe for me the methodology that you used to develop the forecast system peak demand for the Year 2000. MR. MATHERS: A. Beyond what's in the appendix, no. Q. Where in the appendix? MR. CURTIS: Appendix J I believe it was. MR. VAN DUSEN: A. Yes, Appendix 'K' in the supplementary filing on January 4th. I have to also agree with Ian, that unless it's described in some detail here, I'm sorry, I can't tell you the specific methodology used. [Questioning] 644 Board Staff/Consultants Methodology. MR. CURTIS: A. Are you after more information or more detail than presented in appendix K in terms of how the forecast was derived? Q. Well, I think actually what might be helpful is, I believe in this rate application you referenced a sales forecast, a November 1998 sales forecast, which was issued by Ontario Hydro. A. Yes. Q. Is that available? Maybe that would just be helpful for us. Would you be able to provide that? A. This certainly is an excerpt from that and if you're after more of that, I think we could take that under consideration certainly and provide that. Q. That would be helpful. A. Okay. MS. SIMMONS: Q. So what's in Appendix K is derived from the same reference that's made in Appendix I of the original filing. MR. CURTIS: A. Yes. I think -- yes, it certainly is that. Q. Okay. A. We'll have a look at providing you with more, more information that came out of that. Are you specifically interested in the methodology; is that ...? Q. Well, it also only goes until Year 2000. It [Questioning] 645 Board Staff/Consultants gives some historical stuff, but it really doesn't tell me -- I think a forecast, I think, of like five or ten years going out and something that you use based on some historical road research data that's derived to come up with. I think of the traditional, so I think of seeing some historical and some future and I'm only seeing like '91 to '98 and two years beyond that. So I guess I was just wondering about your methodology and do you only do two-year sales forecast and just how -- what's the projected trend going forward? I'm not that familiar with the Ontario business climate or your growth overall, so .... A. Well, I think he we can look into providing that. Q. Thank you. MR. MATHERS: A. In the future, it might not be OHSC that's in the business of doing energy forecasts anymore. It could be the IMO. Q. Well, that's a concern for us as well, that we -- you know, we approve some sort of method, growth method, based on some forecast and someone else might produce something differently. I don't even know whether you might even outsource that and maybe it's something that we should take a look at. MR. HARDY: If I can be clear here, whether there's a sales energy forecast that's coming or a description of how it was -- the methodology that was used is coming. I'm not sure exactly what's coming forward. [Questioning] 646 Board Staff/Consultants MR. CURTIS: Okay. My understanding is that we're going to look at providing two additional pieces of information around appendix K: One is in terms of more details as far as the load forecast methodology is concerned and the second one being around providing more historical and more forecast data. Is that a fair characterization of this? MS. SIMMONS: That's correct. MR. HARDY: Thank you very much. MS. BULKLEY: Q. Moving on to the inflation factor, I guess -- I heard earlier that the criteria that were used to come to the conclusion that CPI was the right index were that it was well understood and that many others were using that as a number. I guess what I was looking to find out was, in your opinion, is this really reflecting any of your costs? Are any of your -- I mean, those two criteria are nice, but they don't seem to get to sort of the crux of the matter. What are your costs doing over time? MR. VAN DUSEN: A. I'll take a first crack at it and then defer to my colleagues. We do not have studies internally that progressed to the point where we had any confidence at all in putting forward an OHSC transmission-specific index. Our look at -- so that would be the one of the better things to have put forward. We can directly link the change in our costs to a certain index - here is the index, here is how we developed it. [Questioning] 647 Board Staff/Consultants We do not have that. There's several references to the material. Our review of the material which is available external to our organization, and Statistics Canada was one of the major sources we went through, was that there wasn't something there that was close enough to being transmission-specific that we felt comfortable putting forward. So do our costs change directly with Ontario CPI? I suspect there are some costs which do. We've had some assistance from our representative from the PWU who's indicated that some of the labour agreements are tied. Are other costs tied to the CPI? I suspect the answer is yes. Are others tied to other type of inflationary pressures? I suspect the answer is yes, but you'll notice I'm saying 'I suspect the answer is yes'. There's not a lot of detailed information internally or, as I might add, externally that has helped us get a direct handle on inflationary pressures on a transmission company; therefore, we rely on the standard answer which we've been giving readily available, easy to understand and does impact our costs to some extent. The exact nature -- is it 80 per cent tied or 30 per cent tied, I couldn't hazard a guess on that. Q. My understanding is that you're using DRI Ontario's calculation of CPI. Did you look at any other institutions' [Questioning] 648 Board Staff/Consultants