RP-1998-0001 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 Thursday, January 21, 1999 commencing at 9:00 a.m. --------------------- TECHNICAL CONFERENCE "Distribution Assets and Capital Plans; issues relevant to Distribution OM&A/Revenue Requirements." VOLUME 8 --------------------- F A C I L I T A T O R : DAVID HARDY Board Technical Staff 1012 A P P E A R A N C E S DAVID HARDY ) Board Technical Staff KATHI LITT ) KIRSTEN WALLI ) in conjunction with: ANN BULKLEY ) Reed Consulting WILLIAM HOPKINS ) VIPIN SURI ) Ontario Hydro JOHN ROGERS ) Services Company Inc. GRAHAM HENDERSON ) [SERVCO] SUSAN FRANK ) MYLES D'ARCEY ) MICHAEL GILLESPIE ) DON ARISS ) MARCEL REGHELINI ) 1013 ---Upon commencing at 9:00 a.m. MR. HARDY: Good morning. Why don't we begin. My name is Dave Hardy and I've been asked to facilitate the rate order Technical Tonferences. Is there anybody who's joined us here for the first time? Hands up if you are. Okay. I'm going to still keep my remarks brief, so if there's any questions, let me know as you go along. Again, this is an informal session. My role is simply to keep the agenda on track and to make sure that matters of process and fairness addressed. We are going to be changing the approach or I guess the order of this particular session in that there are a few time constraints and - of one or two people and then we also have some information that's coming forward from yesterday's session. And so what we'll be doing is having Vipin start with some of the responses to some questions that were outstanding from yesterday. We'll have some presentations and then questions from participants and then have the Board questions, Board Staff and Consultant questions and then back to other questions from participants. And it seems to be a logical order that deals with some time constraints and also allows the panel to bring forward some information from yesterday. Okay. Panel, why don't we begin by having you reintroduce yourselves again and then, Vipin, you can Overview 1014 (Facilitator) begin with the responses to the information that you wish to bring forward. MR. SURI: Okay. My name is Vipin Suri. I'm the General Manager for Distribution Network Asset Management. MR. ROGERS: John Rogers, Director Asset Sustainment. MR. HENDERSON: I'm Graham Henderson, accounts Manager Retail. MS. FRANK: Susan Frank, Finance OHSC, Wires Integration. MR. D'ARCEY: Myles D'Arcey, General Manager Engineering Services, Network Services. MR. HARDY: Okay. The floor is yours. MR. SURI: Okay. Thank you, Panel. RESPONSE TO YESTERDAY'S QUESTIONS BY SERVCO PANEL: MR. SURI: Good morning. Yesterday myself and Susan Frank had agreed to look into a number of requests for information. Specifically there were five requests for information I was looking into, and there were two requests Susan Frank was going to look into. So we are going to be providing a response to those requests at this point in time. Number 1. Okay. The question asked, transcript reference page 35, line 17, regarding the number of staff in the transmission network asset management group. This number was provided by the transmission panel and the number and is about 210. Second item, transcript reference page 849, line Response to yesterday's 1015 questions by SERVCO Panel 6. The question was asked about the SCADA program costs in year 2001. The SCADA program costs for the year 2001 have been estimated at $6-million level. There are no costs planned for this program in future years. Item number 3, transcript reference page 851, line 1, question was asked regarding the estimate of the magnitude of capital numbers for 1999 and 2000 as they relate to our plan going forward. We have looked at the numbers for future years in total and at this point in time we can provide that the numbers going forward indicate a further reduction of 10 per cent in the capital costs from the 2000 level during the period 2001 and 2003. We do not have the details of individual programs for the future years. The question regarding the uncertainty about specific identification of assets, this is just a comment I'll adding here. Although there may be an uncertainty regarding the specific identification of assets to be replaced at this time, but there is no uncertainty regarding the need for planned cost levels. In fact, we can safely say at this time that the planned cost levels are on the low side. Item number 4, it's a question was asked regarding the performance measures, other performance measures being used. Transcript reference page 863, line 17. The performance measures being considered in addition to those specified on page 29 of yesterday's presentation are customer average interruption duration index, which is Response to yesterday's 1016 questions by SERVCO Panel CAIDI, momentary average interruption frequency index which is MAIFI, and advance notification of outages. Those are the three additional indicators we are looking at at this point in time in addition to the four I provided yesterday. Item number 5, transcript reference page 899, line 27. The question was asked regarding the number of trouble calls in previous years. The number of trouble calls for the period 1996 to 1998 are as follows: 1996, 30,800; 1997, 34,300; 1998, 43,000. The numbers for 1998 excludes the impact after January ice storm. At this point in time I'll turn over to Susan Frank to address the items she was going to look into. Susan. MS. FRANK: There are two areas where I was asked to gather information. First I'd like to address a question that was raised at the end of the day yesterday by OEB staff consultants on the overheads. This was in regards to the December 23rd supplementary filing, tab G and on page 14. I was asked to describe what the asset owner driver forecasting method was. Let me first start by explaining what the asset owner driver is and how it's used. The asset owner driver is used for those overhead costs that can be directly related to an asset. There are very few circumstances where an overhead group would work on a specific asset within transmission for distribution so this driver is not very frequently used. Response to yesterday's 1017 questions by SERVCO Panel How the asset owner driver is used is the current owner of the asset or any potential ownership of an asset is used as the basis of charging the overhead. The Y2K embedded chip cost is the only example of work that currently uses this driver. At the same time I'd like to clarify a comment that I made on brand and brand reputation. This is on page 8 of the same supplement, tab G. The work that corporate affairs is currently doing on branding relates to the establishment of a logo for the new business and the advertising related to the new business. The purpose of this work would be to inform customers how to contact the new business for service issues and to inform customers about key messages as to safety and effectiveness of the operations of Ontario Hydro services business. This amount has been allocated across all businesses within OHSC. Any brand or brand reputation work for the new commercial businesses will be conducted by those businesses. The second question that was asked related to a question Mr. White rose -- raised on Kathy McShane's report which was filed on January 14th. And he referred to a question that Kathy McShane's report says about subsidies on page 3 of her report. I spoke with Kathy last night to get some clarification on what she meant by these subsidies. And she informed me that her use of the word subsidy referred to any subsidy that a company might receive related to its cost of capital. Response to yesterday's 1018 questions by SERVCO Panel She used an example that if Ontario Hydro was charged for a debt at a triple A rate because the government subsidized this, then this would have for the calculation of a stand-alone cost of capital for Ontario Hydro Services company. Kathy did not consider the source of the revenue requirement in determining the cost of the capital or the capital structure. MR. HARDY: Those are the additional information then, panel. Okay. Before I ask you to make your opening presentations on OM&A, I know there are questions that will arise out of the additional information. If you can hold those questions until we hear the presentations of the Panel, that would be preferable. I understand that there is a possible presentation by Myles on transmission and you're looking for whether or not people have already heard that presentation; is that accurate? MR. D'ARCEY: On execution of work -- MR. HARDY: On the execution of work. MR. D'ARCEY: -- which was done in the transmission panels and if there was a requirement to repeat that at this... MR. HARDY: Okay. There was an earlier presentation on the execution of work related to transmission. Is there a desire to hear that presentation again? If so, can you just indicate by showing your hand, please. It looks like you're off the hook. Presentation 1019 (V. Suri - SERVCO) Okay. Vipin, why don't you begin with your information on OM&A and revenue requirements. MR. SURI: Thank you, Dave. I'd like to start using some overheads and talk about distribution OM&A programs. PRESENTATION BY MR. SURI: In terms of the presentation outline, we will cover an overview of the OM&A program costs. We will look at the OM&A program costs, the same three categories we looked at the program costs for capital yesterday, sustaining development and operations, and there are other categories we'll talk about it. Specifically, I want to address the registration management program and the presentation outline indicates that there was the execution of work which we have already concluded that Myles D'Arcey will not be making the presentation. Following my presentation, Susan Frank will make a presentation on revenue requirements for distribution and for remote communities, and following Susan's presentation, Graham Henderson who's been added to the Panel today, will make a presentation on monopoly supply. And my estimate is all these presentations should take about 45 minutes. Copies of these presentation slides were in the package which was handed out yesterday and basically they are starting on pages 31 of the presentation which we had given yesterday. Presentation 1020 (V. Suri - SERVCO) Distribution OM&A program cost, essentially this slide indicates of cost levels for 1998, 1999, and the year 2000. OM&A programs are there to support the management of day to day activities of the distribution system. These programs include, as I indicated earlier, sustaining programs, development programs, operations programs, customer care programs, recoverable work, grants in lieu, and distribution support category. The 1998 number is $327-million, the 1999 number is $343-million and the number for 2000 is 290 million. It should be noted that the number for 1998 includes $38-million for the January ice storm. This slide is looking into the breakdown or the trends for the total capital into the category sustaining customer care, distribution support and recoverable work. What we've done is we've combined in the other category the cost of the program for development operations and grants in lieu. The reason for that was those numbers were small compared to the other numbers, so we have added all the numbers into the other category. In the development program, essentially we have a program which is dealing with registration and reporting of property easements and right-of-ways. That is essentially the program in that category. In the operations category we have three programs, mainly two programs and a third program was added in the year 1999 which was dealing with the data collection for the condition of the assets. Presentation 1021 (V. Suri - SERVCO) Customer care program mainly includes the call centre, the meter reading field, the account services and the costs related to the customer service system. We're going to look at the OM&A sustaining program category, that what individual programs are covered under the OM&A sustaining category. As you will note from the slide, that the vegetation management is the largest program in this category with a cost of $47-million in 1998, 61-million in 1999 and 61-million in the year 2000. The legend on this slide, I think there is a little bit of a confusion there. There seems like a couple of more boxes than were necessary. I will just indicate to you when you are reading the columns for 1999 and the year 2000, the categories should really be, starting from bottom going towards the top, is vegetation management and the second box is trouble calls, locates, connects and disconnects. They have been lumped together in the second box going upwards. Third category is station maintenance, fourth is line maintenance, fifth is meters, PCB test and destruction is the sixth category and the seventh is the other. In the station maintenance category we have a program, we touched on it briefly yesterday and we will talk about it a little bit more today, is the station site assessment and remediation program. This is one of the environmental care programs. Presentation 1022 (V. Suri - SERVCO) In the lines -- our lines maintenance program in the year 1999 we also have two programs dealing with the condition of the assets which were the wood pin replacement program at a cost of $3.5-million and a two-piece insulator program at a cost of $11.5-million. Those numbers were also shown and I have a slide indicating those numbers. The ice storm costs in 1998 numbers, the $38-million, basically was the clean up or non-capital work which is done by forestry staff, cleaning of the debris or removing the branches from the lines. This slide is from yesterday, page 22. There were programs which had resulted from asset condition assessments which were conducted and these programs, which are included as part of the OM&A, are the wood pin replacement program, the two-piece insulator program and the vegetation management program. Those are the three OM&A programs and when we go through the discussion of individual programs we can get into more details of it. Both the wood pin replacement program and two-piece insulator programs will be completed in 1999 and there are no costs in future years for these programs. This is also a slide from yesterday, page 26, which deals with the OM&A programs which are as a result of the environmental care programs. PCB testing and destruction is one program in this category and the other one deals with the Presentation 1023 (V. Suri - SERVCO) identification of penta-poles. The replacement of penta treated poles is a capital program or capital activity, but the identification of these poles is $1-million which has been included in 1999. The last program deals with station site assessment and remediation which is looking at the contaminated land at the distribution station sites. These two slides essentially talk about the other programs which is the OM&A development program and the operations program. We have added the development and operations into one category on this slide and given a number on that. Essentially these programs include health and safety, data collection, dealing with divestitures and annexations and deals with the data collection for the condition of the assets, which data would be used as part of the system we are implementing, the DOMCAMS system, which we discussed yesterday. The development program, I've talked about it, includes the property easements, and rights-of-ways in there. In the other category, we have grants in lieu which are essentially the property taxes which we pay to municipalities, the local municipalities for the rights-of-way and land we use on the distribution system. And also includes the categories work like recoverable work which is the work we do for municipal electric utilities or other customers and the cost of Presentation 1024 (V. Suri - SERVCO) these programs are in there. The distribution support category programs have also been added in this particular item. Just to complete the picture from yesterday, there was a slide on page 24 we had used which talked about the programs to meet asset management information needs. I'll just show that slide. We have shown these numbers yesterday that there is $9-million in the data collection which is an OM&A activity which has been included as part of our operations program. At this point in time I'd like to turn to the vegetation management and give you a little bit of a background about the vegetation management program and the kind of issues we've been facing on the distribution side. I think when the study was done, at that time it was about 14 per cent of our interruptions which is the service calls of the outages, the numbers which I provided earlier, were due to trees and which amounted to 4,000 outages per year at the total cost of 5.1-million. When we were doing the condition assessments on rights-of-ways and looking at the vegetation on our facility, which is the trees and the brush which is growing under the conductor or the branches which are overhanging the conductor, the feeling was that if we continued at the level how we were managing the forestry we will face a 13 per cent annual increase in basically the number of outages which would occur. Presentation 1025 (V. Suri - SERVCO) We also compared the number of outages which are being faced by the distribution system in Ontario Hydro Services Company compared to the other companies, then the tree-caused outages really per hundred kilometre of overhead lines are 1.5 to three times more than those experienced by other utilities. And there was statistical samples done as part of the province. We took account of the trees, there are 6.8 million trees based on statistical sampling underneath our lines and certainly about 25 per cent of those trees really need to be taken care of, that they are grown to a height that they have really become removal candidates. Trees also have overhanging limbs which are susceptible to snow and ice storm and we faced that in 1998 in the January ice storm and the subsequent wind storms in September and October of last year that we had lots of tree-related outages on the distribution system. From a vegetation workload point of view I indicated about the 6.8-million trees. Then the estimate is that we have about 400 million immature trees which we call them brush. And if the brush is not properly controlled, certainly one day the brush will become trees and we will be facing into the situation of higher costs from a vegetation perspective. From a brush workload point of view, already we have 12 per cent of the total brush population is over 4 metres in height which is really the definition between a Presentation 1026 (V. Suri - SERVCO) brush and a tree, if I understand correctly is to do with the diameter at the breast height which is... John? MR. ROGERS: Four inches. MR. SURI: Four inches diameter. And then the height we are looking at, anything over three metres we should be paying attention to. So if we have over 12 per cent of the brush in the category which is over 4 metres and there are 23 per cent of category in the two to four metres which sort of indicates that we really need to be looking at the forestry programs in a little bit more aggressive manner than we have been looking at in the previous years. I have some pictures to show you what the state of the affairs is on the vegetation management side. This picture talks about, on the left side, what a well-cleaned off road right-of-way should look. A dream for utility workers, that if you have trouble you can go there and everything is nice and clean. On the right side, this is a single face circuit which is feeding seasonal customer, maybe a cottage customer, maybe one of you, and the right-of-way conditions are such that if there were any outages certainly to get in there with heavy equipment will cause some difficulties. The next picture talks about the growing of trees into the conductor. In your hand-out you may be able to spot the conductor on the top diagram which shows really a tree growing into the conductor. With high winds Presentation 1027 (V. Suri - SERVCO) certainly the branches can damage the conductor, bring the conductor down and certainly that's not the kind of a situation we should be getting into. The picture at the bottom shows the tree growth in ten years after trimming, when you are trimming trees, we have a trimming program, replacement programs, herbicide application programs to control the growth of the brush. This shows that after ten years if you allow and do not do any management and where the conductor is and where the growth of the trees are. Essentially we have been following a cycle of 11 years line clearing cycles in forestry and looking at the condition of our right-of-ways, certainly I think we are looking at changing those cycles to six years in southern Ontario and to eight years in northern Ontario. The concept would be is that if we change the cycles from 11 years to 6 years and 8 years we would be able to manage the vegetation on the distribution system in a much more efficient way, and at the same time we will reduce the number of tree-related outages which are increasing on our system. Another picture shows the overgrown right-of-way. I think from the diagram you can see there's a pole in there and there is a conductor there, but if that's the condition of the right-of-way, if we had to go and replace the insulators or replace the pole, certainly I think that will cause additional time and inefficiencies. Presentation 1028 (V. Suri - SERVCO) So by way of concluding my part of the presentation on OM&A programs, I want to leave three messages. The one, I think, the dollars which we have proposed in the forecast are sufficient to change the vegetation program and result in line clearing cycles of six years in southern Ontario and eight years in northern Ontario, so forecasted levels will achieve the results which we are trying to achieve here. The environmental programs which is the PCB testing and destruction or the program dealing with station site remediations or contaminated lands around distributing stations will adequately address whatever stewardship role and the responsibilities are towards the environment. The replacement of wood pins and two piece -- I should say two piece insulators instead of two pins, are expected to be completed in 1999. These programs essentially were introduced because the failure of pins and pins are literally the word 'pins' which are holding the insulator on the cross arm. And a premature failure of those pins will have a result in conductor falling on the ground which is causing a worker safety hazard, causing a safety hazard for joint-use facilities which we have with telephone companies and it was also posing some public safety hazards if a pin fails and the conductor falls on the ground. We had a similar situation for the two piece Presentation 1029 (V. Suri - SERVCO) insulator programs, that these were defective insulators, as Myles D'Arcey mentioned yesterday, that the company that we are dealing with is out of business, but needless to say, we have to replace those defective equipment on the facilities and it will address the safety concerns which we have for public and for our employees. So that concludes part of my presentation. I will turn it over to Susan to talk about revenue requirements for distribution in remote communities. Susan. MS. FRANK: We'll start with the distribution revenue requirement. PRESENTATION BY MS. FRANK: We had several questions on this topic yesterday so I think I can be relatively quick going through this material. Vipin's already reviewed the OM&A program and provided a bit of a description of some of the elements of that program and that's the first line of our revenue requirement. The second item, line losses was briefly discussed yesterday as well and we indicated that that amount is likely to remain constant over the next two years at about the $93-million that we have on this slide. The next group of costs I call relatively fixed type charges and similar to the transmission revenue requirement presentation, these items are basically driven out of the financial architecture and accounting policies. Presentation 1030 (S. Frank - SERVCO) So that group is relatively consistent with the approach that we used in transmission. The next main grouping, net income, reflects a 10 per cent return equity which is also part of the financial architecture. I'll spend a moment on the next one, recoverable work. We started to discuss some of the elements of this yesterday and I wanted to go into a little bit more detail about what the 210 for '99 would be made up of. It's basically three elements, the first one of it being rural rate of assistance which is $127-million and this amount is established in accordance with regulation and it has the impact of lowering rates for customers. The next key element is the facility charge which is used -- is a charge for the use of distribution facilities and services by municipalities and direct customers. This is $29-million and it's paid to distribution from the revenue pool. The final item is the recoverable work. This item is $54-million in '99 and $58-million in 2000. This primarily relates to work that we do for low voltage customer connections, work for MEUs, joint use of poles as we discussed yesterday, and some recovery of our overhead costs. The bottom line is the 701 that we have to recover from our customers in '99 and 604 in 2000. Moving over to remotes. Ron Stewart described the remote program when he was here on Panel 1 on January 8th. The two points that I'd like to recall from his Presentation 1031 (S. Frank - SERVCO) discussion of remotes just to get us into this one is that remotes are not connected to the grid. They are stand-alone and therefore they are a fully integrated utility that cover off generation and distribution as well. The first line item on this list, the field cost, is for the 67 diesel generators that we have operating in the remote communities. The second item, the OM&A covers off generation and distribution operations and maintenance as well as an environmental program. The environmental program covers both site assessments and some remediation. The depreciation line looks like it takes a significant jump in 2000 over 1999. What's happening here is that we have the obligation to rebuild the assets as they need replacement in remote communities that are subsidized, aboriginal communities in particular. The original building is done and funded by the province or the federal government. When that building is to be replaced, then it's Ontario Hydro's obligation to replace that -- replace the building. The other thing that can happen and gets charged to depreciation is if a community such as Pekanjikum decides to separate themselves from Ontario Hydro services company's services and establish themselves as a known entity, which they did do, we now have to remove our assets from their location and clean up the land and take a write-off of anything that is not recoverable. Presentation 1032 (S. Frank - SERVCO) So you notice the major jump in 2000 relates to the write-off that's happening when this community decided to look after themselves. If we jump down then to the total revenue requirement, the $29-million in '99 and the $31-million in 2000. The source of this funding is actually from two places. One, the payments that the customers provide. These numbers are in the submission, but not on my slide. And the revenue from the customers would be $12.8-million in '99 and 12.6 in 2000. The remainder of this is provided by a remote subsidy which follows the same principles as the rural rate assistance that I've talked about on distribution. We'll naturally be very happy to discuss any questions on this during the cross-examination. Graham. MR. HARDY: Susan, can you just clarify for me under the 2000 -- for your first slide on the 2000. MS. FRANK: Okay. First slide. MR. HARDY: Okay. Just what was that final revenue requirement number? 