MZ e@@SThis program requires Microsoft Windows. $ Z !L!NE 0n8Z@P2x\z6P 6rQ 0010 10 N10 10 10 10 10 C10 t10 10 10 10 810 i10 10 10 10 -10 ^10 10 10  00 /0TopCAT! win87emKERNELGDIUSER2??K???E?????x??H????~????`???l?????6????8#?R?f?D)?$?(?%?4$?$?)?>%?f$?f)?%?#?)?3?y)?)TopCAT! ABOUTDLGPROCOPTIONSDLGPROCMAINFORMWNDPROC TIMERTICKDESKTOPWNDPROCXEU؃2VFXPh*6Xh:6XhJT6Xh%Z6Xh,j\6Xh3zV6Xh:p6XhAl6XhH6XhP6XhX6Xh`z6Xhh|6Xhpv6Xhx x6Xh 485 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Thursday, July 15, 1999, 26 commencing at 9:00 a.m. 27 28 VOLUME 3 486 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Producers' 18 Society of Ontario, IPPSO 19 ELIZABETH DEMARCO Various interested parties 20 BRIAN McKERLIE Municipality of Chatham-Kent 21 ROBERT WARREN Consumers Association of 22 Canada. 23 DICK PERDUE Direct Energy and Enershare 24 Technology 25 DAVID POCH Green Energy Coalition, GEC 26 ZIYAAD MIA Coalition of Distribution 27 Utilities et al 28 487 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 RICK GROULX 11 MARK RONAYNE Competition Bureau 12 KEITH RAWSON TransCanada Power 13 ANDREW BARRETT Ontario Power Generation 14 Inc. 15 RICHARD BATTISTA Union Gas Limited 16 BARBARA BODNER Enbridge Inc. 17 AMIR SHALABY Ontario IMO 18 DAN PASTORIC Energy Advantage 19 JIM RICHARDSON/ Upper Canada Energy Alliance 20 PAUL FERGUSON 21 MICHAEL JANIGAN Vulnerable Energy Consumers 22 Coalition 23 24 25 26 27 28 488 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 490 4 Presentation by Mr. Alan Mark 491 5 Presentation by Mr. I.H. Jennings 505 6 Questions of Mr. Mark and Mr. Jennings 510 7 Luncheon recess at 12:35 p.m. 613 8 Upon resuming at 1:40 p.m. 613 9 Presentation by Mr. Seabron Adamson 616 10 Presentation by Mr. Barry Conway 650 11 Question of Mr. Adamson and Mr. Conway 657 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 489 1 ERRATA 2 3 Technical Conference 4 Wednesday, July 14, 1999, Volume 2 5 Pages 393 to 397: 6 7 Replace every occurrence of 8 "MR. STEPHENSON:" with "MR. RODGER:" 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 490 1 Toronto, Ontario 2 --- Upon resuming on Thursday, July 15, 1999 3 at 9:00 a.m. 4 MS LEA: Good morning. Welcome back 5 to the third day of the Standard Supply Code Technical 6 Conference. 7 I have one announcement. The 8 presenter listed as the first item on the agenda on 9 Friday, DTE Probyn -- Daria Babaie, who was intending 10 to come and present that particular submission, 11 apparently has time constraints that prevents their 12 attendance. 13 So I have a phone number for them 14 also, if you wish clarification. It is (416) 681-9264. 15 If you need something further, 16 perhaps you could let me know and we can contact them. 17 As you are aware, the schedule is 18 becoming a little uncertain due to the various delays 19 we have had. About mid-afternoon today perhaps we will 20 take stock of where we are at and attempt to get 21 something fixed together as to the rest of the 22 schedule. 23 Any of those people who are listed as 24 presenting, if you have time constraints, please let us 25 know and then we can attempt to schedule you in at a 26 time that suits everyone. 27 Our first presenters this morning are 28 Mr. Mark and Mr. Jennings. I see that they have taken 491 1 their seats at the front. 2 MR. MARK: Only because I have always 3 wanted to see what it is like to be up here. 4 MS LEA: Well, there you go. 5 You gentlemen have a presentation 6 that you wish to make before questioning begins? 7 MR. JENNINGS: Yes, please. 8 MS LEA: All right. Please go ahead, 9 then. Thank you. 10 Do you need slides or anything? 11 MR. MARK: No. 12 MS LEA: Okay. Great. Thank you. 13 PRESENTATION 14 MR. MARK: The MEA has filed a 15 proposed alternative which sets out, in general terms, 16 the flexible arrangements that it proposes for 17 section 29 supply. 18 To a significant extent, the 19 framework of that proposal, and indeed many of the 20 objections of the MEA to principally the Board staff 21 proposal, arise out of the MEA's understanding of the 22 legislation and indeed some of the direct objectives 23 and policies enshrined in the legislation and the 24 specific provisions of the legislation, which to a 25 large extent define the structure and operations of the 26 marketplace. 27 Mr. Jennings will present the 28 proposal. But in light of the fact that it was, to a 492 MARK/JENNINGS, presentation 1 significant extent, premised upon the directions and 2 constraints of the legislation, and our comments on the 3 legislation will, at the hearing, form part of the 4 submission, we thought it appropriate today to at least 5 spend a few minutes outlining our position in that 6 regard, not for the purpose of having an argument on 7 the legislation but merely for the purpose of 8 presenting the framework as it is seen from the 9 perspective of the requirements of the legislation. 10 I will just spend a few minutes 11 reviewing that. For those who wish, there is a brief 12 outline of the submissions I will go through today with 13 respect to legislation. That is in the pile over on 14 the window ledge at the side of the room. 15 I simply want to remind people that 16 while we will often, in the course of the presentation 17 and submission, refer to the Municipal Electric 18 Utilities, or the MEUs, the submission is made on 19 behalf of and applicable equally to the several 20 privately owned distribution utilities in the province. 21 Indeed, as everyone is aware, one of the objectives and 22 consequences of the legislation will be effectively to 23 put all distributing companies on the same OBCA 24 footing. So the submission, notwithstanding the 25 nomenclature "MEU", is intended to apply with respect 26 to all utilities. 27 Let me turn to a brief overview of 28 the legislative framework. 493 MARK/JENNINGS, presentation 1 The most important point to keep in 2 mind, of course, is that the Ontario Energy Board, with 3 all due respect to it, has no inherent jurisdiction 4 with respect to the regulation of the electricity 5 industry. As an administrative tribunal, it has no 6 inherent jurisdiction. Its jurisdiction is derived 7 exclusively from, and indeed is circumscribed by, the 8 Ontario Energy Board Act and the Electricity Act. 9 The deliberations of the MDC, and 10 indeed the initial default supply proposal that 11 emanated from it, were tabled before Bill 35 was 12 tabled. There seems to have been a process whereby the 13 MDC's proposal, which was developed without reference 14 to any guiding legislation, took on a life of its own. 15 The important point to bear in mind 16 here is that the Board does not have an open-ended 17 jurisdiction to structure the electricity industry or 18 portions of it in any way it sees fit. Rather, to a 19 large extent, the structure of the industry has already 20 been determined and dictated by the legislation. 21 It is important to take a pause and 22 to examine whether any particular proposal conforms 23 with the legislation and the Board staff technical 24 proposal in particular, which had its origins in a 25 proposal which predated the tabling of Bill 35. 26 Bill 35, which is now enacted, is 27 also interesting because it has expressly within it a 28 list of the objectives which the government is seeking 494 MARK/JENNINGS, presentation 1 to accomplish with the legislation. So, again, it is 2 not open, respectfully, to the OEB to determine its own 3 list of objectives for the restructuring. Rather, it 4 is to abide by, and is constrained by, the objectives 5 that are set out in section 1 of the Ontario Energy 6 Board Act. 7 On the subject of the objectives 8 themselves, it seems to the MEA that there are several 9 objectives, either explicitly or implicitly, underlying 10 the Board staff proposal that are not authorized by and 11 indeed are inconsistent with the legislation. 12 The most significant ones are the 13 objective which seems to drive the Board staff 14 proposal, which is the view that section 29 rates are 15 not to be rates which provide the full benefits of 16 competition to section 29 customers. 17 There seems to be an assumption in 18 the Board staff proposal, and indeed it is evident that 19 it is quite explicit in this regard, that they view 20 section 29 rates as rates which should be designed not 21 to make the full benefits of competition available to a 22 certain set of customers, section 29 customers, and to 23 require them to leave the section 29 service if they 24 want to have available to them the full benefits of 25 competition. 26 The second objective underlying the 27 proposal appears to be the notion that section 29 28 customers are somehow or in some way not legitimate LDC 495 MARK/JENNINGS, presentation 1 customers, but are somehow ill-gotten assets which the 2 LDCs should be forced to divest themselves of. 3 The other objective which seems to 4 motivate it is the belief that the retail affiliates of 5 the local distribution companies are also somehow 6 illegitimate competitors and that measures must be 7 taken to disadvantage the retail affiliates in the 8 marketplace. 9 In our submission, none of these 10 objectives are apparent from the legislation and, 11 indeed, the objectives contained in the legislation are 12 to the contrary. The objectives make it clear that 13 first and foremost the objective of the legislation is 14 to ensure that customers get the benefits of 15 competition in terms of price and choice. That is 16 first and foremost what is intended to be accomplished. 17 The suggestion that customers who 18 wish to continue to be served by the LDC should not be 19 permitted to do so or that they should not be permitted 20 to access the benefits of competition through the LDC 21 is contrary to those objectives. Indeed, if one goes 22 back to the government White Paper, it is clear that 23 the government's intention was that customers who 24 wished to take supply from their local distribution 25 company should be entitled to full benefits of 26 competition. 27 The White Paper stated expressly that 28 customers would always have access to electricity at 496 MARK/JENNINGS, presentation 1 market-based rates through their current supplier. 2 Those are the words of the White Paper which we can 3 have regard to in determining the objectives of the 4 legislation. 5 In our submission, the intention of 6 the legislation is clear, that the full benefits of 7 competition are to be available to consumers, including 8 through their local distribution company, and implicit 9 in that is the notion that customers who do not wish to 10 change are not to be denied pricing benefits and choice 11 which are available to other customers in the 12 marketplace. 13 The system is not to be structured to 14 incentivize them or require them to leave the LDC if 15 they wish to obtain the benefits of the competitive 16 environment. 17 That philosophy is not only apparent 18 from the objectives, but is enshrined in various 19 specific provisions of the legislation. I want to take 20 just a few moments to review some of those. 21 It is firstly important to bear in 22 mind that the words or concept of standard supply are 23 not to be found anywhere in the legislation. It was a 24 proposal of the MDC which predated the legislation and 25 is not derived from or reflected in the legislation. 26 On the contrary. The Act is clear in 27 not making any distinction whatsoever between the type 28 of service which is to be provided by distribution 497 MARK/JENNINGS, presentation 1 companies under section 29 and the type of service 2 which is to be provided by any other participant in the 3 marketplace. 4 Section 29 speaks of an obligation on 5 the distribution companies to sell electricity to 6 someone who wants to buy from it -- not to supply, not 7 to provide, but to sell. Sell is found in the 8 definition of "retailing" in the legislation. 9 Section 78(3) of the legislation very 10 directly and expressly calls the function and service 11 to be provided by the LDC under section 29 as 12 retailing. That is the description used in the 13 legislation itself. 14 Not only is there no basis in 15 section 29 for the notion of a mandatory supply regime 16 at spot price pass-through, the legislation is 17 expressly the contrary in indicating that the LDC is 18 expected to provide retail service, the same type of 19 service that any other retailer covered by the 20 legislation provides. 21 The language of standard supply is in 22 fact the language of the old Public Utilities Act which 23 no longer applies and a regime where electricity was 24 provided at uniform regulated rates with a statutory 25 payment obligation. That is supply and that is why, in 26 our submission, the term "supply" is nowhere to be 27 found in section 29. Section 29, as indicated, speaks 28 in terms of selling and retail. 498 MARK/JENNINGS, presentation 1 In this regard, it is worth noting 2 that if the government had intended that such a 3 significant share of the marketplace -- and I think 4 there is consensus that there will be a significant 5 share of the marketplace on section 29 service -- if 6 the government had intended that that be a 7 non-contractual, non-commercial form of supply 8 arrangement, it clearly would have put in the 9 legislation some mandatory payment obligation such as 10 is found in the Public Utilities Act. 11 In the absence of any provision in 12 the legislation which makes the customer libel for 13 power actually delivered or gives the Board the 14 authority to make the customer responsible for payment, 15 it seems to us that it's difficult to argue that the 16 government intended anything other than that the 17 substantial majority of section 29 customers will be 18 taking power from the utility on a consensual, mutual, 19 contractual basis and not under a standard mandatory 20 supply arrangement. 21 That there should be no distinction 22 between the rates and choice offered to section 29 23 customers and all other customers is reinforced by 24 section 70(9) which permits an LDC to meet its 25 section 29 obligations through its retail affiliate or 26 any other retailer. In our submission, there could not 27 be a clearer indication of the legislature's intention 28 to put section 29 customers on the same footing as all 499 MARK/JENNINGS, presentation 1 other customers. 2 It is inconceivable that the 3 legislature would have permitted the LDC to delegate 4 the section 29 function to a retail affiliate or to a 5 retailer if it was not intended that customers would be 6 offered retail service akin to the service offered by 7 the retail affiliate or other retailers. 8 The draft proposal to require the 9 delegated retailer to provide service other than on a 10 commercial retail basis is, frankly, a tortured reading 11 of the legislation. This is further reinforced by the 12 phase-out provisions contained in the legislation. 13 One of the premises of the standard 14 supply regime that is proposed by Board technical staff 15 which seems to be one of its foundations is again this 16 notion that there should be some standard service, some 17 minimum or generally available service that any 18 customer can take advantage of at any time. 19 The Act explicitly provides that at 20 some point, and it seems to be in one case expressly 21 linked to the competitive environment, that the 22 obligation to sell contained in section 29 is going to 23 go by the boards and that customers will have access 24 only to whatever retail offerings there are in the 25 marketplace and not to some mandated standard supply 26 regime. 27 Once again, there is a clear 28 indication from the legislation that what is intended 500 MARK/JENNINGS, presentation 1 by the government is that all customers should get 2 commercial retail supply in forums developed by 3 competition in the marketplace and that it is not the 4 expectation or the function of the Ontario Energy Board 5 to provide some standard non-commercial, non-market 6 derived form of supply. 7 It should also be borne in mind in 8 this connection that section 78, which is the provision 9 of the Act dealing with the setting and fixing of rates 10 for standard supply, is inconsistent with the regime 11 which is now proposed. 12 Two features stand out from 13 section 78. The first one, which we have had some 14 discussion of already, is the fact that a rate is 15 clearly distinguished from a method or technique. 16 In our submission, that is a strong 17 indication that the utility is to be permitted to 18 propose a rate which may have its origins in a method 19 of determining the rate, but it is manifestly not a 20 spot price pass-through. 21 The proposal presently on the table 22 would make any application under section 78 23 meaningless. 24 The second feature is that in the 25 ordinary course the rates are to be proposed by the 26 distribution companies, without suggesting that there 27 would be 250 separate applications, because clearly 28 there would not be. 501 MARK/JENNINGS, presentation 1 The regime contemplated by the 2 legislation is that a distribution company should be 3 able to determine which rates are appropriate for 4 section 29 service in its service territory, and to 5 bring those rates forward for consideration by the 6 Board, subject to the Board's right to fix a different 7 rate if the rate proposed was not just or reasonable. 8 "Just and reasonable" is an 9 interesting phrase and, in our submission, describes 10 the Board's power to protect consumers against price 11 gouging and other unfair practices but is not the 12 language one would expect to see if the Board was 13 intended to be given the power to micro-manage and 14 micro-regulate the rates of the utility. 15 In this regard it should also be 16 borne in mind that the Board staff proposal does not 17 allow for any distinctions to be made between customers 18 of different sizes and classes. There is a well 19 accepted common-law principle that it is appropriate in 20 rate making, and often necessary in rate making, to 21 make appropriate distinctions amongst classes of 22 customers according to their conditions of service and 23 their needs. 24 The Board staff proposal would 25 exclude from application a broad set of generally 26 accepted rate-making principles and, in our submission, 27 the legislation should not be interpreted as permitting 28 that to happen. 502 MARK/JENNINGS, presentation 1 In terms of the objective that seems 2 embedded in the Board staff proposal to inhibit the 3 delegation of the section 29 function to the LDC's 4 retail affiliate, in our submission there is no 5 question that any such objective is precluded expressly 6 by the legislation. As indicated previously, there is 7 a clear contemplation in the legislation that the LDC 8 should be able to delegate the section 29 function to 9 its retail affiliate. 10 While it may be suggested by some 11 that it is open to the LDC to establish another 12 additional affiliate which does nothing other than deal 13 with the section 29 supply regime, there is certainly 14 nothing in the legislation to suggest this. We suggest 15 that it would be an interesting interpretation of the 16 legislation to suggest that the government had gone to 17 the lengths it did in the legislation to very carefully 18 mandate the circumstances and conditions in which 19 functions had to be separated and affiliates had to be 20 created but intended to leave the door open for that 21 regime to be supplemented by a standard supply regime 22 which mandated the creation of an additional affiliate. 23 The legislation is exhaustive in 24 dealing with mandated functional separations and 25 corporate separations. It should be treated as 26 exhaustive and the Board, in our submission, does not 27 have the authority to supplement it. 28 It is also not reasonable, in our 503 MARK/JENNINGS, presentation 1 view, to suppose that when the government described the 2 section 29 function as "retailing" and authorized the 3 LDC to delegate the retail function to an affiliate, 4 that the government did not intend that that function 5 be delegated to a retail affiliate. It is the only 6 reasonable interpretation available from the 7 legislation. 8 I want, lastly, just to take a moment 9 to deal with the aspect of the Board staff proposal 10 which would mandate that the LDC procure the power for 11 standard supply as presently envisioned by them from 12 the IMO. 13 There is, in our submission, simply 14 no authority in the legislation which bestows a 15 regulatory power on the Ontario Energy Board to 16 regulate procurement. 17 While there is power expressly given 18 with respect to transmission and distribution and 19 retailing, there is no power given to the Board to 20 regulate with respect to procurement. Again, that is 21 consistent with the legislature's intention that it is 22 the market which should operate to regulate, if you 23 will, the procurement function, and that if it intended 24 that a participant in the market should be bound by any 25 other regulation other than the market rules the 26 government would have expressly said so. 27 In the absence of such an express 28 provision, the Board has no inherent jurisdiction to 504 MARK/JENNINGS, presentation 1 regulate on the procurement side. 2 In closing, I just want to make an 3 additional comment concerning the Affiliates 4 Relationship Code. 5 While I understand that the Board has 6 indicated it does not want it to be on the issues list, 7 the Board has indicated it will take comments on other 8 aspects. In view of the correspondence with the 9 Minister, we think it appropriate to put the issue on 10 the table. 11 The effect of 2.5.7 of the Affiliates 12 Relationship Code, in conjunction with other provisions 13 of the proposed Standard Service Supply Code, is to 14 preclude the LDC from having the section 29 function 15 performed by the retail affiliate. 16 For the reasons I outlined 17 previously, we view this as an unreasonable 18 interpretation of the legislation, and indeed when one 19 takes a step back and looks at the legislation as a 20 whole, it is clearly intended that the municipal 21 electric utilities should commercialize their 22 operations and thereafter be on no other or different 23 footing from any other player in the marketplace. 24 In our submission, the restraints 25 imposed in combination of the two Codes which results 26 in an effective prohibition from delegation of the 27 authority to the retail affiliate is not permitted by 28 the legislation. 505 MARK/JENNINGS, presentation 1 That, in summary form, is the outline 2 of the view of the legislation and the constraints it 3 imposes on the Board in the exercise of its 4 jurisdiction and the principles which should guide the 5 Board in selecting a section 29 supply alternative. 6 Mr. Jennings will now deal with the 7 proposal in particular. 8 PRESENTATION 9 MR. JENNINGS: You have to view the 10 proposal in light of what we believe the legislation 11 says. The MEA and its members didn't ask that we move 12 forward in the electricity restructuring at a pace far, 13 far greater than when in gas. In fact, we propose that 14 there be a staged and careful implementation approach 15 so we make sure we get the wholesale market right and 16 then move on. But the government and the legislature, 17 in their wisdom, decided not to do that. 18 Similarly, the utilities and the MEA 19 didn't ask for the OBCA move in restructuring. The 20 legislature and the government decided that was the way 21 to go, that all companies would be on that footing. 22 Given those things, we think the 23 legislature has, in effect, gotten it pretty right and 24 it flows from that that the utilities can continue to 25 serve their customers as they move into the new arena, 26 as promised in the White Paper. 27 We see that the utilities have three, 28 in our view, quite distinct obligations under 506 MARK/JENNINGS, presentation 1 section 29. In summary, section 29 is ensuring that 2 somebody is prepared to sell in some other 3 jurisdictions where there isn't this kind of back-stop 4 protection. There are situations where people with a 5 bad credit risk, et cetera, can't find readily a 6 provider, so the government has looked to a point of 7 contact, and that is the wires company, and given it a 8 responsibility to ensure that somebody is prepared to 9 sell to the people so long as they are able to pay. 10 If I can draw an analogy, one of our 11 member utilities, Cochrane, is the supplier of Internet 12 services and cellular phone services, not because this 13 is a major effort for them but because nobody wanted to 14 go to that part of the country and do the marketing, as 15 was mentioned yesterday or the day before. So they are 16 on their own right, in that case, assuming a supplier 17 of last resort. 18 So we have three distinct 19 obligations. Most of the discussion to date has 20 centred in on the people who don't want to make a 21 choice, the small residential and small commercial 22 customers, and we do agree that they need some 23 protection, but the Act doesn't make any distinction. 24 Large industrial customers have access to section 29 as 25 well, and it is a bigger stretch to assume that they 26 have to be given what may be the best rate, and they 27 have an even greater effect on the market. 28 The market, as we have said, is both 507 MARK/JENNINGS, presentation 1 the spot market and the contracts market, and we 2 believe you need both. 3 Section 29(2) is quite distinctive. 4 You have a situation where there is an obligation to 5 make sure that people have somewhere to move to if they 6 are dissatisfied, having once decided that they are 7 going to sign a contract. We have said that we have no 8 objection under section 29(1) where people don't want 9 to move to there being no contractual agreement; in 10 fact, that is advantageous. Quite frankly, it is not 11 clear in the legislation how that is to be done, but if 12 the government and the OEB can find a way to impose on 13 the customers an obligation to pay and the other 14 elements of an implied contract, we are quite 15 supportive of the idea that section 29(1) customers not 16 have to sign a contract. 17 Having chosen to sign a contract, 18 though, there is a question as to whether or not they 19 should be able to go back to a no-contract arrangement. 20 Clearly, as was said, the Act contemplates a commercial 21 arrangement. 22 Section 29(3) is particularly 23 concerning. Even if one were to look at that kind of 24 spot pass-through arrangement, the costs and 25 administrative arrangements for section 29(3) are 26 substantially different than for the others. You have 27 the potential of a retailer other than the LDCs picking 28 up, let's say, 50 per cent of the load and then being 508 MARK/JENNINGS, presentation 1 unable to perform and suddenly, overnight, you have 2 100 per cent increase in the volume of business. At 3 minimum, there is a change in administrative costs 4 there that is substantially different than what is 5 under the others. 6 So I think there are three distinct 7 obligations that have to be recognized and we would 8 argue that the utilities have the authority to propose 9 different approaches in three ways: the kind of rate 10 that is appropriate for each of those, by customer 11 class, and in fact a combination, as the legislation 12 says, of ways of meeting it. So they might choose to 13 meet their section 29(1) obligations directly if they 14 were only going to be a wires company and go to a third 15 party for the other things, or they might choose to 16 meet sections 29(1) and (2) through their retail 17 affiliate but look to a third party to take the higher 18 risks of perhaps large customers and the section 29(3) 19 obligations. 20 The spot pass-through isn't, as was 21 said, a rate. We would like to be clear that if the 22 Board is prepared to accept that we are very supportive 23 of the MEUs having the ability to propose that, but it 24 is a proposal as a way of limiting the shareholder risk 25 that is involved in this. We don't think it is what is 26 contemplated, and in fact, as we have said in our 27 submission, our recommendation would be that customers 28 would far prefer and are better treated by a standard 509 MARK/JENNINGS, presentation 1 rate that they are used to, which is what has been 2 promised. But we do also try and argue for and defend 3 the rights of the MEUs to make their own determination 4 locally on how best to serve the customers. 5 Another significant factor is how 6 this is structured. There is an issue of timing, but 7 let us assume that the market opens reasonably early in 8 the year 2000. The MEUs have until November 2000 to be 9 incorporated under the OBCA, so they will be an MEU 10 which can't split itself into parts in operating both 11 as a retailer and as a wires company out of one 12 organization, which stresses the point, we believe, 13 that in fact the customers are there and the issue, in 14 terms of 2.5.7., is how they choose to organize their 15 OBCA company and where they put the customers. 16 At the moment they are the customers' 17 current supplier and retailer. They set a variety of 18 rates. They have different strategies and, 19 particularly, if we think about the private utilities 20 which are going to be covered on exactly the same 21 basis, they have a variety of values in terms of that 22 customer relationship, which is very important to the 23 continued health of the organization. 24 So when they split their company in 25 two, we believe it is their right to propose, subject 26 only to the Board's authority -- and the Board is told 27 that it can't order significant restructuring except to 28 require the establishment of a retail affiliate to meet 510 MARK/JENNINGS, presentation 1 section 29 in the other competitive activities that the 2 MEUs, the local distributors, are able to do. 3 Section 73 lists a whole bunch of 4 competitive activities that they must do through a 5 competitive affiliate, and the Board's authority to 6 require that, we think, is akin to the Cochrane 7 situation where if nobody else is there and they are 8 unable to find a third party perhaps to provide 9 reasonable and just rates the Board can require them to 10 set up a retail affiliate. 11 I think that is the paper everybody 12 has. I think that adequately describes the proposal. 13 MS LEA: Thank you very much, 14 Mr. Jennings. 15 Mr. Gibbons, do you have questions 16 for this gentlemen? 17 MR. GIBBONS: Yes. 18 MS LEA: Thank you. Please go ahead. 19 MR. GIBBONS: You are proposing that 20 the MEUs be allowed to offer a fixed-price option for 21 their section 29 customers, and according to Dr. Dewees 22 that could make it very hard for your competitors to 23 gain market share from you in the residential and small 24 commercial market. Do you agree with that analysis? 25 MR. JENNINGS: It is not clear. I 26 think there is a fairly clearly documented resistance 27 to movement. But barring that, I don't think it makes 28 it any more difficult. In fact, the section 29, 511 MARK/JENNINGS 1 whatever the proposal is, will be an "A" rate. If 2 Don Dewees' evidence was right and the fixed rate is 3 going to cost a little more, if they are more 4 interested in price and security they may move 5 elsewhere. 