calculations and conduct any kind of an analysis that shows one was better than another or closer to actual? A. Was one better than another in terms of forecasting accuracy? I can't say specifically that I looked at that. What we did look at is a comparison between DRI and other groups that do inflation forecasting and did a comparison of their averages over periods of time and we felt that they were close enough that we weren't introducing anything by way of an outliner in terms of using the DRI forecast. Q. The last question in this area is, can you tell me why it is that you've proposed to use the August 1999 forecast of CPI versus any time period that might be closer and more accurate? MR. MATHERS: A. I think the August date was selected because of the time needed to recalibrate the rates and that would give lots of time to do it, sufficient time. MR. VAN DUSEN: A. I think also there was some concern about the availability of the actual data for August. I think we've indicated that we would notify the Board on October 1st or November 1st and publish rates on December 1st. And in terms of having August come and go and having the actual data, you know, do you pick July or do you pick October? You've got to pick something where you're going to have the data. Q. Going on to the performance measures, can you explain to me how the performance measures that have been [Questioning] 649 Board Staff/Consultants proposed by SERVCO compare with the performance measures used by the other utilities that are provided in table J1? I know you've listed a few things here in the service quality safeguards, but they don't necessarily directly relate to the types of indices that -- the type of benchmarks that you've chosen, performance measures. MR. CURTIS: A. I think we probably could go through some of them for you. We started off with National Grid. They would report on frequency of delivery point interruptions and system minutes of unsupplied energy. I'm not sure whether they have the one-hour or the 24-hour restoration time and they would have the unavailability value. Q. Do they have other measures as well that are not included in this application? A. You mean linked in terms of their PBR formula? Q. Yes. A. I'm not sure. I -- MR. MATHERS: A. It's possible that there might be additional ones, but I think in general, ours are pretty close to what everybody uses. The frequency and duration of interruptions seems to be the main measure - when's the power out - and that's what people worry about. MS. SIMMONS: Q. Do any of them look at those performance measures on a regional basis rather than on a total system basis? I'm just kind of referring to your system minutes [Questioning] 650 Board Staff/Consultants of unsupplied energy we were told last week was heavily influenced by a specific -- the thinnest of the grid going northwest. So I guess I'm wondering given that it may be sensitive to specific elements of your system would a regional sort of look at system minutes of unsupplied energy by region or something else be more applicable. I guess I'm just wondering about use of a regional or sort of -- I know national grid breaks itself up into different load supply and load areas for pricing. I'm wondering whether they do anything regionally for performance. MR. MATHERS: A. I don't recall that they do that. It's a possible idea, though. It might prove useful here because of the differences that we have in quality. Q. Was it anything you looked at? Can you track it or calculate it in that manner? MR. CURTIS: A. Yes, we can. All of these are indices tend to be derived based on locational measurements and then aggregated together to provide a system-wide measure. So I think for most of these you could develop regional measures. You'd have to be I think obviously careful in terms of what you were talking about in terms of your regions, though. MS. SIMMONS: Q. Right. I'm not sure of the applicability of the design of the regions. I was just [Questioning] 651 Board Staff/Consultants wondering whether it may be more useful given the nature of what drives your investments and things like that. MS. BULKLEY: Thank you. MR. HARDY: That completes the questions? Are there other questions of participants? Okay. I just wondered if I could get an idea of how many questions and I'll know whether I should continue or take a break. How long do you need? MR. SNELSON: I've got about three different areas. So it might take a little while. MR. HARDY: Sir, behind you, how long do you think you will need? MR. ANGEMEER: A couple of minutes. MR. HARDY: Okay. Why don't we take a short break. I've got 2:25. Come back at 2:40 and we will put all the questions then. ---Recessed at 2:25 p.m. ---On resuming at 2:40 p.m. MR. HARDY: Why don't we begin then. We have again a couple of items of clarification from the panel. So why don't you take a minute or two and just provide that clarification. Mr. Snelson, we will start with you after that. MR. CURTIS: The first one is around quality of service safeguards. I think the point that I was referring to in terms of the note at the bottom of page 51 about the Ontario Energy Board Act, that comes from [Questioning] 652 Board Staff/Consultants section 1 of the OEB Act and it is paragraph 3. I guess also as a further clarification, this is one of the objects of the OEB and so our direction in terms of what we're doing around quality of service safeguards is in support of that OEB object. I was asked I think in terms of comparing the quality of service safeguards with the jurisdictions in Appendix J and over the break I guess the one that