640 is it? MS. FRANK: The final revenue requirement after we deduct what we're getting paid from either recoverable work or, you know, other parties is the 701 and the 640. MR. HARDY: Thank you. MR. HENDERSON: Good morning. I'm Graham Henderson, the accounts manager for retail. And I'm going to cover briefly our perspective on monopoly supply. Presentation 1033 (G. Henderson - SERVCO) PRESENTATION BY MR. HENDERSON: What I intend to do is go through it fairly quickly. I believe there are copies of the slides available. I think I saw some on this side for anybody who doesn't have them. I thought what I should do first since most of the rest of this technical conference in the last two days has been concentrating on the wires business, is I've provided a little bit of context about monopoly supply and then talk about the services provided by monopoly supply. I do a breakdown of some of the costs are in the submission and then talk about the uncertainties facing monopoly supply. Our view of monopoly supply is that it covers the transition period from now to the date of retail competition and that date is yet to be established as I'm certain everyone knows. Monopoly supplies evolves to become default supply on that date when retail competition commences. In the meantime, it has to manage existing customer issues, commitments and activities and deal with the customer expectations as they exist now based upon what the utility industry has been and how Ontario hydro has dealt with those utility customers in retail. It will also have to specify and develop the processes in infrastructure needed to fulfil the default supply role and direction. It provides customer services per the Market Design Committee principles. And we see Presentation 1034 (G. Henderson - SERVCO) that it will have a large role to fulfil in terms of preparing and educating customers regarding retail competition and the customer implications of retail competition. I want to give you some examples of the customer services provided by the monopoly supply function as we see it. And this is to provide examples of what is -- what we regard as necessary to fulfil some of the elements of that context that I just talked about. So monopoly supply will provide services such as customer service policy and pricing support as it relates to the existing rate classes. Policy resolution of billing issues, for example, late payment charges, how that will -- should be handled. I'm certain many of you know there is a court case pending that could have some impact on how late payment charges are assessed. Billing and payment options for customers. Proration methodology when a customer moves in or moves out in the middle of a billing period, exactly how should that -- how should their bill be calculated in those circumstances. Collection and disconnection policies, customer service and account management implementation, especially as it relates to the larger commercial and industrial customers. Load profiling and load analysis, both services that we need to carry on for our own purposes and also it's in some cases a service that we offer to customers to help them understand why their bill looks the way it does. Energy usage analysis, third party offers and promotions, Presentation 1035 (G. Henderson - SERVCO) sometimes referred to also as leveraged promotions. Other areas include customer communication. For example, it's a -- we need to communicate to our customers when there are policy changes. Communication regarding electrical safety has been a mandate of the existing utility structure, wise and safe use of electricity. And we see a very large role in the future for monopoly supply as we move towards the date of retail competition in terms of electricity market and retail competition information for customers. We believe it's going to be a very, very confusing period for our retail customers as they start hearing about changes and how it will affect them and we know that customers look to their existing supplier as the one of the credible sources of information to help them understand what the changes mean to them. Wholesale power procurement and settlements is part of monopoly supply. Working capital financing, bad debt management, and administration of existing customer commitments from historical customer programs. Sorry, on that slide it seems we -- on the overhead we either see all of the numbers and not all the writing or all of the writing and not one row of numbers; however, it is there on your paper copy. This is simply a breakdown, a further breakdown of the line that's listed as direct OM&A costs from table 27 of page 152 in the rate order application and which was further updated in the supplementary filing, I believe, it's tab G, but I'd have to check that to be absolutely Presentation 1036 (G. Henderson - SERVCO) certain. What we've done is taken the different services that I've just talked about and put them into these categories, customer service, billing and payment policy including tariff administration for the existing rates, account management and leverage promotion administration, customer communications, bad debt, wholesale power purchasing, retail settlements development -- and I'll talk a little bit about that on the next slide as well -- administration of outstanding commitments and, as you can see, there's some of that in 1999 and we don't expect that because of the cessation of historical programs and we are essentially administering and managing the end of some of those programs, we don't expect any of those costs to continue into 2000, IT support and the rental programs. I'd like to finish by talking a bit about the uncertainties of facing monopoly supply and this is not uncertainties regarding the cost of what we know we need to do to continue the historical service levels that our customers have been provided. Again, in regards to the MDC recommendations, but it is uncertainties about the costs, further cost due to implementation of retail competition. And, in fact, we are quite certain that we have understated some of the costs that will be relateed to that and that's because, I'm certain most of you know, the retail market rules which certainly are much up in the air coming out of the market design committee recommendations, Presentation 1037 (G. Henderson - SERVCO) there is a large amount of work to be done there and that will need to be done before the role and obligations of default supply will be sufficiently defined that we can then start addressing what those further costs will be to implement things like the retail settlements process, also the wholesale settlements process. And, you know, just on that note as one example, it is our understanding, for instance, Toronto Hydro has approximately in the range of 250 wholesale metering points as compared to OHSC which has approximately a thousand wholesale metering points. And so there's a great deal of work to be done there to clearly define those processes, the roles and responsibilities of different parties in those processes and the infrastructure to support them. We're certain some of that will be resolved through things like the licence condition and the codes of conduct especially with regard to transactions between affiliates, but what I wanted to stress at this point is many of these are uncertainties that do not allow definition of costs going forward as needed to implement some of the requirements to evolve into the default supply role. Thanks very much. MR. HARDY: Panel, does that finish your presentation? MR. SURI: Yes, it does. Thank you. MR. HARDY: Why don't we start then with some [Questioning] 1038 Participants questions from participants. Just to repeat, the floor is effectively open to any participant that wishes to ask a question. The only procedure is coming up and using the mike and identifying yourself. Bruce, I see you're ready. Why don't we start with you. QUESTIONING BY THE PARTICIPANTS: MR. BACON: Thank you. Bruce Bacon from OCAP. Q. Graham, I want to ask you a couple of questions about the presentation. I'm not going to hit this one again about where the customer care costs should be. We've done it once with Ron and once with Vipin, but we are not going to hit that one. I would comment that from your presentation it does make some sense that under your context and under your service provider, it does some make sense to put customer care in the monopoly supply, but that's all I am going to say about that one for now. However, with the customer care costs, have we done any benchmarking of that to industry standards about the cost of billing and the cost of the call centre? Has there been any benchmarks in that cost at all? MR. HENDERSON: A. Customer care cost I really think I should refer to Vipin since that is coming under the distribution revenue requirement. Q. Okay. Then I'll ask Vipin the same question. [Questioning] 1039 Participants MR. SURI: A. No, we have not done any benchmarking. As I indicated, we are in the process of developing the performance measures and participating some benchmark studies, but I do not have any benchmarking information available. Q. So as we move into the next application, I'm assuming that those benchmarks would be available as we look at that cost and be able to justify that cost with industrial standards? A. I would certainly agree with that, yes, that as time goes on we are looking at performance measures, we are looking at benchmarking ourselves in all cost categories and they should be available. Q. Okay. Thank you. Susan, I think it is a question with regards to the year-end provision that we talked about in transmission. I think it is really simple, but anyway. There is year-end provision dollars being charged to the customer in the distribution side as well; is that correct? MS. FRANK: A. There's now OM&A dollars which were formerly identified as provision in the distribution application, yes. Q. That's right. Now, are those dollars strictly related to distribution assets or was it a pot that was allocated to the different successor companies? A. No, how -- I will go back to how the provision was developed in the first place. It was an [Questioning] 1040 Participants examination of what work was necessary to be done and it was all OM&A oriented work, no capital. Okay? And it was specific work items, not a pot, we'll call it. It was specifically work -- the vegetation is a good example of that where it was vegetation on the distribution system that was identified when the provision was made as an item that we needed to address. Q. So they are all distribution costs? A. They are all very specifically identified, yes. Q. Okay. Thank you. The next question relates to your -- this is more of an information question on my part. I think it is page 18 in your application and it goes on to page 19 as well. I'm just trying to understand the rationale for the rate freeze on the retail rates. I don't know who is specifically to answer this question. Is that a government direction or is that a policy of OHSC? MR. GILLESPIE: It's Michael Gillespie. A. It's both. The government policy was cast at a wholesale rate freeze, and in this application going forward we have taken that down to the retail level in the spirit of the intent of providing a continuity context for all of electricity consumers in Ontario as we move forward to open access. Q. Okay. When you said "both", it might be in the spirit of it. When was the government giving you direction to freeze the rates? [Questioning] 1041 Participants A. Are you talking about the wholesale rate freeze? Q. That's right. A. I'll have to look at the date when that came into effect, but it was -- I'll have to get you the exact date. I believe it was in '96 I believe. No, it was earlier than that. I'll have to give you the exact date on that. Q. I would suggest it was probably around '95. Have the retail rates changed since 1995? MR. HENDERSON: A. There have been some adjustments to some of the retail rates, but the intent was, again, to maintain an overall no average increase when those are all averaged out. Sorry, Graham Henderson, I forgot to identify myself when I started. Q. Just one last question. It is a little analytical so bear with me. First of all, I appreciate that OHSC provided the revenue on existing -- or revenue for 1999 last night which helped my analysis quite a bit. I didn't have to cook up the number myself. However, on the same side I was able to produce a number very close to yours, so I feel fairly confident that the revenue that you are going to receive from customers for 1999 is, according to your spread sheet, of 1,539. I'm also referring to sub tab H in the supplemental and using some information there as well. I [Questioning] 1042 Participants also took your wholesale or your purchases of 17.9 for 1999 from tab K. So I'll just... MR. HARDY: Tab H of which -- MR. BACON: Tab H of the supplemental. December 23rd, 1998. MR. HARDY: Okay. MR. BACON: And there is a volume number in tab K as well. It's actually on page 7 where it says -- bottom of page 6 says, "whether normal sales for 1999" and breaks it down by the three classes and the retail is typically the OHSC distribution wholesale volume, I believe. Q. Anyway, so I took the 1,539 which is the revenue that you're going to say you get from customers along your distribution system and then I used in table 1 on supplemental filing H cost components. Is everybody there with that? Okay. Good. I took the 17.9 terrawatthours that you are going to buy and applied the rates for energy, transmission, IMO, CTC and I also adjusted properly -- I think properly for losses which we won't get into that, but assume that's correct. I came up with a total for all those costs of $949 -- $949-million, sorry. So when you take the 1539-million, subtract off the 949-million, you end up with 590-million left over to pay your distribution. You are asking for a 701-million in revenue requirement for distribution. That leaves a deficit of 111-million. [Questioning] 1043 Participants Now, you've got the rate freeze under - if you were going to increase rates you would have to increase rates by 7% to recover that 111-million. And I know you are not going do that, but how is that deficit going to be handled? MR. HARDY: Perhaps-- MR. BACON: Is it too fast? MR. HARDY: I just want to make sure I understand how the logic flows through here first before -- MR. BACON: Do you have any questions in regards to the logic? MR. HENDERSON: I think I'm following you, Bruce. I guess I haven't gone back and forth as you just did in here to do that calculation. I've been treating or how we've been characterizing it within OHSC from how we gather the revenues and then pass them on to the revenue allocation pool is that we have a fixed or frozen retail rate and we know what gross revenues we'll receive from the sale of electricity based on that. And the way we've been characterizing it is that we would out of that retain the cost of monopoly supply and the revenue requirement for distribution and then the remaining funds would be passed on through to the revenue allocation pool. And how -- and it was then up to them to decide how it was dealt with beyond that. MR. BACON: Q. I understand that because we have [Questioning] 1044 Participants been discussing that a little bit in the last few days. What I'm getting at is it looks to me like the distribution customers aren't, based on the information I have here, are not covering their full cost under the bundled rates. So I'm just wondering - I think my calculations are pretty good. I could provide them, if you want. But it comes up with a conclusion that you are underfunding by 100-million. I think what it means is that Debtco is going to pay for that? MR. HENDERSON: A. I would be interested in seeing your calculations, certainly. And beyond that how it is dealt with out of the revenue allocation pool, I don't know. Q. Okay. Then I guess I'll go to Susan on a hypothetical question. If it is 111-million deficit, how will it be handled? I guess I want to make sure that Susan is comfortable with the supposition that - I guess I am posing the question to the Panel whether they need to see the calculations and be comfortable with that before they move into commenting on a hypothetical. Q. At this point it is hypothetical. So I guess - Susan explained to us yesterday how the process works, that if there was an actual surplus, then you would see that go to Debtco. I'm just saying, hypothetically if there is a deficit of 111-million, I am assuming that Debtco will have to cough that up to OHSC in some way, [Questioning] 1045 Participants shape or form? MS. FRANK: A. As a -- there is no doubt that the Debtco is the float I'll call it. Q. Right? A. Is the item that goes up or down if there's changes in any of the other elements. The energy -- you took us to tab H and you noticed that the energy item had a star on it. This is very much still a pooled number as well. So we don't -- I'm not certain exactly what that number will end up and that's, I think, why Graham was suggesting that things go into a pool and payments come out of that pool. So I am not certain if the C. T. C. will be the place that pays or if there is money in the energy to deal with some of the losses or anything else. For our purposes it's one number. Q. What's one number? A. The energy number, the 4.3 cents. Q. But 4.3 cents is a reasonable number for generation cost in -- A. It includes line losses. Q. I know, that's why - I made that adjustment. I took the -- I adjusted properly for the line losses. Anyway I just want to make that point. If you want me to file my calculations, I can. If that's... MR. HARDY: Bruce, we have had other participants provide information. I think that would be perfectly sound to do that. MR. BACON: Okay. Thank you. That's it. Thank [Questioning] 1046 Participants you for putting me up first. MR. HARDY: Other participants? MR. STEPHENSON: Richard Stephenson for the Power Workers' Union. Q. In some of the additional information you provided to us this morning was numbers with respect to trouble calls in '96 through '98. And there is a real material increase it appears in those trouble calls even over that three year span and is there some -- do you have -- have you analyzed the basis for that change over that span of time? MR. SURI: A. We have not done a complete analysis as we've been looking at the trends of the trouble calls. As I mentioned this morning about vegetation management, a number of cycles which we have on vegetation management, forestry land clearing cycles, they are resulting in increase in trouble calls. Some trouble calls increases are attributed to the weather patterns, where we are having some more wind storms than we may have experienced in the past and also some trouble calls are attributed to the condition of the assets. Especially there have been trouble calls as a result of two piece insulators which were failing and we are looking at it in that sense. But you are absolutely correct that there is an increase - a trend which is going the wrong way and as I indicated yesterday we have been struggling with getting proper information about these assets and we are hoping that once the information about the assets is obtained [Questioning] 1047 Participants through the implementation of the asset management and outage management systems it will help us solidify these numbers and pinpoint some of these causes. Q. I apologize if this is in the material but have you made a projection on those numbers for '99 and 2,000? A. No, we have not made a projection for '99 for these numbers. Q. Similarly, without getting into too fine a point in terms of numbers, if we went back and looked at a longer term trend on the trouble calls in the period before '96, historically, what's the trend there? Was it flat up to '96 or has it been trending upwards? A. I don't have the specific numbers. If my recollection is correct, the trouble calls normally we are around 28,000 trouble calls on an annual basis. 25 to 28,000, that would be the historical average. Q. Okay. Just moving to another area. On the monopoly supply issue for a moment. I think there is a general recognition of the need for extensive consumer education with respect to the impact of electricity market restructuring as it affects end-users in order to make the market work properly. You've got some money in your monopoly supply numbers that deal with consumer education, and I guess the question I have for you is, are you foreseeing that you're going to be, in essence, assigned extra work in that area because you are - essentially have direct customer contact with [Questioning] 1048 Participants end-users in terms of dealing with the whole issue about the availability of alternate generation supply and so forth, those kinds of broader consumer education issues? And if so, are you foreseeing providing that kind of education and funding that kind of education out of the money that you've allocated in your materials here today, or is that money coming from somewhere else? MR. HENDERSON: A. The approach we've taken to the funding for customer communication which part of that certainly includes communication related to the changes in the market and the impact on the customer and what sort of choices they will be facing in the future is what we view is prudent and right, fulfilling in terms of our responsibilities to our customers. There is, again, and going back to some of the uncertainties, coming out of the Market Design Committee, there was recommendations on consumer education that the Ministry of Energy, Science and Technology should oversee consumer education regarding consumer protection, choices, that type of thing which is always part of implementing retail competition. It's not clear how the funding for all of that would take place, whether there would be additional funding, other funding mechanisms. So really what we've looked at is what we believe we should be doing to fulfil our obligation to customers as monopoly supply, but it's -- included in that, we have not put money that we may be directed to use by some of this oversight on the Ministry of Energy, Science and Technology's part. [Questioning] 1049 Participants Q. And I guess just building on that, and the - I guess the question is, insofar as, for example, there are education programs designed to bring end-users up to speed on the advantages or disadvantages of default supply versus selection of particular and alternate generation or energy sources. The question I have is, do you have any views as to the appropriateness of including those kinds of costs in the distribution rate base? A. I don't think it would be appropriate for me to give views on that until there's been more discussion taken place arising around the recommendations from the Market Design Committee recommendations because it is quite, I would call it vague, about how the funding mechanism for that would occur. And certainly from the point of view of being the monopoly supply now and evolving to the default supply, funding for such consumer education programs is a key point that we feel needs to be discussed and resolved yet. Q. Related to that, in the movement towards market opening, SERVCO was going to be providing energy in at least two different manners. I gather, one as in a default supply capacity and another will be in a retail merchant function as a competitive supplier. How, in terms of consumer education are you going to and whether or not this is in your funding base, avoid problems of, in essence, cross subsidization or favouritism for your SERVCO retail merchant function in terms of promotion towards end-users, towards market [Questioning] 1050 Participants opening? A. Again, another uncertainty is what the codes of conduct will cover and we would expect that part of the codes of conduct in the requirements in that would deal with issues such as the business transactions and relationships between affiliates. Q. Let me just move to another area. In terms of the movement towards PBR in the future, in your -- in the materials that you provided to us, you have -- and you referenced again this morning some additional service, potential service standards that you're looking at, reliability standards, for example. When you're coming back next time in the year 2000 in terms of looking forward from this Board, do you foresee coming up with quantitative standards both in terms of reliability performance and in terms of service standards which was a separate list you provided to us about, you know, keeping appointments and that kind of thing. Are you going to be proposing numerical targets for yourself on both of those two categories? MR. SURI: A. As I indicated earlier, we are developing the performance measures for reliability and other standards of service. I, at the moment, do not know what the regulatory requirements are for those performance measures. Certainly, I think from internal purposes, we will be looking at the numerical targets against these numbers once these measures are developed. And whatever the requirements are going to be from a regulatory [Questioning] 1051 Participants perspective, we will be doing the numbers. Q. Well, obviously you're going to be -- I mean, you're not going to know that. I mean, you're going to be coming here seeking approval of a -- some kind of scheme and you may convince the Board that your scheme is an appropriate one. I'm wondering, from your perspective, whether you would see SERVCO as proposing to be governed or be measured in that fashion? A. The measures can be quantitative and qualitative, but the simple answer can be yes, there will be some measures which will have some numbers. Q. And similarly, I appreciate this is -- we're 18 months away or whatever. In terms of your future regulation, do you have any views at this stage as to whether on these, both system reliability standards and service standards issues, SERVCO will see itself or proposes to see itself governed by a