6 But we expect there to be some in our 7 share. There is no question. 8 MR. GIBBONS: Do you believe if the 9 MEUs are able to retain significant market share in the 10 residential and small commercial market that will 11 frustrate the people of Ontario achieving the benefits 12 of a competitive electricity market? 13 MR. JENNINGS: Frankly, we think it 14 would increase it. You have a much more active 15 negotiated contract market, with the possibility of 16 other suppliers working the system effectively rather 17 than all flowing through sort of a blind bidding system 18 through the spot market. 19 Having both, I think, puts some 20 healthy pressure on things. 21 MR. GIBBONS: With respect to your 22 fixed-price option, you will presumably purchase some 23 of your supplies under medium and long-term contracts? 24 MR. JENNINGS: I would expect so. 25 MR. GIBBONS: Yes. And would you 26 expect that you would do that exclusively through 27 public tenders? 28 MR. JENNINGS: I would assume that 512 MARK/JENNINGS 1 you would use any techniques. John Todd's proposal 2 yesterday I'm sure would be very attractive to some of 3 the utilities. But they will be business companies, 4 and they will use whatever practices are appropriate to 5 business companies, constrained by whatever 6 requirements the Board has on them within their 7 mandate. 8 I would think some kind of penalty 9 process would be common, but I think you would see a 10 variety of tenders. Some communities are going to lean 11 to green power local supply issues. There are going to 12 be a variety of factors which will respond to the local 13 communities, frankly, a lot better. 14 MR. GIBBONS: If you do supply a 15 fixed-price option, will that necessitate you 16 establishing restrictions on the ability of your 17 customers either to leave your system or to come back 18 to your system? 19 MR. JENNINGS: I would think the way 20 section 29 is set up, their ability to leave, after 21 section 29(1), is in law -- even though I don't see how 22 you could. I would assume after that, under 23 section 29(2) or (3), the only limits would be ones 24 that would be in common with any retailer in terms of 25 any penalties to ensure they have picked up their 26 administrative costs. But that would be up to the 27 Board to regulate. 28 So I don't see that they would be any 513 MARK/JENNINGS 1 more restrictive than anybody else's customers. 2 I am not an expert on this. I am a 3 forester by training, and a biologist. 4 MR. GIBBONS: If the MEUs were to 5 offer a fixed-price option, would that increase their 6 business risk relative to the Board staff's proposal? 7 MR. JENNINGS: It would allow them to 8 accept some risk, yes -- probably not as great as the 9 risk allowed by the investment that is allowed under 10 the affiliate relationship code, but it would allow 11 them to accept the risk. 12 But they are supposed to be business 13 companies, and if they are to make a profit, then they 14 ought to be allowed to take a concomitant risk. 15 MR. MARK: If I could just add 16 something there. 17 Unless one assumes an insolvency 18 situation, there is no difference whether you put the 19 risk on the parent company or the subsidiary company, 20 if you assume that that is going to be a common method 21 of implementing it, or even if they are sister 22 companies. The ultimate shareholder is going to be the 23 same in either instance. 24 So unless you want to assume that the 25 shareholder is prepared to permit its affiliate to, for 26 example, go bankrupt, then the same shareholder, 27 whether it is a public shareholder or a private 28 shareholder, is bearing the risk, whether the risk is 514 MARK/JENNINGS 1 found in the affiliate or in the LDC. It is to a large 2 extent, I think, a distinction without a difference. 3 MR. JENNINGS: The other issue is 4 that if in fact the Board staff proposal relieves the 5 utility of risk, it, as has been said, places it on the 6 customers, and most of our members are still quite 7 concerned about ensuring that they are providing the 8 customer with something reasonable and balancing risk 9 across their community. 10 MR. MARK: This reflects also on what 11 I call the legitimacy of the objective of the Board 12 staff paper, which is to have no risk on the LDC. 13 Assuming the government understood the basics of 14 corporate law when it drafted the statute, it well 15 understood that the risk of any commercial activity 16 that the affiliate engages in is a risk which is being 17 imposed on the same ultimate shareholder. 18 So, frankly, the argument that we can 19 put risk in the retailer and no risk in the LDC is an 20 artificial construct and is not something you can base 21 the -- 22 MR. GIBBONS: And under your 23 fixed-price option for section 29 customers -- and I 24 think you just alluded to it, Tony -- the MEU would 25 have the opportunity to earn a profit under those 26 electricity sales, or a loss. 27 MR. JENNINGS: Yes. 28 MR. GIBBONS: And if your proposal 515 MARK/JENNINGS 1 was accepted and the MEUs are allowed to offer a 2 fixed-price offering under section 29, how many Ontario 3 Energy Board hearings do you think there will be in any 4 given year to test the just and reasonableness of these 5 rates? 6 MR. JENNINGS: I would expect the 7 Board to find that there is a limited logical set of 8 approaches that will work. As has been said, there 9 will be groupings, utilities will get together, and MEA 10 has traditionally worked with its members to come up 11 with some fairly common approaches -- not always single 12 approaches, but a limited number. 13 On top of that, I would expect, if 14 our interpretation of what this regulation is about is 15 correct, that the Board could exercise its authority to 16 have written hearings and a lot of this could be 17 handled administratively. 18 MR. GIBBONS: When you say that you 19 think there would be a limited number of hearings, can 20 you be sort of a bit more specific. 21 You talk about the groupings of 22 different utilities. Can you give us sort of a 23 ballpark estimate of how many groupings there would be? 24 Is it five or is it more like fifty? 25 MR. JENNINGS: My suspicion is that 26 it would be closer to five than fifty, but I honestly 27 don't know. One of the issues is that the legislation 28 has set up something that we believe in, which is local 516 MARK/JENNINGS 1 decision-making, and it will be the local people who 2 decide. We will try and facilitate that. 3 If you think about it, there are a 4 limited number of logical options. Somebody is going 5 to come up with something that we didn't think was 6 logical and find a logic for it. 7 MR. MARK: I think you will find, as 8 happens in regulation in most sectors in most 9 environments, that very rapidly a set of standards or 10 permitted parameters are going to develop, and 11 guidelines will be developed and applications will be 12 made within those envelopes. I would expect that in 13 very short order you would not have a lot of outliers, 14 if you will, which would require some form of hearing 15 process more than a written administrative process. 16 MR. JENNINGS: Jack, your question I 17 think goes to the regulatory burden issue. It really 18 bears on an understanding of what is expected under 19 section 29. 20 If, as Mr. Mark said, the emphasis is 21 that the rates being offered are just and reasonable, 22 then Mr. Todd's proposal of comparison of benchmarking 23 approach can deal with that. That is a fairly limited 24 and light and relatively easy approach to regulation. 25 There are also some issues about 26 cross-subsidy and access for information, but those 27 things are there anyway. Those are not additional 28 issues. 517 MARK/JENNINGS 1 MR. GIBBONS: Can you tell us how 2 many MEUs have signed up so far with ENERconnect to be 3 their supplier? 4 MR. JENNINGS: I can't tell you, but 5 there is an understanding that a whole bunch have. 6 What has happened is a number of MEUs have invested in 7 ENERconnect in order that there be a consolidation 8 organization active in the wholesale market other than 9 OPG. 10 You can assume that many utilities 11 that have invested in ENERconnect will buy from 12 ENERconnect, but part of ENERconnect's commitment was 13 that they wouldn't be tied to buy all or any. They 14 will have the choice of getting their energy where they 15 can best get it for their customers. 16 At the moment there is a proposal 17 out, but it isn't a binding one, so the decisions 18 haven't been made yet. 19 I think this exercise will in fact 20 define a lot of where that goes. 21 MR. GIBBONS: Thank you, Tony. Thank 22 you, Alan. Those are all of my questions. 23 MS LEA: Thank you. 24 Mr. Adams. 25 MR. ADAMS: I want to start off by 26 understanding who is speaking. 27 Do you speak for the Upper Canada 28 Energy Alliance in this proceeding? 518 MARK/JENNINGS 1 MR. JENNINGS: We speak for the MEUs 2 broadly, including their members. They have some 3 specific issues. Our position is that they have the 4 right to choose their approach to this. 5 MR. ADAMS: So I take it you are 6 speaking for Toronto Hydro, for Hydro Mississauga, for 7 Innisfill Hydro, that have separate representation 8 here? 9 MR. MARK: Let's not get caught up in 10 semantics. We appear on behalf of the -- 11 MR. ADAMS: Mr. Mark -- 12 MR. MARK: Let me answer the 13 question. 14 We appear on behalf of the Municipal 15 Electric Association. There is no secret to what the 16 Municipal Electric Association is. It is an 17 association which has a history of representing utility 18 interests and does so with them acting collectively. 19 It is not inconsistent with 20 individual utilities being represented. That's it. 21 The membership in the MEA is approximately 260 22 utilities. 23 MR. ADAMS: Mr. Mark, you can 24 characterize my question as one of semantics. I am 25 simply trying to clarify who you are speaking for. 26 MR. MARK: The MEA. 27 MR. ADAMS: Are you speaking for 28 ENERconnect? 519 MARK/JENNINGS 1 MR. JENNINGS: We are speaking for 2 the Municipal Electric Association. 3 MR. ADAMS: What is your relationship 4 with ENERconnect? What is the relationship of the MEA 5 with ENERconnect? 6 MR. JENNINGS: ENERconnect is a 7 partnership of utilities, with a managing partner that 8 is structured as a subsidiary of MEA, with a separate 9 board of directors operating separately. 10 MR. ADAMS: But ENERconnect is 11 properly described as a subsidiary of MEA? 12 MR. MARK: No. 13 MR. JENNINGS: It is a limited 14 partnership. 15 MR. MARK: ENERconnect is a limited 16 partnership established under the Limited Partnerships 17 Act. The partners have the rights and powers with 18 respect to voting and controlling that partnership, as 19 they have under the Act. 20 The general partner is a subsidiary 21 of the Municipal Electric Association, but it has to 22 answer, by agreement and by legislation, to the limited 23 partners. 24 MR. ADAMS: I think we have 25 established that the MEA has an interest in ENERconnect 26 which is represented here under a separate 27 representation. 28 MR. MARK: But it has no partnership 520 MARK/JENNINGS 1 interest. The MEA is not a limited partner. The 2 general partner, which has no ownership stake in the 3 partnership, is an administrative entity which is 4 required so that you have got -- you have to have a 5 general partner which is the one which manages the 6 business on a day-to-day basis. That is a requirement 7 of the legislation. 8 That happens to be a corporation of 9 which the sole shareholder is the Municipal Electric 10 Association, but the Municipal Electric Association 11 does not have an equity stake in ENERconnect and 12 ENERconnect's fares are subject to governments by a 13 board of directors which is elected not by the MEA but 14 by the membership of ENERconnect's limited partners. 15 The general partner is controlled by 16 the partners of ENERconnect, not by the Municipal 17 Electric Association. 18 MR. ADAMS: Thank you for that 19 clarification. 20 Does the MEA adopt the submissions of 21 all of its members that are presented in this hearing 22 or their testimony as it flows forward? 23 MR. JENNINGS: I wouldn't say we have 24 made a practice of doing so. I haven't considered the 25 thought. 26 MR. WARREN: I apologize, 27 Mr. Jennings. We are having some difficulty in hearing 28 what you said. 521 MARK/JENNINGS 1 MR. JENNINGS: My apologies. 2 MR. WARREN: In particular, I didn't 3 catch your last response to Mr. Adams' last question. 4 MR. ADAMS: Should I restate the 5 question? 6 MR. JENNINGS: I haven't considered 7 it. 8 MR. WARREN: I beg your pardon? 9 MR. JENNINGS: I haven't considered 10 it. 11 MR. MARK: He hasn't considered that 12 question. 13 MR. ADAMS: Can you advise us as to 14 whether -- 15 MR. WARREN: I'm sorry to be stupid 16 about this. The question was: Do you adopt the 17 positions put forward by individual MEUs in this 18 hearing? The answer is: We haven't considered it. Is 19 that -- 20 MR. JENNINGS: That's correct. 21 MR. WARREN: Thanks very much. I 22 just couldn't hear it. That's all. 23 MR. ADAMS: Mr. Jennings, can you 24 give me the historical interpretation that the MEA has 25 operated under on the on the concept of power cost? 26 MR. JENNINGS: The historical concept 27 under the Power Corporation Act and the Public 28 Utilities Act was that the customers paid only for the 522 MARK/JENNINGS 1 costs involved in delivering the service, which was a 2 bundled electricity service, including generation, 3 transmission, et cetera, with no taxes and no profit to 4 a shareholder involved. 5 MR. ADAMS: So would it be fair to 6 characterize that historically the MEA has supported a 7 view that producers are there to serve customers? 8 MR. JENNINGS: We used to, yes. 9 MR. ADAMS: Has that changed? 10 MR. JENNINGS: The legislation is in 11 the process of changing that by law. 12 MR. ADAMS: What's the view of the 13 MEA on the appropriate role of distribution utilities? 14 Are they there to serve their customers or are they 15 there for some other purpose? 16 MR. JENNINGS: They have, in our 17 view, little choice under the OBCA Act but to look at 18 their shareholders as well as their customers from here 19 on in. 20 MR. MARK: It also depends, I think, 21 to an extent, Mr. Adams, on who ends up owning the 22 distribution companies. That is an issue which ought 23 not to be quickly forgotten in these proceedings where 24 people often proceed on the assumption that all of them 25 will always be owned by the municipal corporation and 26 that is not necessarily the case. 27 The Municipal Electric Association 28 did not favour the commercialization of the LDCs at 523 MARK/JENNINGS 1 this time. That debate was lost and the government has 2 decided to commercialize that business. The directors 3 of those corporations will have to discharge the duties 4 that any directors have, which is to act in the best 5 interests of the corporation, and each utility, each 6 municipality, is going to have to determine how it 7 interprets those interests and will balance many 8 interests. 9 MR. JENNINGS: The government took 10 advice from some folks that a commercial 11 market-oriented approach is going to be better for the 12 customer in the long run. 13 MR. ADAMS: Mr. Jennings, would it be 14 fair to say that historically the MEA would have 15 championed the approach to power pricing, procurement, 16 and delivery of energy services to customers that would 17 minimize long-term costs? 18 MR. JENNINGS: Yes. 19 MR. ADAMS: That is not necessarily 20 the case any more because you have new interests. Is 21 that what you are telling me? 22 MR. JENNINGS: We are now faced with 23 having to, by law, pay attention to the interests of 24 shareholders as well as customers. 25 If those shareholders are municipal 26 corporations, we would and do advocate that they 27 consider the local community benefits significantly as 28 a factor in their decision on how much dividend, et 524 MARK/JENNINGS 1 cetera, they want to take out of the utility, but it's 2 a shareholder's right. 3 MR. MARK: Could I just add something 4 to that? 5 It seems to me that, ultimately, 6 whether the municipality -- I will call it that just 7 for our discussion's sake -- whether it's a participant 8 or not, how it participates, the objective of this 9 scheme is that the rates are going to be market-driven. 10 So that is going to determine rates. 11 I think the question is: Do you 12 permit or do you preclude the shareholders of the 13 successors to the MEUs from participating in that? It 14 may indeed mean that some of the profits, rather than 15 flowing to private enterprise, will flow back into the 16 hands of the ratepayers or the municipality in the form 17 of dividends. But I'm not sure that it's correct to 18 say that under the new regime they are not pursuing the 19 same objectives they had. 20 MR. ADAMS: Okay. Now, historically, 21 many of us in this room will remember Alan Mark making 22 presentations and suggesting that the MEA spoke on 23 behalf of customers. 24 Just to be clear, we can disabuse 25 ourselves of that notion from here on in. Is that 26 correct? 27 MR. JENNINGS: I wouldn't think so. 28 I would still think that most of our members at the 525 MARK/JENNINGS 1 present time -- at some future date maybe you can, but 2 at the moment most of our members are still municipally 3 owned. 4 The membership voted for a 5 constitutional change at the last annual meeting that 6 still advocates, as one of the options, customer 7 control, directly or through the trustees of the 8 municipal corporation. We believe that the benefits to 9 the community are still customer interest and still 10 believe that most of our members work hard for the 11 benefit of their customers. 12 MR. MARK: If you have attended the 13 multitude of municipal council meetings and public 14 meetings that have gone on around the province so that 15 municipalities can come to grips with the issues that 16 they face because of Bill 35 -- and I am sure 17 Mr. Rodger can concur; he has probably been to more 18 than I have -- you will find that an overwhelming 19 reason for municipalities to not privatize the 20 enterprise at the present time is that many 21 municipalities want the LDC to continue to act in the 22 customer's interest and in the public interest so that 23 their customers are not thrown, at least initially, to 24 the vagaries of public enterprise. 25 That is very much an issue which has 26 motivated many municipalities and, presumably, to some 27 extent, it will continue to motivate them as 28 shareholders. 526 MARK/JENNINGS 1 MR. ADAMS: I'm confused because this 2 seems to contradict the previous presentation that 3 Mr. Jennings just made about the impositions of the 4 OBCA character of municipal utilities requiring them -- 5 MR. JENNINGS: What I said was 6 that -- 7 MR. ADAMS: Excuse me. Let me finish 8 my question. 9 MR. JENNINGS: I'm sorry. 10 MR. ADAMS: I would characterize your 11 previous testimony as having said that although 12 historically the municipal utilities espoused a view 13 that producers were there to serve customers, now they 14 take a view that there are other interests at stake. 15 When I confronted you with the 16 implication of that, that we can disabuse ourselves 17 that the MEA speaks on behalf of customers, you take 18 exception to it. 19 I see two clear arguments being 20 presented here. Can you clarify this? 21 MR. JENNINGS: What you have 22 identified is a challenge for the membership and the 23 association to produce a -- the membership still wants 24 to focus in largely on customers and customer benefits 25 and it still tries to serve customers from large 26 industrial to small householders. Those are the 27 significant issues for our members and their 28 shareholders. But the law also requires us to 527 MARK/JENNINGS 1 recognize a shareholder interest, so we now have two 2 sets of values that we have to pay attention to by law. 3 We have no choice. 4 MR. MARK: Your questions assumes, 5 Mr. Adams, that there is a necessary incompatibility 6 between the corporate obligation and the obligation 7 posed by the Act to deal with the realities of 8 commercial interests and the fact that the shareholders 9 are municipalities which may want to act in the public 10 interest. 11 You seem to assume that those two 12 things are incompatible, and they are not. Clearly, 13 the challenge for the municipalities who want to 14 continue to hold the shares because they want to 15 protect the public interest will be to meld those two 16 objectives and to pursue them simultaneously. 17 That is the objective. I don't 18 accept that they are inherently contradictory. 19 MR. ADAMS: Let's look at some of the 20 practicalities of your proposals here and perhaps you 21 can walk me through. 22 At page 2 of your submissions, you 23 say there should be no obligation on the LDC or its 24 agents to accept customers back on a no-contract basis. 25 The middle of the page. 26 MR. JENNINGS: That's right. 27 MR. ADAMS: Would you accept that 28 that is a constraint on mobility? 528 MARK/JENNINGS 1 MR. JENNINGS: That derives from the 2 fact that we can't find anything in the Act that allows 3 for a no-contract in the first place. We are quite 4 happy, as the submission says, to have customers 5 under 29(1) not have to sign contracts. We support 6 that concept if the government and/or the OEB can find 7 a way to deal with a contract by implication, but the 8 structure of the Act, unfortunately, doesn't appear to 9 contemplate no-contract arrangements. 10 MR. ADAMS: Let me try to put my 11 question with a practical example. 12 In a situation where a municipal 13 utility has contracted for supply at some price that 14 turns out to be below spot prices -- 15 MR. JENNINGS: Yes. 16 MR. ADAMS: -- and a bunch of 17 customers have gone to other suppliers, they now find 18 that the offerings from the municipal utility, had they 19 signed up with it back when it was available, are 20 attractive and they want to come back. 21 Would your proposal lead to any 22 restrictions on customers coming back, the proposal to 23 have contract service? 24 MR. JENNINGS: I don't see why. They 25 are on a contract. The requirement is that the LDC 26 ensure that someone is prepared to sell electricity to 27 them, either the LDC directly for a short period of 28 time or the retail affiliate or a third party, and the 529 MARK/JENNINGS 1 specific offering or guarantee available to them is one 2 that is regulated. I see no reason for a problem in 3 mobility if they are coming from one contract to 4 another. 5 MR. MARK: If they leave the system, 6 as they clearly will, by contracting with other 7 retailers, I don't see how it restricts their mobility 8 to say that they can move back to the LDC or any other 9 retailer by signing a contract. Especially if the 10 motivation for them moving around is that they want a 11 better price as opposed to being the unsophisticated 12 do-nothing inertia customer, it simply cannot be said 13 that requiring them to sign a contract in any way 14 restricts their ability. They are contract players. 15 MR. JENNINGS: The more likely 16 restriction on mobility, I would think, would be the 17 terms of the other retailers contracts that guarantees 18 the people the right to move to a section 29 protection 19 if they want. 20 So I would assume that the other 21 retailers will try and put in some penalty for 22 exercising that right. That I would think, would be 23 the restriction on mobility. 24 MR. ADAMS: One of the reasons the 25 Market Design Committee proposed the spot price 26 pass-through was to facilitate some simple mechanics 27 for customer movement, customer mobility -- the 28 customers could go to other suppliers. 530 MARK/JENNINGS 1 Under your proposal I don't see an 2 explanation of where the bill gets sent, where the 3 payment obligation comes from, what the impact is on 4 prudential requirements. Can you explain to us what 5 the mechanics are of your proposal with regard to 6 customer mobility? 7 MR. MARK: I'm sorry? Customer 8 mobility? 9 MR. ADAMS: If a customer leaves 10 system supply and goes to contract supply, what 11 happens? 12 MR. JENNINGS: What is "system 13 supply"? 14 MR. ADAMS: "System supply" is 15 LDC-provided commodity. They are going to an 16 alternative commodity supplier. 17 MR. JENNINGS: But they may not be 18 there to start with. The LDC might propose to meet 19 their 29(1) obligation through a third party. 20 MR. ADAMS: That's fine. 21 Let's take a situation where you have 22 an LDC or its designate providing the commodity supply 23 and a customer wants to go to ABC retailer. 24 MR. JENNINGS: Yes. 25 MR. ADAMS: How does this work? 26 You haven't explained the mechanics 27 of how this works. Explain it. 28 MR. JENNINGS: It works exactly the 531 MARK/JENNINGS 1 same way as the Board's proposal: They write a letter, 2 there is an arrangement, they sign a contract with 3 somebody else, the somebody else advises the LDC that 4 they are now their customer. 5 It works the same way as anybody 6 moving from one retailer to another. 7 MR. ADAMS: So you have lower volumes 8 on the LDC's contract of supply. How are those volumes 9 contracted? As in "shrunk" to represent the movement 10 of the customer load to another supplier? 11 MR. JENNINGS: Quite possible. 12 MR. ADAMS: I'm asking what the 13 mechanics are for balancing the loads. 14 MR. JENNINGS: The same mechanics 15 that are used by the utilities in servicing their 16 customers today. People move in and out of town, their 17 loads go up and down. 18 MR. ADAMS: Today they are no 19 customers that are moving to alternative suppliers 20 because they are trapped by the monopoly. 21 MR. JENNINGS: No. But the risk that 22 you are talking about in terms of load variation is 23 there anyway. 24 MR. ADAMS: I'm not talking about a 25 risk of load variation. 26 MR. MARK: It doesn't matter that the 27 utilities will deal with in their procurement 28 practices, in their contracts with suppliers. They may 532 MARK/JENNINGS 1 be taking a substantial quantity from spot. They will 2 have commercial contracts. 3 We have all been talking here about 4 the volume, the volume risk, and we know that there is 5 a balancing act. There is a trade-off between paying a 6 price for the -- minimizing the price for that risk and 7 how much mobility you want, and the utilities are going 8 to have to make judgments about where to strike the 9 proper balance. 10 But to a large extent it is going to 11 be dictated by what is available in the marketplace, 12 and that is a little bit difficult to predict with 13 exactitude. 14 MR. JENNINGS: Cornwall, which hasn't 15 been mentioned here but is a good case in point, has a 16 portfolio of contracts: some are firm, some are 17 shoulder and flexible, some are peaking, some are in 18 U.S. dollars, some are in Canadian dollars. They come 19 from a variety of sources. As their customers move up 20 and down they give them fixed prices and look after 21 them quite well. They have, in fact, quite a low rate 22 in the province today. 23 They have been operating in the 24 environment that is contemplated by the Act for some 25 years. 26 MR. ADAMS: Just to repeat, my 27 question was: Please explain the mechanics of customer 28 mobility. 533 MARK/JENNINGS 1 I just want to make sure I have a 2 complete answer to the extent of the MEA's thinking in 3 walking through all of the procedures that allows bills 4 to be formed, customers to be charged, and somehow 5 producers to receive compensation for the power they 6 have produced, and that is the answer that I get. 7 MR. MARK: I don't understand -- 8 MR. JENNINGS: It depends on what 9 your question is. 10 MR. MARK: Yes. I don't understand 11 what the question is, frankly. 12 There is one issue which is the 13 mechanics of how you send the bill, but you seem to 14 suggest that what you are inquiring about is degree of 15 mobility. 16 For myself, I'm not sure I understand 17 the question. 18 MR. ADAMS: The MDC produced several 19 hundred pages, an explanation of how the mechanics of 20 all this works, and I get from the MEA a four-page -- 21 MR. JENNINGS: With respect, we are 22 talking about retail activities which were not several 23 hundred pages of MDC activity. 24 The MDC itself paid attention largely 25 to the wholesale market. The retail technical panel 26 produced a lot of things that the Market Design 27 Committee did not have time to go over in any extensive 28 detail. 534 MARK/JENNINGS 1 As I understood your question, it 2 was: How do you handle the transfer of billing 3 information? 4 All of those issues can be handled on 5 the same basis whether we are dealing with fixed price 6 or spot pass-through. 7 The billing arrangements are the 8 same. 9 I mean, if we need to go into that in 10 today's hearing we can, but I fail to see how it is 11 germane to the issue. 12 Your issue, as I understood it, was 13 going to the question about how they manage their load. 14 That is a different issue, and that is germane. 15 Can you expand your question? 16 MR. ADAMS: I can make this question 17 much more precise. 18 The spot price pass-through was a 19 fundamental design element that allowed a certain 20 mechanical system for transfer of customers, movement 21 of customers from Supplier A to Supplier B. Somebody 22 has to work out the logic on this so that the power 23 market can function. 24 I don't see the MEA having done that. 25 I'm asking you for your explanation of how customer 26 mobility works as a mechanical matter. 27 MR. JENNINGS: I don't understand how 28 the spot price pass-through was a mechanic for transfer 535 MARK/JENNINGS 1 of customers. 2 MR. ADAMS: Okay. That's fine. We 3 will leave it at that. 4 MR. JENNINGS: Let me be clear that, 5 as was said by Mr. Mark, the spot price pass-through 6 concept was developed before the legislation was 7 available, and the MEA representatives on several 8 occasions at the Market Design Committee asked that 9 there be a thorough step-back review of the legislation 10 by the Market Design Committee itself carefully going 11 through what we have ended up -- instead of having down 12 there -- having Mr. Mark do, to try to look at whether 13 that concept is allowable under legislation. 14 MR. ADAMS: Mr. Jennings, do you 15 accept the testimony of Don Dewees when he expressed 16 his view -- and I would suggest he is quite an eminent 17 person on this matter -- that a fixed price standard 18 supply is likely to mean higher cost in the long run 19 than a spot price pass-through? 20 MR. JENNINGS: He also went on to say 21 that it was not likely to be the lowest available, that 22 other people would be able to get it. 23 So no, I didn't understand that part 24 of his evidence. It didn't seem to make sense. 25 MR. ADAMS: Thank you for your 26 opinion. 27 One final question. 