we discussed was around offer and what it requires of national grid. And over the break I was told of the four measures that National Grid reports on to offer. The first one is number of incidents resulting in load loss and that would be somewhat analogous to our frequency measure. The next one is average load lose per incident. That is somewhat analogous to our unsupplied energy and then they have two on unavailability; unavailability of the transmission system, and then unavailability of interconnections. Those are the four that they report on to offer. MS. BULKLEY: Thank you. MR. HARDY: Thank you very much. Mr. Snelson, why don't we start with you with your questions, please. QUESTIONING BY THE PARTICIPANTS: MR. SNELSON: Okay. I'm Ken Snelson and I'm representing AMPCO. Q. First of all, I want to deal very briefly [Questioning] 653 Participants with the growth adjustment factor and you made the comment, David, this morning, that the growth -- the load used in the growth adjustment factor and the load that will be used to true-up the revenue requirement if there is a deviation in load, right, were are in the same units? MR. CURTIS: A. Yes. Q. If you turn to page 169 -- A. I think by the same units I was thinking in terms of megawatts. Is that going to be consistent -- Q. I was going to be more particular as to what kinds of megawatts. A. Oh, I see. All right. Q. On page 169, at the bottom of the page, then it is clear that the growth factor is determined in terms of annual system peak load? A. Yes. Q. And presumably that's because, in your view, that is the best determinant of the size that the transmission has to be? A. Yes. Q. And -- A. It has been historically. Q. Okay. When you come to true-up of the revenue requirement at the end of the year, then the revenue that you get is determined by the billing quantities of each of the customers and, as you've proposes it, the billing quantities are non-constant to monthly peak load? [Questioning] 654 Participants A. Yes. Q. And so the true-up that will be required would be -- for the revenue requirement, would have to be on the deviation of those billing quantities from the forecast that was used to set the rate? I presume that's correct? A. Yes. Q. Okay. A couple of questions about TPI. And, as I understand it -- well, first of all, there are two distinct periods that we are looking at in this application. This application is a two-year application. For the first year and a half or thereabouts we are assuming it will be under a revenue pool scheme for -- and a rate freeze to customers. And for the last part of the two-year period we're hoping that the market will be open and that there will be entirely different regime in place as regards the energy market in that time. So I think we want to talk about in terms of these two periods. A. Okay. Q. Now, in the initial period while we are under a revenue pool, I think what you've told us is that these numbers are really -- you said that they're a place holder; that it's revenue in and revenue out? A. Right. Q. I presume that the impact on the other participants in the revenue pool would be the same whether [Questioning] 655 Participants this number was $23-million a year, $100-million a year or zero dollars a year? A. I believe so, yes. Q. So it's not really very material during this first 18 months? A. That's right, yes. Q. But during the last period when the market is open, then maybe it is material. I wanted to explore that a little bit further. A. Okay. Q. As to during the period when the market is open, do these become real payments? If so, who are they paid to? A. They would become real payments because they would be part of our revenue requirement and they would be reflected in the rates that are determined. So that money would be collected from customers for those items, yes. Q. And then who would the transmission company, OHSC, make payments to for station service, forced and planned transmission outages, constrained off generation and so on, the items that are in your table. A. All right. For the first one, station service load, we would have to buy that energy from the marketplace, whatever marketplace exists at that time, presumably that would be the spot energy price. Q. But only some of the locations will meet it? A. Pardon me. [Questioning] 656 Participants Q. Only some of your locations will meet it? A. However, the -- there would be a billing, if you would, for all of the station service load. You're right that only some of them are metered, but what I think we're talking about here is a payment for the station service load would be estimated on the other stations and that total amount would be paid. The next one is for generation that's constrained off the system, and I think the expectation would be that market rules would have been set to the point where negotiations would be possible between us and the generators in terms of determining how much -- at least an agreement in terms of how much would be paid for those. Q. Why would you -- A. The mechanism for how that would be paid. Q. Why would you negotiate with generators for constrained off payments when the constrained off payments, if a generator can't run because of transmission constraints, the constrained off payments are paid by the IMO and charged to customers through uplift? A. I guess that's the other issue, is if it's determined, for example, that that particular component is not one that should fall under the transmission entity, then presumably that would be transferred over to the IMO and we wouldn't have that as part of the TPI program at that