system of monetary rewards and penalties under a PBR scheme for it's ability to meet, exceed, or fall short of numerical targets for reliability and service standards? A. The performance management group within the Ontario Hydro Services Company is currently looking at what measures, what kind of financial penalties are being used by other utilities, other regulatory bodies. And we, at this point in time, have not come to any conclusions that what we will be using, the data still is not fully compiled as yet and as I indicated, there is a difficulty in even getting the data from other utilities on the [Questioning] 1052 Participants distribution side because many of the utilities have not unbundled, but we are working towards that, but none of these things have been finalized at this stage. Q. Has SERVCO recognized this as a priority in terms of the ability of this Board to put in place a PBR scheme next time, that it needs to have essentially hard numbers that the Board can -- the Board and SERVCO and the ratepayers can rely upon? A. My answer is yes. Yes, it is a priority, and if you're looking at performance based regulation, there has to be means for measuring the performance, so it is a priority for us. Q. But the recognition is there that the performance is not simply on the financial side but it is on the system performance side, both in terms of service standards and reliability standards? A. That's absolutely correct. MR. STEPHENSON: Okay. Thank you. MR. HARDY: Roger, I think before we begin, I'd like to call a break and we'll start off with your question after the break. And so let's come back at 10:35. We'll break for about 15 minutes or so. ---Recessed at 10:20 a.m. ---On resuming at 10:35 a.m. MR. HARDY: Welcome back. Roger, I think we left off with starting with your questions. Go head, please. MR. WHITE: Thank you. Roger White and I am with [Questioning] 1053 Participants Energy Cost Management Incorporated. Q. Can I understand the vegetation management program. How many million dollars are we talking in the forecast period and how does that compare with beyond the forecast period, beyond 2000? Or have you looked at that? MR. SURI: A. John, do you want to cover that. MR. ROGERS: A. The funding for the forestry program line maintenance program is 61-million for 1999 and 2000. And going into the future, after that there will be a decrease in the program over time. The fundamental in the forestry program is that as you make gains in the program that you'll be able to get benefits from that in reduced costs, both in doing herbicide work and cutting brush and in taking improved clearances on the lines. Q. If the 61-million is accepted as the appropriate component for '99 and 2000, is that producing a significant bump in the OM&A that will reoccur some six to eight years out when those particular sites are revisited or what should the Board expect to happen? Is this something which might be better managed over a slightly longer period of time? A. No, what it is is that the lines that we have now have been cleared in approximately in an 11-year cycle. That has resulted in a lot of trees being in contact which increases the number of outages, but also increases the cost of doing the work. What the principles of the forestry program is is [Questioning] 1054 Participants to go through the cycle once, remove a number of danger trees and trouble trees that are there, that if you remove them from the base you no longer have to treat. The principle is to remove the brush and to treat the brush stumps and that sort of thing so that it does not resprout, and then the second time you go through, eight years from now, you get a significant reduction in the price, assuming that you do indeed treat the brush, cut the brush and remove the trees. Q. Thank you. When I look at the revenue requirement, and I heard us go through, and we identified some 54-million in '99 and 58-million in 2000 that was other revenue, and it was indicated that that related to municipal utilities and individual customers. I understand that the municipal utilities may have the option to go elsewhere. Is this contestable services that Ontario Hydro is offering their customers or is this -- is it automatic that Ontario Hydro is the only supplier for these services? MR. SURI: Myles, do you want to... MR. D'ARCEY: A. Yes, Roger, a majority of these are recoverable -- or is recoverable work that is contestable that the customers have an opportunity to utilize either OHSC work forces to complete the work or an external firm. Q. In each case does Ontario Hydro make the customer aware that it is their option to seek an alternate supplier? [Questioning] 1055 Participants A. It is our policy to notify the customer of their alternatives and options within the -- when they are researching to get service connection. Q. Thank you. Susan, would you say that the 127-million is a substantial component of the retail system revenue requirement for RRA, rural residential rate assistance. MS. FRANK: A. I would certainly agree that if the government chose not to apply the rural rate assistance that the customers in the rural communities would have to pay a larger amount than they do today. Q. Okay. That being the case, I'm sure that the order-in-council that was issued which stipulates how rural rate assistance will be calculated, that you are somewhat familiar with that, are you? A. I'm aware of it. I know that we have done some looking at it as in the services company. Q. Are you aware that it ties the level of rural rate assistance to the municipal weighted average bill? A. Yes, I am. Q. Okay. What has happened to that weighted average bill over the last three years? A. That one -- I'm sorry, I can't help you there. Q. I would suggest and maybe ask you to look at what per cent that weighted average municipal bill has gone down over the last three years. I would like some undertaking as to what impact [Questioning] 1056 Participants that would have if the OEB recalculated the rural rate assistance consistent with the order. I'd like to see what the implications in dollars are going to be associated with that and is that going to be directly passed on to customers through further reductions in their bills consistent with the order? A. Before I agree to that, I'd like to suggest that the work that has done looking at the new direction that the government is setting for rural rate assistance and remotes left us with a calculation that was very similar to the 127 that's in this report. Something between the 125 and 130 kind of range is the number that we are getting. So I don't see that there is a major difference that's coming out of the new legislation, that I think we are still in the same ballpark. So I don't expect that customers would see a change as a result of the new legislation. Q. Can you provide this group with copies of the calculation and the numbers that you are using to produce that level of rural rate assistance? A. Certainly we can consider that. MR. HARDY: I will make a note of that then. I assume that, since this is the last day of the technical conferences, that Hydro, you will find some mechanisms to get this information back out to participants if it isn't forthcoming towards the end of the day. MR. GILLESPIE: Yes. It is Michael Gillespie. [Questioning] 1057 Participants I just want to emphasize if any participants -- we have a working list, of course, which the supplementary material is being sent to, but if you're somehow or other missed or are not on that list, please contact me and I will ensure that you get material accordingly. MR. HARDY: Thank you. Roger, continue, please. MR. WHITE: Q. Yesterday, Susan, I asked you about the capital contribution policies. MS. FRANK: A. Correct. Q. That Ontario Hydro had with respect to new services. When were those policies introduced? A. The policy that we are working with now was last modified I believe in '92, 1992. Q. So in the period 1992 to 1995 you were only providing meters and transformers to customers requesting service? MR. D'ARCEY: A. In through 1992 to 1995 we did have some work that was included within the customer work which was some pole work, some of the service upgrade work which was later also provided at no charge to the customer. Through '95, service upgrade work was re-evaluated and some of those costs were changed in '96. Q. The fact that you are now recovering, and I would suggest that there might be substantial dollars there, the fact that you are now recovering these dollars directly from customers, is that consistent with the comment I heard earlier this morning that there have been [Questioning] 1058 Participants no rate increase? If customers end up paying more, it seems to me this sounds a little like the banking business. MS. FRANK: A. This is new connections for customers or new service upgrades or something, and in that recoverable work that I was talking about this morning, the low-voltage customer connections was $25-million. So I believe that there is an amount that customers are paying, but these are customers who are requiring a change. The customers who were there getting their current service haven't seen any of this. Q. But these are dollars that customers in a similar situation would not have been paying before? A. I think they would have paid different dollars. They would have -- we would have had maintenance type costs we might have charged them. To say that there are absolutely no... Q. But it would have been less dollars? A. In total, yes, I agree it would have been less. Q. Okay, thank you. Of the OM&A, if we are looking at a substantial sort of front-end loaded herbicidal program or vegetation management program or whatever it is we're doing in that area, what portion of the total OM&A services that Ontario Hydro will be including in these costs? What percentage of those dollars would be [Questioning] 1059 Participants contracted out to third parties on a tender basis? MR. SURI: A. I do not have any information on that at this point in time. What we're looking at is within Ontario Hydro, as I think Ron Stewart on the first panel described, that we have a hiring hall concept which was approved as part of the last collective agreement and what we will do is some of the forestry work which will -- is not done by the regular employees of the corporation, then that work will be provided by the people who are in the hiring hall. Now, whether you call that contracting out or not I'm not sure, but the additional resources which are going to be required to complete some of these programs, we'll get the people from the hiring hall. Q. So you are not anticipating a tendering process per se to reduce OM&A even when you have unusual increases in workload? MR. D'ARCEY: A. We are currently working under the terms and conditions of our existing collective agreement which has a purchase service agreement, and where there is latitude for us within the organization to achieve external - or contract work to do some work we'll be looking to explore that with our bargaining units. MR. SURI: A. Just a comment to add. The concept of the hiring hall and the purchase service agreement, the PSA agreement which we have, allows us the flexibility essentially to look at the resourcing levels in the most efficient manner. [Questioning] 1060 Participants MR. WHITE: Thank you. MR. HARDY: Thanks. Are there other participants' questions? Ken? MR. SNELSON (AMPCO): Yes, I have a few questions. Q. The first one is in the area of what happens in part years and I think I'm right that in a normal year the revenues that you recover from retail rates are not equally distributed through all months of the year; is that correct? MR. HENDERSON: A. That's correct. It's quite weather dependent. Q. And I believe that OHSC takes over its full responsibilities and becomes fully operational as of April the 1st, 1999? A. That's correct. Q. And it is also clear from the presentation in your submissions that the revenue pooling scheme will stop when the market opens in the year 2000? A. I'm not certain what you mean by the "revenue pooling scheme", sorry. Q. Well, it seems as though once the market opens in the year 2000, then the transmission company will have to have transmission rates and the distribution company will have to have distribution rates which you are not bringing forward as yet, and that the revenue pooling whereby existing rates are grandfathered on a bundled basis and then the revenues are pooled and allocated out [Questioning] 1061 Participants according to the rules that would have been discussed, that revenue pooling scheme will end? A. Yes, with the advent of retail competition. Q. And what we have in front of us is a revenue requirement for a full year in 1999 and a full year in the year 2000. My question relates to what happens in part years. And to be specific, if the OEB approves a full year revenue requirement for 1999, what proportion does OHSC receive for the part year April 1st, 1999 through December 31st, 1999? MS. FRANK: A. Well, 1999, what we will do is apply the ruling for the entire year. So even though the OEB -- you could say it was as of April 1, we will apply the rule for the entire year and have the revenue requirement going back to January 1, whatever they determine. We won't have -- we have no other basis on which to do the first few months of this year. Q. Okay. I can ask the same question with respect to the year 2000. If the electricity market opens partway through the year 2000, what proportion of the OEB approved 2000 revenue requirement will be made available to SERVCO for the part year before the market opens? A. Our basic approach there is we would get one-twelfth of the revenue requirement each month and, therefore, for as many months as it takes in 2000 before the market opens we'll get that many twelfths. Q. Even though on a revenue basis normal rates [Questioning] 1062 Participants do not deliver one-twelfth of your revenue requirement each month? A. Once, again, it is a revenue requirement that went into a pool. Our costs tend to be relatively consistent through the period and we are expecting that there'll be several months in 2000. So we will likely get through more than one season. So it shouldn't be material. Q. Okay. Now, we've just had a bit of a discussion about rural rate assistance with one of the other participants, and you heard mention that there have been some discussions, preliminary discussion, with regard to how rural rate assistance might work after the market opens. And I'm wondering if from those discussions you can tell us whether when the market opens rural rate assistance will be available to other local distribution companies who may have very low density distribution areas? A. The basic principle as to why there is an assistance relates to the density for the rural communities and that would apply irregardless of who was the owner of the distribution system servicing those customers. Q. Okay. And has the government direction with regard to RR -- to rural rate assistance and remote systems progressed to the point where you can say who will pay the rural rate assistance and the remote community [Questioning] 1063 Participants subsidies? A. I'm not aware that it has. Q. Okay. Moving on to another area. This morning you mentioned a facilities charge of $29-million which I believe is the figure that is shown on page 123, table 16-1. A. Yes, I've got it. Q. And it's also discussed on page 124 in section 16.2. And I'm just looking for confirmation that this category includes the costs related to 44 kV and 27.6 kV lines that were called shared LV lines in the previous cost allocation system. MR. SURI: A. We'll have to check into that. I think you're correct, but I will confirm that. Q. Okay. And these are the costs applicable to over 5 megawatt direct customers and municipal utilities which are fed at below 50 kV? A. Correct. Q. Can you tell us at this time how the costs of these lines will be recovered when the electricity market opens up? A. I do not have that information. I think many of the details are currently being worked out though I do not have that information at this time. Q. Okay. And I believe that these customers, that's over 5 megawatt direct customers and municipal utilities fed at about 50 kV will have the opportunity to be participants in the IMO controlled wholesale energy [Questioning] 1064 Participants market when the market opens and Ron Stewart indicated that these customers would have the option of paying their transmission charge directly to the IMO or indirectly through their local distribution company. And my question is, can you tell us at this time how the OHSC distribution company will provide options to embedded wholesale market participants on paying their transmission costs directly or indirectly? A. Okay. As I indicated, those details are being worked on at this point in time and I do not have that information. Q. And moving on to -- MR. HARDY: Before you move on, I'll just note that the Panel's going to be bringing forward some information. MR. SNELSON: I'm not sure I heard a promise to bring forward information. MR. HARDY: I think it was on the shared LV lines. MR. SNELSON: On the shared LV lines, yes. MR. HARDY: Okay. Sorry, go ahead. MR. SNELSON: Q. I wanted to come back to the area of what I've called resurrected costs and I believe we've had a sufficient discussion with the previous transmission panels regarding the philosophy of these things. I just want to make sure whether we've got the numbers straight. So in the transmission panels, we established [Questioning] 1065 Participants that there are certain categories of costs that have previously been written off that are now being proposed in this application for cost recovery and these costs included provision work, GAAP related write-offs and other post employment benefits. I presume these same categories apply to the distribution revenue requirement; is that correct. MS. FRANK: A. Yes, they do. Q. So if we look at supplementary filing under tab C, page 2, and there is a table at the top of the page. Can you tell us the amount of provision work that is included in the total OM&A for each year for 1998, 1999, and 2000. A. I can tell you the total amount that is included in each year. In 1998 for the distribution company, there was $81-million of provision work; in '99, there's $61-million of provision work; and in 2000, there's $45-million of provision work. Q. Thank you. Now, can you tell us how that provision work is broken down among the categories of that table? A. I -- can I tell you what the type of work and I think I can likely categorize it. Q. Okay. A. There's vegetation work that -- that's been described in each of the years. When he gave the vegetation number of $61-million, that was kind of base program plus provision program but -- and that was in the [Questioning] 1066 Participants sustaining program. And in each of the years, we are doing this for each year, can I pick '99 as representative? Q. Certainly. A. Okay. For 1999 it would be -- incremental would be $27-million worth of vegetation work. Q. Are you giving me the amount that is covered by the provision or the amount that is covered -- A. I'm doing -- Q. -- without the provision? A. I'm saying the incremental associated with the asset condition assessments and you can read provision. Q. Okay. A. Okay. Q. Okay. And that was 20 -- A. 7. Q. -- 7. Okay. A. In addition to that, there's a fair amount of the environment work for site assessment, PCB phase out, and I believe that's -- that nature of work and it's $11-million. And the remainder of the work would be in the -- some of the process re-engineering and information gathering items that would be in distribution support. Q. If I'm doing some quick arithmetic, that would be $23-million, I think, to make up the difference. A. I didn't do the quick arithmetic. I was at 61... [Questioning] 1067 Participants MR. HARDY: Just take your time. MS. FRANK: Yes, I would agree with you. MR. SNELSON: Q. Okay. And with respect to the GAAP write-offs, I believe they are mentioned on page 88 of the main submission. MS. FRANK: A. Correct. Q. And Don Ariss, I believe, quoted GAAP related write-offs as applicable to the distribution business of being 17 and a half-million in 1999 and 3-million in the year 2000. And I'm presuming that that is what leads to the $20.4-million on line 3 of page 88 as the sum for 1999 and 2000? A. Yes, it does. Q. Okay. And the amortization of the OPEB, that's the other post employment benefits assets is the $23-million per year shown on the table 13-1 on page 118; is that correct? A. Yes, that's correct. MR. SNELSON: And those are my questions. MR. HARDY: Thank you, Ken. Are there other participant questions before we move on to Board Staff and Consultants. Roger? MR. WHITE (ECMI): Can I pursue one more supplemental on the rural residential rate assistance? Q. If in revisiting that calculation, it was determined that the rebate that should go to customers should increase by 3-million or 8-million, those would be [Questioning] 1068 Participants a reduced revenue, reduced cash in hand that Disco would have and I assume based on the fact that you're prepared to accept the good news, you're also prepared to accept the bad news on some of these numbers. In other words, you would not seek to increase the revenue requirement to offset any increase in the rural rate, residential rate assistance. MS. FRANK: A. The residential, I mean, the rural rate assistance is deducted from our total revenue requirements so if they change the rules and we got more money out of rural rate assistance, customers would get a reduction and we'd still be left whole, I'll describe it. Q. Yesterday you specifically described the rural residential rate assistance as part of your revenue requirement. It seems today you're saying it isn't? A. No, it's -- it -- if you take the total revenue requirement and you subtract off rural rate assistance, that's what we charge customers and other recoverable work and facility charges that I described today. If they change the amount of the rural rate assistance, then the amount we charge customers would change accordingly. Q. So it's not part of the revenue requirement that you're asking to have fixed. You're asking to have a different number fixed, the net number? A. It's the net number, yes. Q. So that's different than the submission [Questioning] 1069 Participants that's been made today? A. No, well, our submission says here's our revenue requirement, here's what rural rate assistance is, and we expect that the Board will comment on both of those because they've been asked to comment on both of those. So they will get us -- they will get us to the full requirement. We certainly don't expect them to comment on the recoverable work because we expect we'll have to fund that ourselves. The facility charge is currently a fixed amount, we wouldn't expect them to deal with that, but the other two items we would expect them to deal with. Q. At the same time you're saying that if the OM&A were to go up or down that you would keep whatever benefit or pay whatever incremental costs you would incur as a result of that? A. My reaction is we would come back at the end of the period and share with the Ontario Energy Board what our actual experience was and deal with that as appropriate at the time. Q. I'm sorry, I'm confused by that comment. A. Well, I guess, Roger, what I'm going to with that comment is I'm concerned that there may well be another ice storm of something of that significance and to say that we would absorb the ice storm without coming back to the Board to ask for some ability to have more revenue for some significant event, we would, because we couldn't absorb some event like that. And you were asking me to [Questioning] 1070 Participants say that I would never come back and I can't agree to that. Q. Okay, so what I'm now understanding is that this is the revenue requirement that you'd like the Board to say yes to, but if you need more, you want the right to come back. Q. If there's some significant event that changes our circumstances, I believe yes, we'd have to the right to come back. MR. WHITE: Thank you. MR. HARDY: Thank you, Roger. Okay. Why don't we begin by having the Board Staff and Consultants reintroduce themselves because we have a new Panel over here and you can ask questions at will. MS. WALLI: I'm Kirsten Walli, Board Technical Staff. MS. LITT: Kathi Litt, Board Technical Staff. MS. BULKLEY: Ann Bulkley, Reed Consulting Group. MR. HOPKINS: Bill Hopkins, Reed Consulting Group. QUESTIONING BY BOARD STAFF AND CONSULTANTS: MR. HOPKINS: Q. I guess in light of that last question, I guess I'd just like to turn to the revenue issue for a moment. Your revenue requirements that you've put forward for us on -- get a good schedule here -- and the handout that you showed this morning indicate 701-million for '99 and 640-million for the year 2000, a [Questioning] 1071 Board Staff/Consultants decline due to cost change and perhaps due to sales, you know, changes as well -- well, I'll leave that aside for a moment, due to cost changes. In charging the same revenues rates, what happens to that $60-million, if you will, if the sales were to be the same, what happens to that $60-million difference in your costs versus what the rates are? The rates are staying the same, as I understand it. MS. FRANK: A. This goes back to our comments several times throughout these technical panels on the pool and where does the rest of the money go if we get less out of the pool, the rest of the money goes to the CTC charge for Debtco's -- they get any difference. Q. Is it -- is that the appropriate distribution of that money as opposed to, perhaps, in your mind, that the distribution rate should be less and the customer shouldn't be asked to pay an additional amount towards a CTC charge in that fashion. A. Well, the CTC charge is the cost of the debt that the current assets of Ontario Hydro have caused to exist and the customers definitely need to pay for the service into that debt. The fact that restructuring has put it into a separate financial holding company doesn't alleviate the obligation to pay for that. So what has been agreed with the government is that through the rate freeze, any money that was available to pay for the debt over and above an amount that is required to operate the business would go to alleviate the debt. [Questioning] 1072 Board Staff/Consultants Q. I see. But in some sense we have maybe two groups of customers. We have a transmission group of customers and a distribution group of customers. And while the distribution costs are coming down, perhaps, and therefore there's money made available that way, if you hold the distribution rate the same, distribution portion the same to pay -- to pay for -- pay down the pool of CTC costs, won't the distribution customers, in effect, pay a disproportionate share versus the transmission customers? A. The distribution customers will continue to pay the frozen