28 Would the MEA advance, support, or in 536 MARK/JENNINGS 1 any other way, lend comfort to a measure that would 2 interfere with the opening of the market as per 3 government policy in year 2000? 4 MR. JENNINGS: I'm not sure I 5 understand the question. 6 MR. MARK: You will have to tell us 7 what the issue is, Mr. Adams. 8 I mean, it is a hard question to 9 field without knowing what the debate was and what the 10 issue was. 11 MR. JENNINGS: If the market you are 12 talking about is the wholesale market, probably not. 13 If it is the retail market, we have advocated that 14 there be some trials to make sure we have this right 15 before we open it up completely. 16 So it depends on the issue you are 17 raising. 18 MR. ADAMS: We will leave it at that. 19 MS LEA: Thank you, Mr. Adams. 20 Mr. Stephenson. 21 MR. STEPHENSON: Thank you. 22 Let me just come back to: it's not 23 the issue of who you are speaking for, but who you are 24 agreeing with perhaps. 25 I noted in the material filed by 26 Mr. Power and Mr. Budd that you are one of the sponsors 27 of -- or one of the stakeholders, I guess, in 28 association with at least Ms Woolf's paper, and I'm not 537 MARK/JENNINGS 1 sure if that also applies to Mr. Adamson's paper, and I 2 just wanted to understand from the perspective of the 3 MEA what it viewed as the implication of its 4 sponsorship of that paper. 5 I guess what it comes down to is: Do 6 you endorse the analysis and recommendations contained 7 in those papers? 8 MR. JENNINGS: We concentrated our 9 efforts on the material that you are seeing here. We 10 also felt it valuable to bring somebody of Ms Woolf's 11 stature to these proceedings and to provide her advice 12 as advisors to a number of governments around the 13 world. 14 We also felt it useful, because we 15 are interested in what is best for the customers, to 16 get London economics analysis of what the implications 17 of intermediate and forward markets are on the record. 18 So we provided some financial support for that as well. 19 But our own focus was on the material 20 you have seen here. 21 MR. STEPHENSON: I noted that 22 Ms Woolf makes the notation that: 23 "OHSC has provided funding for 24 this paper in the interests of 25 encouraging a complete debate." 26 (As read) 27 Would you characterize the MEA's 28 involvement in these papers in the same fashion as that 538 MARK/JENNINGS 1 or is it something beyond that? 2 MR. JENNINGS: What has she said? 3 MR. STEPHENSON: She says that: 4 "OHSC has provided funding for 5 this paper in the interests of 6 encouraging a complete debate." 7 (As read) 8 Which I understood to mean that OHSC 9 doesn't necessarily agree with what she is saying, but 10 they thought that her contribution nevertheless is 11 valuable. 12 Would you characterize your own 13 support -- 14 MR. JENNINGS: That is probably a 15 fair characterization for us as well. 16 MR. STEPHENSON: I don't know if you 17 have turned your mind to it with any great detail, but 18 can you assist us: Is there anything specifically in 19 either Ms Woolf's analysis or recommendations, or 20 Mr. Adamson's analysis or recommendations, that the 21 MEA, as a matter of its own policy, does not agree 22 with? 23 MR. JENNINGS: I haven't turned my 24 mind to it in detail. 25 If there was a point of departure it 26 would be our suggestion that the Act gives our members 27 the right to take different strategies and different 28 approaches, and, to the extent that the Board is 539 MARK/JENNINGS 1 prepared to allow it, their right to propose a spot 2 price pass-through approach if they deem it appropriate 3 for some or all of their obligations under section 29. 4 MR. STEPHENSON: Is it fair to say 5 that insofar as your presentation, your proposal that 6 comes under your letterhead, differs, either explicitly 7 or implicitly, from Ms Woolf's or Mr. Adamson's 8 proposals, we obviously should take your own paper as 9 reflecting the MEA's policy as compared to anything 10 Ms Woolf's and Mr. Adamson's might have? 11 MR. JENNINGS: At the point of time 12 it was submitted, that's correct. That doesn't prevent 13 us from being persuaded by other arguments. 14 MR. STEPHENSON: You may sign on at 15 the end of the day. Okay. 16 MR. JENNINGS: The direction we have 17 as staff at the MEA is to make sure we are doing the 18 best thing for the system overall, and the customers, 19 and the shareholders. 20 MR. STEPHENSON: Fair enough. 21 I think this one is for Mr. Mark, and 22 permit if I will, but it is rather unusual obviously to 23 have sort of evidence about domestic law, so I take 24 this in the manner I hope it was intended, which was 25 simply to explain the basis for your position? 26 MR. MARK: Yes. It wasn't intended 27 as evidence. As I said at the beginning, the concern 28 was that because, to a significant extent, the 540 MARK/JENNINGS 1 structure proposed by the MEA is based on a reading of 2 the legislation, we thought it fair to put out there on 3 the table what we thought those directions were. 4 MR. STEPHENSON: Okay. And that is 5 fair enough. In that spirit I am not about to engage 6 in a debating society about whether my interpretation 7 is different or the same. 8 But maybe you can assist me. I had 9 understood, Mr. Mark, that you made some comment -- and 10 I assume it is derived from a provision of the Act -- 11 that you understood that at some point in time the 12 section 29 obligation was going to disappear. 13 MR. MARK: Could. 14 MR. STEPHENSON: And what would 15 trigger that happening? 16 MR. MARK: There are two sections 17 which deal with the disappearance of that obligation. 18 One is, I believe, section 70 -- 19 MR. POWER: Subsection (10). 20 MR. MARK: -- subsection (10), 21 basically which says that there can be a date 22 prescribed by regulation under which the distributor 23 cannot comply directly with section 29, and there is no 24 triggering event identified for us. The Lieutenant 25 Governor in Council may say that this can only be 26 provided by somebody other than the distributor. We 27 say the logical inference is a competitive service 28 provider. 541 MARK/JENNINGS 1 Another provision is in section 29 2 itself, if I am not mistaken -- section 29 of the 3 Electricity Act -- which provides in subsection (4) 4 that: 5 "The Board may exempt a 6 distributor from any provision 7 of this section if, after 8 holding a hearing, the Board is 9 satisfied that there is 10 sufficient competition among 11 retailers in the distributor's 12 service area." (As read) 13 My point was that this indicates that 14 the government's objective is to ensure that all 15 customers have what is essentially a competitive retail 16 service, which is inconsistent somewhat with the notion 17 that we should always have a public service fall-back 18 standard spot price pass-through option. These seem 19 inconsistent. 20 MR. JENNINGS: It would appear, 21 between those two, to suggest, fairly clearly we think, 22 that the government favours delivery through the retail 23 affiliate, if there is one. You can do it directly if 24 you are going to be only a wires company, so that 25 somebody is doing it, but you can't do that forever. 26 It is certainly not the preferred option. 27 MR. STEPHENSON: Let me just come 28 back to that. Where is it in the Act that you say SSS, 542 MARK/JENNINGS 1 or the section 29 obligation -- let's use your 2 language -- can be provided through a retail affiliate? 3 MR. MARK: The licensing provision, 4 section 70, clearly provides that the function can be 5 designated to an affiliate of the distributor. 6 MR. STEPHENSON: That is 79(b), I 7 think. 8 MR. MARK: I think that's correct. 9 MR. STEPHENSON: But you would agree 10 with me that is an affiliate, period? 11 MR. MARK: Sure. But if you also 12 look at the other right in section 70(9), it is clear 13 that the government considers that the function being 14 performed is a retail function. Just let me turn it up 15 for a moment, if I can put my hands on it. 16 MS LEA: It is section 70, 17 subsection (9), I think, for the record. 18 MR. MARK: If you look at section 19 70(8) and all of the subsections -- for example, look 20 at (3): 21 "The Board may make orders 22 approving or fixing just and 23 reasonable rates for the 24 transmitting or distributing of 25 electricity and for the 26 retailing of electricity in 27 order to meet a distributor's 28 obligations under section 29." 543 MARK/JENNINGS 1 (As read) 2 It couldn't be clearer. The 3 government considers that the section 29 obligation is 4 met through what it calls "retailer". 5 The other section says you can carry 6 out your retail obligation through an affiliate. I 7 don't consider it to be a leap to suppose that the 8 government must have meant your retail affiliate. And 9 given the lengths that the legislation went to to 10 carefully prescribe the circumstances in which there 11 must be separation of functions into different 12 affiliates, it is simply not open to anybody to 13 credibly suggest that what the government really was 14 allowing for here was for the Board to say: In 15 addition to the scheme that is clear in the Act, we are 16 going to change that and we are going to say you have 17 to set up an additional single-purpose affiliate, and 18 that when we said you could delegate the retail 19 function to an affiliate, we did not intend to say you 20 can delegate it to a retail affiliate. 21 MR. STEPHENSON: Do you view there to 22 be any distinction -- in the flexible approach that you 23 advocate in terms of the kinds of options that may be 24 offered and the classes that may be differentiated 25 between, what I will call on the one hand, competitive 26 retail activity and section 29 supply? 27 What is the difference, under your 28 model, between those two activities? 544 MARK/JENNINGS 1 MR. JENNINGS: I think the only 2 difference is that one is an obligation on the LDC to 3 ensure that someone is there. 4 The simple reading of section 29 5 is -- and there are -- I believe it is New Zealand, but 6 I could be wrong -- other jurisdictions where they 7 haven't provided a back-stop and some people with bad 8 credit ratings, et cetera, find that nobody will sell 9 them electricity, even though they have a little cash 10 in their pocket. 11 This is, on a reading of it, simply a 12 way of ensuring that in fact there is a retail function 13 available to customers under three quite different and 14 quite specific circumstances. 15 MR. STEPHENSON: Just to be fair to 16 you, what I assumed is that there would be at least a 17 couple of other minor differences. I think you have 18 indicated that for the 29(1) customers there would be 19 no contract, whereas I assume for your competitive 20 retailing you would have contracts in every case. 21 MR. JENNINGS: 29(1) we have said 22 that we were prepared to support no contract if there 23 is a way to do it. 24 MR. STEPHENSON: I understand that. 25 But that would be a slight distinction -- 26 MR. JENNINGS: But that is just 27 trying to take care of the customers. I don't think 28 there is a distinction in law. 545 MARK/JENNINGS 1 MR. STEPHENSON: Secondly, the other 2 distinction would be that your 29(1) rates would have 3 to be approved by the Board. 4 MR. JENNINGS: And (2) and (3). 5 MR. STEPHENSON: But compared to pure 6 competitive retail rates, which presumably aren't 7 approved by anybody other than the customer and the 8 company, correct? 9 MR. JENNINGS: Correct. 10 MR. MARK: I think in principle 11 that's right, I mean subject to -- because of the 12 customer profile, et cetera, the utility may decide 13 that certain rates are appropriate for certain groups 14 and not others and may vary the rates in its retail 15 package and its section 29 package. But I think, from 16 a more general perspective, it is not anticipated that 17 there would be a sort of significant difference in the 18 type of rates offered. 19 MR. JENNINGS: I think there is 20 another distinction, to answer you, that we 21 expect -- don't know and it is not there in law, but it 22 would make sense on 29(1) at least for the Board to 23 require that it be a pure energy rate. There will be a 24 lot, we expect, of retail offerings if the market 25 actually gets going -- and we believe this will help it 26 get going -- there will be a lot of offerings that are 27 that plus your cable, or it is bundled with other 28 things. That is going to be very hard to sort out the 546 MARK/JENNINGS 1 just and reasonable rate basis. 2 So it wouldn't surprise us if the 3 Board required that the rates offered under 29 be an 4 energy rate, pure and simple, as opposed to being 5 bundled with anything else. 6 MS LEA: Mr. Stephenson, I'm sorry to 7 interrupt. I should have been more vigilant about the 8 time. I should call a break soon. Is this a good time 9 for you, or do you want to continue for a short time? 10 What would you like to do? 11 MR. STEPHENSON: This is perfect. 12 This is a fine time. I am only going to be maybe five 13 or ten minutes at the most, but I would be happy to 14 have a break now. 15 MS LEA: Okay. Let's have a 16 15-minute break, please, and return at 10 to 11:00. 17 --- Upon recessing at 10:35 a.m. 18 --- Upon resuming at 10:50 a.m. 19 MS LEA: Good morning. I think we 20 are ready to start again. 21 Mr. Stephenson, I think you are in 22 the chair. 23 Thank you. 24 MR. STEPHENSON: I just want to 25 follow up on the point that we were discussing earlier, 26 that, from the MEA's perspective, the very minor 27 distinction I think is there between fully competitive 28 retailing on the one hand and section 29 retailing on 547 MARK/JENNINGS 1 the other. As I understood it, it is your view that 2 there would be very minimal distinction between those 3 two things, and I think we covered off what those 4 distinctions might be. 5 The thing that I have some difficulty 6 with is that it seems to me that the Act does seem to 7 make a very explicit distinction between those two 8 types of activities, and in particular it is in 9 section 71. 10 As I read it -- maybe, Mr. Mark, you 11 can help me -- what that provision does is prohibits a 12 distributor -- and then there is this issue about 13 municipal corporations and so forth -- from engaging in 14 any other activity other than transmitting or 15 distributing, or section 29. That would include, 16 presumably, competitive retailing. 17 The point is, doesn't that section 18 indicate a policy in the Act which recognizes a very 19 fundamental distinction between the nature of the 20 activities between section 29 retailing on the one hand 21 and competitive retailing on the other? 22 MR. MARK: Mr. Stephenson, I suggest 23 it indicates the opposite. 24 What it indicates is that the 25 government recognizes that it has created this other 26 obligation that you have to retail under section 29, 27 and that simply, as a matter of not having inconsistent 28 provisions, it says that you can do it in your 548 MARK/JENNINGS 1 distribution company or in your retail company because 2 you have the flexibility for either. 3 I would note also that section 71 4 really characterizes the section 29 function as a 5 business activity. It is clearly talking about 6 business activity. I see it just as ordering the 7 house. I mean, they have generally said that you can't 8 do anything else other than distribute, but then they 9 say on the other hand that we have to have somebody who 10 is going to have the obligation to sell. We are going 11 to make that the distributor and therefore there has to 12 be this exception. 13 MR. STEPHENSON: If you are going to 14 define section 29, or the nature of the activities you 15 are going to be engaging in under section 29 in the 16 manner you have suggested, why do you need this 17 restriction in there at all? 18 MR. JENNINGS: Because they have 19 said -- if I can come at it -- it is the same issue -- 20 they have said that this is a retailing function. The 21 distributor shouldn't be in competitive businesses. 22 There is an exception to that. If in fact the only way 23 the distributor can reasonably meet its obligation 24 under section 29 -- or obligations, plural -- under 25 section 29 is directly, then, for a period of time, 26 until those changes that were previously mentioned are 27 required by regulation, when they can't do it that way 28 any more, they have the section that says that is an 549 MARK/JENNINGS 1 exception. 2 MR. MARK: And they have certainly 3 left it open to the Board to require that the 4 section 29 function be carried out in the retail 5 affiliate. The MEA doesn't have any objection to that, 6 provided that you don't make the retail affiliate give 7 away the rest of its business for the high privilege of 8 doing section 29. 9 That is identified clearly in section 10 70(14), which gives the Board the power to make the 11 distributor, who doesn't have a retail affiliate, 12 create a retail affiliate. So I think you can 13 accommodate it to the extent that the Act does suggest 14 that the distributor is better off not being in the 15 competitive activities. 16 If you look at section 70(14), which 17 allows the Board to mandate the creation of the retail 18 affiliate, I think you can reasonably say the Board 19 might consider directing that the function be performed 20 not through the distributor but only through either a 21 third party or the retail affiliate. 22 I think that is what it leads you to. 23 I don't think it leads you to the conclusion that when 24 the government called the function retailing it really 25 meant that it wasn't retailing. 26 MR. STEPHENSON: Let me move on to 27 something else. 28 One of the things that you talked 550 MARK/JENNINGS 1 about as a potential basis for differentiation amongst 2 the kind of offerings that would be made in fulfilment 3 of the section 29 obligation is customer classes, and 4 Mr. Mark referred to the common-law rationale or 5 justification or recognition of the appropriateness of 6 creating customer classes. 7 The difficulty I was having with that 8 was this. I may be wrong, and there are certainly 9 people with a lot more experience and wisdom on this in 10 this room than me, but I had always understood customer 11 classes to be intrinsically a cost of service notion, a 12 recognition of cost causality, essentially, being 13 different amongst different types of recipients, and 14 that it was appropriate to how people pay for the cost 15 they caused. 16 What I am having difficulty 17 understanding is how that notion applies in the context 18 of a commodity sale, particularly where there is no 19 doubt that you are going to be able to recover 20 administrative costs associated with providing the 21 commodity. 22 In terms of the actual cost of the 23 commodity, how does it make any difference whether they 24 are an individual residential customer or the largest 25 industrial customer? I mean, presumably you are buying 26 the commodity in bulk or as part of a portfolio, and I 27 just don't understand how it applies. 28 MR. MARK: I am certainly no more 551 MARK/JENNINGS 1 expert in this than you are, and I will obviously pass 2 to Mr. Jennings, but one thing does strike me, that the 3 utility may want the flexibility to engage in 4 procurement on a basis which better serves customers of 5 a certain profile. It may be that commercial customers 6 can be better served by putting together a portfolio of 7 energy and demand -- energy sources which better 8 matches price-wise their load profile, and it may be 9 that you would have a somewhat different procurement 10 for a different class of customers, with some variation 11 of the rates perhaps by time of day, to optimize your 12 offerings to the different classes. 13 So you are right to the extent that 14 it may not be, to the same degree it used to be, a 15 cost-of-service issue because you are now unbundling 16 the rates, and presumably most of the cost 17 differentials will be reflected in differences in the 18 transmission and distribution rates. 19 But there is still room in there for 20 optimizing the rates for different classes. 21 MR. STEPHENSON: Let me just explore 22 that for a second -- I'm sorry, Mr. Jennings. 23 MR. JENNINGS: Let me just do a 24 couple of "for instances". Again, I am not a rate 25 expert. 26 I think if you think of the different 27 kinds of customers and the three different obligations, 28 you can see there are, at minimum, administrative 552 MARK/JENNINGS 1 differences in cost and, if in fact there is a rate 2 that is approved that will include the administrative 3 cost. So there is some exposure for the utility. 4 One of the costs is in the form of 5 risk. If you think of 29(3), where the utility has to 6 have or arrange a backstop, we have municipal utilities 7 where single companies represent 15, 20 per cent of 8 their total load. To be able to step in on a moment's 9 notice to backstop that administratively is a problem. 10 The power is flowing through their 11 wires. If the spot price pass-through were allowed, 12 that might be a very good strategy for any large 13 industrial class customer coming back, shazam!, onto 14 the system. So there are some administrative costs and 15 risk management that is necessary. 16 Alternatively, you have to be 17 prepared for all comers at all times, and that is 18 certainly not going to serve a lot of the small 19 customers. If we are dealing with a whole bunch of 20 small businesses and residential customers, one would 21 assume that there is not significant movement in any 22 given period of time. 23 MR. STEPHENSON: Let me just make 24 sure I understand that. 25 I think I am now understanding. I 26 was incorrect in this understanding. 27 Essentially, an LDC, in meeting its 28 section 29 obligation, would assemble a portfolio, and 553 MARK/JENNINGS 1 there would be simply one portfolio to serve all 2 customers on section 29. 3 I take it that in your proposal that 4 wouldn't necessarily be the case. In fact, you would 5 have segments, perhaps, in your portfolio which the 6 LDC, in fulfilling its section 29 obligation, would be 7 fulfilling something like a brokerage function, 8 customizing its procurement for either a single or a 9 group of customers that may have some particular 10 characteristics. 11 MR. JENNINGS: They would put 12 together a portfolio, but the different classes will 13 have different impacts on how that portfolio is 14 structured. 15 When we take section 29(1), 16 Dr. Dewees indicated that the spot pass-through might 17 be the best you could get. If that part of his 18 presentation were accurate, then one would assume a 19 whole bunch of large industrial customers would see no 20 reason to leave. In fact, they are the ones who can 21 best take advantage of the long-term spot, whereas a 22 lot of small customers are more concerned about cash 23 flow issues on a day-to-day basis. 24 So you have these people, but they 25 are entitled by law to be able to leave simply by 26 writing a letter. That would argue for me having -- if 27 I have a large number of them in my utility -- a larger 28 portfolio of power on an "as required" basis and buying 554 MARK/JENNINGS 1 from somebody else who is passing the risk to the 2 generator, so the price is going to be higher. 3 MR. STEPHENSON: If you have what I 4 would call a segmented portfolio, where parts of the 5 portfolio are more or less dedicated to particular 6 groups of customers -- I think you had indicated that 7 there were different costs associated with that, 8 certain segments in terms of risk management and so 9 forth -- can you assist me? Doesn't that entail a 10 policing function for the OEB insofar as these are all 11 regulated rates to ensure that you have in fact 12 allocated the correct portion of your risk management 13 cost into that segment of the portfolio which is then 14 flowing down to the rate that that class of customers 15 get? 16 Don't you wind up having a fairly 17 hands-on policing function for the OEB? 18 MR. JENNINGS: If you assume that the 19 requirement for regulated rate in this is a 20 cost-of-service detailed analysis, that could be the 21 case. 22 But, in fact, if you look at the 23 structure, it would appear to be simply ensuring that 24 those rates offered are just and reasonable. It 25 doesn't suggest a detailed analysis. It is our view 26 that in fact what this is saying is we have three 27 classes of vulnerable customers and they can't be taken 28 advantage of. So there is, we would advocate, a light 555 MARK/JENNINGS 1 comparative overview situation. 2 MR. STEPHENSON: Let me just move on 3 to the last issue I want to deal with, and that is the 4 issue of risk. 5 I think it was Mr. Mark who talked 6 about how ultimately the distinction between requiring 7 certain functions to be carried out in an affiliate 8 versus directly by the LDC was more or less irrelevant 9 from the perspective of risk because of course the 10 ultimate shareholder is the same in either case. 11 I understand, more or less, your view 12 on that. 13 MR. MARK: To the extent that 14 proponents of other models come forward with one of the 15 foundations of those models, being the proposition that 16 the LDC should not be exposed to risk, what I have 17 indicated is that that just doesn't enter into the 18 equation. 19 MR. JENNINGS: And it is not 20 consistent with the Affiliates Code that the Board has 21 already approved. 22 MR. STEPHENSON: I confess that I 23 have not thought this through entirely, but let me 24 raise something with you and get your response to it. 25 Is it one possibility that the 26 legislation contemplates that LDCs may engage in 27 retailing activities but only through affiliates? 28 Clearly, retailing activity is a riskier activity than 556 MARK/JENNINGS 1 the regulated wires business. The magnitude of that 2 risk is unknown. 3 Isn't part of the difference, 4 notwithstanding the single shareholder, that if the 5 retail affiliate gets into financial difficulty, its 6 financial obligations are self-contained within the 7 retail affiliate, that is, the creditors of the retail 8 affiliate won't have recourse against the wires assets? 9 MR. JENNINGS: That is probably one 10 of the reasons why the government would recommend that 11 at some point the distribution company no longer be 12 allowed to do it. It is clearly not their preferred 13 option, and also why it's the only -- 14 MR. STEPHENSON: But isn't that a 15 very legitimate objective or policy objective for 16 requiring riskier activities to be carried out only 17 through corporate affiliates? It is to prevent 18 recourse against the wires asset. 19 MR. JENNINGS: If the local utility 20 chose -- for instance, if it decided that it only 21 wanted to be a wires company and it chose to deliver 22 this directly, not through a third party, you are 23 suggesting that the Board would, in its review, take a 24 look at how the risk involved compares with the return 25 on equity the shareholder can expose. 26 MR. STEPHENSON: I think the point 27 is, if I am right about that, that that is an argument 28 in favour of keeping the section 29 obligation as risk 557 MARK/JENNINGS 1 free as possible, because section 29 obligations can be 2 conducted through the LDC directly -- 3 MR. JENNINGS: But it -- 4 MR. STEPHENSON: Hold on. Let me 5 just finish. 6 MR. JENNINGS: Okay. 7 MR. STEPHENSON: Then, bearing in 8 mind this risk aversion to the LDC wires assets, you 9 want to make that section 29 operation -- business, if 10 you like -- as risk free as possible to maintain this 11 basic notion of protecting the wires assets from 12 creditors. 13 MR. JENNINGS: I think you make a 14 good point if you are looking at a utility that chooses 15 to do it directly. I think again that is why the 16 government has clearly tipped against that strategy 17 over time. 18 The same does not -- in fact, it 19 reinforces the need to differentiate between those 20 three strategies. 21 MR. MARK: The other difficulty I 22 have is that your concern really only applies in a 23 circumstance of complete financial failure of the 24 retail affiliate. I am not sure that that is the 25 scenario we ought to be contemplating. 26 It contemplates that what the 27 government is suggesting is that the parent corporation 28 should let the affiliate and its creditors go 558 MARK/JENNINGS 1 unsatisfied and just cut them loose. 2 But the second point, which I don't 3 think is a scenario that is envisaged in the 4 legislation -- I have difficulty -- it seems reasonably 5 clear that government has the separation primarily for 6 other reasons rather than the financial reason. 7 The other issue that bears on this, 8 though, is that the government has permitted, or it is 9 permitted -- I forget exactly where it is found -- a 10 25 per cent guarantee is permitted to come from the 11 LDC. 12 MR. JENNINGS: That is the Board and 13 its Affiliates Code. 14 MR. MARK: In the Affiliates Code 15 they are permitting a guarantee of 25 per cent of the 16 obligations. 17 So it seems to me to be a rather 18 extreme scenario that you are dealing with. The more 19 likely purpose for the separation is for cross-subsidy 20 and some of the other informational objectives. It 21 seems to me a stretch to say that the government has 22 required this situation, that it required this 23 separation because in a situation where the retail 24 affiliate has reached total failure it wants the 25 publicly-owned parent corporation to be able to say to 26 creditors, "You're on your own." 27 MR. STEPHENSON: This will be the 28 last point. 559 MARK/JENNINGS 1 Surely, it is within the 2 contemplation of everybody that, as we enter a new 3 fully competitive marketplace in retail, amongst that 4 hurly-burly there will be winners and losers and there 5 is going to be a shake-out, and it is well within the 6 contemplation of everybody that financial failure is 7 entirely possible amongst competitive retailers. 8 MR. MARK: I think if this Board were 9 to tell the utilities that they can do the section 29 10 supply in the retail affiliate without having to give 11 up the rest of the business of the retail affiliate, I 12 don't think you would have a lot of opposition. 13 MR. STEPHENSON: Let's deal with 14 purely private sector competitive retailers. You don't 15 have any philosophical problems with them going 16 bankrupt. It's within everybody's expectation that 17 that is an outcome of a competitive marketplace. 18 MR. JENNINGS: That's why sub (3) of 19 29 presumably is in force. 20 MR. STEPHENSON: Exactly. 21 Surely there is no reason at all, 22 given the level playing field, that we would have a 23 different set of presumptions for privately-owned 24 competitive retailers versus publicly-owned via 25 affiliates of LDCs. It is equally within the realm of 26 contemplation that those companies will fail. 27 MR. JENNINGS: Affiliates of LDCs may 28 in fact be private companies. Some obviously will be 560 MARK/JENNINGS 1 since there are some privates now. 2 MR. STEPHENSON: Fair enough. 3 Thank you. Those are my questions. 4 MS LEA: Thank you. 5 Mr. Power, do you have questions for 6 this panel? 7 MR. POWER: No questions. Thank you. 8 MR. RODGER: No questions. 9 MS LEA: Mr. Rodger has no questions. 10 Mr. Warren. 