particular point in time. Q. Okay. Can we continue with the incremental losses due to transmission outages. [Questioning] 657 Participants A. Again, that would be an energy payment that would go back into the marketplace. Then the final one would be the reactive support. And, again, if we -- if it is deemed that the transmission company is the appropriate provider of reactive support on the system, then there would, again, be some negotiated arrangement with the providers of that condensing support and payment would be made for that. Q. I'm not quite familiar yet with how the market rules are going to deal with reactive support. A. And I'm not either. Q. And it seems to be quite possible that the IMO would be responsible for obtaining reactive support? A. That's quite possible as well, yes. Q. Another factor which could influence these payments is the agreement which SERVCO is required to enter into with the IMO for the use of the transmission system? A. Yes. Q. Can you comment on whether or not these items are covered in the agreement or draft agreement as it currently stands or -- is it premature to comment on that. A. It's premature. I don't think that the IMO agreement has progressed to the point where we know whether these are going to be specifically covered within that. Q. But it's quite possible, depending on how that agreement is drawn, that some of these items may not [Questioning] 658 Participants be costs to the transmission company? A. That's possible, yes. I think this would all come out in terms of the development of the market rules. Q. Okay. I wanted just to deal a bit further with the productivity factor and quite a lot of comment has been made about the productivity factors used in other jurisdictions. I believe that Appendix J has some information on that. A. Yes. Q. And these appear to be agreements that are currently in force in most of these jurisdictions. A. Yes. Q. And particularly, as regards the U.K. situation, they've had performance based regulation for a quite a number of years now, ever since the market was restructured. A. Yes. Q. And as I understand it, the performance factors upon restructuring were grossly underestimated in the initial contracts, the initial performance based regulation, and that the degree of productivity savings achieved by the companies greatly exceeded their commitment to achieve productivity improvements and that this made the companies vastly profitable. You may not want to agree with my hyperbole, but directionally, I think that's probably the case; isn't that so? MR. MATHERS: A. I think we might look at that [Questioning] 659 Participants in a different light and say that the PBR scheme was extremely successful. It drove all those efficiencies. Q. But the customers had to wait quite a long time before they got a share in addition to what had been committed? A. Well, they immediately get their share in the "X" factor -- Q. Yes. A. -- whatever it is. In this case, it's 4 per cent. And then they share in the next period, yes. Q. And particularly with respect to the National Grid Company which is the transmission and system operating company in the U.K., you have shown that they have a current productivity factor of 4 per cent per year, and my information is that this was put in place in October 1996 when the regulator imposed a cut in National Grid Company's charges of 20 per cent and an ongoing efficiency term of 4 per cent from April 1997. And my question is, seeing that companies have achieved quite substantial efficiency savings, efficient productivity improvements, at the time when the industry is restructured, then -- and I believe there have also been significant savings in Victoria and other places, but given that that's the case, why should the OEB be satisfied with a 2.4 per cent year over year increase in productivity? MR. VAN DUSEN: A. I think there are several responses to that, Ken. I'll list a few and ask my [Questioning] 660 Participants colleagues to add to it if they feel necessary. First of all, I would like to say that regulators, customers, and utilities have learned from the experience of PBR in other jurisdictions, unquestionably. You've brought up a very dramatic example. I am sure that, partly as a result of the experience in the U.K., the scrutiny of PBR systems and the underlying costs is quite extensive at regulatory proceedings. We have had our OM&A and capital costs put forward in this application for '99/2000 scrutinized on the transmission side and we will have them scrutinized on the distribution side in the next couple of days. So certainly, there's an opportunity to scrutinize the costs and the validity of costs. Second of all, I think the 4 per cent productivity factor in the situation with respect to the U.K. National Grid, I think, is partly a reaction to the specific circumstances there and one would have to take a look at the specific circumstances in each of these jurisdictions and the many others for which PBR schemes exist and information is available and take a look at the particular circumstances. One can then go through and see whether the productivity offset is reasonable or not for that particular circumstance. We did a simple average calculation here to show that the productivity was roughly around 2 per cent and indicated that the productivity that we had put forward at 2.4 is certainly not out of line with any of the numbers [Questioning] 661 Participants shown on this page nor with the average sort of giving further credence that the productivity that we are putting forward is fairly reasonable. I think, in addition, I