rate that they pay today. The share that goes to payment of debt will definitely increase as we get more efficient. And certainly that's a direction that all of our businesses should strive to take. So I don't see that they're harmed in anyway. Q. I was just thinking as we get two classes of customers here, is the share of the paying of that charge being proportionately distributed between, say, a transmission customer and a distribution customer? And as you save money on the distribution system, even by holding the rate you are effectively asking them to pay more? A. How the pool approach was taken that we are using during this transition was that we would have a frozen rate and that the revenue requirement would come from each business out of that pool and any money left over would go to the payment of debt. That's just -- Q. That's the simplest deal. [Questioning] 1073 Board Staff/Consultants A. Yes. MS. LITT (Board Staff): Has any considering been given to using a deferral account mechanism so that you can accumulate those funds and they can be disposed of in a different fashion? MS. FRANK: There has not been a discussion about that. MS. LITT: Thank you. MR. HOPKINS: Q. As we look at the costs that you've presented in your filing, we see the expenditure programs put forward in your December 23rd document related to your various categories of work programs to 1998 as well as 2000 and -- '99 and 2000 by program and then program area of sustaining, development, operations, recoverable work, et cetera. And within those categories you've indicated that, you know, major elements of activities such as meters or lines or activities, maintenance and what have you. Here we have set forth a broad plan that you have established your revenue requirements from. Will your cost accounting system track your actual expenditures in that same fashion so that the Board or other parties at some later date can evaluate what we have set forth in this proceeding versus what's occurred In actuality in the future as we look at the years '99 and 2000, and as you come forward perhaps again in the year 2000 with a different rate proposal, would the costs show in these [Questioning] 1074 Board Staff/Consultants same categorization items? MR. SURI: A. My answer is yes. The cost accounting systems which are being put place will track the costs even in further details. The actuals will be reported in a lot more finer details. And certainly we would be able to summarize them in any way, shape or form we want to look at them. And certainly we can summarize them in this form also. Q. I take it because you are presenting it in form now this is sort of your chosen format? A. That's correct. Q. For going forward? A. That's correct. MS. FRANK: A. On the distribution side, there is a process under way with the OEB and the municipalities looking at a standard chart of accounts and that will likely change in detail how the accounts need to be kept. However, our new system that we talked about the other day, the people soft financial system, PEP is the description of that system, has the ability to track costs in a variety of mechanisms so we can report on what we have accomplished here, but we could also report on whatever new mechanism the Board might determine and I expect they will determine a new mechanism. MR. SURI: A. Just one more comment to add. The fundamental way of managing, as we've indicated, the transmission and distribution program is sustaining development and operations. So those three categories [Questioning] 1075 Board Staff/Consultants will be looked at. As I indicated through the organization structure for distribution network asset management, we have individual directors responsible for each one of these three areas. So certainly costs would be tracked in that manner. Q. Thank you. When you -- as I understand it, the revenue requirements for the distribution operation here and particularly including the distribution OM&A have been reviewed with your board, the Ontario Services Board, and approved by them; is that correct? MS. FRANK: A. That's correct. Q. Which leads up to the $700-million revenue requirement amount. In making that presentation to your board as to this is the level of costs that you expect and need approval of, cost recovery, is this the level of detail that you have presented to them or is there another level of detail that you have available? By "this" I mean what you have presented us in the filing. A. The filing that's come to OEB was in far greater detail than our board has seen. Q. One of the major items of expenditures that have been discussed here this morning has been this vegetation management program. And I just -- I guess you've provided a fairly detailed explanation of it, including in some materials [Questioning] 1076 Board Staff/Consultants received last night a -- and which included your program for asset management discussion of the need -- there was a discussion for the need of the vegetation program in there as well indicating that much of what you've presented this morning. That was -- that leads me to think, is the genesis of the program that you are presenting this morning the results of that analysis in 1997? A. I just want to make sure of the document you're referring to is this... Q. I saw it as the 1997 asset condition management summary report. A. Correct. Q. That came -- that was some supplemental material presented last evening. A. If that's the document you're referring to, the answer to your question is yes. That document included a summary of the asset condition assessments which are taken. As I indicated yesterday, there were two studies done. One was internally to look at the condition of lines, conductors, and transformers, et cetera. And there was an external study done to look at the vegetation management. And that document is the basis for putting a program forward. One of the recommendations in the document was that we really need to be optimizing our line clearing cycles for forestry. [Questioning] 1077 Board Staff/Consultants As Roger -- John pointed out this morning, that we were clearing our lines on an 11-year cycle basis and the program put forward will change the line clearing cycles to 6 years in southern Ontario and 8 years in northern Ontario. MR. HARDY: Would there be extra copies of the information that was filed last night just so I can follow along? Thank you. I've got one. Thank you. MR. HOPKINS: I'm not going to refer in detail to that. I just wanted to get an idea of when the assessment was done and that has set forth the program that we are now looking at, the $61- million a year. Q. I take it this 61-million, as I can see from the other material you filed which showed the 1998 level expenditure, it showed an amount of 47-million. So we're not really looking at a new whole thing here. We are talking about an increase in what you are already doing. MR. SURI: A. Yes. It is an increase from an 11-year cycle to ramping up to 6-year cycle and 8-year cycles. So that's what you're looking at, but we're not getting there in one year. We are spreading the program I think over a 3- or 4-year period and the concept would be that at the end of that period we will reach the 6-year cycle and then you start clearing the lines on a 6-year cycle basis. Q. But that 47 -- just for background purposes, that 47- million that was shown for 1998, that didn't include the kind of ice storm activities? [Questioning] 1078 Board Staff/Consultants A. No, it did not. The results of this study -- or the asset condition assessment, we had ramped up that program in 1998. So we are on a road to changing our cycles from 11 years to 6 years. So that process started last year. Q. I see. So that -- A. So 47 is not the base program which we were conducting in previous years like 1996, 1997. So it's ramped up from those levels and it will go up to 61, and once we have cleared the lines and brought them back to a 6-year cycle basis, then the levels will come down. Q. Did the ice storm and the work that you did as a result of that ice storm -- well, ice was a major factor just laying on the lines, but I presume from pictures I've seen had a major impact on many of the trees and things. Is there any plausibility in re-examining this program and what condition that the rights-of-way and the trees surrounding the wires are now as a result of that ice storm that might -- work you might have already done in just clearing as a result of that storm. I imagine there was a substantial amount of that. A. As you're aware of it, ice storm was in eastern Ontario and trees are in other parts of the province also. I think your comment is valid that some work was done and some trees have just fallen off because the limbs were broken to start with. [Questioning] 1079 Board Staff/Consultants But the brush control work in eastern Ontario would exactly still be the same as the brush control work. So the part of the work load is the removal of the trees and overhanging branches, but the other part is the brush control work. John, you may want to add something. MR. ROGERS: A. The other issue that you get into is that the trees that were damaged during the ice storm that were still standing will have to be reassessed because you'll get split trunks and you'll get issues like that. So you're going to end up with a greater number of danger trees along the side of the right-of-way that have to be removed. So I'm not sure you can make the jump to the fact that there will be less work in the short-term. Q. I see. There has been no assessment made of that per se at this point for this program? The effect of that on this program? What you're saying is as you treated things in the ice storm you did it on a temporary basis? If there was a tree that was damaged but you could clear what was needed to be cleared you left it in that damaged condition. You didn't fully remediate it or something? A. I would anticipate at the time that a lot of work was done simply to clear the lines to make it safe in the short-term. [Questioning] 1080 Board Staff/Consultants Q. When we look at the services provided into the network asset management system perhaps by the service corporate accounts and then as those come forward into these categories, how do we -- is there a way of just discerning the amount of the overhead Ontario Hydro Service Corporate's functional costs that are in the OM&A categories here that have been put into sustaining, developing, operating and that type of thing? Is there a line to do that with? MS. FRANK: A. The majority of the overhead costs that would have been at the OHSC level or in the NAM support programs are in the distribution support line. That's where you would find most of it. However, some of network services work when they were working on sustaining program or on the development there is some overhead spread through each of those programs. This is because of the way the work is charged to network services. For every hour of work they do it's the direct costs plus an overhead and that same principle applies if it's working on the distribution program or if it is doing recoverable work. So there is some spreading through the entire program. If you want to know the total amount of overhead that exists within the distribution you'd go to the appendices that Don Ariss provided and talked to you about, and then I think we are also talking about the supplemental filing first thing this morning. That was [Questioning] 1081 Board Staff/Consultants the December 23rd, tab G. So you can get to the total by going to those tabs and if you want to look in the programs you will find most of it being in distribution support. Not all. Q. Yes. In that tab G, if we could just look there for a moment, I think we do see the split on page 21 of tab G and in that December 23rd you see sort of the division of those costs going to distribution and transmission; is that correct? A. That's correct. Q. So that just to follow through, there's shown 23 million for distribution in 1999 -- or, excuse me, of which 14.5 is OM&A? A. That's correct. Q. And you are saying the majority of that OM&A would show up in the 60-million of distribution support? A. The item that you're referring to on page 21 of tab G is the network services piece. Q. Yes. A. And that's the portion that I said was spread through the other programs. So you're looking at a subcomponent of all of G, only the network services ones rather than the entire overhead that would include the rest of the OHSC costs and the NAM support costs. This is the category that spreads across a variety of programs. Q. Is there any track -- I guess I want to go -- is there any tracking document that shows me that? How that ends up? [Questioning] 1082 Board Staff/Consultants A. Are you asking, is there one that tells you how the 14 goes to each one of the programs? Q. Yes. A. No, there isn't, but what I would -- as a simple approximation, what I'd suggest you do is look at the total cost in those programs and, say, excluding the distribution support and apply a percentage to this number and that's likely how it would track. It's a rough, but it would give you an approximation. Q. The other portions of those costs would have shown up on page 25, is that... the network asset manager... A. I would have jumped all the way back to page 32. Q. 32? A. And said that's the total distribution OM&A and capital costs of overhead, and then the 72 doesn't agree with the distribution support item because we do take out that network service charge, that 14 item, and some of network services local costs as well. MS. BULKLEY (Reed): Excuse me, Susan, did you just reference a page 32? We seem to be completed at page 30. MS. FRANK: G came in two parts. You have to go to the filing on January 4th and it's the first page-- MS. BULKLEY: Thank you. MS. FRANK: --of January 4th. MR. HARDY: Thanks. [Questioning] 1083 Board Staff/Consultants MS. BULKLEY: You lost me for a second. MR. HOPKINS: Okay. I can't put my finger on that at the moment. We'll borrow. I have it. Thank you. MR. HOPKINS: Q. As we look at appendix G and we have described in appendix G that there's a -- there's a corporate finance function on pages 7, mentions finance services. And again, I think, on page 24 indicates finance activities. What's the differences between that and the network asset managers finance function or cost? MS. FRANK: A. Yeah, I'll try to take us back it page 7 first and what was that. Page 7 was the costs of the, I'll call it the finance centre at the OHSC that existed at the time of preparing this submission. At that time, we had finance spread throughout the organization and we had a central group that provided the functions that are described here. And then we had organizations within network asset management and in network services. So page 7 only described what the central group was doing. And the place that you took me to next which was on page 24 was one of the elements, and if you go back to page 22, you say the saw the top of that table and that was the network asset management. So the piece on page 24 only describes finance that existed in asset network management, only that small group. Q. What would be the differences in their [Questioning] 1084 Board Staff/Consultants functions and are we duplicating services here or are we... A. Actually, I'll describe the difference in the functions and then tell you a subsequent change. Basically at the centre was very much a policy group, a integration group, so if we take an example of business planning, they would have sent out the directions as to how business planning is done. Then the people in network asset management would have actually done the detail planning for their group with the line organization and sent the information back to the centre group that would have integrated network asset management with network services, with some of the other parts of OHSC to come up with an integrated OHSC plan. That basic policy, direction, and integration would be true for other areas. Some of the functions, however, only happen at OHSC. Items like the treasury, that's always been an integrated -- only OHSC would look after treasury; the pension fund, only OHSC would look after the pension fund; the audit, that's only at OHSC. So there are some items that are unique as well as having a general policy setting direction. I'm just going to go on. That's how it was arranged. And now subsequent to gathering this material, there's been an organizational change that I believe on day one Ron Taylor put up a slide saying here's our new organization. And one of the items that was done in the new organization was to consolidate the support [Questioning] 1085 Board Staff/Consultants activities. So finance is now all consolidated at the OHSC level. That's why when I introduce myself I always say OHSC finance, wires integration. I actually used to be in this NAM organization, but now, if you're in finance, you're at the OHSC level. Same is true for HR, IT, these things have all been centralized. And one of the reasons to centralize them is try to get efficiencies out of the organization as we get the processes refined. MS. BULKLEY (Reed): Thank you. That actually explained my next question regarding the resources. MR. HOPKINS: That would be the same. That's the same answer, is that correct? To -- MS. BULKLEY: Q. That the costs that are associated with marketing and sales for network services, I think they're outlined in appendix G on page 26. Can you tell me a little bit about that? Are they related to supporting NAM or are they developing additional services for network services? MS. FRANK: A. This indeed is a very small group. Myles is in that group, so he might wish to talk to it. MR. D'ARCEY: A. Actually again, going back to a recent -- the recent restructuring, we no longer have a marketing and sales group within the network services component, okay. So those costs are not there. Q. So what happens to the functions that these -- that this group served? Where did it go? A. We did a study with regards to marketability [Questioning] 1086 Board Staff/Consultants and opportunities and based on the results of those studies, we've decided at this time that we would not be taking an active marketing role for the products and services provided by network services. We are more in a reactive mode. MS. FRANK: A. But the function, however, has been consolidated like the other functions and at the -- if you try to... MR. D'ARCEY: A. Within the OHSC level within customer care. MR. HOPKINS: Q. I want to turn to a few things about depreciation and practices in depreciation. We received some materials just the other day indicating some of the information on depreciation, practices and policies. And if we are looking at it correctly, I -- the depreciation accounting policies from your 1992 agenda that you included in that package indicate that you -- MS. FRANK: A. Sorry, could you tell me the date of that one because I'm going to have to -- Q. Yes, this was the January -- this came in on the 12th of January or the 13th of January. And I'm referring to the portion dealing with the item 1.1 in there which is... A. I've got it. Q. Okay. And in there you had indicated, if I'm not mistaken, that you depreciate the purchase price and acquisition cost of the land for retail systems and [Questioning] 1087 Board Staff/Consultants communication facilities; is that -- A. Can you take me to that? The reference in this -- Q. Would that be a policy of yours because that seems to be unusual? A. I just would like you to take me to the reference, please. Q. Well, I may have some trouble finding it at the moment. I've lost it suddenly. I just made a note of it and... A. Let me try taking you to something. Q. Yeah. A. Okay. On the first page of that, appendix D and D1 is the depreciation policy, and if you go to the top of the next column. Q. Yes. A. It says the purchase price -- Q. Yes. A. -- and acquisition cost of all owned land, and then it tells all the places where we might own it -- Q. Right. A. -- are not depreciable. Q. Well, but the next one says something else? A. The next one talks not about the land itself, but any improvements we might make to the land or any -- I'll call it betterments that we might do. That we would depreciate. Q. So on a land, associated asset is not the [Questioning] 1088 Board Staff/Consultants land itself? A. Right. The land is not depreciated, but if we do something to modify the land, if we do some excavation and then we depreciate that. Q. If you made some improvement on the land like draining an area or something, would that be an improvement? Would that be depreciated or... A. That would likely be depreciated, yes. Q. And that's been a long-standing practice I take it? A. Yes, it has. Q. Okay. In that same package, I'm at -- in response to item 1.13. If I can find that... A. I'm sorry. I don't have a 1.13. MS. BULKLEY: I'm sorry. It's a 1.31. MR. HOPKINS: 1.31. Yeah, I'm sorry. MS. BULKLEY: That might help. MR. HOPKINS: Is this it. MS. BULKLEY: Yes. MR. HOPKINS: Okay. MS. BULKLEY: The reference is actually page 18 when you're there. MS. FRANK: This is from the material that was filed in 1990, am I in the right package? MS. BULKLEY: Yes, it's the study of the depreciation review committee process, May 1990. MR. HOPKINS: The report on the study of [Questioning] 1089 Board Staff/Consultants depreciation review process, page 18. MS. FRANK: Okay. MR. HARDY: We are there? MS. FRANK: We are there. MR. HOPKINS: We're there. All of us. Q. It indicates there in the last paragraph in looking at -- it said that Hydro has promulgated its own depreciation policies and procedures. The differences in doing that between Hydro and other bodies have been that Hydro does not include net salvage in the development of its depreciation rates. Otherwise, charging it off as incurred, I guess, is what it goes on to suggest, but is it -- is it your intention to continue to follow that policy on a going forward basis to reevaluate it or have you given it any consideration at this point? MS. FRANK: A. I'd suggest we haven't given it any consideration at this point. On the other hand, I'm not certain that net salvage in our business is a major factor, but I'll leave it at that we didn't consider it. Q. Well, in some areas I think we found that the, you know, the net salvage which is the -- is it the difference between, you know, the value of it when you take it, when it's removed from service and the cost of doing that, the retirement cost of removal, if you will? A. Any salvage on our assets in the transmission or distribution businesses tend to be small. Q. But would the net salvage imply that it's the difference between the cost of removing it and what it's [Questioning] 1090 Board Staff/Consultants -- any value it might have? No? A. I'm suggesting that we're not talking about a significant dollar amount for this business. It is far more significant in the generation part of Ontario Hydro, so while I agree with you that this is something that we might look at, I don't imagine it's first on our list. Q. The costs of removing items that has -- has gone up in many industries and to some degree in that they find that there's -- there's actually a cost there that occurs when you do that and -- A. Removal costs are charged to depreciation so if you do track removal costs separately. Q. So when you net salvage, that's not included, net salvage? A. Salvage would be the sale of assets that were removed from service and we're able to find somebody else who wants to use those assets. That's why I am having a lot of trouble thinking of many -- I guess there is some equipment that would apply but... Q. There could be a negative salvage value, that's correct; is it not? A. The removal costs we charge against depreciation are the costs of taking anything out of service. The salvage tends to relate to an asset that you would no longer need and could use nowhere else and you would sell to somebody else. I have trouble thinking of [Questioning] 1091 Board Staff/Consultants many of those in our business. MR. HARDY: I have heard a couple of ways at this particular question. I've heard the panel quite clear in the response. MR. HOPKINS: Q. If we look forward to page 30 of the same document. MS. BULKLEY: On this page, the study is indicating that at that time there was insufficient historical information available to assess dispersion patterns for some of the asset categories due to infrequent retirements. I guess the question is: At this point does OHSC have sufficient information to develop dispersion patterns for those asset classes or no? MS. FRANK: We use Iowa curves in our RC assessments and there is generally sufficient information to come up with an Iowa curve. Universally utilities have trouble with recording retirements and I'd say we're no exception there. So the information could always be better and it's constantly a struggle to make it better but there is sufficient for us to come up with Iowa curves for all of our asset classes we use for RC. MR. HOPKINS: Q. This report that we've been looking at, by the way, puts forward a number of recommendations. I presume that these were taken into account and you have been working on those recommendation since -- this is a 1990 report. [Questioning] 1092 Board Staff/Consultants MS. FRANK: A. 1990 is, for me, a long time ago. So I'm not intimately familiar with, you know, the use of this report, but I would agree with you that that would have been our normal practice. So I'm going leave it as normal practice rather than having specific knowledge of how we implemented it. Q. There is also some testimony attached to as well which was given by Jewels Brightling I believe and I guess I'm not sure of the date of that testimony. Do you know? A. I'm sorry, I don't know. It was something in Mr. Ariss' evidence which prompted the filing of this that set a date, but I don't recall it. Q. I think it was the 1991 time frame. Would that seem -- A. Given that the next piece is the Ontario Energy Board's interim report, and I think it refers to the same topic, so I would suspect that... Q. 1990/1991 area? A. Yes. MR. HARDY: Are you giving a reference that could be helpful to the panel? MR. HOPKINS: I just wanted to establish what the time frame for it was and then, you know, it is equally, you know, a past item. Q. But the author, he suggested at that time that you seek some independent assessments of service lives as was being determined by your depreciation review [Questioning] 1093 Board Staff/Consultants committee. MS. FRANK: A. Sorry, Bill, somebody just showed me that it was May 11th of 1990 that this piece was filed. Q. Thank you. I believe that suggestion was on page 1926. A. 1926. I'm sorry I missed your question. MR. HARDY: Do you want to restate your question? MR. HOPKINS: Yes. Well, it wasn't a question yet, but I guess it is in a sense. Q. In that document at page 1926, I believe there was a suggestion made that -- there has been no independent assessment made of the service lives that