11 MR. WARREN: I have just a very few 12 questions. 13 MS LEA: Thank you, Mr. Warren. 14 MR. WARREN: First of all, 15 Mr. Jennings, let me see if I can understand this. 16 May I presume that the MEA has 17 received an opinion from Mr. Mark with respect to the 18 interpretation the Act which Mr. Mark has summarized in 19 his presentation this morning and on the two-page 20 submission. Is that fair? 21 MR. MARK: Whether it's true or not, 22 it's privileged information. 23 MR. WARREN: Whether or not you have 24 received the opinion, have you received an opinion to 25 this effect? 26 MR. MARK: Sorry? 27 MR. WARREN: I'm asking Mr. Jennings 28 has he received an opinion from Mr. Rodger -- I'm 561 MARK/JENNINGS 1 sorry, from Mr. Mark. 2 MR. JENNINGS: Mr. Rodger, no. 3 MR. WARREN: With respect -- 4 MR. MARK: Whether he has or he 5 hasn't, that's also privileged. 6 MR. WARREN: The analysis which is 7 set out by Mr. Mark, which presumably is not 8 privileged, has that analysis been made available to 9 the members of the MEA? 10 MR. JENNINGS: It was submitted to 11 the Board or a version of it was submitted to the Board 12 in the first round. Unfortunately, because of the 13 number of days that were allowed, we weren't able to 14 get it together in time. It arrived late and was not 15 included in the Board's summation. We did provide it 16 to all our members. 17 MR. WARREN: But do I take it that it 18 is open to the members, each of your individual 19 members, to decide whether or not they agree with 20 Mr. Mark's analysis? 21 MR. MARK: As it always is with every 22 issue at the MEA -- and perhaps in the context of your 23 question it is worth reminding everyone for the record 24 that the MEA is a democratic organization with a system 25 of committees by which the membership authorizes the 26 association to speak on the collective behalf of the 27 membership -- as I understand it, and Mr. Jennings can 28 correct me if I'm wrong, the position, if you will, 562 MARK/JENNINGS 1 that has been put before you is one which has been duly 2 authorized in accordance with those standing 3 procedures. 4 MR. WARREN: I take it the answer to 5 my question, Mr. Jennings, is that it is open to the 6 individual members of the MEA to take a different 7 interpretation of the legislation if they so choose? 8 MR. JENNINGS: If they so choose. Of 9 course, we periodically have individuals or even a few 10 members disagree with us on policy points and 11 presumably the same could be an interpretation of 12 legislation. 13 MR. WARREN: If you could turn up 14 page 3 of your written submission, Mr. Jennings. 15 If I look at the top paragraph under 16 the heading "Rates" in the second sentence, you 17 indicate: 18 "The MEA would recommend to its 19 members that they would best 20 meet the customer protection 21 objective by providing 22 customers..." (As read) 23 Or at least the residential and small business 24 customers: 25 "...with a true fixed rate to 26 meet section 29(1)." (As read) 27 That is the recommendation. Has that 28 recommendation been made to all of your members? 563 MARK/JENNINGS 1 MR. JENNINGS: Yes. I believe that's 2 in the previous material we set up. 3 MR. WARREN: Is it open to your 4 members to disagree with that recommendation and to 5 take their own position? 6 MR. JENNINGS: Absolutely. 7 MR. WARREN: Now, I haven't done the 8 head count, and I'm sure that someone can correct me if 9 I'm wrong, but we have about, roughly speaking, 10 30 members, 30 MEUs represented in this proceeding. 11 Can you tell me with respect to the 12 balance of the 260 members, how many of them are 13 adopting your recommendation as it is set out on page 3 14 of your submissions? 15 MR. JENNINGS: I cannot. I can tell 16 you that a number of them have said they are counting 17 on the MEA to try and sort this out and represent their 18 interests. 19 MR. WARREN: Fair enough. I just 20 want to get a sense of the order of magnitude. Is it 21 the case that we have 35 of your members, for example, 22 who are going to adopt this recommendation? 23 MR. JENNINGS: I would think that you 24 are closer to 200 out of 260 and maybe more. I would 25 also think that some who are represented here on 26 specific issues don't disagree with our position. 27 MR. WARREN: Fair enough. I wasn't 28 dealing with those. I was dealing with the balance of 564 MARK/JENNINGS 1 the 230. 2 Now, the second area I want to deal 3 with is the ENERconnect connection which was discussed, 4 I believe, with Mr. Gibbons in his questions this 5 morning. 6 As I understand it, the MEA has a 7 managerial function with respect to ENERconnect. Is 8 that correct? 9 MR. JENNINGS: No. The MEA is the 10 shareholder of the general partner which has the 11 managerial functions, but the contractual arrangements 12 are such that the board of directors of that 13 corporation, the general partner, is controlled by the 14 limited partners. 15 MR. WARREN: The MEA, as I take it 16 from the answer that was given earlier, doesn't make 17 any money if ENERconnect makes money. Is that right? 18 MR. JENNINGS: Let me be specific. 19 We do have an obligation, a right to collect the costs 20 of setting ENERconnect up to recover our costs if it 21 makes money. Other than that, we have no revenue from 22 it. 23 MR. WARREN: In your understanding of 24 it, Mr. Jennings, does ENERconnect make more money 25 under a scheme in which there is a portfolio of 26 supplies made available to fulfil a section 29 27 obligation than it does if there is simply spot price 28 pass-through? 565 MARK/JENNINGS 1 MR. JENNINGS: Let me answer it the 2 other way around. ENERconnect is operated on behalf of 3 the limited partners. 4 MS LEA: I can hardly hear you, 5 Mr. Jennings. 6 MR. JENNINGS: ENERconnect is 7 operated on behalf of its limited partners to make sure 8 in fact that there is some power procurement benefits. 9 ENERconnect makes no net profit other than the benefits 10 to its member, its partner. 11 MR. WARREN: I'm sorry, were you 12 finished, Mr. Jennings? 13 MR. JENNINGS: I think the other 14 question is whether or not there is a market at all. 15 If everything is going through spot price, or close to 16 everything, then we probably don't need ENERconnect. 17 MR. WARREN: Let's imagine a 18 universe, if we can, in which your proposal or 19 something like Mr. Adams' proposal or indeed Mr.Todd's 20 proposal goes through, whether it's a portfolio of 21 options available under section 29, including fixed 22 price or a variety of fixed price. Do I understand 23 correctly that in that scheme to the extent that 24 ENERconnect is the procurer, the aggregator, for the 25 supply, ENERconnect would make money which would be 26 distributed on some basis to the partners who own it? 27 Is that correct? 28 MR. JENNINGS: Make money in the 566 MARK/JENNINGS 1 sense of profit on the transaction? 2 MR. WARREN: Yes. 3 MR. JENNINGS: I don't think that's 4 necessarily correct. I don't understand that that's 5 what is causing it. 6 MR. WARREN: Not necessarily correct 7 or it may be correct? Which is it? 8 MR. JENNINGS: As far as I'm aware, 9 there is no present contemplation that ENERconnect will 10 be making a profit on the procurement function. 11 MR. WARREN: I believe you said in 12 answer to Mr. Gibbons that the LDCs who are partners in 13 ENERconnect have no obligation to procure supply from 14 ENERconnect. Is that correct? 15 MR. JENNINGS: It's my understanding. 16 MR. WARREN: Is there, in your view, 17 any conflict of interest between the LDCs' obligation 18 to their shareholders under the OBCA and their 19 obligations as partners of ENERconnect? 20 MR. MARK: What obligations of 21 partners of ENERconnect are you referring to? 22 MR. WARREN: To advance the 23 ENERconnect presumably. 24 MR. MARK: It's clearly agreed 25 amongst all the partners that they are free to get all 26 their procurement elsewhere, ergo, they do not have a 27 fiduciary or any other duty to advance the interests of 28 ENERconnect by purchasing from it, so there is by 567 MARK/JENNINGS 1 definition no conflict of interest. 2 MR. WARREN: Can the partnership 3 agreement forming ENERconnect be produced as part of 4 this proceeding? 5 MR. MARK: I think you will have to 6 ask ENERconnect. 7 MR. WARREN: Finally, could you 8 explain to me, Mr. Jennings, looking at page 2 of your 9 submission, the distinction between a person who is 10 taking their supply under section 29(1) and who leaves, 11 goes to somebody else, and comes back? Do I understand 12 it correctly that a section 29(1) person doesn't have 13 to have a contract with the LDC? Is that right? 14 MR. JENNINGS: Let me restate it. I 15 will try and get this clear again. 16 We find nothing in the Act, with the 17 advice we have, that has anybody without a contract. 18 Under the old legislation, the Power Corporation Act 19 and the Public Utilities Act, there were arrangements 20 that took the price of contracts for electricity. You 21 don't find that in this Act. 22 We are prepared and support the 23 concept of no requirement for the existing customers. 24 That is what they are used to. That is what the White 25 Paper suggested. So we support that concept for the 26 29(1)s. 27 MR. WARREN: Just going on on that, 28 let's suppose then that there is no contract under 568 MARK/JENNINGS 1 section 29(1). 2 MR. JENNINGS: Right. 3 MR. WARREN: The person leaves and 4 then comes back. As I understand it, your view is, 5 under section 29(2), that they then must sign a 6 contract with the LDC. Is that right? 7 MR. JENNINGS: I think that's 8 consistent with the construction of the legislation. 9 That's correct. They have chosen to go elsewhere, 10 which presumably means signing a contract. They have 11 decided they want to buy power on that basis. 12 MR. WARREN: Now, once having signed 13 a contract, are the services and the rates at which 14 they had received those services any different when 15 they are section 29(2) customers than when they were 16 section 29(1) customers? 17 MR. JENNINGS: They may be. It 18 depends on what rate structure is proposed by the 19 specific utility they are dealing with and approved by 20 the Board. 21 MR. WARREN: If I may, I think you 22 have got to bear in mind that there is contemplation 23 that some of the 29(1) customers will make no choices 24 about anything whatsoever. Somehow the Board is going 25 to have to fashion a scheme where there is, if you 26 will, a form of service that they get if they elect 27 nothing else. 28 You may be talking about two 569 MARK/JENNINGS 1 different types of people when you ask the question, 2 "Will the service be any different?". The available 3 options may be no different, but your comparator group 4 may be a group that by nature and definition doesn't 5 exercise any option. It only gets one form of supply. 6 MR. WARREN: Perhaps I can frame it 7 this way, Mr. Jennings. 8 In your view of the legislation, is 9 the LDC entitled to discriminate between a 10 section 29(1) customer and a returning section 29(2) 11 customer in terms of the services and prices at which 12 they may get those services? 13 MR. JENNINGS: Without accepting the 14 usual derogatory interpretations that discriminate, I 15 would think yes they could make a distinction between 16 them because they are different risks and there are 17 different responsibilities. 18 That would help to achieve the 19 legislature's goal that this essentially will be phased 20 out. 21 MR. WARREN: Finally, and you may 22 have answered this question in response to 23 Mr. Stephenson, but it wasn't clear to me, is it your 24 view that one of the options which the LDC may offer is 25 a spot price pass-through? 26 MR. JENNINGS: I didn't answer that 27 response. 28 A reading of the Act would suggest 570 MARK/JENNINGS 1 that the only way you can get there, assuming a rate is 2 a rate is a rate, is by contract. On the other hand, 3 if you look at the Market Design Committee's report, it 4 recommended in No. 2, which Dr. Dewees referred to, 5 both what was called then a default rate and a spot 6 pass-through and said both of those should be required. 7 There was some discussion about 8 whether all retailers should be required to offer spot 9 as one of their portfolio of offerings. I didn't 10 answer to that. 11 In terms of section 29, what we are 12 suggesting is, if the Board is prepared to accept that 13 we would support our members' right to take that 14 approach in meeting their obligations. There is a 15 separate, aside from section 29, issue in order to make 16 the retail market work, have spot available. That is 17 quite distinct as was identified by the Market Design 18 Committee. 19 MR. WARREN: Finally, sir, if I 20 correctly understood your recommendation that each LDC 21 would have the right to choose the options that they 22 want to make available to their customers under 23 section 29, it follows from that that you may have, for 24 example, residential consumers in adjoining areas that 25 will have different services and different prices 26 available to them under the section 29 regime. 27 MR. JENNINGS: At least the 29(1), I 28 would expect, but, technically, I think you are 571 MARK/JENNINGS 1 correct. I would expect under 29(1) that the services 2 would be very similar but they may, as they are today, 3 be quite different. You have different companies 4 supplying the services. They could be different. 5 MR. WARREN: Thanks very much, 6 Mr. Jennings. 7 MR. JENNINGS: There is nothing that 8 we can see in the legislation that suggests a single 9 product-wide approach. 10 MR. WARREN: Thank you. 11 MS LEA: Thank you, Mr. Warren. 12 Mr. Janigan, do you have questions? 13 MR. JANIGAN: Just a few. 14 MS LEA: Thank you. 15 Go ahead. 16 MR. JANIGAN: I'm going to resist the 17 opportunity, Mr. Mark, of asking if you filed a Resume 18 with your statutory analysis outline. 19 I want to get to the different 20 classifications of customers, or the different types of 21 customers and how they will be treated under your 22 alternative. 23 The first class of customer is those 24 that will not choose, that simply do not choose a 25 supplier, continue on receiving and paying their bills. 26 I believe I heard Mr. Mark indicate 27 that in that circumstance what would happen is that the 28 Energy Board would in fact rule that there was an 572 MARK/JENNINGS 1 implied contract with either the LDC or the affiliate 2 that it has chosen to supply the 29(1) service. Is 3 that correct? Am I correct in my understanding? 4 MR. JENNINGS: I think that is the 5 only way you can go to it. 6 MR. MARK: Put it this way: We have 7 identified a concern that the legislation doesn't 8 expressly deal with the mandatory payment obligation. 9 Whatever scheme is adopted from amongst the proposals 10 around the table, somebody at some point is going to 11 have to pay very careful attention to that question and 12 decide whether there is a sufficient existing 13 jurisdiction in the Board to effectively implement the 14 implied contract or whether some additional legislative 15 authority may be necessary. 16 But that is a feature that seems to 17 me to be common to every form of proposal. 18 MR. JENNINGS: In 29(2) we are not 19 saying the utility must do that. If in fact there is a 20 way of the Board imposing the contractual obligation on 21 the customers and the utility chooses to get the 22 Board's approval to take them back on a similar 23 no-contract basis, that would be up to them. 24 MR. JANIGAN: Was I correct in my 25 understanding that this flows from the distinction that 26 you set out in your opening remarks concerning the fact 27 of the use of the word "sell" rather than "supply" in 28 section 29, or am I incorrect on that? 573 MARK/JENNINGS 1 MR. MARK: I'm sorry. The contract? 2 MR. JANIGAN: In particular, I 3 believe you indicated in your opening remarks that in 4 fact the use of the word "sell", particularly in 5 section 29, rather than the old language under the -- 6 MR. MARK: The Act uses consistently 7 and interchangeable "selling" and "retail" and uses 8 nothing -- no suggestion anywhere by use of different 9 words to suggest that the function performed under 10 section 29 is any different. 11 If you combine that with the fact 12 that the government clearly intends that at some point, 13 presumably in the not too distant future, that the 14 section 29 obligation will disappear -- and don't 15 forget, once the section 29 obligation disappears, 16 everybody is going to have to sign a contract. There 17 is go to be no such thing as a do-nothing customer who 18 wants electricity. 19 So when you put all that together, 20 the conclusion, it seems to us, is pretty clear that 21 what the government had in contemplation is that people 22 are going to contract for supply. What the Act does is 23 simply says that for a period of time the LDC or its 24 delegate cannot say no. 25 MR. JENNINGS: I don't think this is 26 evidence in terms of the legislation per se, but in the 27 nature of this I think it is worth mentioning, that in 28 our comments on Bill 35 we in fact identified that 574 MARK/JENNINGS 1 there were some things that were in the old legislation 2 which allowed the schema -- the regulator, in effect, 3 at the time -- to impose on the end-use customer some 4 obligations to balance the contract. 5 We don't find that here. The 6 government chose not to correct that. 7 We also, you will find on the record, 8 recommended that the word "sell" be changed in 29 to 9 something else, and the government did not change that. 10 They chose to keep it there. 11 Anectodal, but it supports, as we 12 have said, the fact that the obligation -- and I stress 13 that -- on the utilities, not something they asked for, 14 is to provide retailing under these circumstances, 15 selling. 16 MR. JANIGAN: In dealing with this 17 group of customers that simply do not choose -- and 18 let's assume that the Energy Board implies a contract 19 in that circumstance, the offering or offerings that 20 the individual LDC, or the LDC through an affiliate, 21 chooses to supply will ultimately be approved by the 22 Energy Board. 23 Now, if the Energy Board chose to 24 determine that the only rate which is just and 25 reasonable under their determination is a smoothed spot 26 pass-through for example, as exists in the Board staff 27 proposal, would that be something that would be 28 permitted the Energy Board, in that circumstance? 575 MARK/JENNINGS 1 MR. JENNINGS: That is more a 2 question for Mr. Mark. 3 But there will be differences in 4 costs and administration given different utilities and 5 different strategies. The Act contemplates them 6 proposing and the Board approving, so I -- and the Act 7 also gives the Board the right to set out some methods 8 specific to the licence. But, as was said earlier, 9 that is distinct from rate. 10 So to reach something that says you 11 can only do it one way would seem to frustrate the 12 intent of the legislation. 13 MR. JANIGAN: I guess what I'm 14 getting at is, in the event -- I understand you object 15 to the idea of a setting of a standard supply function 16 or rate at this point in time. 17 Couldn't the Board, through its 18 rate-setting ability, when your individual LDC comes 19 forward with a 29(1) rate before the Board, simply say, 20 "That is not permissible and this is what we want"? 21 MR. MARK: It seems to me that 22 encompasses two -- there are two questions there. The 23 first question is: Is it permissible to the OEB in any 24 circumstance to impose spot price pass-through? 25 As I have indicated, both the other 26 day and today, in our minds there is a question about 27 the Board's jurisdiction to do that as oppose to fix 28 a rate. 576 MARK/JENNINGS 1 The second question is whether it 2 would be advisable to do so. 3 I expect that the MEA's view of the 4 matter would be you would have to see what size of that 5 component of the marketplace is. It may be that you 6 get to a point where the do-nothing group of customers 7 is of such a size that it is not going to make a 8 difference to the achievement of the market objectives 9 or the other objectives if you do that. I suspect if 10 that group is of any size the position will be, for the 11 reasons articulated, that it should not be spot price 12 pass-through. 13 MR. JENNINGS: The other thing is, 14 this has to be looked at in terms of the whole overall 15 schema. The spot pass-through per se, if in fact 16 Don Dewees is correct and it is the lowest you can get, 17 is likely to keep a whole bunch of people and load 18 there, and I would think particularly large industrial 19 load, if he's right on that point. 20 He did, in fairness to him, say that 21 even though that is the best you could do large 22 industrial customers might do better. I didn't 23 understand that. 24 So I think an aggregator who can 25 aggregate a whole bunch of residential customers ought 26 to have the same power in the market a large 27 industrial. 28 But aside from that, if you have only 577 MARK/JENNINGS 1 the spot market you probably don't have much activity 2 going on to get true competition and generation in this 3 province, and the customers are even more 4 disadvantaged. 5 So we have some concerns about the 6 concept of spot pass-through in terms of its impact on 7 the whole issue of competition in generation. 8 MR. JANIGAN: Now, getting back to 9 this group of customers who, for whatever reason, do 10 not choose -- and let's assume once again that the OEB 11 implied a contract in this circumstance. 12 If the LDC chooses to meet that 13 obligation by supply through a retail affiliate, who do 14 these customers get their bill from? 15 MR. JENNINGS: I would assume from 16 the retail affiliate, but that would be an organization 17 decision of the utility. They could contract that out 18 to a third party. 19 MR. JANIGAN: In terms of the 20 customers who do not have an offering available to them 21 or, for whatever reason, are not supplied in any 22 competitive market, I would assume that the same kind 23 of arrangements would be implicit for them? 24 MR. JENNINGS: Yes. 25 MR. JANIGAN: The third category are 26 those who have chosen a retail supplier, but the 27 retailer has not supplied for whatever reason, for 28 failure or it has withdrawn from the market. 578 MARK/JENNINGS 1 MR. JENNINGS: Or their supplier may 2 have failed for some reason. 3 MR. JANIGAN: That's right. 4 MR. JENNINGS: Yes. 5 MR. JANIGAN: In that circumstance, 6 when the customer chooses to avail him or herself of 7 the supply from the LDC, that would be pursuant only to 8 a written contract in your scheme. Would that be the 9 case? 10 MR. JENNINGS: You put your finger on 11 a difficulty, because that could happen quite suddenly. 12 There is a difficulty in requiring people to sign a 13 contract before they get supply if in fact supply 14 disappears at 12:01 today. 15 In reality, the utility -- the 16 electrons are still going to flow and the utility is 17 still going to have to settle up. 18 So there is an exposure of the 19 utility under that in order to get a contract in place. 20 They are going to be billed for the electricity, and 21 they may or may not have a contractual obligation on 22 the recipient to buy. 23 MR. MARK: If I could add? 24 Even when the section 29 obligation 25 is eventually phased out, as seems to be the intention, 26 you are always going to have that potential problem of 27 what happens to the customer whose supplier -- you 28 know, who may only be somebody who gauges in financial 579 MARK/JENNINGS 1 transactions -- closes its doors, the electrons are 2 still flowing so there is something of value going 3 through the system and to that customer and there is 4 going to have to be some sort of regime set up to deal 5 with that. 6 It is not a problem which is 7 particular to any of the proposals here, and I don't 8 recall offhand if anybody's proposal or the MDC's paper 9 even has a scheme for dealing with that. 10 MR. JENNINGS: But there is a 11 prudential requirement that needs to be involved with 12 any retailer because of the possibility of them not 13 being able to perform and their financial guarantee. 14 Because they don't, in the first instance, pay for the 15 electricity, even though nominally they take ownership, 16 it goes through the LDC's meter. 17 That is a big exposure of the wires 18 companies if we don't get the prudential requirements 19 right. That is a separate issue. As Mr. Mark said, it 20 applies regardless of whether there is a section 29. 21 MR. JANIGAN: I guess what I'm 22 getting at is: People in this particular situation, 23 would they automatically obtain electricity at the same 24 rates as those who were in the situation of never 25 having chosen initially, or is it just impossible to 26 tell? 27 MR. JENNINGS: I'm not a rate expert, 28 but my guess would be that they would not, that in fact 580 MARK/JENNINGS 1 the administrative costs and the risk burdens involved 2 in meeting 29(3), and maintaining preparedness to meet 3 29(3), would be different than serving 29(1) customers. 4 MR. JANIGAN: If I understood your 5 answers earlier, I think to questions from Mr. Adams 6 and Mr. Gibbons, those who have chosen but do not like 7 the choice would, similarly, not have the same supply 8 as those who have never chosen? 9 MR. JENNINGS: They might, but no 10 requirement. They would have the right to shop around, 11 but there is an obligation on the LDC to ensure that 12 they have at least one other approved rate that they 13 can go to. 14 MR. JANIGAN: Thank you, those are 15 all of my questions. 16 MS LEA: Thank you very much, 17 Mr. Janigan. 18 Mr. Perdue, unfortunately we need to 19 break for lunch at noon. Will that give you sufficient 20 time? 21 MR. PERDUE: I will be finished 22 before noon. 23 MS LEA: Thank you. Go ahead. 24 MR. PERDUE: Mr. Jennings, I act for 25 some of the private retailers, and I just want to ask a 26 quick question as to how they would fit into your 27 proposed plan. 28 What I am suggesting, sir, is that if 581 MARK/JENNINGS 1 the market opens on December 1, can we assume, then, 2 that on that day the utility would set up an SSS in an 3 affiliate and that it would move all SSS requirements 4 to the affiliate on December 1, the opening day of the 5 market? Can I assume that? Or the option would be 6 available as an option plan? 7 MR. JENNINGS: That is an option. I 8 guess that is what I was searching for. Thank you, 9 Dick. 10 The utility has to divide itself into 11 parts on or before November 7. 12 MR. PERDUE: That is why I picked 13 December 1 as the date, assuming that that therefore 14 was done. 15 MR. JENNINGS: And it is before 16 November 7 that they must decide whether they are 17 putting their customer responsibilities in their 18 affiliate or how they are organizing their company. 19 Right now they are giving a bundled 20 service that includes both the retailing of electricity 21 and the provision of wire service, and it is all 22 bundled together. Any return that they have from 23 maintaining the system comes from the overall price. 24 They are being required by November 7 to separate, if 25 they want to stay in the retailing business -- if they 26 want to stay in it, they are being required to separate 27 into two. 28 I would think that they have to make 582 MARK/JENNINGS 1 their decision at that point, not when the market 2 opens. 3 MR. PERDUE: All right. 4 So what we are saying is that those 5 customers, then, who choose to provide the SSS through 6 an affiliate would, as of the date the market opens, 7 move all of the customers -- the customer care services 8 for those customers -- to the affiliate? 9 MR. JENNINGS: They wouldn't move 10 them there. We have agreed with the Board that you 11 can't move back and forth between the parties. They 12 wouldn't move them anywhere. The part of the company 13 that is all one company today that looks after the 14 customer and the commodity would have to be separated 15 out, if that is the strategy they choose, on or before 16 November 7. 17 MR. PERDUE: I may have misused the 18 word or should not have used the word "move". But what 19 you are going to do, then, is to separate from the 20 wires company the customer care services into an 21 affiliate. Am I correct? 22 MR. JENNINGS: That is one strategy, 23 yes. 24 MR. PERDUE: And the procurement as 25 well? 26 MR. JENNINGS: Yes, that is a 27 strategy that is available to the utility. 28 MR. PERDUE: I would assume, then, 583 MARK/JENNINGS 1 that on December 1, if that is available and the 2 utilities in fact take advantage of the proposal that 3 you are suggesting, those affiliates would provide a 4 fixed price for their SSS customers and they would 5 offer them a range of other prices, all of which would 6 be regulated? 7 MR. JENNINGS: Not all of which -- 8 the one rate which is required to be regulated in order 9 to provide the assurance of supply would be regulated. 10 They could well have a variety of other rates, but 11 those would be unregulated rates. 12 MR. PERDUE: Excuse me. The only 13 rate, then, that would be regulated would be the one 14 that the Board stipulates must be offered? 15 MR. JENNINGS: What the law requires 16 is that there be a supply available, either provided by 17 the LDC or a retail affiliate or a third party, and I 18 would assume that a number of members will look to 19 third parties to ensure that customers have access to 20 electricity at that rate, and that one rate must be 21 regulated for -- 22 MR. PERDUE: So the OEB, then, would 23 only regulate one rate? 24 MR. JENNINGS: That's correct. 25 MR. PERDUE: All right. There would 26 be other rates also offered by the affiliate? 27 MR. JENNINGS: The affiliate and 28 others, yes. 584 MARK/JENNINGS 1 MR. PERDUE: Let's leave the others 2 aside. 3 MR. MARK: There may be more than one 4 rate available to section 29 customers. They may be 5 able to choose from -- 6 MR. JENNINGS: And anything that is 7 offered to meet section 29 would require regulation. 8 MR. PERDUE: All I am asking is, does 9 your proposal permit the utilities to request, say, two 10 or three regulated rates from the utility for their SSS 11 customers? 12 I thought I heard that earlier, that 13 that was the case, but I may be wrong. 14 MR. JENNINGS: It definitely does in 15 terms of some different categories and different 16 classes, yes, and potentially requests further 17 regulated rates. 18 MR. PERDUE: So as of December 1, 19 then, it is conceivable that the affiliate could have 20 three or four regulated rates. Am I correct? 21 MR. JENNINGS: Yes. 22 MR. PERDUE: And those regulated 23 rates, would there be an administrative charge as well? 24 MR. JENNINGS: Part of the rate, 25 presumably. 26 MR. PERDUE: All right. Would there 27 be any return on infrastructure as well on those rates? 28 MR. JENNINGS: I would assume so, 585 MARK/JENNINGS 1 yes. 2 We are talking electricity rates, so 3 I apologize. Probably not. By "infrastructure" you 4 meant wires and poles? 5 MR. PERDUE: No, I didn't. That is 6 why I used the word "infrastructure". I meant the 7 infrastructure of the affiliate. 