think we would like to put forward the proposition that Ontario Hydro, as an integrated utility, has been restructuring since 1993 and that there have been significant changes in both our cost structure and our management practices since 1993. And what we're seeing is coming forward with this application is some of that productivity improvement embedded in the transmission application. MR. CURTIS: A. And I believe that latter point was referred to at one of the earlier panels and we talked in terms of a 30 per cent improvement. Q. Okay. Actually that's probably where I wanted to go to next. And that is that there's a paragraph in the submission on pages 31 going over on to page 32. It starts at line 25 of page 31. And maybe I'll read it just to get the sense of it: 'The level of productivity incorporated in this plan depends on other variables such as the initial efficiency of the service providers operations. The experience over the recent past suggests that the services provider prior to 1998 has achieved significant cost reductions. 'In particular, from 1992 to 1997, the predecessor groups of OHSC, of which the majority [Questioning] 662 Participants of the staff and costs are attributable to the services provider, experienced reductions of about 40 per cent in both total staff and total expenditures. ' And this, I believe, kind of attributes, it puts it into the same paragraph, the idea of efficiency improvement and the 40 per cent reduction in cost. And we've also heard all last week that a lot of the cost reductions that have been made in the past have resulted in large backlogs of work that are still required to be done, and that there are now catch-up costs going into the revenue requirement to make up for past underfunding of needed work. And I believe that last week, Tim Davies mentioned that maintenance work was running at about 65 per cent of the level required by the strategy. And my question is, how do we interpret that? I don't think we can interpret it as underfunding of needed work one week when we want to justify increased programs and catch-up work for OM&A spending and then the next week justify it on the basis that this is an efficiency improvement and that's why we can't make efficiency improvements in the future. And I'm wondering if you can just comment on which this is. Is it underfunding of needed work or is it efficiency improvements? A. I think the comment is it's both. And I think the context that we have to put this in is the quote [Questioning] 663 Participants that you read from page 31 and 32 is applicable to Ontario Hydro as a fully integrated company, and all parts of the company experienced those cost cuttings and, you know, at the same time. I think the consideration here is whether or not, through this process, that it was done necessarily appropriately across all parts of the Ontario Hydro business. And I think what you were seeing or what you were hearing last week is that from a transmission business perspective, there -- as a result of this, there was underfunding that was occurring in some of the different areas. And the issue, I think, that we're dealing with here is that the quote that you read from 31 to 32 has an overall impact on Ontario Hydro. And what we're bringing forward in this application is also sort of counter to that to some degree is a recovery in terms of appropriate levels of funding and it's -- and it's between that balance is where the real historical productivity improvement has occurred. Q. I -- MR. VAN DUSEN: A. If I could just add to that, I would also disagree somewhat with your comment that the 2.4 per cent productivity that we put forward in this application is not significant. I think we've put evidence on the record here that we feel that this is significant productivity improvement. Q. So the 40 per cent reduction in cost is partly productivity improvement and partly underfunding of [Questioning] 664 Participants needed work. Can you give us a rough idea of what proportions to interpret that? MR. CURTIS: A. I don't think I could right at this moment, Ken, no. MR. SNELSON: Those are my questions. MR. HARDY: Excuse me. Panel, I heard -- not at this moment -- am I to understand that there is something that might be brought forward? MR. CURTIS: I think we can look into trying to provide some additional information on that. Can we -- we'll take that under consideration. MR. HARDY: Okay. Thank you. Go ahead with your -- introduce yourself and lead with your questions, please. MR. ANGEMEER: Hello, I'm Mike Angemeer, and I'm representing Hydro Mississauga. I guess I'm speaking as your second largest customer. Q. And I just wanted to explore in a little more detail the way you came up with your performance targets and then also develop a little bit further this idea of regional reliability. The way it was explained, and correct me if I'm wrong, you've taken the second worst performance over the last ten years in all these measures and say that's the target that you're trying to meet; is that correct? MR. CURTIS: A. Yes, actually what we are saying is that we'll do better than that target, but that's the way that target was derived, yes. [Questioning] 665 Participants Q. Speaking for many of my customers who are very high needs from reliability point of view, the second worst, taking into account the whole province and certain concerns there may be in other areas that you can't meet the reliability that we see in Mississauga, that's certainly a concern to me. So I would like to, I'd like to see also some regional type of measures that would ensure that not only our