are coming forward from your committee at that time. And I guess my question is: Have you in your depreciation review committee process sought to get independent views on what's taking place since then? A. I'm just reading the portion where it is. Okay. We haven't had an independent study of our depreciation review committee assessment. Not that I can recall. I will say no, there hasn't been any independent study. Q. Your committee, as I understand it, has met for many parts of the organization -- has drawn in many people from many parts of the organization as part of the committee to-- A. Yes. Q. --look at these properties? [Questioning] 1094 Board Staff/Consultants A. Yes, it does. Q. With your organization, will that committee still exist on a going-forward basis? A. We are actually considering how we might reconstitute our review of depreciation for Ontario Hydro Services Company. There is a lot of merit from using the approach that we do that we have the engineering expertise from within our organization. We have financial people involved and we have people who know what the assets are doing from kind of a field presence, knowing what's happening to their condition and very intimately familiar with what their life would likely look like. We don't want to lose the good part of that in anything that we would do. On the other hand, we certainly have considered having an external party being involved in the review. There has not been a determination yet as to how we will proceed in the future. Q. I see. Well, there were a number of I think of comments in this report that perhaps some more independent outside assistance might make sense even though there were comments -- additionally there were comments that what you are doing with your group activity was somewhat unique and quite good to do that the way you're doing it. I guess the nature of a number of questions that came forward were just how you anticipated going forward [Questioning] 1095 Board Staff/Consultants with that and if you were going to adopt some independent review of what you are doing at some time in the near future. A. It is being considered but a decision has not been made. MR. HARDY: We are approaching the noon hour. I am just wondering if there is a logical place to have a break and then we will be breaking for lunch. So if you can inform me what seems to be a good place to break. MS. BULKLEY: I actually just have a couple more questions related to that testimony and maybe we can do that. MR. HARDY: Thank you. MS. BULKLEY: I will try to make a blanket question out of it for us. Q. That particular piece of testimony had noted, as Bill said, that there were some good processes and I think you have described some of that as well, but it also did include some areas that maybe could be improved in your review process, including things like developing checklists and technical inspections of assets and making the depreciation review committee members a little bit more knowledgeable about the subject matter. I think you go with a broad range of people from your organization. To the extent that that hasn't been incorporated in the review committee today, are those kind of things going to be incorporated in your new process? [Questioning] 1096 Board Staff/Consultants Will you be sort of referencing some of the areas that were pointed out as - weakness might be a strong word - but areas needing improvement and incorporate that in your new process? MS. FRANK: A. We've already incorporated some of those and I will just pick on the education as an example. What we've done is we've found educational conferences, and there's a whole series of levels of conferences. I personally attended some of them. You normally have to go to the United States to get these, but you get trained on the depreciation studies and the approach and helpful hints as to how to improve your retirement tracking, which is something I found useful. But we send a lot of our people on this training and there would always be somebody in attendance who would have gone on some formal training to make sure that they have that perspective for the committee. In terms of keeping better records and logs, it has been certainly been a priority for us to do that. We are now where there are tests that one could use. We are noting what tests have been used. I would say that this is a path that we are on. I wouldn't say that we are at a level of excellence in this area yet, but we've certainly made several improvements that I know of in the recent years. MS. BULKLEY: Okay. Thank you. MR. HOPKINS: I think that's really the area we [Questioning] 1097 Board Staff/Consultants had on depreciation. We would like to turn to some tax matters, but we can do that after lunch. MR. HARDY: After lunch. I have about twelve. Why don't we break for an hour and come back about five after one. Okay? So we are adjourned until five after one. ---Luncheon recess at 12:00 p.m. ---On resuming at 1:10 p.m. MR. HARDY: Are we ready to go? Welcome back. Where we left off was questioning by Bill. We are continue the questioning. Again, this is an informal process and if you have any questions, please come forward and we will make sure we get those questions asked. Why don't you start off and we can resume. MR. HOPKINS: Okay. We had stopped talk about depreciation when we left in the depreciation report. Q. I just wanted to -- there were a couple of other questions on another page here and I just wanted to go through those quickly, if I could. Depreciation. The Depreciation Report. MS. FRANK: A. Bill, we are bringing somebody to come who is more of an expert in this field than I am to talk about any income tax questions you might have or depreciation. I expect -- this is Don Ariss that was here on Panel 1. I expect him to arrive within the next 15 minutes, so if there is a chance we could hold those, that [Questioning] 1098 Board Staff/Consultants would be appreciated. Q. Certainly. We had another question which flows from something we discussed earlier too which is as you describe the reorganization that took place in the network asset manager staffing functionally in the finance area, and you did provide us with just last evening a mapping of the organization and I just wanted to go over that quickly with you, if I could. A. That's fine. Q. I think it was called item 8; is that correct? A. Yes. Q. The new and the old organization mapping of the new organization to the old organization. And in this document you've looked -- shown the staffing levels by organizational unit similar to those that were going forward with in 1998 and in 1999 and the changes attendant therewith from one year to the next. And it shows a net gain, does it not, of 214 people between-- A. That's correct. Q. --between '98 and '99? I guess I understand that change in staff level from '98 to '99 to be the fact that the '99 figures now incorporate inherent in them some of the functions that were elsewhere in the Ontario Hydro organization at that time in '98? A. That's correct. [Questioning] 1099 Board Staff/Consultants Q. Okay. Those functions you have listed as treasury and legal and materials management, information services. I think I understand that to some degree. In Table 2 you have the staff levels shown of 5,604 broken down between the first column showing 1999 and then the new 1999, and is that the difference that we were talking about this morning where we reshuffled some of the functions? A. That's exactly. The first page was the organization that existed at the time that we prepared the submission and it was the NAM network services organization. And when we get to the second page on Table 2 under the new organization, the new is the one that Rod Taylor showed us on Day 1 of these Technical Conferences and we've been talking about since. I think yesterday morning, as well, we talked about in the network asset management group -- this gives me an opportunity to correct I think a number that I said incorrectly during yesterday morning's material. We talked about the network asset management 481 and how was that broken up. And it went to in the 310 being only DNAM or TNAM or transmission network asset manager and distribution network asset manager, and all the rest of the support groups have been removed. I think I said 70 yesterday and it was 170. Q. Yes. A. I missed the hundred. Q. This shows the 170 reduction which is then [Questioning] 1100 Board Staff/Consultants taking the support group and put -- as I look at this chart, of course, a numbers of things are changing but it goes into -- effectively those people show up again down in the OHSC level I would presume? A. Yes, they basically go two places. Line 8, the planning and development, the majority of that staff has come from the network asset management group and they would be the planning people, the regulatory people and the performance management. So it's like the first bullet under item 1 has moved down to line 8. And the second bullet moves down to line 9. Q. The change for 1999, was to -- this change that Rod discussed was a better way of doing it? A. I think there are several things that we thought were helpful. One, as we were discussing earlier today, the centralization of the support functions to look for best practices, to get efficiencies out. You had asked if there were redundancies, we wanted to make sure we clearly identify the most efficient and effective way of delivering each of the support functions in HR and finance and IT and centralized is, we believe, likely the most efficient way to do this. So that's the one change that was made rather than having these functions spread throughout. The other one is by putting the wires together, I think we had some conversations about the asset management model and I believe it was Dave Barrie that indicated that one application problem that could occur is if the network [Questioning] 1101 Board Staff/Consultants asset manager and the network services didn't work together in an alliance, and if they saw themselves as too far separated there could be problems. Well, this brings them closer together and under the wires operation they will work jointly to get the work accomplished and not be as far separated. Q. I guess it struck me that one of the reasons you mentioned was that it is a better way to do it, but in the end it comes out the same, everybody found a home. 5,604 was what was there before we changed them around and 5,604 is what is there after we changed them around. Is there -- A. Bill, I would suggest that that is -- we are in 1999 now. This is our first year and basically it is a matter of getting everybody into the new organizations and then looking for efficiencies. Q. I see. A. So today when we do it, people didn't drop out, but I do believe there will be opportunities to find efficiencies as we go forward. Q. Has any of that been reflected in the cost estimates that you look ahead with? A. I believe that in 2000 we show cost reductions and you have noticed in the support area in particular quite drastic reductions from what we had in 1999 that had higher costs through re-engineering and everything else. I think one of the ways of reaching is through [Questioning] 1102 Board Staff/Consultants this exercise that we have now done. I don't know if we could have managed such large reductions in the support costs if we hadn't centralized. Q. Thank you. Looking at the OM&A budget in terms of the functional areas, the seven major component areas that we've become somewhat familiar with, is there -- you may have answered this before, bear with me. Is there a possibility that those can be broken up by labour and materials and overheads and that type of cost breakdown? Those would be the major -- those would be the areas that are... A. We did file information on a resource breakdown on January 4th, tab J, and it was for the entire organization. Q. Yes. A. We provided that. Q. But was that in any way developed with reference to these other categories, I guess is my -- the sustaining, operating, customer care? A. I think Myles was prepared to discuss this. Most of that work is accomplished by network services, so... MR. SURI: A. Maybe I can answer that. When we were putting programs together we were just looking at this is a plan which we have done. And when we are developing the plan certainly we did not go down to the finer resource levels. Essentially the plans were done on a total basis. [Questioning] 1103 Board Staff/Consultants Q. So that is not -- it's not possible to do that, at this point, is that...? MR. D'ARCEY: A. From the services perspective we have broken out all the products and services which we provide and have calculated the total costs for delivery of that, including labour costs, TWE, material costs and the delivery of specific products and services which we talked about in the SOAs which have been developed and a unit cost to deliver those components. MR. SURI: A. When the actuals are going to be reported we will have those breakdowns. When the actual work starts and actuals reported, but from a planning point of view those breakdowns were not done. Q. The OM&A activity, as you've set it out for '99 and 2000, shows a pretty significant decline from '99 to 2000 and is in the order of 50 million. MS. BULKLEY: I actually think a good reference for this would be page 87 of the initial filing and it is Table 11.1. MR. HOPKINS: Q. And Susan mentioned that this might reflect a - the reduction in head count or... MS. FRANK: A. Let me -- there seem to be two areas if you're looking at page 87 where you see the reduction between 2000 and '99. And where it's significant, one is the same and the other is the distribution support. So if we do it again -- well, I'll start with distribution support and we'll pass it over to Vipin to talk about sustaining. And hopefully -- [Questioning] 1104 Board Staff/Consultants Q. That will be fine. A. -- we'll get something there. In 1999, similar to the pieces that we talked in transmission, there are costs associated with establishing the new functionality and getting the processes in place. So there's extra, I would call them de-merger costs, in 1999 that disappear once we've got things set up. So that's one reason for the drop is some of the work just disappears. The other would be efficiencies that we expect to achieve as we re-engineer the processes and we put in a new information management systems and we also have new financial systems and we -- so one of the capital projects related to HR services talked about employees accessing information directly themselves and not needing to have HR people in order to do the accessing of the information. That's an example of one of the efficiencies that will drive some of these savings, but... Any more than that? Q. When you look at your costs for year 2000 and if there are reductions in work forces, those are permanent reductions in work force? A. Yes, that's -- that would be -- once we've redesigned our processes, using my HR example again, if once we've got the tool in place, the people can access their own information about their own benefits and do that from an automated system. The people who used to do it manually won't be necessary any longer. [Questioning] 1105 Board Staff/Consultants Q. As you reduce the work force, I mean, what might be the size of that reduction? Do you have any idea? A. In terms of the work force? Q. People. Attendant with that kind of a cost level change. You're talking $12-million of distribution support cost change. A. The number was 60 to 38. So are the numbers... Is that 23? No, 22, isn't it? MR. HARDY: 22. MS. FRANK: Okay. The -- just one more minute, please. Okay. At tab A on table 1 shows the changes in the staff levels. So. MR. HARDY: Sorry? Tab A, table 1? MS. FRANK: Tab A, table 1. Let's go there. On the corporate service functions, we see almost a reduction of about 50 people, but some of the reductions because this is still the older organization in networks -- asset management network services also would have been from these support groups, so there's in excess of 50 people. MR. HOPKINS: Q. In projecting costs for the year 2000, have the compensation or termination costs been taken into account of those 50 people? MS. FRANK: A. The -- there has -- the surplus in staff costs are in for 1999 and we've heard about the provision, the GAAP provision for surplus staff costs, so [Questioning] 1106 Board Staff/Consultants that there is some in there. In addition, we have -- we expect some people to leave by attrition. Our work force tends to be getting a bit older and a lot of people are approaching a pensionable age, so that will help us out as well. Q. Thank you. In your filing you show under your work programs for OM&A expenditures for data collections for the divestitures. I'm thinking of what's shown on page 91 of the original filing. $4-million in '99 and $3-million for 2000. MR. SURI: A. Yes. Q. I guess I'm not sure what the nature of those costs are. If you had something, you could explain that a little bit more with, and also there seems to be an indication that these are recoverable; is that... A. That is correct. The nature of these costs is that we, when we are dealing with annexations or when we are looking at boundary studies between municipal electric utilities and the distribution function within the Services Company, we have to collect the specific information about customers, we have to collect the specific information about the assets. When these studies result into specific annexations, proper inventory of assets, those dollars are recovered from municipal electrical utilities. There is a portion of the dollars which are not recovered from municipal electric utilities if you are engaging into some general work. Out of the $4-million for 1999, 2.7-million is [Questioning] 1107 Board Staff/Consultants planned to be recovered from municipal electric utilities because we have some specific annexations which are going on at this point in time. And the activities which we are conducting, municipal electric utilities would be charged for this particular work. Q. Yes, I think you showed that in some of your other materials. It is some $90-million of annexation change here? A. Of assets are being transferred or planned to be transferred between now and end of June, July this year. Q. There are no asset transfers shown, though, for the year 2000? A. The annexations essentially are going to be completed under the old Bill 185 because the municipal electric utilities were restricted to those municipalities who have passed by-laws by a certain date in June. And there were 20 municipal electric utilities who qualified for that. And after that, there are no annexations to take place. After that, if there are any asset transfers need to take place, they will take place on a commercial and voluntary basis. Means old Bill 185 formal land rules will not apply. Q. But you're showing an expenditure here which is close to what you had for '99 in the year 2000 for that related activity, but no result. And I was sort of curious how those might match up? [Questioning] 1108 Board Staff/Consultants A. Yeah, what is happening is we still are going to be involved into a number of items which would be in the area of for distribution rationalization. What's happening is we are dealing into some joint ventures with some - a number of municipal electric utilities. Whether those joint ventures ever get formed or not, time is going to tell. If joint ventures are formed, some costs may be recovered from those joint ventures, but the data collection still needs to be done before you perform any studies or look into that. So we are not showing any -- the same level is being shown because the distribution rationalization, as my understanding is, is going to continue and will go on for the next few years, anyhow. Q. Okay. And one final -- where are the recovery of these costs shown? Is that in the revenues received? A. Recovery of these costs -- I'll have to double check on the accounting -- when we do the transfers of the assets, these costs are part of the transfer price. And at the end, it is really a recoverable work, I'll have to double check that if they end up in the recoverable revenue which we have shown here or not. I can undertake to -- I can look into that. Q. Susan, you have a comment on that? MS. FRANK: A. Yeah, actually I believe the costs that we are showing in here are the costs that we have to bear in this. There is a recoverable element [Questioning] 1109 Board Staff/Consultants that's associated with the transfer, but these are the costs that -- I would describe it as the cost that we have to pay rather than the ones that we can recover. There's elements that we can charge for when we do and there's extra work that we need to do on our own that we can't bill for when we do it. So the 4-million indeed is not going to appear in recoverable work. It's a cost that would stay with us. The cost to actually be doing the annexations is higher than that and that higher portion would be recovered from the customers as part of the annexation and do not appear in our costs anywhere. MR. SURI: A. Well, okay. Why don't I -- I think we should -- I'll look into that. Q. Can we have maybe some further confirmation of that? A. Yes -- MS. FRANK: A. Sure. MR. SURI: A. -- and we will do that. MR. HARDY: Okay. So I'll just note on that table whether or not if there are OM&A costs or if there are other recoverable costs related to it. MR. SURI: Correct. MS. BULKLEY: Q. If we could just talk very briefly about grants in lieu which were in your filing on page 92. You have in here $3-million for each year of the test period as a forecast and you indicate that this is fairly uncertain based on discussions with the government. Can you just give us a sense of when you expect a little [Questioning] 1110 Board Staff/Consultants bit more certainty on that. Is it within this two year period. MR. ARISS (SERVCO): A. I'm sorry. Q. I'm sorry? A. I apologize. I didn't realize that question was being directed my way. Q. I actually didn't either. I was just questioning on the grants in lieu, the forecasts that have been included in here of $3-million a year. I understand that based on discussions with the provincial government this is an uncertain number. And I just wanted to get a sense of when there would be more certainty surrounding this number? A. Okay. If we could just again clarify that amount grants in lieu relative to the proxy income taxes or is that in relationship to our property taxes? A. Yeah, this is property tax. I'm sorry, I had originally -- it was page 92 of the filing. It's in reference to property tax. MR. HARDY: Sorry, could you just reintroduce yourself for the purpose of our court reporter. MR. ARISS: Don Ariss, accounting policy and reporting. MR. HARDY: Thank you. MS. FRANK: If it's property taxes, I get to deal with it. If it's income taxes, it's Don. MS. BULKLEY: Q. I should have been more specific at the outset. [Questioning] 1111 Board Staff/Consultants MS. FRANK: A. Okay. The property taxes is what we've got in here is the current level of property taxes that we pay on the distribution system. There's always the possibility that that amount could change, but for now, we continue to use the $3-million. We have had no indication from the government that they're proposing to change it and I believe it's a good number to use for going forward. Q. Okay. That's fine. I guess just from reading the initial application, it sounded like there was just something that you were ironing out right now? A. No, there's nothing in the works. It's always the -- I guess with property taxes there has been new legislation considered and everything, so it's just that uncertainty. Q. Sure. A. But the $3-million is certainly an item that we shared with the government. They haven't indicated that it's unreasonable or -- so I think it's a good number to use. Q. Okay. That's fair. MR. HOPKINS: Q. One other thought on that distribution support OM&A change that we talked about earlier. Largely, if that's due to reorganization of the organization, I guess I wondered if that could be treated as a capital item as opposed to an expense item, some of those changes, or if you had any comment on that. MS. FRANK: A. Well, some of them are. The HR [Questioning] 1112 Board Staff/Consultants system that I -- my example that I continue to use in terms of the -- developing the new system and re- engineering the processes to allow employees to access the information themselves. That isn't at the capital program as one of the costs. Some of the financial systems is part of the people soft pet project, we are assuming that we'll have the efficiencies in there and that project is capitalized. So if it's a system process with the -- we're capitalizing all of those and the benefits that we're expecting to receive for them are showing up in the OM&A dollar reductions. Q. So you sort of look at '98, '99, 2000, and we see a $25-million bump in '99 -- A. Yeah. Q. -- and it drops off again. And we talked about the drop off, you know, people that are... But it seemed like it was a one time cost element of setting up something new that would have some life and... A. There's the -- there's several elements of this. In the '99 you'd asked me if we had surplus staff costs in there because obviously if we are going to have fewer people we need to have the costs for it. Well, the surplus staff costs are in '99 and that, I'm trying to remember. Q. Is that what happens between '98 and '99, that the staff suddenly goes up in '99 and then you get rid of them in 2000 or... [Questioning] 1113 Board Staff/Consultants A. There is some increase in staff that you saw, we looked at it a little bit earlier in that other schedule that was filed on the 20th. Some of that increase in staff is new functionality, the treasury and other items. There is a bit of staff that I would say are surplus today from the old corporate group that we get our share of them, so to speak, and so there are some surplus people coming over as well. But the surplus staff costs, actually when we go down is in '99 and we have those costs primarily in '99, there's a tiny bit in 2000, but it's primarily in '99 when we're doing the surplusing and that amount is in this $60-million. So that's one reason for the higher costs. Some of the other setting up of processors or gathering data that you need to do when you brought this new organization are also in here. So I call some of these demerger activities that we are doing, so there is some of that that's in here. What's happening is we have got some things driving costs up and, on the other hand, we also have other things that are bringing it down. So when we get to 2000 we have a reduction, but what we're doing in 2000 is not the same thing we did in '98. In '98 we didn't have treasury, we didn't have audit functions that were included in here to the same extent as we have in 2000. So there is a different mix of work for the support function. I just use those