8 MR. JENNINGS: Okay. Yes. Then I 9 was right the first time. Yes, presumably that would 10 be included. They would have to have -- 11 MR. PERDUE: But it is the 12 infrastructure of the affiliate we are talking about, 13 not the infrastructure of the utility. 14 MR. JENNINGS: Correct, yes. 15 MR. PERDUE: Just so we understand, 16 the utility will pass on a regulated rate which will 17 have a rate of return. We understand that. 18 MR. JENNINGS: A wires rate, that's 19 right. 20 MR. PERDUE: Yes. But you are saying 21 that there would be a separate rate from the 22 affiliate -- or what your proposal requests is a 23 separate rate from the affiliate, which would include 24 the commodity charge, an administration charge, plus a 25 return on infrastructure. 26 MR. MARK: No. There is a difference 27 between infrastructure costs and return on 28 infrastructure. If you are talking about -- 586 MARK/JENNINGS 1 MR. PERDUE: I know there is a 2 difference. I am asking, though, which -- 3 MR. MARK: I know, but I think your 4 questioning went back and forth between the two without 5 making the distinction clear. I think your first 6 question was not the return -- and I may be mistaken. 7 My sense of your first question was infrastructure 8 costs, as opposed to return on infrastructure. 9 MR. PERDUE: I don't care how the 10 affiliate's infrastructure is charged to the customer. 11 However, I am assuming that it would be charged by a 12 return on that infrastructure, somehow or other. That 13 is contemplated, am I correct? 14 MR. JENNINGS: I assume so. I hadn't 15 turned my mind to the specifics, but I would assume so. 16 MR. PERDUE: And that return to the 17 SSS customers would be regulated. 18 MR. JENNINGS: Yes. 19 MR. PERDUE: And the administrative 20 charge would be regulated. 21 MR. JENNINGS: Yes. I would assume 22 that all of that is in a rate. It is the rate proposed 23 which has to cover all of those costs. 24 MR. PERDUE: I don't care if it is 25 bundled or not, but, nonetheless, those items actually 26 would then form the bundled rate. Bundled or 27 unbundled, it doesn't make any difference. 28 MR. MARK: Yes, as it is even with 587 MARK/JENNINGS 1 the spot price pass-through. 2 Even the Board's proposal 3 specifically contemplates that on top of the commodity 4 price is an amount to reflect the cost of service in 5 terms of the admin of the infrastructure costs of the 6 service provider, and I would assume the same thing 7 would apply whether your service provider is a dis. 8 co., a retail affiliate, another retailer or a third 9 party dedicated only to billing services. That same 10 cost is going to be packaged under any conceivable 11 proposal. 12 MR. PERDUE: I appreciate that. 13 MR. JENNINGS: If the utility 14 contracted with one of your members to provide the SSS 15 service, I would assume the same package of costs would 16 have to be captured in there in order to do that. 17 MR. PERDUE: All right. And the 18 customer care costs are also -- 19 Do you know what I mean by customer 20 care, sir? I am using that in the sense that I think 21 is somewhat defined under regulatory business. Do you 22 know what I mean by that? 23 MR. JENNINGS: Please help me. 24 MR. PERDUE: I think it would 25 essentially involve meter reading, billing, accounting, 26 providing the bill, collecting the bill and call 27 centres. 28 MR. JENNINGS: Depending on the 588 MARK/JENNINGS 1 arrangement and scheme of the set-up, as I understand 2 it the responsibility for metering and meter reading, 3 at least in the short-term, is not yet determined and 4 is being looked at under the distribution code. 5 So it would depend. There are some 6 options. Clearly, some utilities will look at 7 contracting out some of these things. So I don't think 8 there is a single answer to that question. 9 MR. PERDUE: That's fine. 10 I am going to be another five or ten 11 minutes, maybe. Do you want me to carry on or to stop? 12 MS LEA: Just one moment. 13 Are there other questioners, besides 14 Mr. Poch and Mr. White, for this panel? 15 MR. POCH: I was just going to say 16 that I am going to take Mr. Stephenson's lead and not 17 ask the debating society, which means that I am 18 actually going to honour that commitment. I have no 19 questions. 20 MS LEA: Are there any other 21 questioners, then, besides Mr. White for this panel? 22 What I am going to suggest, if it is 23 agreeable to Mr. Perdue, is for me to interrupt him and 24 ask the one question I have. I, unfortunately, have a 25 commitment at noon, but Ms O'Riley will be able to stay 26 and you can keep going, and then we can let you 27 gentlemen go before lunch, which probably would be 28 preferable. 589 MARK/JENNINGS 1 If that is agreeable, Mr. Perdue, I 2 will interrupt you at this point. 3 MR. PERDUE: Any time. 4 MS LEA: Thanks. 5 Gentlemen, I wonder if you could help 6 me with one thing. 7 I had understood you to say on a 8 couple of occasions that the function performed under 9 section 29 is no different from any other type of 10 selling and that it isn't a question of no contract 11 selling. I understood that part of the reason for this 12 interpretation was the lack of a mandatory payment 13 obligation in the legislation. Do I understand you 14 correctly? 15 MR. MARK: That's correct. There is 16 a section that allows a cut-off for non-payment, but 17 that I think is different than all of the terms of a 18 contract. How quickly you have to pay and all of those 19 things that would be in a normal contract is an 20 obligation on the buyer. Clearly, the Board has the 21 authority to oversee the sellers. 22 MS LEA: Thank you. 23 Mr. Jennings, yes, you have 24 anticipated my question. I wanted to understand how 25 section 31 of the Electricity Act fits into your 26 understanding of how the legislation works. 27 As we are aware, section 31(1) allows 28 you to shut off the distribution of electricity to a 590 MARK/JENNINGS 1 property if there are amounts payable for distribution, 2 or for amounts payable for section 29 service. 3 Further, under subsection (3) you can recover all of 4 the amounts payable, despite shutting off the 5 distribution of electricity, and that includes amounts 6 payable for section 29 service. 7 When I read that it sounds as if 8 section 29 service is something special, something 9 different. Can you help me with that and comment on 10 that, please? 11 MR. MARK: I haven't considered that 12 question before. 13 Offhand, it strikes me that the 14 reason why section 29 is specifically referred to in 15 section 31 is because that is the only situation in 16 which the distributor is providing a retail service. 17 So it makes no sense for the section to say that you 18 can cut off supply if somebody hasn't paid the 19 distributor the distribution charge or the retail 20 charge. What they are saying is that you can cut off 21 somebody who is not paying the distribution charge or 22 the section 29 retail charge because that is the only 23 retail charge a distributor is going to levy? 24 MR. JENNINGS: It is the distributor 25 who must cut off, and that raises, frankly, a different 26 concern because it is not clear how somebody who isn't 27 paying one of Mr. Perdue's client's bills gets cut off. 28 MS LEA: Yes. Thank you, 591 MARK/JENNINGS 1 Mr. Jennings. 2 That also points to a difficulty that 3 I was having. It appears that section 31 only allows 4 for cut-offs for retail if the distributor is providing 5 it under section 29, or so it appears. Is that what I 6 understood your answer to be also? 7 MR. MARK: There are two possible 8 interpretations. Either it is because that is the only 9 type of retail service -- because, yes, it only 10 contemplates cut off if the distributor is the 11 supplier, but, admittedly, there is another possible 12 perspective on that, which is that it is giving a 13 cut-off right if anyone who is providing the section 29 14 service hasn't been paid according to the obligations 15 of the customer. But that seems to me a bit of a 16 stretch of an interpretation. 17 The point I would make is that the 18 whole section seems to me to be contemplated on having 19 a payment obligation in the first place, which is the 20 problem I have with it. 21 MS LEA: So I guess I go back to my 22 original question, then. Is it still your view, given 23 the provisions of section 31, that the function 24 performed -- the services provided -- under section 29 25 are no different from other retail services? 26 MR. MARK: It is no different in 27 their type or nature, in the sense that we say the 28 section 29 customer should have available to him the 592 MARK/JENNINGS 1 type of rights and the types of choice which are 2 typical of what is offered in competitive markets. 3 There is an acknowledgement here of a 4 difference, which is that there is a difference between 5 the service the distributor provides under section 29 6 and the retail service, in that the distributor can't 7 say no. He has to enter into a contract for one of his 8 rates with the customer. 9 So that is the difference. Unlike 10 the other retail marketers, they don't have the 11 opportunity to say to the customer, "I don't like the 12 cut of your jib. I don't like your credit rating", or 13 whatever, "I am not going to take that risk." 14 There is an obvious and fair quid pro 15 quo here. If you have to take the customer, we are 16 going to give you a corresponding power which nobody 17 else has, which is that if the son of a gun doesn't pay 18 you don't have to supply him. 19 MS LEA: Thanks very much for your 20 answers. 21 Thank you, Mr. Perdue. Please go 22 ahead. 23 MR. JENNINGS: Could I ask, for 24 biological reasons, for a quick recess? 25 MS LEA: Certainly. I was just 26 trying to rush through so that you can get off the hot 27 seat there. 28 MR. JENNINGS: I understand. 593 MARK/JENNINGS 1 MS LEA: Certainly if the seat has 2 gotten too hot, let's break for five minutes, then. 3 --- Short recess at 12:05 p.m. 4 --- Upon resuming at 12:08 p.m. 5 MS LEA: Mr. Perdue. 6 MR. PERDUE: Tony, if we could just 7 go back to that affiliate that we have here, besides 8 the various regulated SSS rates that he is offering, 9 the affiliate is also offering unregulated rates in 10 normal contract offerings. Am I correct? 11 MR. JENNINGS: I would assume so, 12 yes. 13 MR. PERDUE: I think there was some 14 indication -- Mrs. Jones, if she is a customer of one 15 of these utilities offering several rates, is she going 16 to have an opportunity to decide which of those rates 17 she should fall into or is she going to be put into 18 that rate or class as a result of some allocation by 19 the affiliate? 20 MR. JENNINGS: I would assume 21 Mrs. Jones has a choice. 22 MR. PERDUE: Now, how is she going to 23 exercise that choice? 24 MR. JENNINGS: I had difficulty 25 understanding the question, Dick. 26 I would assume, like anything else 27 that is offered to her, there is a description or a set 28 of arrangements and she gets to choose. 594 MARK/JENNINGS 1 MR. PERDUE: What I am saying is that 2 I'm assuming that if you have several SSS offerings -- 3 and I'm gathering that there was some discussion 4 earlier that there could be several residential small 5 market SSS offerings -- therefore somebody has to 6 determine, according to your proposal, where Mrs. Jones 7 fits into those. 8 What you are saying is that 9 Mrs. Jones would get an option as to which one of those 10 residential small volume rates classes she might fit 11 into. Have I read it correctly? 12 MR. JENNINGS: You are correct. 13 MR. PERDUE: Presumably, then, you 14 would have to get some sort of -- I'm sorry, Tony; were 15 you going to say something? 16 MR. JENNINGS: No. 17 MR. PERDUE: Presumably, then, if 18 Mrs. Jones is going to exercise her option, she then 19 would have to be informed that there is an option. 20 Obviously, the utility would send out information 21 indicating that she had an option as to which one of 22 these rates she wanted to fall into? 23 MR. JENNINGS: Yes, I would assume 24 that there is an obligation to set out what is being 25 provided as a section 29 protection for her. 26 MR. PERDUE: Right. And, presumably, 27 then, she had to send something back or contact the 28 affiliate somehow and indicate which one she wanted? 595 MARK/JENNINGS 1 MR. JENNINGS: Yes. 2 MR. PERDUE: All right. 3 MR. JENNINGS: The exception to that 4 is the 29(1) folks who are just "leave me alone and 5 don't do anything". Clearly, they have to fall to one 6 rate and the Board would have to be clear about that 7 rate. 8 MR. PERDUE: I'm sorry, I may have 9 misunderstood, then. I thought we only had one 10 regulated rate. 11 MR. JENNINGS: For 29(1) customers? 12 I mean -- 13 MR. PERDUE: I don't care which 14 customers. You only have one regulated rate. 15 MR. JENNINGS: No. I do care, 16 unfortunately. 17 MR. PERDUE: Okay. 18 MR. JENNINGS: There were three 19 different conditions. If in fact we have this 20 arrangement where Mrs. Jones doesn't have to choose, 21 doesn't have to do anything, there has to be one rate 22 that that person goes on if they don't elect anything 23 else. 24 MR. PERDUE: Right. No choice for 25 Mrs. Jones at all. Gotcha. 26 MR. JENNINGS: No. 27 MR. MARK: She has a choice. 28 MR. JENNINGS: She chooses to not 596 MARK/JENNINGS 1 choose. 2 MR. MARK: If she is one of those 3 customers who, no matter how many times you knock on 4 the door or sell them something in the mail, simply do 5 nothing, then clearly there has to be a rate which 6 applies without that customer doing anything. 7 That is the same concern I expressed 8 before about the payment obligation in that 9 circumstance. You are always going to have those 10 customers who you are going to have to tell, "Because 11 you have done nothing, the Energy Board said you are 12 getting Rate X." 13 MR. PERDUE: I acknowledge that. 14 MR. JENNINGS: But the jurisdictions 15 normally, for example, required every customer to 16 choose between these range of options and said at the 17 end of the day, "If you don't send in your form, you'll 18 get X." 19 So I would assume that the Board 20 would say, and appears to have the authority to say, 21 what X is for those people who don't sign anything and 22 don't make any -- 23 MR. PERDUE: I appreciate that, and 24 there is only -- 25 I'm sorry. Is Mrs. Jones asked by 26 the affiliate if she wants to have a series of rates? 27 I thought we had established that 28 Mrs. Jones would get some sort of choice from the 597 MARK/JENNINGS 1 affiliate. 2 MR. JENNINGS: If Mrs. Jones is a 3 29(1) customer who doesn't want to sign anything, 4 doesn't want to read any forms, et cetera, then she 5 would get one rate. 6 MR. PERDUE: All right. Then she 7 would not get a choice. 8 MR. JENNINGS: She would get a 9 choice -- 10 MR. PERDUE: Excuse me, I will take 11 that back, I'm sorry. 12 If we have, then, the one single 13 regulated rate -- 14 MR. MARK: Perhaps I could try and 15 clarify it. 16 You may have a situation in which 17 there is more than one available section 29 rate to a 18 customer. 19 MR. PERDUE: That's what I was 20 asking. I was trying to determine that. 21 There is more than one section 29. 22 MR. MARK: You could conceivably have 23 a situation where the Board may say, for example, that 24 a section 29 customer can elect between a fixed rate 25 and a spot price pass-through or a second type of rate, 26 and if they don't elect its default is this. 27 That is a possibility that isn't 28 precluded by this proposal, I don't believe. 598 MARK/JENNINGS 1 MR. PERDUE: That's what I was trying 2 to determine, then. So the proposal would permit 3 Mrs. Jones a default choice. Of course, she does not 4 choose. But it would also allow her to choose through 5 several other regulated rates. That is what this 6 proposal would allow. 7 MR. JENNINGS: To be frank, we 8 haven't canvassed that issue very far. But Mr. Mark's 9 reading would suggest that that was possible. 10 MR. PERDUE: All right. 11 When Mrs. Jones -- let's say she is a 12 default customer and she remains on the SSO, and it's a 13 single rate. Let's assume there is just one rate, not 14 several, but she does not choose in any case. 15 She gets a bill, a monthly bill, 16 whatever, and that bill comes from the affiliate. Am I 17 correct? 18 MR. JENNINGS: If she is being served 19 by the affiliate, yes, it could be. 20 MR. MARK: Just to clarify, as I 21 understand it, there is permitted flexibility in the 22 billing arrangements. You are going to have 23 situations, as I understand it, where for example the 24 distributor may be rendering the bills on behalf of the 25 retailers. 26 So I don't think it is necessarily 27 the case that the affiliate is going to be rendering 28 the bill. 599 MARK/JENNINGS 1 MR. PERDUE: So the wires company, 2 then, could be rendering the bill. Am I correct? 3 MR. MARK: They could be. 4 MR. PERDUE: But this proposal would 5 permit the affiliate to render the bill? 6 MR. JENNINGS: I think this proposal 7 doesn't preclude anything in terms of billing 8 arrangements. 9 MR. PERDUE: If she is on an SSS 10 rate, the default rate, if I might use that term, and 11 that default rate is provided by the affiliate, you are 12 saying that the bill could still come from the wires 13 company. 14 MR. JENNINGS: It might. The wires 15 company -- well, assuming a parallel to the gas, some 16 of the utilities are billing on behalf of a number of 17 energy marketers. It could be that way, but it doesn't 18 have to be that way. 19 MR. PERDUE: All right. 20 If the bill comes from the affiliate, 21 if under your proposal the affiliate -- and we are just 22 talking about Mrs. Jones, the default customer -- your 23 proposal, then, would permit the bill to come from the 24 affiliate and it would then permit the affiliate's name 25 on the bill. Am I correct? 26 MR. JENNINGS: I would assume so, 27 yes. 28 MR. PERDUE: And the payment, then, 600 MARK/JENNINGS 1 would be made to the affiliate? 2 MR. JENNINGS: Yes. 3 MR. PERDUE: And the affiliate would 4 then pay to the wires company only the distribution 5 cost, the distribution tariff. Is that correct? 6 MR. JENNINGS: Unless the wires 7 company was providing some other services to that and 8 other retailers. 9 MR. PERDUE: What I am trying to get 10 at -- let's talk about the commodity portion of 11 Mrs. Jones' bill. 12 MR. JENNINGS: Right. 13 MR. PERDUE: The commodity portion of 14 Mrs. Jones' bill, I presume, if it is on some sort of a 15 fixed price default, that that would be paid through 16 some sort of presumably bilateral contract with the 17 supplier? 18 MR. JENNINGS: Presumably, yes. And 19 the distribution company has a retail settlement -- the 20 wires company has a retail settlement obligation to 21 either perform or arrange. 22 MR. PERDUE: I'm sorry? Why would 23 the wires compare with settlement? 24 MR. JENNINGS: The wires company gets 25 billed for 100 per cent of the electricity coming into 26 the wires, regardless of who the seller is. 27 MR. PERDUE: So then they are going 28 to get paid -- they are going to have to pay the spot 601 MARK/JENNINGS 1 price to the IMO, is what you are saying, and the 2 bilateral -- and that is a contract for differences, is 3 what you are saying? 4 MR. JENNINGS: They may have a 5 contract for differences, or whatever, but the wires 6 company, which is not in the commodity business, gets 7 the bill. It is the one that is metered, and it will 8 pay the IMO. It has an hourly settlement 9 responsibility with all of the retailers that happen to 10 be operating in its area and all of its customers. 11 MR. PERDUE: I appreciate that. 12 From a money point of view, then, the 13 affiliate would pay the wires company, its parent, that 14 money, which would cover the spot price payable to the 15 IMO. Then the remainder would be settled up with the 16 contract for differences with your generator. 17 MR. JENNINGS: Correct. 18 MR. PERDUE: If Mrs. Jones all of a 19 sudden decides -- do we know who Mrs. Jones is? She is 20 an SSS-regulated default customer? 21 MR. JENNINGS: A 29(1) default 22 customer. 23 MR. PERDUE: She is contestable. Am 24 I correct? 25 MR. JENNINGS: Yes, very. 26 MR. PERDUE: The other affiliate, the 27 other customers served under different rates in the 28 affiliate -- we spoke about them before -- they too are 602 MARK/JENNINGS 1 contestable? 2 MR. JENNINGS: Yes, I believe so, 3 subject to whatever their contract conditions are. 4 MR. PERDUE: So what we are doing is 5 we are providing a regulated service with a contract, 6 and therefore their contestability is removed. They 7 are not contestable. 8 MR. JENNINGS: When you say "others", 9 it depends on which other you are talking about. 10 MR. PERDUE: I am talking about the 11 regulated ones, not the unregulated ones. Leave aside 12 any thought of the unregulated ones. I know you are 13 supply, but we are not talking about those. 14 MR. JENNINGS: But you asked him. 15 Your question was about the other ones. So, please be 16 clear when -- 17 MR. PERDUE: I'm sorry, I will be 18 more specific. I am just talking then about the -- 19 MR. MARK: You were specific and you 20 asked about the other ones. 21 MR. PERDUE: All right. I apologize, 22 Mr. Mark. I will try better. 23 What I am talking about is the 24 regulated SSO customer who has for some reason picked a 25 different rate, but he is an SSS customer. 26 MR. JENNINGS: What I was trying to 27 make a distinction -- if that customer -- look at our 28 discussion about the question about the implied 603 MARK/JENNINGS 1 contract and about the phasing out of this protection 2 and the phasing out of the wires company providing this 3 service. If we want to assist in moving in that 4 direction, it seems logical that anybody who leaves and 5 signs a contract would logically be expected to sign a 6 contract when they come back. 7 So you will have some section 29 8 customers who have a contract. 9 MR. PERDUE: Mrs. Jones signs with 10 Sunoco. She signs a two-year contract with Sunoco. 11 Where does Sunoco send notification of this contract 12 signature? To the wires company? 13 MR. JENNINGS: Assuming the law 14 allows Sunoco to send notification, I would assume they 15 send it to the wires company, from the way the Act is 16 constructed. 17 I say "assuming" because it says the 18 customer must advise the LDC. 19 MR. PERDUE: All right. 20 Mrs. Jones, then, if you are happy 21 with Mrs. Jones -- Mrs. Jones has sent the notification 22 to the wires company. Then the wires company 23 presumably would inform the affiliate that Mrs. Jones 24 wants to go somewhere else? 25 MR. JENNINGS: We are a third party 26 retailer, however that is arranged. Yes. 27 MR. PERDUE: Right. Okay. And 28 Sunoco, then, would start to bill Mrs. Jones. 604 MARK/JENNINGS 1 MR. JENNINGS: That's one option. 2 MR. PERDUE: Let's just assume that's 3 the option that they take, that is permitted and 4 accepted and whatever, that Sunoco then would take over 5 according to the MDC's recommendation. Sunoco would 6 take over the billing of both the distribution function 7 and the commodity function. 8 MR. JENNINGS: As I understood the 9 MDC's recommendation, they favoured the LDC doing all 10 of that, unless the retailer was prepared to pay for 11 the additional costs for setting it up the other way, 12 but let's assume they did, so we are now there. 13 MR. PERDUE: Yes. Let's assume, 14 then, that Sunoco bills both. Does that mean then that 15 Sunoco then would carry on still paying the spot price 16 to the utility and the money would be then paid to the 17 utility, is that correct, not to the affiliate. 18 MR. JENNINGS: To the wires company. 19 That's correct. 20 MR. PERDUE: All right. 21 If the affiliate is going to do all 22 these functions in the regulated part of the 23 utility -- I'm assuming part of the affiliate is going 24 to have to be virtually regulated, part of it. What's 25 the rationale for not just doing it within the utility, 26 within the wires company itself? What is the advantage 27 to moving it out if everything is regulated? 28 MR. JENNINGS: Because the codes 605 MARK/JENNINGS 1 don't allow certain sets of information and advantage 2 to move back and forward. This is, as we said, a 3 commercial function. It would be logical to do the 4 commercial activities and cost effective to do it all 5 in one place. 6 MR. PERDUE: That's true, Tony, but 7 that is not true for the regulated part. We are 8 talking here -- we agreed that there were certain 9 regulated rates, certain regulated administrative 10 charges. 11 MR. JENNINGS: But those are 12 commercial rates. 13 MR. PERDUE: They are regulated 14 commercial rates. 15 MR. JENNINGS: That's correct. 16 MR. PERDUE: Okay. I will look that 17 up. 18 MR. JENNINGS: I mean, that is really 19 fundamental to what our understanding of what the 20 legislation says, that section 29 is retailing. The 21 Act says that. 22 MR. PERDUE: I agree that if you want 23 to retail in competition with a broker, that is the 24 other half of the retail company that we have not 25 spoken about, and you want to offer unregulated rates, 26 that's fine. 27 But the regulated part of the SSO -- 28 if we have just one charge, it would have to be split 606 MARK/JENNINGS 1 into three or four charges -- what you are talking 2 about, the regulated administrative charge and the 3 regulated fixed price, all that sort of stuff, is 4 regulated. Why would that be undertaken in the 5 affiliate? 6 MR. JENNINGS: Because it is a 7 commercial undertaking the same as all the other things 8 they are doing. There is no need to separate your 9 administration into two parts. 10 MR. MARK: It would be cheaper if you 11 were going to take advantage of an existing 12 administrative infrastructure. 13 MR. PERDUE: Where? In the wires 14 company? 15 MR. MARK: No, in the affiliate. 16 MR. JENNINGS: Let me assume that I 17 am a little utility and I only want to be a wires 18 company. I am going to go to the board and say, "I 19 want to contract my obligations out to Perdue", and 20 Dick Perdue comes up with one of the battery of rates 21 that are being offered in his retailer company and 22 says, "This is the one we want regulatory approval of, 23 that it's just and reasonable", not that it's cost 24 analyzed, et cetera, but that this is a just and 25 reasonable rate. That is the rate we are asking for, 26 to keep it to one to make it simple, the rate we are 27 asking for Board approval for to offer for 29(1) 28 customers. 607 MARK/JENNINGS 1 MR. MARK: No doubt the rate that 2 Mr. Perdue offers for that "can do it for" is cheaper 3 than the LDC who is not in this business and doesn't 4 want to be in this business. 5 MR. PERDUE: The amount of the rate 6 I'm not too concerned with. It was the sharing of the 7 resources I was concerned with. I gathered that the 8 share in resources that you were referring to at this 9 point were the share in resource of the affiliate 10 between the two sides of the affiliate. 11 MR. JENNINGS: It could equally be 12 the sharing of the resources of the retail marketer who 13 you contract with. If Sunoco, to use your example, is 14 doing all the billing and everything, then it would be 15 logical to contract for Sunoco to meet the obligations. 16 Although this is a delegation not an abdication of 17 responsibility on the LDC's part, they have got to 18 assure it is being done and they are on the hook with 19 the Board for the approval. 20 There is economies in Sunoco doing it 21 out of its single instances. 22 MR. PERDUE: Thank you, gentlemen. 23 That's all. 24 Thank you. 25 MR. JENNINGS: Thank you, Mr. Perdue. 26 Mr. White. 27 MR. WHITE: I have three areas of 28 interest. I would like for a minute to take us to a 608 MARK/JENNINGS 1 different Mrs. Jones because I don't necessarily want 2 to carry the same baggage as the previous one. 3 Mrs. Jones has made a contractual 4 relationship with a third party and that third party 5 defaults on the contract they have with Mrs. Jones and 6 Mrs. Jones doesn't find out about it and Mrs. Jones' 7 lights still stay on. 8 What we are looking at is sort of a 9 29(2) kind of situation. 10 MR. JENNINGS: 29(3). 11 MR. WHITE: 29(3). Does the 29(3) 12 rate under the proposal you have put forward relate to 13 the 29(1) rate or some other menu of rates or 14 alternatives? 15 MR. JENNINGS: It's theoretically 16 possible that a utility could come forward and say 17 "Well, we are only proposing one rate to meet all of 18 these requirements". 19 My expectation is, because there are 20 different risks, different exposures and different 21 administration, that there would at least be some 22 variation between 29(3) and 29(1). The utility would 23 find out fairly quickly that Mrs. Jones' supplier is 24 not able to perform. 25 There are a whole bunch of codes and 26 other things and IMO rules that have yet to be worked 27 out which are going to define some of this, but there 28 is definitely a lag, probably close to two months, 609 MARK/JENNINGS 1 before the next billing in which they advise Mrs. 2 Jones, "Here is what you are going to get if you want 3 to sign with us. Otherwise you have to find another 4 supplier." 5 If the other supplier will take over 6 from the first one, then they don't have to get 7 Mrs. Jones to sign. 8 MR. WHITE: Let's deal with a Miss 9 Jones. 10 MR. JENNINGS: Miss Jones. 11 MR. WHITE: All right. So we change 12 the context a little better. 13 MR. JENNINGS: A student who is 14 renting. 15 MR. WHITE: "Ms"; is that better? 16 I'll get there. I guess it's the grey showing. She 17 has turned 16 and has no established credit rating and 18 is trying to establish electrical service. She would 19 clearly be a 29(1) customer from your perspective 20 initially? 21 MR. JENNINGS: She may be. 22 MR. WHITE: In the absence of 23 anything else. 24 MR. JENNINGS: Okay, if she has to 25 sign up with somebody else or something else, yes. 26 Actually, that's interesting because 27 she hasn't been there before. I'm not clear in law 28 whether she would enter under 29(2). Otherwise you 610 MARK/JENNINGS 1 would never have this scheme phasing out which is 2 contemplated in the Act. To be honest, Roger, I 3 haven't thought it through. 4 MR. WHITE: That's the other place I 5 would like to go and you may want to caucus a little on 6 this one because I am still trying to get my head 7 around the implications of the phase-out, particularly 8 when I put them together with section 142 of the 9 Electricity Act. 10 The phase-out I understood from 11 earlier comments this morning can happen in one of two 12 ways, one by a regulation or an Order in Council that 13 basically says that default supply can no longer be 14 offered in other than an affiliate. It can't be 15 offered by the distributor. It's still open to have it 16 offered by either an affiliate or a third party, but 17 the distributor is put out of that business. 18 MR. JENNINGS: The distributor that 19 has a lot of relationships and is otherwise a regulated 20 company shouldn't be in the competitive business, 21 except 29 would appear to be the construction. It can 22 only be there for some period of time. 23 MR. WHITE: If there is no third 24 party in the scheme of things for this particular 25 distributor -- 26 MR. JENNINGS: If they can't find 27 one, then the Board has got the authority to order them 28 to set up a retail affiliate in order to provide the 611 MARK/JENNINGS 1 service. 