customers see similar performance to what they've been seeing in the past, but that you don't go backwards to try to go to a second worst over ten years scenario? MR. HARDY: Sorry, was there a question that comes from that or do you wish the panel to comment on your observations? MR. ANGEMEER: I guess the question would be: Is it possible to -- and it's been asked before already -- to better define what reliability we could expect to see in various areas depending on the historical values because this -- this, again, these numbers would be very difficult to sell to our customers? MR. HARDY: Okay. MR. CURTIS: It certainly is possible to set up regional measures. The issue here is around what are the appropriate regions for these measures to be set up in? And what we're putting forward together as far as this particular application is concerned are aggregate measures and the aggregate measures are built up from individual components. So I would suggest to you that, for example, [Questioning] 666 Participants in terms of frequency of delivery point interruptions, we're not proposing for Mississauga that we're going to aim for 1.93 because the measure in terms of driving that 1.93 is made up of the aggregate across the province. In fact, what it would mean is, whatever the historical levels of performance of -- in this particular case frequency of delivery point interruption for Mississauga would be the ones that you'd likely see for us to deliver on a total aggregate system of 1.93. MR. ANGEMEER: Okay, thank you. MR. HARDY: Does that complete your questions? MR. ANGEMEER: Yes. MR. HARDY: Thank you. Are there other participant questions before I move back to the panel -- or sorry, to the Board Staff and Consultants? ---(No response) Are there other Board Staff and Consultants' questions? QUESTIONING BY BOARD STAFF AND CONSULTANTS: MS. WALLI (Board Staff): Yes, I just have one question: Q. Do you see that implementation of this PBR scheme in the Year 2000 will drive internal cultural change in your new organization; and if you see that, can you give us some examples? MR. CURTIS: A. Well, I think we've seen it already. I think we've tried to explain several times that the assumption that our organization has been [Questioning] 667 Board Staff/Consultants operating under for -- since the "White Paper" came out is that we would be under a PBR-type regime. And as a result, a lot of the discussion that went on in panels 2 and 3 focused in on changes that have been made and changes not only within the organizational structure; for example, like the asset management model being put in place, but also in terms of specific programs, reflection in specific programs in terms of productivity and efficiency improvements. You're talking in terms of changes in culture as well and there are programs like incentive mechanisms that are applied to certain staff levels, to the executive salary range level that are reflective of this as well. I think what the aim is, is to try and move such programs throughout the organization at some future point, that that would be maybe a longer term objective of coming out of PBR. I don't know if you've got -- have you got more ....? Why don't you -- MR. VAN DUSEN: A. I was just going to add, the incentive to innovate is greater under PBR to look for additional cost savings and to look at more innovative techniques of doing the work. MR. CURTIS: A. We talked, for example, in terms of the TPI program that was introduced within the transmission business with the expectation that we were going to fall under PBR and that's been quite a good program in terms of focusing staff on particular areas of [Questioning] 668 Board Staff/Consultants improved productivity and improved efficiency. For example, in terms of outage management, I think it was either Dave Barrie or Myles D'Arcey talked yesterday about how this has created a tension in terms of trying to bring back earlier lines into service than what might have happened. So there's an effort in terms of trying to restore lines to service earlier and quicker than what there would have been before. MS. WALLI: Thank you. MS. SIMMONS (Reed): I just have a couple more questions and I'm not sure this question has specifically been asked. Q. We focused a lot of discussion comparing your productivity proposal relative to other jurisdictions' proposals and we talked about the National Grid companies and their big change. What I wasn't clear that I heard is, you've developed yours based on an internal measure, your forecast productivity. You could develop it based on internal measures, historical or forecast, as well as external. And I'm wondering, are you aware of the specific factors or specific basis upon which the productivity factors were derived and utilized in other jurisdictions? Are they internal? Are they national to those jurisdictions? MR. MATHERS: A. National Grid used internal forecasts as well. They gave all their forecast revenue [Questioning] 669 Board Staff/Consultants requirements to the regulator and he was the one that came up with the productivity factor And he took that into consideration on what the company could do. Q. And are you aware of the other -- that Australia -- some of the U.S. companies you had in that J1 table in appendix J? A. Australia is going forward now with resetting the rates. They were initially done by the government in setting the initial cap. Privatization occurred almost at the same time. So the exact mechanism and how they set the "X" wasn't laid out specifically. Q. Okay. I just was trying to figure out whether there were some