examples. There is law, there [Questioning] 1114 Board Staff/Consultants are many other examples, but it is just a different nature of what's happening in distribution support in 2000 than there was in '98. The '99 blip is making that transition. Q. But I guess it's proper accounting policy to treat it the way you have. You look at the difference between '98 and 2000. I guess what I see is you have changed the organization and, in doing so, you spent $25-million in '99. That was one way of looking at it. I just wondered if that type of expenditure could be capitalized or should be capitalized as opposed to expensed? MR. ARISS: A. If I might touch on that for a moment. I believe we touched briefly on that policy question during Panel 1 as to what GAAP allowed in terms of capitalizing those types of reorganization or restructuring costs. And just to clarify, as Susan has correctly pointed out, that if as part of that activity the item that you are expending money on do represent assets, in other words, be it new systems or you are acquiring physical assets that qualify as a capital asset, regardless of whether you are doing a restructuring or anything else, then obviously those costs may be categorized as being incurred because of that reorganization. But the inherent nature of them is still a capital asset and, therefore, under GAAP they are treated accordingly. [Questioning] 1115 Board Staff/Consultants If you are dealing with period costs, costs that should be treated as OM&A in that period, then there was a new pronouncement that recently came out by the Accounting Institute of CPAs in the U.S., just a clarification, because this has been an area where there had been over the last number of years there had been significant reorganizations and there had been need for some clarification, and they made it very specific in that pronouncement that these type of costs were not capitalizable under GAAP. So the treatment that you see in the submission is in accordance with GAAP. Q. There are costs of an organization that are not tangible assets that do get capitalized. That is true, though, is it not? A. Of course. Yes, that is correct. I mean, intangible assets are assets nevertheless. Patents or items of that nature. Q. When you buy a company you pay something for it, you would capitalize your purchase price, so to speak? A. Well, you would most likely set up a goodwill item, again, because you have an arm's-length transaction and that is really what makes the difference in that case. If you have an arm's-length transaction, a willing buyer and seller, and they have established what is deemed to be the appropriate market price for that transaction, if you're willing to pay -- if the purchaser is willing to pay more than the book value for those [Questioning] 1116 Board Staff/Consultants assets, then of course you have a goodwill item. And that quite often, then you go through an exercise of assigning to the individual assets that you are acquiring, what their market value is, effectively what that goodwill represents, the expected potential for incremental earnings in the future and that, because it can't be assigned to a specific depreciable asset, does get set up as goodwill and is amortized over what is considered -- or whatever is considered to be an appropriate period of time. But that's different from carrying out a reorganization where you are spending the money. There is no arm's-length transaction involved. This is simply costs you are incurring. You're right, there is an expectation of future benefit, but there isn't a basis within the accounting framework to say: Yes, this is really going to do something for you. So it's a function of, in general, a more conservative position that accountants do take when it comes to setting up those type of expenditures on the balance sheet. Q. Thank you. I'd like to take advantage of your being here to ask you some question that's been hanging on income taxes and perhaps depreciation as best I can express it because I'm not an expert in this area and you are I'm sure. In the information package we got on the 12th of January here, we see that the -- when we look at the [Questioning] 1117 Board Staff/Consultants detailed calculation of taxes that you provided for the distribution entity, we note that the capital cost allowance -- that the depreciation expense shown is some $144-million and that the capital cost allowance shown is only $138-million. And I guess, as I understand it, the capital cost allowance is sort of the accelerated write-off of facilities. It is the allowance for an accelerated write-off, is that...? A. Well, the capital cost allowance is based upon applying the rules that come from the Income Tax Act of Canada, of course, that there are specific depreciation -- well, there are specific capital cost allowance rates applied to the particular classes of assets. So it doesn't necessarily mean that one is accelerated over the other. They are different. The capital cost allowance is done on a fixed percentage applied to a declining balance, and in the capital cost allowance pool our depreciation policies are based upon a straight line depreciation over the remaining service life of those individual assets. So the difference between those two is driven by the specific differences in the timing and the different methodology that is used for calculating our depreciation versus the methodology for the capital cost allowance. Q. Just generalizing, I realize each rate -- each class and each rate of property will have something different, but sort of generalizing, it was my impression [Questioning] 1118 Board Staff/Consultants that the tax allowance for depreciation will generally exceed the book allowances in terms of the rate per year, the amount per year? A. When you're dealing with manufacturing and equipment and - well, specifically class A which is, I think, I believe it is class A, I would want to confirm - but that's a 20 per cent capital cost allowance rate. If you -- Q. Over a five-year life and that effectively -- A. Well, it's actually -- Q. If you look at your books you'd have to have -- to be the same, the depreciation recorded on your books would have a five-year life? A. Not exactly because, again, it's on a declining balance basis. So it's 20 per cent of the balance so it does extend out over greater than five years. If you look at the classification, though, for the majority of our assets which is class one, and I think touch on that during our Panel 1, that the provincial government in looking at what would be the allowable capital cost allowance categories for us, have allowed us to also use class two, which addresses property acquired before 1998. For class one, you're dealing with a 4 per cent capital cost allowance rate and a class 2 is only 6 per cent. So we are -- because those are the particular classes within which our transmission and distribution [Questioning] 1119 Board Staff/Consultants assets fit, you're not getting that kind of an accelerated rate of capital cost allowance versus depreciation, which is probably more typically what you're thinking of when it is manufacturing and processing type of equipment, your more standard type of assets that commercial businesses that you might be thinking of. Q. I guess I was thinking that I would expect to see that capital cost allowance in excess of the book rate depreciation expense and -- A. If we were able to get a 20 per cent classification, then that's what you would, but those are not the rules we have to fit within the particular definitions of those classes as prescribed by the Income Tax Act. Q. So you are starting at a much lower level of depreciation? Four per cent you said and 6 per cent? A. Four per cent and 6 per cent are the -- again, those are the capital cost allowance rates applicable to the majority, the vast majority of the assets that we will be starting off with. Q. Six per cent would not be equivalent would it, or would it be equivalent to a 15- to 20-year life? Is that -- whatever that is. A. Actually, I'm not quite sure. I don't have that -- Susan might able to do a quick calculation there for us. MS. FRANK: A. I will try, but I don't know. MR. ARISS: A. Because -- again, because it's on [Questioning] 1120 Board Staff/Consultants a declining balance, I mean, that is something we could check in to give you an approximation. Q. It's not an equivalency, though? A. Yes, it is very difficult to strike an equivalency, but if that was -- it is a mathematical calculation which could be determined. Q. Okay. MR. HARDY: Do you have an answer for that? MR. ARISS: Well, I'm just asking if it's a necessary -- if we had to do that calculation if that's something that you would desire? MR. HOPKINS: What would that calculation be again? I missed it. MR. ARISS: I believe you were asking what would a 4 per cent or a 6 per cent declining balance rate equate to on a straight line basis, what number of years' life would that equate to? MR. HOPKINS: I think that would be helpful. If you can do that I think that would be helpful to show that. And that's a general proposition. MR. HARDY: I'm not going to note that as information coming forward. It sounds like something in a in spare moment you can do on a calculator. MR. ARISS: That's correct. MR. HOPKINS: Q. I just need to change the page here. I would like to refer to the information on depreciation that was filed in the original -- or the [Questioning] 1121 Board Staff/Consultants December 7th document. It was the portion that dealt with in Appendix 5 under "Depreciation Review Committee Recommendations". MS. BULKLEY: I have got a lot of pages spread out here. So basically what I'm looking to do is reconcile the numbers, the totals in Tables 3.41, 2, 3 and 3.51 with the numbers that are -- the totals that are listed on page 201 of this filing. So I will wait for you to get the same number of pages spread out in front of you. I think communications is probably a straightforward one, but the other three are not so evident to me. MR. ARISS: That, if I may, is something I -- if I could just check on that because I do recall when we reviewed these numbers, when the depreciation review committee came out, we had to have a separate reconciliation done. They do reconcile, I can assure you of that. The numbers -- it's difficult to follow them through this and I don't have the particular reconciliation in front of me. I didn't bring that along, but we did check on that. I understand the difficulty because it didn't appear to tie in, but there was a reason for that in the way they present the information. MS. BULKLEY: Yes. If you could tie these in. If that is something you can provide so as to help with these various schedules. [Questioning] 1122 Board Staff/Consultants MR. HARDY: I will make a note of that. So it is Appendix 5, December 7, reconciliation of tables 34.1 -- MS. BULKLEY: You can shorten it and say all the tables in Appendix 5 to page 201. MR. HARDY: Thank you. Go ahead. MS. BULKLEY: Thank you. MR. HOPKINS: I think we are finished with tax and depreciation-related issues. I hope. Q. I wanted to look at the remote communities costs for a moment, if we could turn to that. MS. FRANK: A. Having brought Don to answer those kind of questions, I wondered if there is a chance there are any other questions on tax or depreciation before we let him go. MR. HARDY: Would it be possible to go to the participants? MS. BULKLEY: That makes perfect sense. MR. HARDY: Are there questions from participants related to either depreciation, CCA or tax? ---(No response) Okay. I don't see any. So you're excused. Thank you. ---[Mr. Ariss withdraws] MR. HOPKINS: I have a question to start off looking at this. Q. If we look at the level of staff that we see assigned to the remote communities business, we see a significant difference in the, what shall I say, [Questioning] 1123 Board Staff/Consultants customers-per-employee basis than we see when we look at SERVCO in the whole, and I sort of wondered why, you know, why that is? MR. SURI: A. In general, the answer would be twofold. One, the remote communities we are dealing with generation as well as distribution because these are integrated utilities in a general sense. Two, the distances in remote communities are quite a bit -- as a matter of fact many of the utilities you cannot even get to them by road. The only way to travel would be either by air or by winter roads. So certainly what happens is because of the distances, because of the additional load of generation, those ratios for distribution in remote communities are not comparable. Q. I may have said that in -- you have higher labour costs, you know, at the sites, you have agreements with the First Nations, I understand, of some sort? A. That's correct. Q. And they provide-- A. Some of the services, yes. Q. --a number of services? A. That is correct. Q. So this would cut down on your staffing requirements? A. That is correct. Because there are local people there who will take care of some of the activities, but not all of them. [Questioning] 1124 Board Staff/Consultants Q. You show for the remote communities an expenditure item which is a fairly significant part of the OM&A costs for environmental concerns. Is the management of that activity to be part of the overall Ontario Hydro Services Corporations' activity or is it going to be a separate operation? A. The remote communities is being managed as a separate operation. We keep track of the revenue and cost of remote communities separately. We may get some general direction from an environmental policy and environmental programs point view for the common groups which we have within the Services Company, and the remote communities operation does pay an allocation for that, to get a benefit from those services. But as far as the identification of the sites is concerned, as far as the remediation of the sites are concerned, those are the OM&A costs. So there is an activity which goes on on behalf of remote communities at the Services Company corporate level. And the functions and services costs are allocated in an appropriate manner to the remote community operation for providing those services. Q. Are their programs operated as part of the overall program for the wires company or are they going to be on a separate track for a separate reason? A. They are separate track for a separate reason. One of the things was the Ontario Ministry of Environment sometime in September 1997, they had a ruling [Questioning] 1125 Board Staff/Consultants that we should be identifying all power generation facilities where adverse effects exist or likely to exist as a result of -- because these are diesel sites as a result of fuel which could be spilled or any other contaminations which could be in the ground. So one, we are keeping track of the generation sites as a result of that ruling. Two, remote communities being a separate operation, we are keeping track of those costs and programs separately. Q. You've indicated in the remote community expenditures that there's about a million dollars for doing site assessments? A. That is correct. Q. And one of them is called property boundaries definition, defining property boundaries to older sites to establish property ownership. Now, that's one of the items that's in there in this amount. MR. HARDY: Sorry, where are you, Bill? MR. HOPKINS: I'm looking at the supplemental material that was filed on the 23rd and on page 2 of what's under tab D. MR. HARDY: Thank you. MR. SURI: Okay. Yes, I'm there. MR. HOPKINS: Q. It sort of the seems like a fairly high expense to define property boundaries and what -- what is involved in that? I mean wouldn't property [Questioning] 1126 Board Staff/Consultants boundaries be fairly well known by this time? MR. SURI: A. The property boundaries are known, but what we are really looking at is when we were dealing with contaminated land issue, it becomes an issue clearly saying what are the property boundaries, what are the -- in many times we have lands around distributing stations or these generating stations which other people may be growing vegetables or occupying those lands. But when we deal with the decontamination of these lands, it becomes absolutely essential that what those boundaries were and who has, essentially, been encroaching on our property. And the concept would be that we want to test that the contaminations, have they moved from where the generation or distribution facilities would be, and look at what our liabilities are in that particular area. So the whole land remediation program which applies to remote communities as well as distribution station sites is dealing with that. And one of the key things we are looking at is identification of the sites and what are the issues associated with that. As I mentioned, that if other people are using our land, many times, you know, we may not have the proper fencing on these sites. And the other people may be using it so the lines may not be as completely shown and evident to the other people. So the identification of the boundaries and making sure, depending on the contamination level in the land, we may have to deal with putting some proper fencing [Questioning] 1127 Board Staff/Consultants and the part of that would be is that you do have to define then what the boundaries are because you cannot start putting fences if your boundaries are on other people's properties. Q. And do I take it that this million dollars is part of what was described when we looked at the 1998 cost level for environmental at the remote communities of being about $2-million a year, suddenly it goes up to $7-million a year in '99 and $7-million a year in 2000. And we don't know what goes on after that, but is this a one-time cost of a million dollars or is this something -- A. Well, I think. Q. -- is this something that's a million dollars every year because we see it go up to 7-million and so it stays there? A. The land remediation program is in phases. The first phase is to identify identification of the site, do site assessments. And the second phase, which is part of the $7.9-million cost in '99 and future years is to take on the remediation work. Means if you have to dig some soil and remove it to different location like decontaminate the properties or stop movement of the contaminations from the contaminated site to adjoining properties, whatever work needs to be done. So the additional monies -- the identification would be in one-time cost, but the remediation would go on until we have cleaned up all the sites. Q. So the reason it goes up from 2-million to [Questioning] 1128 Board Staff/Consultants 7-million includes this 1-million, but then as it goes on at 7-million, the 1-million is replaced by additional expenditures on remediation, is that -- A. That is correct. Q. That's the concept? A. That is correct. Q. If we look at the - looking again at the remote communities and turning to some of their costs and this may have been something more appropriate for discussion yesterday because I'd like to talk just briefly about the assets and - of it -- if I could, maybe you could help me with it. On page 137 of the December filing, December 7th filing, we look at the remote community assets amount which show it to be about $36-million in total, going to 37 in the year 2000? A. That's correct. Q. And incorporated in those totals are the current assets and the other assets which represent between them about -- well, exactly in '99, $9-million of the total. 9-million of the 36 is in those two accounts. It's seemingly a large number for that reason. You know, a large portion of the total assets there. What are those items? MS. FRANK: A. I can likely help with that. Q. Awe, good. A. The current assets are composed of three elements. They're accounts receivable and they are -- I'm [Questioning] 1129 Board Staff/Consultants going to use the 1999 numbers because there's not a big difference to 2000 so accounts receivable in 1999 are 3.2-million. There's fuel for generation in the inventory which is 1-million; there's other inventoried material of another million, and that gets the total current assets of 5.2-million. Going to other assets which was the remainder of your question. Q. Yes. A. There's two items in there. First is deferred pension, similar to what we had in the rest of the company, of 1.4-million and OPB of 2.4-million getting us to 3.8. Q. And those amounts have been allocated, have they, based upon -- as we talked about the other day? A. The other assets have been allocated on the same principle. The current accounts directly relate to this business. Q. We may have touched on this before as well, but in light of the remote communities, there -- the cost that you set forward for them reflects 100 per cent debt financing as the basis for their cost to service? A. Actually, I remember that Ron Stewart answered this question and I believe he said something about a business that was so heavily subsidized wouldn't appropriately have a return on equity that you would also have to subsidize. So a hundred per cent debt was the agreed upon as appropriate. Q. The difference might come into play if there [Questioning] 1130 Board Staff/Consultants were two different people subsidizing, you know, the same thing. You know, I mean -- A. There aren't though. Q. There aren't though. If the subsidies that are paid virtually come back through and are paid by the electric users in the province? A. This -- the regulation that's under development now includes rural rate assistance and remotes as to one, I'll call it, almost grouping one form of treatment. And it -- it's uncertain as to just how it's going to come from the customer, you know, if it becomes -- through a pool, I don't know how it's going to be collected yet exactly, but the electricity customers of Ontario will pay for this somehow. Q. So it's pay me now or pay me later or... A. So why pay a return on equity for such a business. MR. HARDY: I wonder if this might be an appropriate time for the break? MR. HOPKINS: It might be. I think we are finished with that. We want to next talk about the retail monopoly supply items. MR. HARDY: Okay. Just before we break, I know there was an item this morning from Bruce Bacon. It posed some numbers I'm wondering how SERVCO is intending to get back to Bruce and the others in response to it. MS. FRANK: We thought that once we saw the calculation that Bruce had done in terms of -- he [Questioning] 1131 Participants suggested that there was some subsidy involved here. And what we wanted to do was see his calculation and then we could comment on what Bruce had to say in writing, we'd get it back to the Board and to participants. MR. HARDY: Okay. Thank you. Okay. Why don't we break for 15 minutes. That should take us almost to 2:30. Thank you. ---Recessed at 2:10 p.m. ---On resuming at 2:30 p.m. MR. HARDY: Okay. Why don't we reconvene. Are there any questions from participants? Maybe we'll start there for this part of the afternoon. We expect to be finished by three-ish. Okay. Go ahead, Mr. Robertson. QUESTIONING BY THE PARTICIPANTS: MR. ROBERTSON (OCAP): Q. Now, if I could refer the panel to page 90 of the original filing, and in particular, page 11... This has been dealt with to some extent, I think, to a fair extent by the Board. Just to review the '99 figure for data collections for divestitures is 4 and the year 2000 is 3. I couldn't follow from the conversation that went on between you and the Board representatives whether, in fact, the MEUs actually had to pay anything to acquire these assets. MR. SURI: A. The cost of collection of the data about customers' assets for inventory evaluation is paid [Questioning] 1132 Participants by municipal electric utilities during annexations and it is part of the transfer price. So if a utility is annexing assets under Bill 185, and the transfer price was net book value minus equity, we will be adding the cost of performing these activities and this will become part of the transfer price. Q. But I'm right in saying there's no way we can actually find out what monies you received for the transfer of these assets, even subtracting these various expenses from this data you've provided here? A. Sorry, I didn't follow the question. What money did we receive to transfer -- due to transfer of these assets? Q. Yes. A. The sale of the assets or? Q. Yes, the sale. A. The asset value in the submission have been adjusted for the annexations to the amount of 90 plus million dollars. Q. Okay. That's fine. Can you point me then to a place where I'd find that? MR. HOPKINS: I believe it's on page 49. MR. ROBERTSON: Thank you. That's good enough. That's all I've got. Thank you. MR. HARDY: Okay. Thank you. Roger? MR. WHITE (ECMI): I have a couple of questions and I can start with maybe Susan and she can bring others [Questioning] 1133 Participants in if she feels it's appropriate. It's Roger White and I'm with ECMI. Q. I notice when I go through the revenue requirement I find the contestable services and else that we talked about earlier. And elsewhere I find something called Reynold Programs under OM&A at a cost of between 6 and a half and $7-million. I guess there are two questions but they relate to the same fundamental principle that I'm trying to -- trying to get a handle on. These contestable items when they are -- when they are provided to customers, did they bear the full overhead burdens of the corporation in terms of what's billed out to the people for the provision of services or are these services being subsidized in some way. MR. D'ARCEY: A. Back in 1995, we went through a review process by the OEL, the Ontario Electrical League and the Electrical Contractors Association of Ontario with regards to practices related to this specific type of work. We came to agreements with regards to how that work would be managed and I referenced to earlier with regards to policies and that the customers are made aware of the fact that this is contestable work. And we were then also audited - independently audited, to ensure that our practices were for recovery of this work, we're in tune with acceptable practices. Q. Did I get an answer as to what makes a practice acceptable? Does it include contribution to net [Questioning] 1134 Participants income? What does it include? MS. FRANK: A. The costs that would be included when we do recoverable work would be all of the direct labour, material costs, any depreciation associated with the equipment that we use, and any overhead associated with the support groups in the OHSC levels that -- as well as a profit margin. So they're fully costed work and the costs in this work in terms of the direct labour and overhead rates are similar as to how we cost our own programs. Q. Okay. With respect to the rental programs, the 6.7- million and $7-million in costs that are included in OM&A, do the revenues associated with those programs more than offset the cost? A. Can you just take me to the page that you're referring to. Q. Okay. It is one of the handouts that we got today