2 MR. WHITE: I think that deals with 3 the dilemma I was facing myself because under 142 it's 4 permissive that the municipality set one up, but the 5 Board has the ability to order the LDC to do it as 6 well. 7 MR. JENNINGS: The Board can require 8 for that or other competitive activities under 9 section 73 of the OEB Act. It can order the LDC to set 10 up and that's the only structural authority of 11 significance that the Board has, it would appear, 12 except for sub (9) which is section 29 responsibilities 13 or 73, which are the other competitive affiliates, 14 including retailing. 15 MR. WHITE: Potentially though, in 16 the absence of a Board order, if the municipal 17 corporation had not set up a retail affiliate and was 18 carrying on default supply obligations directly within 19 the wires business, in the absence of a Board order, if 20 the regulation were passed which closed the ability of 21 the LDC to do it directly, it might continue to have a 22 statutory obligation to provide, if you will, default 23 supply or standard supply even though it doesn't have 24 an affiliate with which to do it. 25 MR. JENNINGS: Presumably in that 26 situation the Board would exercise authority to require 27 the establishment of an affiliate for the purpose of 28 fulfilling that section 29 obligation. 612 MARK/JENNINGS 1 MR. WHITE: But it's not mandated. 2 MR. MARK: No, but I don't think we 3 should presume that the government on this issue and 4 the Board on this issue would be two ships passing in 5 the night. 6 MR. WHITE: No comment. 7 MR. JENNINGS: One hopes rather than 8 assumes. One hopes that the government wouldn't make 9 it illegal to provide, wouldn't say you can't provide 10 through the distributor unless they were reasonably 11 assured that there are other ways of doing it, so 12 you -- I mentioned the Cochrane situation where in 13 other services nobody was interested in providing the 14 service, so the PUC stepped in. 15 That clearly I think was contemplated 16 in the legislation as a possibility. The Board has 17 some -- it's probably the wrong word, but let me say 18 Draconian powers in this respect. They can order, and 19 it's the only place they can order a restructuring. 20 They can order the set up of a retail affiliate if you 21 can't do it some other way. 22 In another case, if you are not 23 performing your job right, they can order somebody else 24 to run the system with no compensation. 25 MR. WHITE: No further questions. 26 Thank you very much. 27 MS LEA: Thank you, Mr. White. 28 Thank you Mr. Mark, Mr. Jennings. 613 MARK/JENNINGS 1 We will reconvene at twenty-five to 2 2:00. 3 MR. POWER: Just to let everybody 4 know, I do have copies of the paper that John Todd 5 referred to here. I will just lay them out on the side 6 there. 7 --- Upon recessing at 12:35 p.m. 8 --- Upon resuming at 1:40 p.m. 9 MS LEA: Good afternoon. 10 One administrative announcement. It 11 appeared to us, in any event, that we would not 12 complete all the presentations and questioning by the 13 end of this week. Also, we had a couple of parties who 14 made specific requests to give their presentations on 15 Monday. 16 I would like to inform attendees that 17 on Monday morning at 9:00 a.m. the Toronto Hydro panel 18 will present. They will be starting us off, then, 19 Monday at 9:00 a.m. 20 Following them, Mr. Rawson from 21 TransCanada Power will be making his presentation. 22 I hope that everyone else can be 23 accommodated within the scope of Friday, but if there 24 is anyone else who cannot attend on Friday who is 25 scheduled for Friday, perhaps they could let me know. 26 MR. BUDD: Excuse me. If I may? 27 MS LEA: Yes? 28 MR. BUDD: Do we know how long those 614 MARK/JENNINGS 1 two presentations might be, and the cross-examinations, 2 because I do know that there is one fellow who has 3 flown in from Alberta to be here. 4 MS LEA: When is that? 5 MR. POWER: John Jenkins, who is in 6 the panel with Fiona Woolf. 7 MS LEA: Oh. Well, I was hoping they 8 would be completed tomorrow. I'm talking about Monday. 9 MR. POWER: Oh, Monday. I'm sorry. 10 MS LEA: Yes. I'm sorry, Mr. Power, 11 perhaps I didn't make myself clear. 12 MR. POWER: No, that's okay. 13 MS LEA: I was talking about Monday 14 morning at 9:00 a.m., we would start with Toronto Hydro 15 and then Mr. Rawson to follow. 16 MR. POWER: Great. Okay. 17 Thank you. 18 MS LEA: Mr. Power, I think you have 19 some presenters to present. 20 MR. POWER: We do indeed. 21 Maybe I can give a brief overview of 22 who will be here and the documentation. 23 Just by way of background, we will 24 have two panels of witnesses, to use the old language, 25 or two panels of presenters, Seabron Adamson and Barry 26 Conway, who are here today in front of us. 27 Afterwards it will be Fiona Woolf, 28 Gunars Ceksters and John Jenkins. 615 MARK/JENNINGS 1 In terms of the documents, you will 2 have the report of Fiona Woolf and Seabron Adamson. 3 Seabron Adamson's paper is attached as Appendix B and, 4 of course, the CVs are attached as "F" and "G" to that 5 document. 6 There are witness statements that 7 were also provided for the other witnesses, Gunars and 8 John Jenkins and Barry Conway. 9 In terms of the panels, very 10 generically, Seabron Adamson and Barry Conway will deal 11 with market mechanisms for electricity pricing and 12 consumer protection, and also deal with the capability 13 of utilities to manage risk in the competitive 14 marketplace. 15 Panel 2 will deal with the major 16 effects of the proposed Standard Supply Code, including 17 its immediate impact on the Lakeview Generating Project 18 and related impacts on other commercial ventures, and 19 constructive comments on how the draft Standard Supply 20 Code can be amended to still achieve its objectives but 21 without these types of detrimental effects. 22 By way of introduction to Seabron 23 Adamson, who has flown up today to be here with us, 24 Mr. Adamson has a wide range of practical experience in 25 advising governments and regulators in both market 26 design and implementation. 27 He is relatively rare in that he has 28 10 years of experience in competitive electricity 616 MARK/JENNINGS 1 markets in various jurisdictions in the world. He has 2 just finished one of the largest merchant plant capital 3 market financings in the world at about $1 billion U.S. 4 and, perhaps importantly, has done extensive work in 5 the Alberta jurisdiction, which is somewhat relevant 6 here, advised the Alberta Department of Energy on the 7 market power mitigation options and designed the 8 contract option model in the 1998 legislation. 9 Barry Conway is the V-P of Energy 10 Market Operations with ENERconnect, and he is here to 11 speak about the capability of the utilities to manage 12 their risk in the new market. Of course, Barry is well 13 known to most of us, having participated through the 14 MDC process. 15 With that background, perhaps I can 16 just hand it over to the witnesses and go from there. 17 MS LEA: Thank you. 18 MR. POWER: I will have one or two 19 questions at the tail end, after they are done. 20 Thank you. 21 PRESENTATION 22 MR. ADAMSON: I would like to stand 23 up, if I may, just because I'm not used to making 24 presentations sitting down. Will you be able to hear 25 me if I speak from here? 26 MS LEA: As long as your voice is 27 captured by the microphone. That's the main thing, 28 sir. 617 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: Okay. 2 Well, as Rob suggested, my name is 3 Seabron Adamson from Frontier Economics in the Boston 4 area. 5 I would just like to start with kind 6 of a list of the issues I would like to speak about 7 briefly this morning -- or this afternoon now, rather, 8 I'm sorry. 9 I would like to start with a set of 10 economic principles which, from my viewpoint, should 11 underlie the design of the pricing mechanism for 12 standard supply service in the Province of Ontario. 13 I would like to focus on the 14 importance of getting those economic principles right, 15 the development of an efficient wholesale and retail 16 market, which I think is everyone's objective in this 17 room. 18 I would like to comment a bit on the 19 consistency of the draft code in Ontario with the 20 principles I have enumerated before. 21 I will give a brief overview -- and 22 it will necessarily be briefer than I might like -- for 23 how my alternative proposal for standard supply service 24 might work, and talk a little bit about implementation 25 of that. 26 Finally, probably many of you are 27 aware of the famous line of George Bernard Shaw that if 28 you laid all the economists in the world end-to-end 618 ADAMSON/CONWAY, presentation 1 they still wouldn't reach a conclusion. But I would 2 like to try to make a conclusion and try to get some 3 recommendations on how I think such an alternative 4 proposal might be implemented in the Province of 5 Ontario. 6 I believe you are being handed out 7 copies of slides. I will try to refer to the numbers 8 as we go along. 9 What are the economic principles for 10 designing this mechanism, and in fact for designing 11 most pricing mechanisms? There is nothing particularly 12 special about the standard supply service pricing 13 mechanism in this regard 14 I would like to start with two main 15 economic principles. 16 First off, is the principle that 17 risks should be allocated efficiently. 18 One of the more sort of interesting 19 developments of modern economics has been the 20 understanding that prices and risks have distributions. 21 They are not single numbers and there is no perfect 22 information of those numbers. There is always 23 variation in those numbers. 24 The question of risk is: Who should 25 bear risk? An economic principle is: The party which 26 can bear and mitigate risks at lowest cost is the 27 person who should bear it. That is what is most 28 efficient. We all are risk averse, we all want to try 619 ADAMSON/CONWAY, presentation 1 to avoid risk if possible, but it is better for me to 2 avoid it rather than someone else if I can do something 3 about it at the lowest cost. 4 So in a very simple example, I am in 5 a power market -- taking us back to our example of now. 6 Risks related to fuel prices, where might those go? 7 Down this vertical chain all the way from the fuel 8 supplier down to generators, intermediaries, final 9 customers. 10 Well, I might recommend, for example, 11 that those at least get pushed up as far as generators, 12 because generators are probably more likely to be able 13 to bear them and to hedge them at lowest cost. They 14 can sign the risk mitigating contract with their 15 upstream gas suppliers, and they may have a substantial 16 enough portfolio with a different fuel mix in order so 17 that they may not be particularly heavily exposed by 18 the change in any one fuel product, much less than an 19 individual customer. 20 Finally, I would like to note that 21 people with risk aversion, it depends on who you are. 22 Some customers -- and I would put in this category 23 probably lower income customers -- are much more likely 24 to be risk averse for a basic commodity like 25 electricity than other customers. 26 Second, we need to think practically 27 about what are the costs of moving things around. Why 28 don't markets always work perfectly? Why do they 620 ADAMSON/CONWAY, presentation 1 always allocate risks in the absolute optimal fashion? 2 Well, the second point, of course, is 3 that there are very significant transaction and 4 information costs. It costs me money, it costs me time 5 to do anything about this. To the level of when you 6 aggregate lots of time coming from millions of 7 individual customers, those costs are very, very large. 8 So at the level of the small consumer 9 in particular, the cost of doing anything to hedge 10 risks is much, much higher, as a proportion of my total 11 investment in this enterprise than it may be from 12 someone else. I'm not taking advantage of any 13 economies of scale. I have no idea what this is all 14 about, and it costs me a lot of time and money to find 15 out anything about it. 16 As opposed to an industry participant 17 who might be acting on a very large number of 18 consumers, so once he or she knows, she can use that 19 same information for the benefit of lots and lots of 20 different parties. 21 Finally, I would like to consider the 22 impact on the wholesale market. I think this is a very 23 critical element of the critique than I presented in my 24 paper. 25 What does this mean for the 26 functioning of the wholesale market? Is this only 27 about what price the apocryphal Mrs. Jones gets 28 charged, or does this have any influence for the 621 ADAMSON/CONWAY, presentation 1 remainder of the market? 2 I actually would argue very strongly 3 that it does. One practical lesson of electricity 4 markets is that intermediate contract markets, whether 5 they be financial hedges or physical sales contracts, 6 they are not an addendum to the market, they actually 7 are the market. To think only about the spot market is 8 actually putting the cart before the horse. 9 The vast majority of power in a free 10 market in electricity will actually be traded under 11 contract. That is for two real reasons. First, as 12 other people have suggested, there is very substantial 13 volatility in electricity prices and people are risk 14 averse. We understand that. 15 Second, this actually reflects the 16 economics of this industry. All of the parties in 17 there have risk, not just the consumer. A generator 18 who has sunk half a billion dollars into a set of power 19 plants and has to meet a debt financing schedule also 20 has risks. 21 Now, if I have risks and Barry over 22 here has risks, it seems to me relatively economically 23 efficient that we try to get together and do a swap. 24 It is like those little analogies they always use about 25 trade between Canada and Japan, or something, in the 26 newspaper. It is most efficient if we actually don't 27 do everything independently of each other. 28 Remember that these markets are not 622 ADAMSON/CONWAY, presentation 1 an addendum to the market, they are the market for the 2 most part. Most of these power markets that we see, 3 the vast majority of the electricity is traded under 4 these contracts, even in markets such as the England 5 and Wales pool, where everything pretty much is 6 required to be bid into the pool and purchased from the 7 pool. There is a pool price and it appears in the 8 paper every day. 9 I would argue that, although that is 10 a price, and it is a reference price, and it is a very 11 nice price that you can look up on the Web site, it is 12 not the price for electricity in that market. The 13 price for electricity in that market is actually 14 defined by contract prices. Normally about 70 to 15 80 per cent of the total volume of power traded in this 16 market is actually traded under forward contracts. 17 What do these forward contracts do? 18 They help Barry and I hedge our risks. We know that. 19 But they have some other important features for people 20 coming into the market as well. Clearly, they help 21 retailers who are going to be, hopefully, serving final 22 competitive retail customers at fixed prices who need 23 to hedge their own risks. 24 They also have a very powerful effect 25 on the ability of people to enter these markets from 26 the generation side. Remember, I am again thinking 27 hundreds of millions of dollars in capital and I want 28 to be able to hedge my risk of market revenues and 623 ADAMSON/CONWAY, presentation 1 fluctuations. 2 These forward contract prices are one 3 of the things that send the signal about, "Should I put 4 money into this?" And just as importantly, "Can I get 5 my bankers to lend me money against this?" 6 As Rob mentioned beforehand, I kind 7 of wear two hats in terms of my advisory role in these 8 types of markets. One is on the economics of 9 restructuring and the design of the California Power 10 Exchange and stuff like that. The other one is a bit 11 more commercially focused, which is advising people who 12 invest in merchant generation, be they utilities, 13 independent developers or, very often, commercial and 14 investment banks, about, "Is this a good decision? 15 Should you finance this?" 16 The first question that always come 17 up in one of these merchant financings is: What does 18 the forward market say? 19 I just completed a big transaction in 20 western New York state and they basically pay us to 21 produce revenue projections which they then use to 22 basically back up their financial modelling of the 23 company revenues. But the first thing you are always 24 asked when you do the financing presentation is: Are 25 these consistent with the forward prices going out? If 26 they are, okay, then the market agrees with you. If 27 they are not, you had better make a very, very good 28 case. 624 ADAMSON/CONWAY, presentation 1 We know that merchant power financing 2 is never going to be as risk free as generation 3 financing may have been in the past when we had 4 effectively regulated returns. But anything that 5 basically helps give a new entrant any market-based 6 contract signal of what the future price of electricity 7 is has a very powerful influence on your ability to get 8 financing for merchant generation, of any sort, and to 9 basically secure a lower cost of debt or lower cost of 10 equity. 11 So if those signals don't exist we 12 might surmise -- and from my practical experience I 13 would argue not to surmise, not to say "I know", but it 14 is a little harder for you to see that just because I 15 say it -- if those signals aren't there we have 16 fundamentally a higher cost of capital for merchant 17 generation, and over the long run I personally don't 18 see how that doesn't translate into higher final retail 19 prices for consumers. 20 These slides don't really quite fit 21 the screen. Maybe you will have to look at the paper. 22 An assertion has been made by some of 23 the previous presenters and in some of the previous 24 written comments that, "Our price is always the lowest 25 price, so if you charge anybody any other price, you 26 are basically charging them an artificially high 27 price." 28 I don't actually agree with that. I 625 ADAMSON/CONWAY, presentation 1 don't agree with that because, as I said before, there 2 are multiple prices in these markets and the contract 3 prices seem to dominate the volume. There is a 4 succession of prices in one of these power markets. 5 If you have ever been involved in the 6 trading side of this industry, like I have, there is no 7 price to look up. It is like if you called the 8 Toronto-Dominion Bank and said, "What is the interest 9 rate?" I think you would get a very long and pregnant 10 pause. We don't have an interest rate. An interest 11 rate for what? For what term? Based on what security? 12 Based on what currency? 13 There is a very large number of 14 prices for, in this case, a truly commoditized product, 15 in Canadian dollars, which are all on top of each other 16 and all evolve together. Similarly, the contract 17 prices and the spot prices in these markets tend to 18 evolve together. 19 The spot price may be a final kind of 20 price for settling up all of the differences, but I can 21 assure you that it is the experience that almost all of 22 the markets have come through in Ontario -- I don't 23 believe economics is any different in Ontario than it 24 is anywhere else in the world -- that actually the spot 25 market volume will end up being a very small proportion 26 of the contract volume unless it is artificially 27 distorted from being so. That, I think, is an issue of 28 very real concern. 626 ADAMSON/CONWAY, presentation 1 Consumers, we know, face 2 risks -- price risks -- and we think they are risk 3 averse. Like all of us, they don't like risk, so they 4 get away from it. But they are not the only people in 5 these markets who actually face any risk. As I 6 mentioned, generators face risk. They invest money and 7 they are dependent on market prices and contract prices 8 over time in order to recover their fixed costs. 9 Where this is really especially 10 rather true is for smaller generators and probably new 11 entrant generators, and most importantly for those who 12 don't have sufficient market power to, in effect, 13 dictate what prices may be, but are rather dependent on 14 the influence of external events in determining what 15 prices will be. 16 On a risk-adjusted basis -- and this 17 is a very important fact -- the spot price isn't 18 necessarily the lowest price. Just like on a 19 risk-adjusted basis me taking a variable mortgage rate 20 is not necessarily the cheapest way for me to borrow 21 money to buy my home. 22 We are always cognizant of the 23 trade-offs between risks and returns or risks and 24 costs. Electricity, I don't believe, is any different 25 from that. Electricity is a commodity, but then so are 26 dollars a commodity, and people are allowed to express 27 risk preferences there. 28 If I am coming in and I am saying, "I 627 ADAMSON/CONWAY, presentation 1 actually want to buy in this market", from one of these 2 retailers, which I have just drawn as a little white 3 box, is the spot price necessarily the best price I am 4 going to get? 5 If you were in a market where you 6 thought new entry was likely and where a new entrant 7 was probably going to face very substantial 8 systemic-type risks, like I believe you would in this 9 market, a lot of risk about worrying about not external 10 parameters like what the gas price is going to be but 11 parameters that are harder to judge, like "What are 12 some of my large competitors going to do?" I argue that 13 if I was that new entrant generator, in order to secure 14 financing and to lower my volatility of return, maybe I 15 would accept a lower expected profit -- and these 16 prices are all expectations; hindsight is the only 17 perfect information -- in return for some lower 18 volatility and uncertainty. 19 I suspect in this type of market that 20 a new entrant will be very, very strongly interested in 21 doing this to have lower volatility or uncertainty, or 22 I would personally opine that they will have extreme 23 trouble when they go into the syndicated loans market 24 trying to do the financing for their plants. 25 It's just not a creditable scenario, 26 given the current state of the financing of merchant 27 based assets in these newly evolving markets. 28 Based on these economic principles, 628 ADAMSON/CONWAY, presentation 1 what initial conclusions might we draw about the draft 2 Standard Supply Service Code? 3 Our first reaction, upon looking at 4 this, was one of astoundment, actually. It allocates 5 all the price risks to the person who can't deal with 6 it -- Mrs. Jones, who finds it by far most costly to 7 deal with it, or the millions of Mrs. Jones and 8 Mr. Jones who live across the province. 9 That certainly is truly 10 extraordinary. 11 Now, another assertion -- remember 12 the comment about transaction costs. She may not like 13 her price to go up and down a lot, but it is also 14 relatively expensive for her to find out what she can 15 do about it and to understand this rather peculiar 16 industry: I am just not getting my electric bill. It 17 didn't use to fluctuate in the past, and now it seems 18 to have developed a mind of its own. 19 I am probably pretty likely, if I am 20 Mr. Jones, to kind of stay where I am. Although the 21 system has decreased my welfare quite considerably by 22 exposing me to this risk that I didn't have before, I 23 might just stay there. I would think: Well, I am 24 probably reasonably sophisticated in thinking about 25 financial markets, have some expertise there. Do I 26 always make sure that I leave the balance on my lowest 27 credit card? No. Most of the time I probably don't. 28 I don't have the time. Most people are like that. 629 ADAMSON/CONWAY, presentation 1 So it is quite likely that even 2 though this risk allocation is pretty poor, a very 3 large number of them will just suffer and bear it and 4 go on. 5 The second point is, as these people 6 stay, we probably are going to find a much lower demand 7 for intermediate contract products, for contracts, 8 physical or financial, over the counter, traded through 9 an exchange. I am not real particular about what kind 10 they are, but I am very clear that they are very 11 important to these markets. 12 What does that imply? It implies 13 that if these contract markets are liquid, new 14 interests and small generators are going to have a 15 great deal of hedging their own revenue and cash flow 16 risks. I assert that that raises their cost of 17 capital. 18 Who else is this going to affect? 19 Well, most of the merchant power transactions in the 20 world are actually not people building new power 21 plants, they are people buying power plants that are 22 sold. If the decontrol process is ever going to 23 involve the actual sale with any of the generation, 24 that too has to be financed. 25 What does it mean? People looking to 26 buy this, whether it is a TransAlta or a Duke Energy or 27 a National Power, or whoever, by looking to buy these 28 assets and face higher risks, they pay less. That is 630 ADAMSON/CONWAY, presentation 1 all there is to it. 2 The market structure doesn't make 3 sense. The rules are uncertain. It is just a discount 4 to what you are willing to pay. 5 Finally, over the long term increased 6 risk, to me, necessarily implies higher prices for 7 generators to take on this risk. 8 One thing that also rather struck me 9 in this proceeding is that there was a lot of 10 discussion of volatility, and there was a lot of 11 discussion about what the impact might be on customer 12 bills. I haven't tried to recreate all of this 13 analysis, of course. 14 The one thing that was very clear to 15 me is that a lot of the conclusions about the potential 16 volatility of the Ontario market seemed to have been 17 rather extrapolated from that of the Alberta market far 18 to the west and not really interconnected. 19 I would advise you strongly to put 20 some very strong caveats on estimates of volatility 21 taken in the market. Alberta, because it is in Canada, 22 has really no more connection to the Ontario power 23 market than that of New Zealand. First of all, the 24 fact that it is Canadian doesn't mean anything to it. 25 I would like to offer two other 26 things about using these volatility assessments, which 27 I think are actually very critical. 28 First off, of course, is that the 631 ADAMSON/CONWAY, presentation 1 systems are different, the physics are different, the 2 plants and the margins are different, the volatility in 3 the underlying fuel prices is different. 4 Secondly, for the period that they 5 were looking at the prices on, the market structure in 6 Alberta is extremely concentrated. I believe John Todd 7 yesterday referred to a study done by London Economics, 8 my old firm, for the Alberta Department of Energy on 9 market power issues. 10 I actually authored that study and 11 advised the Alberta government on these issues. To me, 12 it was a pretty open and shut case. This industry is 13 so concentrated that the potential abuse of market 14 power is extremely high. 15 Actually, the structure we are 16 actually starting with in Ontario is actually worse 17 still, and where market structure problems exist, no 18 amount of patching up of rules can correct it. We can 19 stick band-aids all over the patient, but he has 20 probably still got a bad heart. 21 Secondly -- and this is a very 22 important point, and I absolutely urge you, before you 23 kind of take extrapolations of these numbers into 24 thinking -- to consider this point. The prices in 25 these markets are very dependent on the incentives 26 placed on generators, particularly if those incentives 27 are on generators who have substantial potential market 28 power. 632 ADAMSON/CONWAY, presentation 1 We all know the stories of the 2 England and Wales duopoly, National Power and Power 3 Gen, and so forth. We all know that to a very 4 significant degree the prices in those markets are 5 traditionally pretty much what NP&PG thought they 6 should be. 7 Before you look at historical Alberta 8 prices and the patterns of those prices in 9 understanding what might happen in Ontario, I suggest 10 you think very hard about what the incentives were on 11 the generators historically before -- well, even now, 12 before the new legislation is enacted in Alberta. 13 I would sort of point to one or two 14 comments. 15 Over 90 per cent of the energy in 16 Alberta was traded under form of legislated hedges. 17 These were betting contracts basically between the 18 generation and distribution components of the same 19 vertically integrated utilities. Those provided an 20 awful lot of revenue stability to the generators. 21 The way the legislated hedges are 22 structured is effectively a form of contract for 23 difference. I don't want to get too much into the 24 details of incentives and modelling or something like 25 this, but I will be happy to explain it to anyone 26 later. 27 Most of the time these actually 28 provide no incentives for generators to push up prices. 633 ADAMSON/CONWAY, presentation 1 If you are covered by a significant amount of 2 legislative hedge, actually the strongest incentive is 3 to basically bid your marginal cost. 4 Alberta prices are historically one 5 of the fewer markets in which you could take a marginal 6 cost-based dispatch model and come very close to market 7 prices. Most markets don't have that, because in most 8 markets people are trying to recover some fixed costs, 9 particularly in peak periods. After all, they have to 10 pay their property taxes, pay their staff, pay their 11 bank, whoever. 12 In Alberta, all that was actually 13 done through these hedge contracts. It was really not 14 done through the market at all. The market, as it 15 exists historically in Alberta, is almost a sideshow. 16 The real action, the real revenues are all in the 17 legislated hedges, which were basically dictated from 18 the start of the process and covered the mass majority 19 of the energy. 20 So we have a mechanism that said: 21 Bid low; stay low. No incentive for you to push it up. 22 You will have to give it back in every hour -- and it 23 is calculated hourly. And that's a very different 24 mechanism than the MPMA approach in terms of the 25 incentive it creates, whether you do this hourly or 26 whether you do this annual rebate process. 27 Causing a rebate above a fixed price 28 initially is rather different than implying a very high 634 ADAMSON/CONWAY, presentation 1 degree of CFD cover on a generator. 2 If any of you have this document 3 here, I think it is on page 14 of this document 4 entitled "The Effect of Volatile Electricity Prices on 5 the Residential Customer's Bill", I think there is a 6 histogram -- I can never remember all the statistical 7 words -- about the distribution of hourly prices. 