sort of external benchmarks that possibly they're using because they collect data in those areas. A. No. They've specifically said down there they had a lot of trouble getting the benchmarks and they wanted to see the internal data because they weren't sure of the benchmarks. The U.S. tends to rely on benchmarks a little bit more. Like, they're not as far advanced as Australia, is because they're just starting to do it. But the Australian regulator has said that America has a lot better data in the regulatory field and that they can rely on that a little bit heavier for their benchmarks than Australia could. Q. One more question and it's kind of a follow-up to something that was said by someone else: For [Questioning] 670 Board Staff/Consultants your growth adjustment factor, you've proposed to look at growth and peak demand; however, you've - and this is getting in tomorrow's discussion I recognize - for billing purposes, you're billing customers on non-coincident peak, not their share of the system peak demand, and I'm just wondering or whether you could comment on -- what you've said in one case is the driver for investment and then providing a signal to customers based on another driver which is their own system peak -- or their own coincident peak. Can you comment on the discrepancy in your two sort of applications of what drives system investment? MR. CURTIS: A. Well, I think the distinction between the two - at least the focus of the distinction between the two - is around diversity benefits and, you know, the ability of a customer in terms of positioning its peak outside of that of the system peak. What we have found historically is that it is the system peak that tends to drive or has driven the investment. In some respects this is because we've been as part of an integrated company and historical system peak has driven the requirement for the installation of generation, new generation, and coincident with that, it comes the requirement for installing new transmission, so the two have been linked via that mechanism. I guess maybe what we're discussing is the appropriateness of carrying that particular factor forward as the basis for projecting the additional investment requirements on the [Questioning] 671 Board Staff/Consultants transmission system. I think there was a discussion in panel 3 when Bob Chow was talking about the internal -- or sorry, I guess it was Panel 2, when he was talking about investments made for new transmission facilities and he was talking in terms of local load and local demand factors as being one of the determinants there. Again, our endeavour here is to try and aggregate those together to reflect it in one measure with our PBR scheme for growth. I think that's what the effort has been here. You're talking about a discrepancy between that and the billing methodology going forward and I think really the issue is really -- hopefully might be better addressed tomorrow in terms of the discussion around why non-coincident peak was used as the basis for the billing proposal that's in here. But in terms of the investment, the overall investment driver, it has historically been the system peak and we're still seeing evidence of that at least on a local basis, that it is -- that system peak is one of the primary drivers for investment. Q. Well, I will raise it again tomorrow. In trying to understand your billing determinants, I'm not going to pursue it anymore today. One last question I wanted to just understand and clarify, in response to questions regarding DSM, I want to understand if and how you would evaluate use of DSM for transmission investments. You've indicated you will look [Questioning] 672 Board Staff/Consultants at that to the extent it's economical. So for example, if you looked at a specific area of your system that needed system reinforcement to do, you know, higher than system average growth, would you and do your asset managers look at load curtailment programs that could be implemented in contrast with -- or an alternative to some sort of system reinforcement for that particular area; is that part of your planning process? A. Yes, it is. This is curt. I think -- I believe it was Bob Chow that was talking about that I think within Panel 2. I think it was either Bob or it was Dave Barrie that talked about looking at DSM projects and where they were economical, even if it meant deferring transmission investment for three or four years, that that was part of the program development, if you will, that goes on. So, yes, they are looked at. Q. And not knowing your history, has Ontario Hydro pursued any sort of customer-specific RFPs to deal with deferring the need for system reinforcement, you know, not on the supply side but more on the transmission side, to either defer or mitigate the need for system reinforcement on any area of the system; have you used that in the past? A. We've had a fairly elaborate and extensive program that was referred to as local integrated resource planning or LIRP. And where there's been a specific need, customer need, that's been identified, either by the customer itself or through some sort of a load assessment [Questioning] 673 Board Staff/Consultants that we've done, and in those particular initiatives, we would get together with the customer and with local area representatives to look at a broad spectrum of possible solutions to address the local need and inevitably among those are a number of DSM proposals and then the process would go on to do the economic evaluations. In some instances, there was some push by the provincial government to carry out