on monopoly supply. There is a chart called "Breakdown of Direct OM&A Costs" with an asterisk. MR. HENDERSON: A. And the question is? Q. There is $7-million and $6.7-million associated with rental programs. Does the rental revenue associated with those programs in a similar way cover all of these costs plus overheads plus a contribution to net income? A. Yes, the rental costs do cover all of those things that you mentioned. [Questioning] 1135 Participants Q. Okay. This is a general question and I don't know who should pick this up one, but I'll throw it out. Ontario Hydro retail is losing approximately 6 per cent of its customers as a result of these municipal utility expansions. If I look at the staff count in 1998 I see 5,390 employees. In that particular case it seems to me that a 6 per cent reduction in customers should have more than a 50 or 60 employee impact if there is a direct co-relation between the work involved and the services provided. Can you help me understand where the numbers go? MS. FRANK: A. Roger, going back to your reference again, were you referring to the piece that was prepared on January 19th, OHSC staff levels supplementary filing? Q. Yes. A. Okay, and the number that you are quoting was the 1998 total staff for all of OHSC? Q. Yes. A. Is that correct? Q. Yes. A. This is total staff for all of OHSC dealing with all the transmission system and all the distribution system. The small change in customers is not going to have much of an impact on the staff level. Q. Do we have a Split in the staff between transmission and distribution? A. You've been provided that information in [Questioning] 1136 Participants terms of the network asset management function. Vipin this morning or yesterday morning gave you I think staff of 105 in distribution network asset management and a couple of days ago Dave Barrie gave you around 210 in transmission network asset management. And our services group, which is, you know, the 4,187 that's on the filing that you were referring to, is not broken out into transmission and distribution. If you want more reasons as to why I'm certain Myles can handle the why. MR. SURI: A. Just maybe a comment to clarify that, Roger. During annexations we are expected to identify staff associated with the work and the assets which are being transferred. Although what we have done is we have made attempts to associate staff which are serving the assets which are being transferred because part of the annexation also is that the municipality electric utilities who are receiving the assets are also obligated to take staff associated with those assets. So we do make those estimations and saying which the people who are associated with those assets. Q. And those numbers are, off the top of your head? A. I do not have those numbers in front of me. I think it maybe in the range of 80 to 100 if all the annexations proceed as we are talking about it. MR. WHITE: Thank you. [Questioning] 1137 Participants MR. HARDY: Thank you. Are there other participant questions? Ken? MR. SNELSON: Yes, Ken Snelson, AMPCO. Q. In previous discussions there has been some mention of agreements with unions regarding flexibility to manage the varying quantity of work. There was some mention of the hiring hall concept with the Power Workers' Union in the latest collective agreement. I wondered if you could tell me if I'm right that this process gives you a mechanism to manage a varying volume of work but it still leaves you tied to union labour rates. MR. D'ARCEY: A. That's correct, we are still tied to union labour rates. There is a differential though between the hiring hall rates and our regular rates. Q. Which rate is higher? A. Our - regular employee rates are higher than the hiring hall -- total cost of the rates, including all burdens. Q. Including burdens, okay. And in the transmission panel there was some discussion of an agreement with EPSCA, which I think was the Electric Power System Construction Association. Maybe I haven't got that right, but it is something like that, and that you can contract out work to other companies as long as they are also EPSCA contractors. [Questioning] 1138 Participants And I'm wondering if this is another example of giving you some flexibility to contract out but you still remain tied to the EPSCA labour rates? A. I'm not sure I fully understand your meaning behind that. Perhaps you could give me a little more clarity. Q. Well, as I understand the discussion then, and I haven't got the transcript in front of me, there was a mention that you are allowed to place work with other construction companies, but that they had to be part of this EPSCA association, and presumably if they are part of that association they will be paying the same labour rates. A. I believe the question was posed as to -- if my memory serves me correctly was that if a third party was to do the work would they contract or would they utilize EPSCA resources to accomplish this and I believe the answer was yes. MR. SNELSON: Thank you. MR. HARDY: Thank you. Sorry, Roger, go ahead. MR. WHITE (ECMI): I'm sorry, I have one more question. I think my memory is going. It must be the sun shining in my eyes over here. Q. At one point in time until recently there was something called "Grant and Aid" showing on Ontario Hydro's books and this represented contributions from the provincial government to aid construction on the distribution system, and that carried forward under the [Questioning] 1139 Participants Rural Electrification Act starting in 1921 to somewhere on or about 1972. Can you tell me what has happened to those dollars in the corporate restructuring? MS. FRANK: A. I'm sorry, my memory doesn't go back that far. Q. Mine doesn't either. That's my story and I'm sticking to it. Can you undertake to find out what happened to those dollars, please? A. We can certainly see -- I think they were gone a long time before restructuring, but... Q. They were not written down. A. I will see, okay.. I will see what I can... Q. Thank you. MR. HARDY: I will note that. MS. FRANK: Can I have what they're called again just to help me? MR. WHITE: It was called "Grant and Aid". It appeared on the balance sheets. MS. FRANK: Okay. MR. WHITE: It amounted to several million dollars, as I remember. MR. HARDY: Richard. MR. STEPHENSON (PWU): I just wanted to follow up on something that Myles had mentioned earlier on. Q. It was something to do with a marketing function within -- I believe within the network asset [Questioning] 1140 Participants management that has now been transferred out as a result of restructuring. Did I understand that correctly? MR. D'ARCEY: A. I believe it was the marketing and sales function being directly attributed to the network services group and that has been consolidated at the OHSC level and is not directly related to the NS function specifically. Q. Right. And I had understood there were two parts to that, but one of the parts was I gather that the network services group essentially isn't marketing itself at this point in time. Did I understand that correctly? A. Within network services, no, we are not taking an active role in marketing the services that we have. Most of our external work is -- comes through the door because of our contacts and being out in the field. Within the OHSC we have a new businesses group which is looking at other opportunities. Q. The thing I'm having some difficulty understanding is that - is it the rationale because you felt that a dedicated marketing and sales function within network services wasn't successfully generating sufficient volume of additional work to justify it? A. That would be a fairly accurate reflection, yes, given the fact that we do most of the transmission work within the Province of Ontario, and if we are still confined within the Province of Ontario we would not be actively looking to market something that we have 95 per [Questioning] 1141 Participants cent of the work at this time. Q. And I did understand from, I believe it was Ron Stewart, I think, that nevertheless one of the future areas of potential revenue for SERVCO generally through network services is to market its abilities to third party purchasers on an ongoing basis in the future? You haven't given up on that idea? A. No. Within network services our primary focus is to build upon efficiencies, to continue to reduce our costs in order to become a competitive work force in the marketplace, and most of the efforts then will be consolidated within the new business ventures within OHSC. Q. You say most. I take it most of the marketing and promotional work for the development of third party business is going to be channeled through new business? A. I believe that would be correct. MR. STEPHENSON: That's fine. Thank you. MR. HARDY: Thank you. Why don't we return to our Board Staff and Consultants. Go ahead, please. QUESTIONING BY BOARD STAFF AND CONSULTANTS: MR. HOPKINS (Reed): To follow up on that area for a moment. Q. There was a question I don't think I asked a while back when we talked about the transfer of people and this reorganization from the originally proposed setup of the new -- to a reorganization of that moving people from network asset management and network services perhaps or [Questioning] 1142 Board Staff/Consultants mostly asset management people into the corporate function area. Is it true that based upon doing that different dollars will flow to the transmission and distribution functions as a result of reassigning those? What would have been allocated from the network asset management for those people that were in transition to distribution and to transmission is changed by putting them up to the service level. MS. FRANK: A. I don't believe there would be a material change, but let me first of all say that in the submission everything is based upon the allocations that were consistent with the organization in place when we prepared the submissions, not the new 1999 as we're calling it. Q. Yes. A. If you redid the work based upon the new 1999, I doubt that there would be much of an impact and the reason I say that is that the split between is it transmission or distribution in NAM, the 65/35, was true if it was at an OHSC level or if it was in the NAM support. It didn't matter, you had the same ratio. Network services, similarly, all that work followed literally the work activity and it would continue to do that, so I don't think there is a big change there. The very minor change that I think could happen would be if there was a cost which was originally within the -- one of the operating groups, either within network [Questioning] 1143 Board Staff/Consultants services or network asset manager that got pulled up to the top and then spread across all of OHSC, not just the regulated businesses. Now, since the majority of our business is indeed regulated, the small amount that would make its way outside of the regulated business I don't think would materially change it. But I agree with you, we haven't done it on that basis. If anything, it would imply that the costs that would come into the regulated businesses would change very, very little because so much of our businesses are regulated. Q. Typically it would take it down probably. As you pointed out, if we take the finance from the network asset management group and we put it up to the OHSC group it might get -- some of that might proportionately get spread out to the non-wires part of the operation? A. Actually, if you were to do it you would have to go back and look at the drivers again and say what percentages go, what drivers. I'm not certain if it would change it or not. Overall I believe the impact will be very, very small and I think you would have to back and look at your overhead allocation mechanism. I don't believe there is a material impact. MR. HARDY: Kirsten. MS. WALLI (Board Staff): Yes. Q. I was wondering if you could actually go back [Questioning] 1144 Board Staff/Consultants and provide some working paper to substantiate that, which I believe would be in Appendix G of the supplementary filing of 23rd of December, just to show us that the impact would not, in fact, be material. MS. FRANK: A. Kirsten, the problem is you'd have to re-do the work. It's not just updating for the change in the staff where they are moving to. You'd have to say, have the drivers changed now that the work location of people have changed, shall we change the percentages and you'd have to basically start over and do this exercise again. Q. So it would essentially be a new cost allocation study so to speak? A. Yes, it would. MS. WALLI: Thank you. Perhaps we can come back to that, but thank you. MR. HARDY: Sorry, Bill. Go ahead, please. MR. HOPKINS: Q. With respect to what we were talking about as well in the network services group, to the extent that there is a work force there and there is work there and it's charged out - the services are charged out at standard rates, I understand that that is the general intent. Is there an -- there is a built in expectation of work here in that group inherent in the fact that you have so many people and you have added up some cost and you're charging it out. To the extent that you have any success in [Questioning] 1145 Board Staff/Consultants selling services forward as was just discussed to other enterprises, how do you expect to take that into account? Is it -- if your charge-out rate goes up because you find some new business to do for other enterprises out of the network services group, is there to be some kind of refund or recosting back to the other enterprises, or how does the transmission or distribution group share in that benefit of increased workload, increased revenue for the network services group? MR. D'ARCEY: A. If there was an opportunity to increase the external work which we had, obviously it would show up as revenues back in through OHSC. Q. Is there any plan on your part to have some kind of a crediting mechanism nor that or... MS. FRANK: A. Bill, it actually does show in here -- that's what recoverable work primarily is, it's the work that network services people do for MEUs, for the generation company, for actually low-voltage customers. It's their work and we show the costs separately for incurring that -- that work and we subtract off the revenues from the revenue requirement. And we are showing that we are expecting a very modest increase in 2000 over 1999. Our focus during this period, you know, as Ron Stewart said, is really on operational excellence within on our business. Our focus for the next couple of years is really not to be out there growing this business in an aggressive way. I mean, if work lands on our table, we are not going to turn it away, [Questioning] 1146 Board Staff/Consultants but we are not aggressively seeking it out. Q. Okay. So it would be reflected in that fashion, but we'd gain some insight into it the next go around, but you're not expecting suddenly to start marketing a lot of services that aren't already reflected in this outside, you know -- MR. D'ARCEY: A. That's correct, yes. Q. ...programs. Okay. Thank you. Within that -- within the network services group as you approach the activities in there, are there some performance measures you're going to have internal to that? A. As I mentioned earlier, the relationship between the asset manager group and the network services group is based upon the development of service level agreements. The service level agreements themselves all have within them performance measures in the delivery of that specific service would contained unit - standard unit price, time lines for the delivery, and reporting requirements associated with the completion of the work. Q. So those unit prices and those time line deliveries are something you're working on preparing or something -- A. That's in the development of the SOAs, yes, yeah, within that. Q. And it would be based upon your historical work practices or what we would they be based on? A. As a baseline, they're based on historical work practices and obviously it's something that we would [Questioning] 1147 Board Staff/Consultants -- and another component of it is the continuous improvement upon that, both in the timeliness of the delivery and a reduction of unit costs. Q. Any benchmarking going on to see if those work practices were efficient or -- in the first place? A. We have not done a lot of benchmarking with regards to our cost to deliver within the province. I think Dave Barrie made reference to the asset manager's perspective on benchmarking for the completion of specific tasks and I think we sort of referenced that within the completion of the cost to complete a specific program, do you complete the program within the dollar limits that are -- best in class then for other utilities then, and that is as a driver then for it. And we do have references then on the external work and we do do external work. Our ability then to compete and win that work in the marketplace. Q. So the network asset manager as he hires the services group to come and perform a task may be presented with some standard for the network services work in the contract for that; is that my understanding? That time and the unit costs would be defined? A. Yes. Q. But he's not really able to negotiate. Is he able to negotiate that in any way in the sense of how come it takes you -- you're proposing to do this in two days when you I think, you know, a standard of one day would make more sense or? [Questioning] 1148 Board Staff/Consultants A. The SOA process is the basis of a commercial relationship which does allow for negotiations. And the development of that was both within the services group and the asset management group to come to the terms and conditions of the delivery of those specific services and within, as I mentioned earlier, within each one of those SOAs, there are components in that for continued improvements which would also include increased -- a reduction in the unit price then, as well as improvements in the delivery of services. We referenced and some of these things are still ongoing developments. We talked about the trouble call component and as the recording mechanisms are put into place, we work on time to respond, time to repair, those types of things. MR. SURI: A. Just a comment to add to that. There are specific activities on the asset managers side in distribution and transmission which really try to help the service level agreements and monitor them as contracts. And the part of the performance development work and benchmarking work which is being done on the asset side, is also looking at cost of doing certain activities so we can put those kind of performance measures in our SOAs. Q. You're a smart buyer? A. That's exactly, I think, the intent here is. Q. Okay. Well, I'd like to return, as I mentioned, to just some more questions on the retail [Questioning] 1149 Board Staff/Consultants monopoly supply retail operation here. I'd like to turn to page 148, if I could, of the initial -- the December 7th submission and just quickly look at the numbers there shown for current assets, under current assets, in particular, accounts receivable. And I guess I'm looking for any explanation that we might get that explains -- yeah, of the market difference between the year '99 and 2000 values. MR. HENDERSON: A. The '99 numbers are based on our current levels of working capital as we have historically seen them occur and that's based on what we find as base payable, base receivable. The 2000 numbers are based on an increase that is due to the expected increase in the average day's receivable resulting from what - the interpretation that we read into the Market Design Committee retail settlement recommendations. Q. Would that somehow reflect that you're going to get 1/365th of your revenue requirement every day or something or what is it? I mean, how -- A. No, I don't -- no, I don't know. I don't understand that interpretation, but when we look at the market design committee recommendations on retail settlements and we start adding up what the entire process may require and in the retail settlement side and then also on the wholesale settlement side, it appears to us that the likelihood is there will be a substantial increase in the working capital requirements because it will be -- we will be out of pocket for the money much [Questioning] 1150 Board Staff/Consultants longer. Q. Yes. I guess I understand that that's what this means, that you will be out of pocket some money for a while. I guess I don't understand why? A. I'm not. Q. What is it I should -- what is it I need to look at so to see why -- I understand, I guess, the increase in the accounts receivable as a result of your being out of pocket money longer? A. Yes. Q. And I guess I'm not as familiar as you might be with the Market Design Committee's implications on this, and if you could help me understand that, I'd appreciate it. A. I'll try. I'm no expert on all of it. What I understand it to be is because of the -- especially for -- we're talking in 2000 of it being a default supply and because of the default supply recommendations and billing based on -- or calculating a bill based on a net system load shape and all the implications of gathering the data to create the load shape and then transfer that into a bill, our interpretation of it is, when we add up all the additional steps in the process before we can actually take the wholesale bill, turn it into a retail bill, and in turn bill the customer and receive the money, it results in this much increase in the number of days receivable. Q. Is there something that you've analyzed this [Questioning] 1151 Board Staff/Consultants with, a document that you've laid out your expectations here that would further detail this? A. We have taken a look at it, and again, it -- I hate to keep going back to the uncertainties, but one of the major uncertainties for the default supply is exactly how that retail settlements process will actually work and that clearly has yet to be well defined. Q. Okay. But as we take -- I mean, this is your best estimate of it and -- A. Yes, it is. Q. -- I wondered what it was -- what type of estimates it was based on, obviously, and what components give rise to this large increase. And if there was any, you know, I presume you made some series of estimates that gave you this as a result? A. Mm-hmm, yeah. Q. And I wondered if there was a possibility you could share that with us and point out what's changed from '99 to 200 that would give rise to it? A. We could certainly take a look at preparing that summary. MR. HARDY: Okay. I'll note that then. Table 20-4. MR. HOPKINS: Yes, it's shown on page 20-4 and it's the difference -- MR. HARDY: Between item 4. MR. HOPKINS: -- accounts receivable. Yes, item 4. [Questioning] 1152 Board Staff/Consultants Q. Just turning the page to 20-4 continued where we look at the liabilities and the equity. At the bottom it shows equity being $69-million is - out of a $290-million total assets, that ratio appears to be somewhat different than the 40 per cent, you know, that we were talking about with respect to 60/40 financing? MR. HENDERSON: A. Mm-hmm. Q. What's the nature of that? A. I don't know. I know that the equity level has been set to reflect the same 60/40 debt equity ratio as OHSC's regulated business. I'm not aware of it being different than that. I haven't done that calculation myself. Q. So, you know, 70 over 300 is about 20 something per cent, 24 or 5? MR. HARDY: Do you want to bring that one forward as well. MR. HENDERSON: I would have to bring that one forward. I can't answer that now. MR. HOPKINS: Q. Turning to table 20.6 in that same series, we note that it indicates that the results of the rental program are a 5.7 to 5.3 per cent return on equity. That clearly isn't what you're asking for other elements of the business, so what is the reason for that and/or -- and what would it be if we were to -- what additional revenue would come in and would be needed if we were to increase it to a level more consistent with the objectives of the corporation which is the 8 to 9 per cent [Questioning] 1153 Board Staff/Consultants and about a compositive -- well, whatever it is. You know, 10 per cent if you want to put it that way. MR. HENDERSON: A. Clearly the return on equity for the rental program is not achieving the 10 per cent target that we're saying is appropriate for OHSC. There seem to be two options in this case; either the rental rates would have to be increased or we would have to reduce our costs. An increase in rental rates, we believe, would be perceived by customers as being contrary to the announcement of a general rate increase or a zero average rate increase. And so that's by far the least preferred option from our point of view. We believe that we should be looking very closely at reducing our costs associated with these programs and there is a task force that has been given the job, and is working on it right now, of identifying what the options are to reduce the costs associated with these programs. Q. If it continues at a 6 per cent rate, isn't the balance made up as a subsidy by the other customers, if we look for 10 per cent? A. And we recognize that is the issue with it and that's why we've established this task force to correct it so that it -- these programs do reach the 10 per cent return on equity basis. Q. When are they -- it shows it going down -- the return equity going down in the year 2000. I mean it seems like it's vectoring in the wrong [Questioning] 1154 Board Staff/Consultants direction here? A. At this point it is because we don't have the results of that working group to establish what -- what we can correct it to in year 2000. Q. And you think that it's more -- it's more acceptable to have a subsidy continue from all consumers into these people that are taking advantage of the rental program than to go to this smaller group, the rental program, and say it's now time for you to pay your full share? A. Clearly, our first preferred option is to look at cost reduction because that is in the interests of everyone. Q. I would expect that you were doing that across the board, yeah, but that's right. A. And so that's why we're taking that approach to this first. If it turns out that that is not an achievable target, then our next alternative is looking at exactly what you suggested. Q. In the calculations shown here, there is a tax amount shown for the -- for the operations and I think we've gotten the tax calculations for the other four business pieces. I wondered if we could also get a similar calculation of the income tax piece for this? A. For the overall business or are you referring to the rental program. Q. The overall business, the retail monopoly supply function? [Questioning] 1155 Board Staff/Consultants A. That's not a problem. MR. HARDY: So we are doing table 20.7, item 5. MR. HOPKINS: Yes, I believe that would be what's shown there in item 5, I believe, yeah. MR. HARDY: Okay. MR. HOPKINS: Q. With respect to the assets, with respect to the same organization, your retail monopoly supply, did the assets, the fixed assets are shown on table 20.5. There are no -- are there no other assets than the rental facilities and what's called MFAs, minor fixed assets? There's no office building or is that what MFA means? MR. HENDERSON: A. MFA refers to the small assets under certain materiality limits such as computers, but there's no separate office building, no retail monopoly supply as part of OHSC and the overheads allocated from OHSC will cover things like the cost of office space. MS. BULKLEY: Do those also cover things like customer information systems and account management systems? Those are overhead allocations? MR. HENDERSON: The overhead allocations? MS. BULKLEY: Or how is that taken care of? MR. HENDERSON: I believe we've built those into the minor fixed assets because within retail monopoly supply there's a relatively small cost. They are local data basis. MR. HOPKINS: Q. We have a few questions on [Questioning] 1156 Board Staff/Consultants rate-related issues because the Board is going to, in preparing its rate order, need to, I think, understand the terms and applicability of the rates that it's going to effectively being put forward as saying the continuing rates should continue I guess or the existing rates should continue. I have a few questions. They maybe just interpretive questions but they are going to be comparing what we received -- what we received in Appendix 10, I believe, the detail there. That was in the December 7th submission. With your -- your monthly rates and comparative bills report and what's indicated here in this document, just so we can -- where there are some ambiguities we just wanted to make sure we understood them. I don't know. Do you have a copy of this monthly rates? MR. HENDERSON: A. No, I don't have that with me. Sorry. Q. Maybe I can ask a question in such a way you can help me understand them anyway. In the -- MR. HARDY: Just as a matter of process here, can we just show him what is in that? Is there another way -- MR. HOPKINS: I virtually only have one copy. I will try to make the question understandable enough that he might be able to follow along. MR. HARDY: If you need to see it or need to -- MR. HOPKINS: If you look at Appendix 10 -- [Questioning] 1157 Board Staff/Consultants MR. HARDY: --we will stop and wait and make sure you have that opportunity, okay? MR. HOPKINS: Q. If you look at Appendix 10 I think I can make it work. In Appendix 10, with respect to rate R1R which is high density service -- MS. BULKLEY: 1R1. MR. HOPKINS: 1R1, I'm sorry. Q. Your billing analysis tends to indicate with an asterisk that that service is -- can attract RRA, rural rate assistance, subsidy for qualifying residents for qualifying residences. The Appendix 10 which has that notation has it only with respect to 1R2. Is it the fact that it would also apply to 1R1? MR. HENDERSON: A. Sorry, I didn't hear the last part -- Q. The rural rate -- if you note on Appendix 10 there is an asterisk under Rate 1 -- under the service charge for Rate 1R1 if you look at the very first line there and the asterisk refers to the fact that there is rural rate assistance possible for qualifying residences. Is that also true for rate 1R1, that condition? A. I'm not certain. 