8 The extraordinary thing to me, of 9 course, is that it is not that these prices are very 10 volatile. These prices aren't volatile at all. They 11 are extremely heavily concentrated in a couple of 12 areas. 13 The average annual price it lists is 14 actually probably below the average cost of any of the 15 generators. They were covering other costs from the 16 legislated hedges. These are not prices in the same 17 way in which we are thinking of market prices in the 18 Ontario market. 19 If generators would have been 20 receiving these prices over time, they would have been 21 bankrupt by then. Every generator, I believe, in 22 Alberta probably would have exited the market had they 23 received these prices without the legislative hedges. 24 To suggest that this is the pricing 25 pattern consistent with generators recovering their 26 average costs in the Ontario market is to me to have a 27 very profound misunderstanding of the nature of the 28 Alberta market historically. 635 ADAMSON/CONWAY, presentation 1 It's not that one can learn lessons 2 from these markets, but be very, very careful at making 3 extrapolations across them because there are these kind 4 of regulatory differences or market structure 5 differences which can have very, very powerful effects. 6 So in terms of thinking about the prices, don't just 7 think about what the fuel prices are going to be and 8 whether some of the nukes are going to be up or down, 9 think very, very carefully in my estimation of what the 10 incentives are for participants. Then it really shakes 11 the pavement. 12 Finally, in one final example -- this 13 is another area of concern for me, frankly, when I got 14 involved in this, thinking about the MPMA approach, 15 which is another sort of historical example -- I 16 mentioned before that effectively they created a near 17 duopoly of national power in Power Gen in England and 18 Wales in 1990. Finally, the regulators saw they had to 19 do something, a credit-to-market structural solution, 20 and said, "We will have an effect of a price cap, an 21 average price that we will jump up and down about if 22 the generators make the price go above this level". 23 The outcome of that is actually to 24 cause an increase in market volatility, really for a 25 couple of reasons. If you couldn't raise your overall 26 spot price any more, you could try to raise the net you 27 got out of the contract market by forcing people, 28 making it more and more incentivized for someone to buy 636 ADAMSON/CONWAY, presentation 1 a contract with you. I could simply make the prices 2 jump around because it helps scare off entrants an 3 awful lot. 4 Really, in posing this thing that 5 they felt was a market price cap, which did cap the 6 market price as suggested, it actually has a series of 7 unintended impacts by the regulator, in my opinion, in 8 the contract market and in terms of volatility. 9 It's quite likely, although it's very 10 difficult to prove, that it may have created some 11 rather peculiar incentives on the ability to manipulate 12 the shape of prices, in fact, in order to push up peak 13 and market prices, and off-peak prices down, simply 14 because it made it much harder for a base lead new 15 entrant combined cycle plant to enter the market. 16 Third, in my opinion, the initial 17 risk allocation in this has also been poor. It has 18 often been suggested that if people don't like it they 19 can move to a retailer that will offer them a fixed 20 rate. 21 Again, coming back to this 22 transaction cost issue, I think this is kind of a nice 23 way to think about it. I think it was like the 24 activation in the energy and chemistry, that people 25 have to get over this hump a bit in order to finally 26 kind of move to a greater risk allocation, and that it 27 is the smaller consumers who are going to face the vast 28 majority of those transaction costs. 637 ADAMSON/CONWAY, presentation 1 I don't know of a way to assess those 2 on a province-wide basis. It would be interesting to 3 sort of work out how long you might think it would take 4 the average person to find out about this and multiply 5 it up, but I would expect that you would get a very 6 large number. 7 I think that practical experience in 8 other systems is kind of really more than a -- 9 recommends this conclusion. I can think of almost no 10 system where smaller customers have switched very much, 11 to any significant degree, even in the context of 12 systems like in parts of Pennsylvania where there has 13 been almost bribery to make them do it, as Fiona 14 suggests, by the setting of a shopping credit price, at 15 a price which is probably substantially higher than the 16 market price. 17 So there is a real cost saving set by 18 effectively regulatory declaration at the output of 19 this hearing that says, "You can cut your rate by 20 switching." 21 The last numbers I saw evidently 22 suggested about 25 to 30 per cent of people who 23 switched, even though I think there was a very 24 substantial amount of money to be saved for each 25 customer for switching. If that's not there, people 26 aren't going to switch. Inertia is pretty high. 27 What does that leave us with? Well, 28 it probably leaves us back up here. It says "Offering 638 ADAMSON/CONWAY, presentation 1 the option to switch to a competitive retailer." It's 2 a cap on what people might -- a welfare lots of people 3 might have, but it's really not secure. 4 Thinking a little bit about some of 5 the other approaches to this problem, and I don't want 6 to run too much longer over my time, there is this kind 7 of, "Well, we will set a rate, we will just set a fixed 8 rate, have a regulatory proceeding for it", and that's 9 pretty much the shopping credit model. I think it has 10 some rather substantial problems with that. 11 It does require very substantial 12 oversight. Pennsylvania has the benefit of a 13 relatively small number of very large utilities. In 14 doing so, those cases were still very contentious and 15 protracted in terms of setting those shopping credit 16 rates. 17 Given the number of likely standard 18 service supply providers, to me that seems a completely 19 impractical solution and doesn't take in any advantage 20 of the kind of market stability to firm information 21 about what is sufficient. It really creates very few 22 incentives for them to purchase efficiently on behalf 23 of customers. You really are dependent on the 24 regulator to step in and knock people on the head if 25 they are doing something wrong. It probably would, if 26 you want to set a fixed rate in advance, force the OEB 27 or some other figure of authority to estimate spot 28 market prices which seems like it's an issue of great 639 ADAMSON/CONWAY, presentation 1 concern in this proceeding. That to me fails any form 2 of regulatory burden. 3 The second option which I sort of 4 considered was the implementation of kind of an auction 5 process, a tender process, whatever you might call it. 6 I guess you might describe it as being relatively 7 similar to this model described by John Todd yesterday 8 afternoon, so it's quite good. 9 It's kind of close, I guess, in the 10 U.S. terminology to what I call "standard offer model", 11 where there is a bid supplied, a standard offer of 12 service. 13 That certainly has some of the 14 benefits of not requiring nearly the same level of 15 behavioral regulation so it does require you to 16 administer an RFP for essentially an awful lot of 17 standard service providers. 18 Importantly to me, and I thought 19 about this model in putting mine together, it's a very 20 passive model, "I ran my option, I ran my RFP, these 21 are the bids I got, I show them to you", it's over. 22 There is no incentive created on me as a standard 23 service provider to go out and try to do anything to 24 get a better deal for customers to try to sign up 25 anything to actively participate in the market. All I 26 have to do is show that I have met my statutory duty to 27 run this option. 28 I have some experience with some of 640 ADAMSON/CONWAY, presentation 1 the U.S. options for standard offer service, and they 2 haven't tended to be particularly successful. There is 3 an awful lot of uncertainty about what the kind of 4 implications are, especially for the more longer term 5 ones. 6 For example, in Massachusetts, the 7 state where I actually live, they had the provision 8 that whoever bought a certain set of power plants got 9 this whether they wanted it or not, as no one else did. 10 After a very large option design process on which the 11 Massachusetts Department of Telecommunications and 12 Energy spent quite a lot of money, they had not a 13 single bidder, and so the obligation effectively went 14 to the new generation owner. 15 What can we try to do to get around 16 this requirement to go and oversee an awful lot of 17 options or oversee the procurement process for an awful 18 lot of utilities? 19 In my thinking about this, I thought 20 "Well, I think perhaps a comparative competition may 21 offer a way for it". Just in kind of explaining this, 22 I will just try to give you a kind of a very simple, 23 stylized example. 24 Say, for example, I run a company 25 that buys many plane tickets between two cities, which 26 I certainly have -- I don't know, let's say Boston and 27 Toronto -- there is this wide variety of fares 28 available. I mean, there is the hundred dollar weekend 641 ADAMSON/CONWAY, presentation 1 fare all the way up to the, you know, $1,200 2 welcome-to-the-airport fare. It's pretty burdensome 3 for me to ensure that my employees are always buying 4 these tickets at the lowest prices. If I say, you 5 know, "Gosh, you seem to have bought a lot of expensive 6 $1,200 tickets", and they are saying, "Well, those were 7 the only ones available", what I don't know is did they 8 really buy those because they were the only ones 9 available or were those the ones with the triple miles 10 that week or something. 11 It's a classic regulatory problem of 12 information. I'm sitting here and I really don't have 13 much way of knowing what all these people are saying is 14 true or not. 15 One thing I might think about is 16 maybe if I had some kind of comparative competition 17 between my employees to ensure that everybody has an 18 incentive to get a good fare -- even though there is an 19 agency problem because I'm doing the paying and they 20 are doing the buying and they are the ones with the 21 frequent flyer miles -- so I might think of a little 22 system like this where I say, "Everybody has to report 23 the cost of the tickets they have bought to me and I am 24 going to pay everyone the average cost across the whole 25 company-wide set of employees", I am going to pay them 26 the average cost of the ticket, and, "If you do better 27 than that, fine, as Mary has done here, you get to keep 28 the difference. If you do worse than that, then you 642 ADAMSON/CONWAY, presentation 1 lose the difference." 2 If they really all had the same 3 opportunities to buy, that has a couple of features. 4 Clearly, I, as the company, am doing better on Bob and 5 worse on Mary than I could by paying them their average 6 cost, but what I am actually giving them is a great 7 incentive to compete with each other, to push down the 8 average cost per ticket, and I might expect that that 9 average cost might fall rather sharply because everyone 10 is all of a sudden not incentivized to buy the most 11 expensive airplane fare on Air Canada between Boston 12 and Toronto. 13 Even though I give up a little bit on 14 something and make a little on the other, what I may 15 expect is a very strong pressure on this yellow dotted 16 line to fall as people try to beat each other out. 17 It seems to me -- and comparative 18 regulations, again, they are not something I have 19 suddenly invented. There is vast economic literature 20 on this if you want to check -- it seems to me that 21 this might be the base of the mechanism to try and get 22 the incentives right, and when the incentives are 23 right, then the regulation is much, much easier. 24 So how might this be implemented in 25 the form of a standard service arrangement? 26 These systems, by the way, because I 27 probably have to switch terminology in here, are often 28 called yardstick competition, where effectively the 643 ADAMSON/CONWAY, presentation 1 "yardstick" is, in my previous case, the average cost 2 of the ticket. 3 One might think of: Well, we start 4 people off basically on the basis of their purchase 5 costs, which in most places are the average, they are 6 the arbitrary drawings of the black band, and we stack 7 everyone up. My yardstick in this case might be the 8 average demand weighted price in dollars per megawatt 9 hour or my set of standard supply customers. 10 We stack them up highest to lowest 11 and calculate the average -- man, it's all pretty 12 easy -- and say: All right. Now the next thing we 13 need is the creation of some incentives on this 14 mechanism. 15 But we have to allow for the fact 16 that there is some imprecision in information. We will 17 say -- let's deal within 5 per cent of the average. 18 These are example numbers. These are not to be taken 19 home and written down. Your band, the regulatory 20 mechanism says, you know, you get nothing extra on 21 that. 22 If you manage to beat it by very 23 much, you get a sharing of the difference between that 24 and the average and if you manage to do significantly 25 worse, like the SSC provider has on the red band on the 26 very left hand side, then you actually are penalized 27 for that. 28 Again, what does that do? It 644 ADAMSON/CONWAY, presentation 1 provides a very strong incentive for people to try to 2 push down this average and that, I believe, is 3 beneficial to consumers. 4 Speaking a little bit more about the 5 implementation of this, and I said I didn't want to 6 turn this into too long a spiel, how might we think 7 about a standard supply service mechanism driven around 8 the principles of comparative competition? 9 First off, we are offering a fixed 10 price as one of our objectives -- we think that is a 11 much better risk allocation initially -- so we are 12 going to have a substantial contractual portfolio for 13 the standard supply list, so providers or groups of 14 providers will have to contract for the majority, in 15 one form or another, of their standard supply loads; 16 plus from that we calculate a very simple dollars per 17 megawatt yardstick measure, which I suggest might be 18 demand weighted average prices in dollars per megawatt 19 hour, and those then go into creating the kind of 20 stacked up costs that I showed you in the previous 21 slide and the retail tariff could actually be set, 22 100 times normal rate-making principles from the 23 contract costs, as said. 24 Now, there are a couple of critical 25 features here which I want to sort of outline which I 26 think are critical and which shouldn't be completely 27 ignored. 28 One of the comments has been that 645 ADAMSON/CONWAY, presentation 1 there is all this quantity risk, because people 2 basically can leave and come back, which is definitely 3 true. However, I would sort of like to remind people 4 that, well, we are actually not unused to markets with 5 substantial quantity risk -- not just in electricity 6 even, I mean, retailers deal with it dealing with 7 selling -- I don't know -- Stephen King novels all the 8 time. 9 How that is normally dealt with is in 10 a contractual mechanism so that some producer assumes a 11 substantial amount of that quantity risk, what might be 12 called full requirements contracts in the language of 13 municipal utilities, and in the United States, for 14 example, net-back contracts, other terminology of that 15 nature. 16 The same thing is that, because I 17 have set it all up, in signing up my contract portfolio 18 I would obviously be very cognizant of the fact that if 19 my quantity of customers actually drops, then I 20 probably will be selling contract coverage to someone 21 else. 22 The great thing about this is that 23 the electricity demand in the short run is very, very 24 inelastic, so if I lose my load from my standard supply 25 it's going somewhere else. It didn't just, like, 26 disappear and move to Manitoba, it is somewhere in the 27 system. So there is probably a demand for contract for 28 somewhere in the system. 646 ADAMSON/CONWAY, presentation 1 Selling quantity risk hedging 2 contracts, we would expect, in a system like this, is 3 not to be extremely costly. Those are, in fact, common 4 in some of the markets we know, including England and 5 Wales, where people, even on the competitive side, face 6 the same types of quantity risks. After all, I have to 7 go out and offer people a bunch of prices, and there is 8 inevitably some time delay before I decide how many of 9 them sign up and how many of them quit, and so on and 10 so forth. 11 I think it has kind of become clear 12 that there is a trade-off between the ability of people 13 to flip back and forth, on and off standard supply 14 service, and the cost of providing that. I'm not 15 saying that it is necessarily a zero effect. 16 It is worth recognizing from the 17 policy side that you are effectively trying to offer 18 people a costless option, and one of the things of 19 Finance 101 is that the options always have some 20 positive value. So if there is a cost in terms of 21 dealing with that quantity risk, what I would say is: 22 Well, the market has probably just crystallized it for 23 you and told you how much it is going to cost, and it 24 is the difference between quantity risk hedging 25 contracts and, say, a pure fixed-term/fixed-quantity 26 contract. 27 But remember, the amount of 28 electricity sold in the province is pretty much going 647 ADAMSON/CONWAY, presentation 1 to depend on GDP growth, the weather. If it moves 2 around between people, people sell contracts back and 3 forth all the time, and one of our sort of objectives 4 is the creation of liquidity in these intermediate 5 markets. 6 So we maybe shouldn't be too 7 concerned that there is going to be that much quantity 8 risk, because if I lose it, well, maybe I would sell my 9 contract off to Barry or someone else who has just 10 picked it up for his retail load. 11 So why do I think this form of 12 comparative competition may offer some benefit over the 13 kind of current system? 14 First off, one of my clear and first 15 principles was that the risk allocation needs to be 16 efficient, and a risk allocation where the final small 17 customer bears all the risk to me seems highly 18 inefficient by definition. 19 What it does is it allows a mechanism 20 without having large amounts of transaction costs and 21 information costs. So a lot of that price risk is 22 really allocated back up to where it belongs, up to 23 level of generators, maybe up to the level of fuel 24 suppliers. It certainly doesn't belong with small 25 customers, because there is going to be a significant 26 volume of contracts being traded to meet this. 27 I have heard estimates that 70 per 28 cent of the final market may be served through standard 648 ADAMSON/CONWAY, presentation 1 service supply initially. It stimulates the demand for 2 hedging contracts, fixed price contracts. If you leave 3 that 70 per cent out of the market, you are almost 4 assuredly damaging the liquidity and viability of these 5 contract markets which, in my opinion, are so critical. 6 Again, remember my comment that 70 to 7 80 per cent of the power in one of these markets 8 typically is traded under a contract. If we say that 9 only industrial customers, intermediate meter customers 10 are likely to be trading in this market initially, you 11 know, why only 25 per cent? If the market seems 12 naturally to want to evolve to a much higher level of 13 trading, we certainly must be worried, I think, 14 economically to thinking there may be some economic 15 distortion being put on here if we think that only 16 industrial customers are going to participate in this 17 market. 18 Finally, it even helps them because 19 even industrial customers of course do have some risk 20 aversion, so the fact that there is more liquidity in 21 these markets certainly doesn't hurt them any anyway. 22 Finally, I think it will make the 23 task of the entrant much, much simpler. It allows him 24 or her to have some benchmark going forward about what 25 revenue streams are going to be, and that really can't 26 do anything but help lower uncertainty over revenue 27 streams, and that has an almost direct linear impact on 28 the cost of capital, that, in turn, as new entrants 649 ADAMSON/CONWAY, presentation 1 come in or as you start to finally decontrol generation 2 in the province and sell it off, can't help but lower 3 wholesale prices and/or maximize the value you will get 4 for existing generation over time. 5 But I did promise to try to make some 6 sort of conclusions, and some of these I have already 7 probably repeated enough. 8 I do believe the spot price 9 pass-through mechanism is inefficient. I am very 10 hard-pressed to think of another industry in normal 11 market circumstances where one uses it without knowing 12 the price before one has bought it. The ability to 13 respond to a price is clearly dependent upon that price 14 being known at the time of consumption. 15 It is likely to impair the 16 development of liquid intermediate markets which are 17 critical for the robustness of the wholesale market. 18 They are the majority of the wholesale market. Without 19 these markets new entry is going to be hindered. We 20 are not clear where the supply situation is going to be 21 in Ontario. I guess it rather depends on what happens. 22 With the nuclear plant, if it turns 23 out tight, you don't want these contract markets to be 24 liquid and to make it that much slower for any new 25 generation to come into the province. 26 The OEB is rightfully concerned about 27 the cost and burden of implementing a fixed price 28 mechanism. That's just clear, both in terms of the 650 ADAMSON/CONWAY, presentation 1 direct costs of doing it and the potential elapsed time 2 of implementing such a mechanism. 3 However, I think there are the 4 competitive forces that I have described, the 5 requirement that people are even not directly competing 6 but indirectly competing with each other, can be 7 harnessed to give standard supply providers incentives 8 to purchase electricity at those lower costs, and I 9 think that tends to make the regulatory profit much, 10 much simpler where the incentives are going the same 11 way between the regulator and the regulated. 12 If there are any kind of net costs of 13 implementing such a system, which I haven't tried to 14 specify in my comments today, they are likely to be 15 greatly outweighed by the benefits of lower risk to 16 smaller consumers than development of an official 17 wholesale contract market and, finally, wholesale -- a 18 power market in its true sense in Ontario. 19 Thank you. 20 MR. POWER: Perhaps we can have 21 Mr. Conway next and then I will have a couple of 22 questions and we can open it up. 23 Would you like the lights on, 24 Mr. Conway. 25 PRESENTATION 26 MR. CONWAY: Thank you, Rob. 27 My comments are short. I will not 28 try to match Seabron in any way whatsoever, including 651 ADAMSON/CONWAY, presentation 1 standing up. 2 My comments are directed at the 3 developing capability of municipal utilities to manage 4 risk in the new market. This story necessarily starts 5 with a history of ENERconnect. 6 By the way, some of my comments were 7 pre-empted by earlier conversation this morning, but 8 this is what I wanted to tell people about ENERconnect. 9 The history of ENERconnect is 10 necessarily brief because it was created to fit into 11 the new paradigm that the government is trying to 12 create for electricity in Ontario. It starts in 1996, 13 which you will recall was the year of the MacDonald 14 Commission. The report of that commission essentially, 15 among many things, said that municipal utilities were 16 going to have to be able to manage market risk in the 17 new world, that they would have to be able to cope with 18 the buying and selling of futures and forwards. 19 So the MEA immediately started to 20 investigate how that should be done and, in 1997, 21 roughly at the time in which the government issued its 22 White Paper, which essentially endorsed that need, 23 ENERconnect was created as a separate organization. 24 There were two basic principles to 25 the ENERconnect proposal. The first principle was that 26 ENERconnect was founded to provide its partners with 27 power procurement and related services at cost. 28 The second principle was that 652 ADAMSON/CONWAY, presentation 1 although it was founded on the concept of the power of 2 aggregation, if I can put it that way, the members were 3 afraid to do that function themselves or to go to other 4 third parties to supply energy procurement, so we have 5 no monopoly on their business. 6 This must have been a good 7 proposition, because during 1998 over 230 municipal 8 utilities joined ENERconnect. They invested in excess 9 of $3 million as seed money to start up the business, 10 and they elected a board of governors to govern it. 11 The other important thing we did in 12 1998 was go about trying to find a service provider to 13 help us with power procurement, and we issued an RFP to 14 do that. Some long and arduous number of months later 15 we signed a contract with Enron, and just last month we 16 launched a new product line of services that were aimed 17 exactly at the kinds of services that municipal 18 utilities will require to meet their obligations under 19 the Standard Supply Code as it currently exists. 20 Now, everyone knows who Enron is. 21 They are big. But the most important point about them 22 is that they are very good at what they do. I believe 23 this gives the municipal utilities the instant 24 capability to manage risks in the marketplace through 25 ENERconnect. 26 The next thing I thought I would deal 27 with is just a little explanation of what ENERconnect 28 is. 653 ADAMSON/CONWAY, presentation 1 It is a limited partnership now of 2 about 222 municipal utilities. We lost a few through 3 amalgamation and sale. It has a board of nine members. 4 There are only seven full-time staff. We provide most 5 of our services by using strategic partners, so 6 essentially we are a virtual company. 7 ENERconnect is not a unique 8 proposition. There are quite a few agencies springing 9 up in the U.S. like us. I can name a few. There is 10 the Northern California Power Agency, the Energy 11 Authority of Florida, the Municipal Power Agencies of 12 Indiana and Oklahoma, and the American Municipal Power 13 of Ohio, to name a few. 14 Because our partners have no 15 obligation to buy from us, I think essentially what is 16 happening with ENERconnect is that they are regarding 17 us as an insurance policy at this point. They have not 18 signed up to do business with us as yet because, as you 19 all know, the market is not completely defined yet. So 20 ENERconnect is basically their fall-back position. 21 Dealing with some of the risks that 22 municipal utilities face. 23 First of all, they are under serious 24 time pressures to do a lot of things, so I suppose that 25 is the risk of being spread too thin. They have to, by 26 November of next year, incorporate under the Ontario 27 Business Corporations Act. They have to deal with the 28 question of whether they should be sold or retained. 654 ADAMSON/CONWAY, presentation 1 They have to decide whether they want a retail 2 affiliate. They have to obtain licences to do all 3 those things. They have to prepare for 4 performance-based regulation. They also have to get up 5 and running for the new market that presumably is 6 coming at the end of next year. 7 That leads me to the standard supply 8 obligations then, the sort of operational services they 9 will be required to provide. There are really two 10 components to it. 11 The first component has to do with 12 retail settlements. As we all know, there is a task 13 force that was meeting yesterday in the next room 14 trying to work out the details of that, but that will 15 impose certain work and software requirements on all 16 utilities. 17 They are also required by the IMO to 18 deliver on a daily basis data for dispatch, and that 19 will require them to mount a forecasting capability. 20 Of course, they will also have to figure out whether 21 the bill they received from the IMO is correct or not, 22 and that will be quite a daunting task considering the 23 amount of data they will have to deal with in the new 24 market. 25 There are some 20 or so utilities 26 that are dealing with the retail settlement task force. 27 There are three or four large utilities there working 28 with the IMO. It is unclear, actually, what the other 655 ADAMSON/CONWAY, presentation 1 utilities are doing to prepare, but there is quite a 2 lot of work to be done. 3 In order to provide all of these 4 functions they will have to invest in staff and they 5 will have to invest in software. 6 If they are sold, if they are 7 amalgamated, or if the market rules change -- and if 8 you look at any market that has been deregulated 9 anywhere in the world, the rules have changed fairly 10 shortly after deregulation -- all of these investments 11 could be either fully or partially stranded. 12 So we have dealt with stranded 13 investments, market rule changes. 14 The market risks that are often 15 talked about, and in fact have been talked about for 16 the last few days, that they also have to deal with are 17 price and volume uncertainty; the problem of supplier 18 default, in which case credit assessment becomes a very 19 important task for them. 20 If they decide to import their power 21 needs from the U.S., they have to deal with 22 transmission access and, potentially, currency exposure 23 as well. 24 I guess the point of my message is 25 that all of these risks are manageable. 26 First of all, ENERconnect is a 27 service bureau proposition, so we are making 28 investments. The municipal utilities do not have to 656 ADAMSON/CONWAY, presentation 1 make investments on behalf of all of these functions 2 that they will have to develop. They do not have to 3 hire new staff if they take the ENERconnect route. 4 There are also a lot of other third 5 party suppliers available. As most of you probably 6 know, there are at least 300 power marketers registered 7 in the United States that are obviously capable of 8 helping. In fact, if the municipal utility wants to 9 outboard all of its risk it can do so by outsourcing 10 through a wholesaler this requirement contract with any 11 of those power marketers. 