DSM and so there -- I guess it was in that particular sense some investment from Ontario Hydro in order to promote the DSM alternatives. So it has been done that way. I think looking forward or carrying this forward, at the moment it's been unstated as to how specific DSM projects might be incented. And so what we are saying in terms of this particular application is that we would look at DSM alternatives wherever there's a system need, but we would look at it within the context of how they would fit in to an overall economic assessment. MS. SIMMONS: Thank you. That's all I have at this point. MR. HARDY: That completes all the questions of Board Staff. Other questions of participants? Bruce, do you want to... Ken, do you want to start? QUESTIONING BY PARTICIPANTS: MR. SNELSON: I have a very quick follow-up to a question that's just been asked. [Questioning] 674 Participants Q. That is, that you had said that in settling the productivity improvement factor for National Grid Company, the National Grid Company had proposed a number based on its internal studies and then the regulator set the number. And my question is: Did the regulator set a greater level of productivity improvement than the NGC calculated through their internal studies and offered? MR. MATHERS: A. I would guess yes, not knowing the exact answer. MR. HARDY: Thank you, Ken. Bruce. MR. BACON (OCAP): Just a quick question. Q. When you reviewed your return on equity from an outside consultant, someone reviewed that, correct? MR. VAN DUSEN: A. Correct. Q. For your PBR proposal, did you have anyone review from outside your proposal and get an opinion on that? A. Certainly I think the report that has been filed, which was the work of Kathy McShane in support of the cost of capital and the rate of return-- Q. Right. A. --talks to risks faced by OHSC and within the context of discussing risks faced by OHSC takes a look at regulatory risks. So it was considered in their review. Q. That's not -- that's good, but my point was, has your proposal been reviewed from someone outside? [Questioning] 675 Participants Specifically have they looked at your factors, your growth factors, your inflation factors, your productivity factors to see if -- I guess the first question would be, is the PBR process appropriate at this time from an outside opinion and are the factors appropriate? A. If you are talking strictly from the financial community, with respect to the financial community there is no question that the financial community is extremely interested in the regulatory framework and how the regulatory framework works. I have no question that credit rating agencies are interested in what we put forward, but more importantly probably interested in the regulatory environment and what comes out of the regulatory decision. Q. Okay. Another way of asking it: There are PBR experts in the world, has any PBR expert reviewed this and given an opinion on it? MR. CURTIS: A. Yes, they have. Q. Is that something that we can see or has that been filed in the application? That hasn't been filed in the application? A. No, it hasn't been filed in the application. We've tended to ask these opinions in terms of the support for our own internal development of it. Q. So there is nothing in writing to really support that? A. The opinions that we have got have been [Questioning] 676 Participants verbal by and large, yes, verbal reactions. MR. BACON: Thank you. MR. HARDY: Okay. Thank you. MR. CURTIS: I'm wondering before we conclude this session, there has been quite a lot of discussion around quality of service safeguards and the ones that we have put forward in our application, and just for the record I would like to read in a quote from the "White Paper". It talks about: 'Ontario enjoys very reliable electricity service by world standards and current performance levels must be maintained and reliability ensured.' That's the direction that we have been taking from the "White Paper". MR. HARDY: Do you have a page reference? MR. CURTIS: Yes. It is page 11 of the "White Paper", "Direction for Change, Charting a Course for Competitive Electricity and Jobs in Ontario". MR. HARDY: Thank you. Are you finished with -- MR. CURTIS: Yes. MR. HARDY: Is there anybody who wished to ask a question but has not had an opportunity? ---(No response) Seeing none, then why don't we adjourn this particular panel. Thank you very much for all your efforts. We will begin tomorrow with transmission cost [Questioning] 677 Participants allocation and rates. Thank you, panel. ---Whereupon, the Technical Conference proceedings were adjourned at 3:25 p.m., to be reconvened on Tuesday, January 19, 1999 at 9:00 a.m. 678 I N D E X o f P R O C E E D I N G S Page No. Overview (Facilitator) 524-528 Introductions SERVCO panel 527-528 PRESENTATION: by David Curtis 528-542 Introductions, Board Staff and Consultants 543 QUESTIONING: by Board Staff and Consultants 543-564 by Participants 565-613 ---[Luncheon 12:10 p.m. - 1:17 p.m.] . . . 612/613 by Participants (cont'd) 613-636 by Board Staff and Consultants 636-652 by Participants 652-666 by Board Staff and Consultants 666-673 by Participants 673-676 Parties who questioned: B. Bacon E. Robertson . . . . . . . . . OCAP M. Klippenstein . . . . . . . Pollution Probe R. Stephenson . . . . . . . . Power Workers' Union K. Snelson J. Fisher . . . . . . . . . . AMPCO R. White . . . . . . . . . . Energy Cost Management Incorporated A. Barrett . . . . . . . . . . Genco (soon to be OPG) N. Chande . . . . . . . . . . Toronto Hydro M. Angemeer . . . . . . . . . Hydro Mississauga JB/MC/LL [ Copyright 1985].