1R1 refers to high density and by definition on rural rate assistance I'm not certain whether they would automatically be qualified for rural rate assistance. I would need to check that answer. Q. That's the discrepancy we noted there that in [Questioning] 1158 Board Staff/Consultants his billing report, your monthly billing report, your monthly billing comparison report, it is noted that it is applicable and -- MR. ROGERS: A. I might just add there that the rurals rate assistance does not apply to 1R1. Q. So the monthly report is -- and Appendix 10 is correct? A. This is correct. Q. Turning the page or two, as we look at service classifications for general service in farm service we note that in your billing table under service charge your billing table notes that the minimum charges for applicable to rates like UG2 and 1G2 and IG2 -- is it IG2? Yes. Categories, commercial and industrial categories that those minimum service charges are in an amount plus a monthly minimum charge of 60 cents per kilowatt for maximum demands in excess of 50 kilowatts. The table presented here does not note that and I wondered if that was the case, that these are just -- these service charges listed here are adjusted additionally by demands in excess of 50 kilowatts? MR. HENDERSON: A. Yes, I believe that's the case. MS. BULKLEY: We are trying to clarify a couple of inconsistencies, that's all. MR. HOPKINS: Q. Is it -- looking at the farm rate, for example, and that's back on page -- just [Questioning] 1159 Board Staff/Consultants preceding page, 1F2, single phase and three phase, as shown here in table 10 it indicates that the rural rate assistance one is frozen at $39.20. The service charge as well. That's what I'm referring to. When I look at your billing table it indicated an amount of $40.10. I wasn't sure which one of those two were correct. A. Offhand I'm not either, but I could get back to you on that. Q. Okay. MS. BULKLEY: Just to clarify on that, when you refer to the billing table, the May 1st, 1998 billing table, the footnote that we are addressing is the first footnote for Section 2, Table 2. The issue is that the three phase -- well, farm customers Rate 1F2-3 have a rate listed there of $40.10. However, the footnote seems to indicate that the rate should have been frozen at 39.20. The rates have been carried over into this document but it just seems unclear, that footnote. Maybe we can get some explanation on what the rate is supposed to be. MR. HENDERSON: Clarification of the actual footnote? MS. BULKLEY: Of the rate that should be applied. The footnote makes the rate itself confusing. So if you could just clarify what that is supposed to be that would be helpful. [Questioning] 1160 Board Staff/Consultants MR. HENDERSON: That's no problem. MS. BULKLEY: Okay. MR. HOPKINS: Q. Again, we noted in this billing document a table showing -- MR. HARDY: Sorry, can I just -- just out of process, we are going substantially through a document that this panel hasn't seen. MR. HOPKINS: I understand. MR. HARDY: I just want to check again to see if the panel is comfortable with commenting to the undertakings. MR. HOPKINS: I think they have been able to answer the questions. MS. BULKLEY: They have been able to answer. MR. HARDY: How do you feel? MR. HENDERSON: I don't have so much issue commenting on, but I will have to add the caveat there is probably going to be many cases, as there have been already, where I have to get back to you on it. MS. BULKLEY: That's fine. MR. HOPKINS: Q. This is the last one and this is it and maybe you can help. We just noted that that table that you now have in front of you which represents an industrial, direct industrial user group table indicating customers time of use greater than five megawatts, this classification didn't appear in the rates in Table 10, and so I guess we're -- I presume it exists and I was wondering what is [Questioning] 1161 Board Staff/Consultants missing out of Table 10 to reflect that? MR. HENDERSON: A. If I am interpreting this table correctly that you just passed over to me, and I'd have to confirm this, but this appears to me, this sheet that's labelled Section 2, Table 4, it talks about direct industrial customers times of use greater than 5,000 kilowatts, those -- especially when I look at the voltage levels, et cetera, that the charges vary. These appear to me to be Ontario Hydro wholesale rates, not retail rates. Q. I see. So those would not be in the retail category of customers? A. Correct. Q. Not for this distribution table. That's why it does not appear. A. Right. MS. BULKLEY: Thank you. MR. HOPKINS: If there is any confirmation that you need to do that, that's fine. I'd appreciate that. Q. I have a question that was presented to me and I think I'll ask it, you know, and hopefully it's not too difficult. But for 1999, he just wants you to confirm there is going to be no changes in the rate structure relating to the service classifications, the energy demand peak, time of use periods or anything of that nature in the rates classes going forward. MR. HENDERSON: A. We certainly have no plans to so that. If there was some, again, unusual driver that [Questioning] 1162 Board Staff/Consultants caused us to consider that... It's difficult to say no we would never ever change because sometimes circumstances or new arrangements would cause -- could lead to that eventuality, but there is certainly no plans to change any of those items that you must just mentioned. Q. Those type of changes would be taken up in the next rate hearing when you were doing an unbundling if you were to shift service classifications or -- A. Clearly our intent is we need to come back to the Ontario Energy Board for another rate hearing before we get to the advent of retail competition in order to get the required approvals for default supply. Q. Okay. But absent that, would there be -- at that time would you be shifting, potentially reorganizing service classes and eligibilities? A. Possibly. That work is just starting up now in terms of what we would need to do to come back to the OEB for those approvals for the rates to be in place when retail competition begins. And, again, not knowing exactly how the market rules will come out and what the various license requirements will be it's impossible to comment on what that will look like, but at that time we will be bringing back an application. Q. That wouldn't -- just to be absolutely clear, that's not something that's going to happen during this interim period, though? That's going to happen-- [Questioning] 1163 Board Staff/Consultants A. Right. Q. --conjunctively with the end of the interim period? A. Correct. Q. Okay. I think that's what I needed to know. MR. REGHELINI: A. Just to clarify, if open access is declared in 1999 we will be back before the OEB with an unbundled rate submission before that happens, not after. Q. Okay. To be effective, they're going forward. A. Correct. Q. We're not facing any distribution or retail rate changes absent that in -- A. Correct. Q. Either changes of price levels or who is in which class which could affect customer billings? A. Correct. MR. HOPKINS: Okay. MR. HARDY: I am going to ask the Board to say some closing remarks in a minute. Are there any other questions from the Board Staff or Consultants before -- I would also like to get back to our participants. MS. WALLI: Certainly. I'd like to ask a couple of follow-up questions, if I might. MR. HARDY: Okay. MS. WALLI (Board Staff): Q. Firstly, returning [Questioning] 1164 Board Staff/Consultants to the rental program for a few moments. Can you provide the number, can you quantify the dollar subsidization for this rental program? So what dollars would be required to be on par with the overall return of the company, and that would be, say, the overall weighted cost of capital as well as looking at it from the 10 per cent return on equity as well? So what the dollar subsidization is. MR. HENDERSON: A. That's not a problem to provide that. Q. Thank you very much. MR. HARDY: Can you just give me a reference to that, please. MS. WALLI: Certainly. I believe the reference would be table 20-6. Page 151, actually. MR. HARDY: Thank you. Other questions? MS. WALLI: Yes, just one or two more. Q. Now turning to the question of the cost allocation we're discussing just a few moments ago, we're not actually looking for a complete first principles reworking of the cost allocation model. For example, we're not looking for any change in the drivers, but what we would like to see is a re-weighting of the drivers that would include all of the changes since the filing, for example, the organizational structure changes that has discussed because obviously the revenue requirement between the transmission and distribution is quite important. [Questioning] 1165 Board Staff/Consultants MS. FRANK: A. Kirsten, as I suggested, I don't believe that there is a change of any material nature and I don't believe you can just go back and apply the current drivers and the current percentages without doing the rethink. I think that would be quite inappropriate. My suggestion would be if I was asked to do something that I would stay with the overhead costs and rework my percentages of allocation to equal exactly the overhead dollars that are in there until such time as I had an opportunity to do a full study. Q. Perhaps if that is a problem, which it sounds like it might be, would it possible to essentially rerun the model, so to speak, without doing any re-weighting, but with the dollar changes in cost. Is that a possibility? A. The difficulty is the new organization will need to change the drivers and the approach. What the old piece did was to take things to a NAM and network services and then reallocate to a transmission and distribution. This is not how we would do it again because now we would more directly go to transmission and distribution. I believe that changes the drivers, it changes the weights and I think you have to do a study. When we come back next time you would do it. For now my suggestion would be that the overheads that are in here are I think a good indication of what's appropriate for these businesses and I would suggest we [Questioning] 1166 Board Staff/Consultants stay with them. Q. And with the allocations -- the allocations are -- between the transmission side and the distribution side? A. Yes. Q. Even after the changes that have come in since the original filing? A. The work that the people were doing -- I'm not certain that if you take a group of finance, I will pick finance group that was in the network asset management work and was divided 65/35 between if they were in transmission or distribution because that's the only business that they were supporting, and if you moved them up to the OHSC business and you looked at the absolute dollars that should be in transmission or distribution, I'd suggest it should be exactly the same. But now if you're saying since they are up at OHSC and I'm going to do a percentage allocation across all of the wires and unregulated, what would you have to do, I would suggest I'd have to change my percentage because these people work only relates to the work in the transmission and distribution business. It does not relate to the work elsewhere. So that's why what you are asking me do really means I'd have to go back and change the whole allocation method rather than just trying to apply the old allocation method to the new organization. I don't believe that's doable. [Questioning] 1167 Board Staff/Consultants Q. It is not even doable, shall we say, on a somewhat quick and dirty basis to give some substantiation to your assertion that the change is not material? A. What you're asking for, though, is not a change just in applying the current allocation method, but a change to the allocation methodology because the functions and the work that the people were doing they continue to do even though they are in a new organization. So if they were reporting -- in network asset management or network services and working on those areas and have now been taken to the OHSC level, they are still doing work that's associated with that particular portion of the business. That's what we are doing, you know --using the old allocation methods just won't give get us to the right percentages for transmission and distribution. We've got to change the percentages. The change that you are asking for, I believe, is an allocation methodology in percentages. Not applying the old allocation methodology to the new organization. I don't believe it's appropriate any more. MR. HARDY: I've heard a very clear response to that question. I think it's been posed a couple of times. I am not sure if there were some variations in that that you wanted to explore but... MS. WALLI: I think that will be it for the time being, although I think, again, this is an area that perhaps there may be some future discussion on. That's [Questioning] 1168 Board Staff/Consultants fair enough. Q. And actually a final question in wrapping up. If the Board did approve a deferral account, would the balance in the deferral account be flown through to the overall revenue allocation; that is, for example, would the payment from the overall revenue allocation pool, would it be equal to just the Board approved revenue requirement or would it be equal to the Board approved revenue requirement plus or minus the disposition of the deferral account? MS. FRANK: A. There have been other questions about deferral accounts and we really haven't given this any consideration. We thought that we were coming, particularly in the case with distribution, with a relatively short application and an expectation that we would be back at the end of the year providing information on how -- how things have gone. I -- I couldn't tell you how we planned to handle it because we haven't even considered that this is a possibility, so I don't have plans. Q. But could you undertake to provide us with an answer though on this particular question; again, it's not numbers involved, but again a question of if a deferral account were approved by the Board, if it were put in place by the Board, would that flow through to the revenue allocation or not? A. I can agree to look into that. Q. Oh, that would be just great. Thank you very [Questioning] 1169 Participants much. MR. HARDY: Let me just note that. Are there other questions from participants? Mr. Robertson. QUESTIONING BY THE PARTICIPANTS: MR. ROBERTSON (OCAP): It's not so much a question, just a clearing up procedure so as I can get it on the record. Q. You may recall that this morning my colleague, who was is summoned to confer elsewhere in this building for the rest of the day and is still at it, had a discussion with the panel in regards to some differences of opinion on net revenues for -- for a distribution company in 1999, 2000. I'm sure you're quite familiar with that discussion this morning, first thing. MS. FRANK: A. It was distribution revenue -- or are you talking about the chart that he was -- Q. Yes, the chart. A. And the calculation that he was doing? Q. Yes. Yeah. A. And the piece that we agreed that after he files it, we'll come back and read in to him? Q. Yeah. Well, that's -- A. Okay. Q. Now, we are on the same wavelength. He's been unable, but he's, in fact, he's been tied up in that discussion on PBR on the 26th floor to [Questioning] 1170 Participants complete other than his rough notes. And I've conferred with him, and with your agreement, he would prefer to do this overnight in a more reasonable fashion, put it in by fax. And he particularly asked me if I could have your fax number. MR. HARDY: Perhaps, sir, we can have that happen outside. MR. ROBERTSON: Yes. I really wanted to get that on the record for lest it was lost in the shuffle this morning. Thank you. MS. FRANK: Could you make sure that Bruce is aware that we do intend to respond to it. MR. ROBERTSON: Once you've got it. MS. FRANK: Yes, okay. Once we've got it. MR. HARDY: Roger? MR. WHITE: It's Roger White, ECMI. Q. I heard that direct industrial customers who are retail and currently retail customers of Ontario Hydro were not retail customers of Ontario Hydro today, just a few minutes ago. And I now will buy into the fact that their rates look awfully much like wholesale rates, but I would suggest that they are retail customers of Ontario Hydro. Now, I'm not sure whether my question is, is wholesale, but it relates to the implication of the prices that these customers will pay. Many municipal utilities receive something now called the diversity benefit credit [Questioning] 1171 Participants associated with their large use customers and I'm wondering if that will carry on until open access happens. Can anybody on this panel answer that question? MR. HENDERSON: A. I don't think we can answer that question. That's really a question that resides, I believe, with the -- at the wholesale level. Q. Is it Transco that should be answering that question then? A. That would be the place I'd start. I'm not certain in our new world. Q. I am substantially concerned about this issue. Do you want to jump in? MR. HARPER: Yes. Can I just suggest that you pose the question and either get on the record here or -- and that we would have a look at it and see about responding to it with the appropriate part of the organization. MR. WHITE: Okay. The question is two parts. Q. First, will the subsidy that goes into the price making for large users of municipal utilities, something called the diversity benefit credit carry-on. If the answer to that question is no, then has the revenue requirement for Disco and Transco been adjusted downward to reflect the fact that the direct industrial customers of Ontario Hydro who are paying the cost of that subsidy under the old allocation system are -- will see a reduced rate to reflect the fact that that benefit doesn't flow to other large users? So it's a two-part question. [Questioning] 1172 Participants MR. HARDY: Thank you. Other questions? MR. WHITE: That's fine. Thank you. MR. HARDY: Other questions from other participants? Ken? MR. SNELSON (AMPCO): I'll just make a comment on that last question; and that is, that with non-coincident peak billing for direct industrial customers, then the -- at least as far as those who are connected to the 50 kV and above system are concerned, then the need for that diversity adjustment goes away, and may, in fact, need to be in the other direction. And if you were to go to a coincident peak billing system, then the need for these diversity adjustments would no longer be there. MR. HARDY: I don't think we need to have a response from the panel on that. I'm not hearing a question. Is there anybody who has wished to provide a question to this panel that has not had an opportunity to do so. Okay. Then I would like to conclude by asking -- first of all, I should ask from the panel, is there anything else that you wish to share before we close off the day? Are you finished providing all the information you wished? MR. SURI: Yes, we have. MR. HARDY: Okay. I would just like to thank our reporters. I know they have worked very hard over the Closing Remarks 1173 last two days for -- usually they work in three, and they've worked very hard. I'd like to thank our Panel as well. Kirsten, would you like to conclude? MS. WALLI: Certainly. A little change in tempo here. I have some closing remarks to make. First of all, on behalf of the Board, I would like to thank all the participants for both your attendance, your questions, and certainly your participation in this process. I would also like to thank this current SERVCO panel as well as previous OHSC panels, as well as the regulatory staff and other SERVCO staff who have been working behind the scenes as well. Board Staff will be submitting a report on the return on equity for both transmission and distribution operations of OHSC. This report has been prepared by the Board's Technical Consultants, Dr. William Cannon as well as the Reed Group. The intention is to distribute this report on Monday to all parties that have registered their interest in these technical proceedings. As well, we will be posting it on our website and just for people's reference, our website is www.oeb.gov.on.ca. And as I mentioned, that should be distributed by this coming Monday. We'll be discussing and examining this report as well as Ms. McShane's report on Tuesday, February the 2nd and that will be in a forum very similar so these sessions Closing Remarks 1174 and will also be in the same location and also presumably starting off 9 o'clock in the morning. There may be a spill-over day, if required, and this would be on Wednesday, February the 3rd. Turning briefly to the area of financial support. OHSC has agreed to provide financial support to eligible parties. Guidelines were presented in the Board's letter of December the 18th, and I believe OHSC has some additional copies of that memo if parties require it. OHSC will also be providing further details and directions as to format, timing, et cetera. And I believe that's being made available to the parties very shortly? MR. HARPER: Yes, the letter, I believe, went out yesterday. And if any party has any -- hasn't received it, please contact me directly and I'll see that you do so. MS. WALLI: Okay. And also, just following up on that, all questions on the area of financial assistance should be directed to OHSC directly and I believe the contact person for that is Bill Harper and his number for your reference is 506-2776. One final topic, and that's the area of written submissions. Interested parties are asked to submit comments on the OHSC applications. The written submissions should be delivered to the Board's offices no later than Friday, February the 5th. All comments should be in reference to the OHSC applications, these technical sessions, as well as the issues list that was distributed Closing Remarks 1175 on December the 18th. There's no predetermined specific format for this submission. Comments on the return and equity section alone, strictly that one alone, can be submitted the following week given that the technical conference on that, so to speak, will be on February 2nd. We are asking for those comments to be in no later than Wednesday, February the 10th. And as a further courtesy to the Board, could all parties that intend to submit written comments on the proceedings as a whole, on the applications as a whole, notify the Board as soon as possible. And you can do this by faxing the Board's secretary. The Board's secretary number, fax number, is: (416)440-7656. And this information is requested solely to assist the Board in its planning. It won't be used for any other purposes at all. As that concludes my closing remarks, and once again, I thank you to all who have participated in this process. MR. HARDY: If there are no other questions, we are adjourned. ---Whereupon, the Technical Conference proceedings were adjourned at 3:45 p.m. 1176 I N D E X o f P R O C E E D I N G S Page No. Overview (Facilitator) 1013-1014 Introduction of SERVCO panel 1014 Response to yesterday's questions by SERVCO panel 1014-1018 PRESENTATION by Vipin Suri 1019-1029 by Ms. Frank 1029-1032 by Mr. Henderson 1033-1037 QUESTIONING: by Participants 1038-1070 Introduction of Board Staff and Consultants 1070 by Board Staff and Consultants 1070-1097 ---[Lucheon 12:00 p.m. - 1:10 p.m.] 1097 by Board Staff and Consultants (cont'd) 1097-1131 by Participants 1131-1141 by Board Staff and Consultants 1141-1168 by Participants 1168-1172 Closing Remarks . . . . . . . . . . . . 1172-1175 Parties who questioned: R. White . . . . . . . . . . ECMI B. Bacon E. Robertson . . . . . . . . . OCAP R. Stephenson . . . . . . . . Power Workers' Union K. Snelson . . . . . . . . . AMPCO MC/LL [ Copyright 1985].