12 The Board has heard from at least two 13 groups of municipal utilities -- actually three: the 14 Upper Canada Energy Alliance, the G6 Utilities and the 15 Northern Energy Alliance. There are other groups of 16 utilities forming alliances as we speak. There is the 17 group of Niagara utilities, there is a triangle group 18 around the Guelph area and there is something going on 19 in eastern Ontario. All of these groups will have the 20 skill to develop their own buying operation in time. 21 I might add, too, that the G6 22 utilities, in particular, recently announced that they 23 were soliciting interest in purchasing up to 1,000 24 megawatts of fixed priced power, and they received 25 quite a broad variety of responses -- 22 in all -- from 26 companies all around the North American continent. So 27 it is quite obvious that Ontario is an important market 28 in the North American context and it will not be 657 ADAMSON/CONWAY, presentation 1 overlooked. 2 That concludes my comments. 3 MR. POWER: Thank you very much, 4 Mr. Conway. I just have three questions for 5 Mr. Adamson. 6 Mr. Adamson, Mr. Dewees has made the 7 assertion that the percentage in the market accounted 8 for by the large industrial customers is sufficient to 9 sustain the development of a forward market. Would you 10 have any response to that assertion by Mr. Dewees? 11 MR. ADAMSON: As I mentioned during 12 my presentation, I think two things are relevant. 13 First off, in markets unconstrained by mechanisms such 14 as the Standard Supply Draft Code we have been 15 discussing here, the vast majority of the actual 16 physical megawatt hours traded actually seemed to go 17 into contracts. That is a lot higher than 25 per cent. 18 It is rather hard to make an 19 assessment, or at least I don't know of an easy way. I 20 don't know of a way to do so that says, "Here is the 21 percentage you require" in order to have the 22 intermediate markets develop the required level of 23 liquidity. I can't help but believe that, if 24 experience tends to show that it is a much higher 25 percentage of that, that you are not essentially 26 damaging the potential by artificially constraining it. 27 The other thing I would like to say 28 is that it is not just the pure volume of generation in 658 ADAMSON/CONWAY, presentation 1 megawatt hours. Liquidity in the market is relatively 2 dependent on the number of players in the market as 3 well. So although those consumers may make up a 4 relatively large amount in megawatt hour terms, there 5 are probably relatively small numbers of players from 6 the industrial side that would be participating. 7 Those players probably are -- and 8 typically they are quite energy intensive -- probably 9 are the best ones to actually face spot prices as well. 10 They are usually the ones that we see in other 11 markets -- Alberta, England and Wales and 12 whatnot -- who actually can respond to these price 13 signals because they are the ones who usually can sit 14 there with somebody on a switch and say, "Gosh, if the 15 price hits a spike, we turn off this pump". I believe 16 that there are quite a few large industrial consumers 17 in Alberta who literally did that. They had a little 18 program that picked up the prices off Alberta's Web 19 site and if it went above a certain number a red light 20 flashed and some guy went over and turned off some form 21 of industrial machinery. 22 So they are maybe the ones who are 23 best able to deal with the actual price risk, the 24 physical management of it, by changing their 25 consumption. 26 Of that generation, of that 25 per 27 cent of total market volume, is most of that going to 28 be in the price hedging market? No, probably not 659 ADAMSON/CONWAY, presentation 1 because there is probably a fair number of particularly 2 large industrial consumers who are actually able to 3 deal with the price signals that an hourly market 4 produces. 5 MR. POWER: Thank you. 6 Mr. Todd yesterday made a comment 7 that there was a trade-off between the mobility of 8 customers and the ability to pursue a stable or fixed 9 rate. Do you have any comments on that assertion? 10 MR. ADAMSON: I think I did mention 11 that you can't offer people a costless option, and the 12 option to switch without any form of constraint always 13 costs someone somewhere. There is some form of 14 quantity risk. 15 I think at the kind of policy 16 level -- and it clearly is a policy decision -- one of 17 the things to think about in designing these mechanisms 18 is, do we want to select that option? It is like me 19 picking the options on my car. I like some, but, gosh, 20 some of them cost more money than I am willing to pay. 21 That is clearly a policy decision about whether you 22 want to choose to exercise that. 23 To the extent that there is a cost, 24 as I said before, I think the overall quantity risk in 25 the market can't be that high, because the overall 26 short-term elasticity of demand for electricity is very 27 low. So if I don't need my contract, someone else 28 will. 660 ADAMSON/CONWAY, presentation 1 However, it is probably clear that 2 there is some cost, and that just needs to be stated 3 upfront, call a spade a spade and say whether you are 4 willing to live with the cost or not. 5 MR. POWER: Thank you. My last 6 question is, you were here this morning for Mr. Mark's 7 and Mr. Jennings' testimony. They outlined a type of 8 light-handed regulation or review of rates charged for 9 what we are calling the standard supply. Do you have 10 any comments on that? 11 MR. ADAMSON: I think it is probably 12 almost a job requirement for anyone who calls 13 themselves an economist to call out for light-handed 14 regulation. I suspect you would lose your union card 15 if you didn't. 16 --- Laughter 17 MR. ADAMSON: It is a bit like saying 18 "I am member of the Communist Party, but a secret 19 admirer of Bill Gates." It doesn't happen. 20 Everyone wants to believe in 21 light-handed regulation, and many regulatory regimes 22 are truly light-handed. I think the question becomes: 23 How do you actually implement it? Who is actually 24 going to do what? Is there going to be a sufficient 25 level of oversight? 26 I believe that it is not impossible 27 for regulators to oversee contract purchases on behalf 28 of franchise or standard supply customers. That is not 661 ADAMSON/CONWAY, presentation 1 dissimilar to the mechanism that the regulator in the 2 U.K. offers and has used for franchise customers of the 3 RECs over time, where they effectively buy contracts 4 and are really basically able to pass the costs 5 through, subject to some potential regulatory 6 intervention, nor does offers have a huge staff of 7 people involved in doing this. Offers just doesn't 8 have a huge staff and it is not seen to require that 9 much effort, given the scale of the market. 10 When I first moved over to London in 11 the very early nineties, one of my very first projects 12 was in fact what was called the Economic Purchasing 13 Review, which was done by the firm Northern Economics, 14 which I worked for at that time, basically helping 15 offers to decide whether the contracts had been 16 purchased in an economic manner, i.e. at the lowest 17 cost, risk adjusted. While it was not a trivial 18 exercise, it wasn't exactly the Manhattan project 19 either. The outcome seemed to be fairly reasonable and 20 offers went on its way. So it is not impossible to do 21 it that way. 22 I am a proponent of creating 23 incentives where practical. I think if you get the 24 incentives right, which was the purpose of the 25 presentation I just gave, it makes the life of the 26 regulator much easier. If you have faith in the fact 27 that the incentives you have created are correct, I 28 think that makes a much more light-handed approach 662 ADAMSON/CONWAY, presentation 1 really possible. 2 MR. POWER: Thank you, Mr. Adamson. 3 Ms Lea, these gentlemen are here to 4 answer any questions. 5 MS LEA: Thank you very much. 6 Mr. Gibbons, I understand that you 7 very kindly switched places with Mr. Warren, due to a 8 time constraint of his. 9 Mr. Warren. 10 MR. WARREN: Thank you. 11 Mr. Adamson, first of all, just by 12 way of clarification on your submission, it isn't 13 stated in your submission by whom you were retained to 14 prepare it. Can you tell me who it is who retained 15 you? 16 MR. ADAMSON: My paper, as Rob Power 17 suggested, is included in the volume in conjunction 18 with Fiona's paper. We are sort of a double-axe on 19 this. I guess that I am the first movie. She is the 20 main feature. 21 If you flip over -- 22 MR. WARREN: I wouldn't say that you 23 were a "B" movie trailer, Mr. Adamson. 24 MR. ADAMSON: Well, you know. Maybe 25 sometimes the "B" side is a better thing. 26 --- Laughter 27 MR. ADAMSON: If you look on page 1 28 of the executive summary at the end of the paper, which 663 ADAMSON/CONWAY, presentation 1 is in this document -- 2 MR. WARREN: I have it, Mr. Adamson. 3 MR. ADAMSON: There is a list of the 4 stakeholders who supported that submission. I also 5 want to include in that, because they are not listed in 6 this group, Enron Capital & Trade Canada, which we also 7 interacted with. 8 MR. WARREN: I just want to make it 9 clear. Were you retained by Enron directly to prepare 10 a paper? Is that what I am to understand? 11 MR. ADAMSON: I believe that it is a 12 contractual mechanism, but it was on behalf of a more 13 substantial group of stakeholders. Barry can probably 14 tell you more about the contract than I can. 15 MR. CONWAY: There were five parties: 16 Toronto Hydro, Enron, ENERconnect, the MEA and the 17 Ontario Hydro Services Company. 18 MR. WARREN: I am sorry, Mr. Conway, 19 I can't write as fast as you can speak. It is Toronto 20 Hydro, the MEA, Enron -- 21 MR. CONWAY: ENERconnect and the 22 Ontario Hydro Services Company. 23 MR. WARREN: Perhaps you can answer 24 this question. Those five entities retained Ms Woolf 25 and Ms Woolf, in turn, retained Mr. Adamson? Is that 26 the way it worked, or did they retain Mr. Adamson 27 directly? 28 MR. CONWAY: Those five parties 664 ADAMSON/CONWAY, presentation 1 agreed, as a group, to retain Mr. Adamson. 2 MR. WARREN: When I look at the first 3 page of Ms Woolf's written submission and I see the 4 group of stakeholders, what is the relationship between 5 those stakeholders and the five people you have just 6 told me you retained, among others, Mr. Adamson? 7 MR. CONWAY: Some of them are the 8 same. 9 MR. WARREN: I take it that London 10 Hydro is not the same as any of those five. Did they 11 independently retain Mr. Adamson or Mr. Conway? Can 12 you help me out? 13 MR. CONWAY: Another group that is 14 listed in that paper retained Fiona Woolf. 15 MR. WARREN: Looking at page 1, the 16 folks who are listed there retained Ms Woolf to provide 17 a paper. There is a smaller group, consisting of 18 Toronto Hydro, the MEA, Enron, ENERconnect and the 19 Ontario Hydro Service Corporation, which retained 20 Mr. Adamson. Is that correct? 21 MR. CONWAY: That's correct. 22 MR. WARREN: Am I to take it from 23 that, Mr. Conway, that those members of the larger 24 group who didn't retain Mr. Adamson didn't feel it was 25 necessary or don't support his position? What am I to 26 conclude about that? 27 MR. CONWAY: I think we can conclude 28 that the history of retaining the two parties was a 665 ADAMSON/CONWAY, presentation 1 little disjointed and eventually came together into one 2 package. 3 MR. WARREN: But I am clear that 4 Mr. Adamson appears here today on behalf of five 5 entities and five entities alone. Is that right, 6 Mr. Conway? 7 Is that your understanding, 8 Mr. Adamson? 9 MR. POWER: If I could interject, I 10 think I said at the start that there is the group of 11 clients that we represent, that has been set out at the 12 start of this proceeding, which is putting these 13 gentlemen on the stand. So they are here on behalf of 14 the group, if that helps you in any meaningful fashion. 15 MR. WARREN: Well, sorting out the 16 players is hard, Mr. Power, but it is about the best I 17 am going to get, I guess, at this stage. 18 Mr. Adamson, I just want to start 19 with the final point, the final question that was asked 20 you by counsel for the group, Mr. Power, and that is 21 whether or not -- and this is my gloss on the question, 22 and you can tell me if I have misunderstood it -- he 23 asked you if you agree with the proposal that was 24 advanced by one of the people that retained you, namely 25 the MEA, and I took it that you didn't agree with it. 26 MR. POWER: I didn't ask whether he 27 agreed, I just asked Mr. Adamson to comment on one 28 aspect of the testimony that was heard earlier. 666 ADAMSON/CONWAY, presentation 1 MR. WARREN: Let me ask the question. 2 Do you agree with the proposal that has been advanced 3 by the MEA? 4 MR. ADAMSON: I believe I was 5 agreeing with the assertion that an approach of 6 light-handed regulation is most appropriate. So in 7 that very broad sense, I do support a fixed-price 8 standard supply service mechanism, I do support some 9 other features of what they spoke to today -- and I 10 can't say that I probably took in all of it -- and I do 11 support some form of light-handed regulatory approach. 12 I definitely agree with that. 13 I have tried, I believe, to go a 14 little further in describing the mechanics of an 15 incentive-based mechanism for the standard supply 16 service procedure. So I don't think they elucidated 17 anything as detailed as I have. I guess I have gone 18 beyond what I believe they said this morning. 19 MR. WARREN: Do you agree that what 20 they are proposing constitutes light-handed regulation? 21 They described it that way. I am going to ask you if 22 you agree that what they have proposed constitutes 23 light-handed regulation? 24 MR. ADAMSON: I personally think that 25 light-handed regulation, I would say, is more in 26 practice than in theory. There may be all sorts of 27 different schemes which might be applied in a 28 light-handed or a sort of heavy-handed way. I 667 ADAMSON/CONWAY, presentation 1 certainly believe Mr. Mark had the idea that he is 2 hoping for a regulatory scheme that would be applied in 3 a light-handed way. 4 I believe, using these types of 5 incentive approaches, it makes it much easier for the 6 OEB to act in a light-handed way. 7 MR. WARREN: So you think that your 8 proposal constitutes a lighter form of light-handed 9 regulation than what they are proposing. Is that a 10 fair summary? 11 MR. ADAMSON: I think in the 12 implementation of it and the practice of it, it would 13 turn out to be lighter-handed, if that is in fact an 14 adjective. 15 MR. WARREN: Can I ask you to turn 16 up, then, Mr. Adamson, page 3 of the prefiled material. 17 MR. CONWAY: Which section? 18 MR. POWER: Of Mr. Adamson's paper? 19 MR. WARREN: Yes. He didn't write 20 any others, did he? 21 It is Mr. Adamson's paper, your 22 prefiled material. 23 MR. ADAMSON: Okay. We are there. 24 MR. WARREN: Do I understand 25 correctly that what you are talking about on this page 26 or this section of your paper is the risk which the 27 standard service proposal imposes on consumers? 28 Is that fair? Have I got that? Is 668 ADAMSON/CONWAY, presentation 1 that what you are talking about here? 2 MR. ADAMSON: Can you give me a 3 specific line or -- 4 MR. WARREN: I want to take you to 5 the third full paragraph, the one that begins with the 6 words "Wholesale electricity prices". 7 Do you see that paragraph? 8 MR. ADAMSON: Yes. 9 MR. WARREN: In the last sentence you 10 say: 11 "This is hardly an economically 12 rational policy since the 13 introduction of competition is 14 designed to provide economic 15 benefits to customers, not 16 impose large and often 17 undiversifiable risks on them." 18 (As read) 19 Do I understand your paper to be 20 suggesting that the standard service proposal, the spot 21 price pass-through, imposes large and undiversifiable 22 risks on consumers in Ontario? 23 MR. ADAMSON: It is my opinion that, 24 yes, it proposes that the mechanism, as currently 25 proposed in the Code, imposes a substantial risk upon 26 them and that they will face a serious disbenefit from 27 that risk that they need not face. 28 MR. WARREN: Is the source of that 669 ADAMSON/CONWAY, presentation 1 risk price volatility? 2 MR. ADAMSON: Yes, fundamentally. 3 MR. WARREN: Can you tell me, sir, 4 what independent analysis you have made of the risk of 5 price volatility in Ontario, if any? 6 MR. ADAMSON: I have not made an 7 analysis of price risk volatility in Ontario. 8 MR. WARREN: What are you relying on 9 for your proposition that under the spot price 10 pass-through there will be a large risk of price 11 volatility in Ontario? 12 MR. ADAMSON: I had seen the analysis 13 that had been prepared in this paper, for example, 14 which is labelled "RET94", called "The Effective 15 Volatile Electricity Prices on the Residential 16 Customer's Bill". That provides some analysis. I have 17 not done a specific volatility analysis of my own. 18 I was also basing it on my experience 19 of what the volatility tends to be in these markets, 20 some of which are actually summarized in this paper, 21 for example. If you turn to page 19, there is a little 22 table about "Averages in Standard Deviations and 23 Coefficients of Variation". 24 I have done an analysis of volatility 25 in prices in some other markets and fundamentally 26 believe that while I have not studied the empirics of 27 Ontario in particular, the same laws of economics 28 apply. 670 ADAMSON/CONWAY, presentation 1 MR. WARREN: Can I take it from 2 that -- first of all, I take it that the principal 3 source of your conclusion is the PHB analysis. 4 MR. ADAMSON: I had not seen the 5 John Todd paper at that time, by the way, although that 6 is an additional kind of reference point for you, 7 called "The Assessment of Price Volatility in the 8 Competitive Ontario Electricity Market". 9 I would say the basis of my assertion 10 was on my experience in other competitive electricity 11 markets around the world -- 12 MR. WARREN: Have you read -- 13 MR. ADAMSON: -- more than the PHB 14 paper, about which I had some misgivings, to be honest. 15 MR. WARREN: Have you read Mr. Todd's 16 analysis? 17 MR. ADAMSON: I have now, but I had 18 not read it at the time when I wrote the words which 19 you just quoted to me. So I think it is unfair to say 20 that I based my assessment upon Mr. Todd's analysis. 21 MR. WARREN: Can you turn it up for 22 me, please. I ask you to turn to page 22. 23 I am going to take you to the third 24 full paragraph and I am going to read it to you. It 25 says: 26 "The full impact of the spot 27 market volatility would not be 28 observed by consumers paying for 671 ADAMSON/CONWAY, presentation 1 SSS under the purest spot market 2 pass-through, for two reasons: 3 first, the monthly pricing 4 mechanism will smooth volatility 5 of the ROE spot market; second, 6 charges for distribution and 7 customer care are likely to be 8 relatively stable, which will 9 reduce the volatility of the 10 total bills of customers." 11 (As read) 12 Do you have any reason to quarrel 13 with that conclusion of Mr. Todd? 14 MR. ADAMSON: I don't believe 15 Mr. Todd is here. 16 MR. WARREN: Do you have any reason 17 to quarrel with that conclusion of Mr. Todd? 18 MR. ADAMSON: Of Mr. Todd; excuse me. 19 First off, the pricing mechanism -- 20 it is probably true, in fact, that the distribution 21 rates aren't going to change. I certainly don't 22 disagree with that. Customer care costs are not a 23 defined term that I am familiar with. I assume this is 24 like billing costs, call centre costs, and stuff, and I 25 would agree that those probably are to be relatively 26 pretty constant. 27 However, I would note that even on a 28 monthly basis, it seems to me that the pure energy or 672 ADAMSON/CONWAY, presentation 1 commodity component of electricity prices could be 2 highly, highly volatile. 3 MR. WARREN: I assume I can conclude, 4 Mr. Adamson -- but I want to be clear on this so that I 5 understand the basis for your conclusions -- that you 6 have not done any independent analysis of the potential 7 impact of the spot price pass-through on the bills of 8 customers. 9 Is that fair? 10 MR. ADAMSON: That's absolutely true. 11 MR. WARREN: Staying on page 3 of 12 your paper, you talk about -- and this is in the 13 second-to-last paragraph, about two-thirds of the way 14 through it, in a sentence beginning with the words 15 "Experience in other markets". 16 You talk there in that sentence about 17 the real and significant transaction and information 18 costs. 19 Have you made a quantitative 20 analysis, Mr. Adamson, of what those transactional and 21 information costs are in Ontario? 22 MR. ADAMSON: I have not made an 23 analysis of what those costs may be in Ontario, no. 24 However, I do believe they exist. 25 MR. WARREN: I take it in reading 26 your paper -- and please correct me if I am wrong -- 27 that the transactional and information costs would be 28 the same whether you had a fixed-price regime or a spot 673 ADAMSON/CONWAY, presentation 1 price pass-through regime. Is that fair? 2 MR. ADAMSON: I am a bit unclear on 3 your question. 4 MR. WARREN: Let me rephrase it, 5 then. 6 Are the transactional and information 7 costs that you are referring to on page 3 of your paper 8 unique to a spot price pass-through regime or do they 9 obtain generally regardless of the standard service 10 regime that is in place? 11 MR. ADAMSON: Well, I think I 12 understand what you are saying there. 13 Remember, these costs are borne by 14 those who switched. I can effectively not incur those 15 costs by doing nothing and writing the cheque for my 16 electricity bill as it comes through the post. 17 It is when I change. It is when I 18 try to move over that hump in my little drawing is when 19 I would incur these costs. 20 I do think one relatively important 21 feature, though, is that we need to be realistic, from 22 the policy perspective, about the difficulties that the 23 average small consumer has in evaluating these offers, 24 these retail offers, from competitive retail suppliers 25 in the market. 26 So would the transactions costs be 27 more difficult, or the information costs, rather, be 28 more difficult for someone who is offered a price by 674 ADAMSON/CONWAY, presentation 1 Toronto Electricity Retailers Company, compared to a 2 spot price mechanism where the customer is not even 3 able to look on his bill and say, "Well, gosh, right 4 now I am paying X cents, and this guy is offering me 5 Y cents. Is Y even less than X?" 6 One lesson, I think, of the telecom 7 market, which I believe Mr. Todd alluded to yesterday, 8 is that there has been a very strong kind of 9 rationalization and simplification of the offers made 10 to consumers, because small consumers, like me with my 11 own telephone bill, tend to respond very much to "9 12 cents a minute to anywhere in the United States" type 13 messages rather than the comparisons to very hard to 14 assess floating spot prices. 15 I would think that the transaction 16 cost might be higher if you were transitioning from a 17 spot price mechanism than a fixed price mechanism. 18 However, I would note that the main 19 costs were incurred just from the fact that I am trying 20 to understand this enough to switch. 21 MR. WARREN: Okay. Thank you for 22 that clarification. 23 Let me see if I understand one aspect 24 of your concern about the spot price pass-through. It 25 is that there are hidden costs, and the hidden costs 26 are the costs of bearing the risk. Is that fair? 27 Undisclosed costs under the spot 28 price pass-through, and that is the cost of the risk. 675 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: There is inevitably, I 2 believe, in almost all markets, a trade-off between 3 costs and risk. People, in most products, in most 4 items in their ordinary life, are risk averse and don't 5 accept risks without some reason. Maybe that's not 6 true in lottery tickets, probably not, but people in 7 general don't take on price risks without some form of 8 compensation. 9 Is there a cost to doing so? I would 10 argue if I am risk averse that the definition of being 11 "risk averse" is that I prefer a less risky selection 12 to a risky selection at the same net cost. You can 13 describe it as a cost or you can describe it as a 14 disbenefit, if you will, a lower utility, but I accept 15 a variable return on my savings. I accept a lower 16 expected on variable return than I would for an 17 expected fixed return on my savings account. 18 MR. WARREN: Mr. Adamson, there 19 wasn't any magic in my question. I thought what you 20 were saying in your presentation to us, in the written 21 paper, was that one of the problems with the Board 22 staff's proposal was that the spot price pass-through 23 doesn't factor in the cost of risk and that you think 24 it ought to be to in accord with the thinking in 25 economics. Have I got that right? 26 MR. ADAMSON: I think it should 27 account for risk. You can describe it as a cost, you 28 can describe it as a lower utility. There is a 676 ADAMSON/CONWAY, presentation 1 trade-off between cost and risk and that trade-off, I 2 believe, has not been properly accounted for. 3 MR. WARREN: Thanks. 4 Now, if you go to a fixed price 5 regime -- correct me if I am wrong -- what you do is 6 you get a higher cost, all things equal, than a spot 7 price pass-through, but the higher cost includes 8 coverage for the risk. Is that not fair? 9 MR. ADAMSON: No, I wouldn't say that 10 was completely true. That may be true. I don't 11 believe that's necessarily true because I would need to 12 account for the risk preferences of other people in the 13 market. 14 MR. WARREN: It may be the case under 15 a fixed price regime that customers are forced to buy 16 at a hedge price that they may not be willing to pay. 17 Is that not a possibility? 18 MR. ADAMSON: That, I would argue, is 19 the flip-side of they may be forced to buy at a 20 unhedged price that they are not willing to pay. 21 MR. WARREN: Fair enough. But those 22 are two choices which people can make. Fair enough? 23 MR. ADAMSON: One could design a set 24 of policies where one allowed people to express 25 preferences between fixed and floating options, if you 26 will, and, in general, offering people that choice, 27 unless it was very costly, is probably of net benefit 28 to the chooser. 677 ADAMSON/CONWAY, presentation 1 MR. WARREN: Now, let me turn to your 2 specific proposal. First of all, can you help me out? 3 How does your proposal differ -- your proposal 4 envisages a portfolio of choices which each local 5 distribution company will make available to the default 6 customers. Is that right? 7 MR. ADAMSON: I think you are making 8 that extrapolation, not me. What types of choices have 9 to be offered to standard supply of service, what types 10 of final retail rates have to be offered to standard 11 supply service customers is not something I have 12 discussed. What I was offering is a mechanism by 13 which, I believe, a fixed rate standard supply service 14 could be offered, but I have not said anything about 15 are there five options, two options or one option. 16 MR. WARREN: It might just be one 17 option. Is that fair? 18 MR. ADAMSON: That again is a policy 19 decision. 20 MR. WARREN: And whose decision is 21 that? Is it the individual MEU or the regulator? 22 MR. ADAMSON: That's for you to 23 decide, not me -- you broadly. 24 MR. WARREN: In your universe, as you 25 imagine it, Mr. Adamson, who makes the choice, is it 26 the regulator or the LDC, about what options are made 27 available and how many of them are -- 28 MR. ADAMSON: I have not made a 678 ADAMSON/CONWAY, presentation 1 comment on that. That is the choice that -- 2 MR. WARREN: I am asking you, 3 Mr. Adamson. 4 MR. ADAMSON: -- people in Ontario 5 have to choose, not me. 6 MR. WARREN: Do you have a 7 preference? 8 MR. ADAMSON: I have offered a 9 mechanism by which a fixed rate choice could be offered 10 to them. I have not tried to define that that should 11 be the only choice. 12 MR. WARREN: So you don't suggest 13 that it should be -- you don't take any position as to 14 whether or not it should be one fixed price choice or a 15 number of them. You don't take any position on that at 16 all? 17 MR. ADAMSON: I have not stated that 18 there needs to be one choice. 19 MR. CONWAY: I think, actually, that 20 might be covered in Fiona Woolf's paper. 21 MR. ADAMSON: There are clearly some 22 other choices because I can always switch to a 23 competitive supplier. So there are at least some other 24 options, clearly, but you are making the line that I am 25 imposing one choice on it. I am offering a mechanism 26 by which a fixed rate choice might be made available. 27 That might be the only method if people in Ontario 28 wanted to implement it that way or it might be, you 679 ADAMSON/CONWAY, presentation 1 know, one of several options. 2 MR. WARREN: So the limit of what I 3 am to take from your paper is that you are suggesting a 4 methodology whereby a fixed price regime might be made 5 available under standard supply. That is what I am to 6 take from your paper? 7 MR. ADAMSON: That is one conclusion 8 to take from the paper. 9 MR. WARREN: You spend some 10 considerable time talking about regulatory costs. 11 First of all, have you made any 12 independent assessment about the regulatory costs in 13 Ontario from a spot price pass-through regime? 14 MR. ADAMSON: No, I have not. 15 MR. WARREN: I just want to 16 understand how the regulatory system works for your 17 suggested mechanism. Can you describe to me how it 18 works? 19 MR. ADAMSON: Sorry, what do you mean 20 by "the regulatory mechanism"? 21 MR. WARREN: Well, let me walk 22 through it. 23 Let's take an LDC. Let's take 24 Toronto Hydro under your regime. Does it come forward 25 to the Board with a yardstick proposal, as you have 26 described it, for one rate or two rates or three rates 27 to be approved by the Board? 28 MR. ADAMSON: There is one yardstick 680 ADAMSON/CONWAY, presentation 1 mechanism which would be used by the regulator. So 2 there is no multiple kind of different yardstick 3 mechanisms in use. I certainly don't envision that at 4 the same time. I think that would be extremely 5 difficult. 6 Could you turn to page 16 of my 7 paper? 8 MR. WARREN: I certainly can. 9 MR. ADAMSON: There is a little bit 10 in there which you might see in a section called 11 "Regulatory Implementation of Yardstick Approaches" and 12 there is a number of points beneath it. Effectively, 13 what is the set of choices that the OEB would have to 14 make in putting such a system in place? I am not going 15 to bore you all to tears by reading these multiple 16 points. I think it gives a little bit of a road map 17 about some of the choices in designing the yardstick 18 mechanisms that the OEB would face in implementing such 19 a system. 20 Now, another question is: How does 21 one get the retail rate which will actually be charged? 22 That is envisioned as being really very quite simple. 23 Individual standard supply service providers would sign 24 up a portfolio of contracts on which is the basis they 25 could offer a fixed rate. The question is, how do you 26 go -- 27 MR. WARREN: They sign up with whom? 28 MR. ADAMSON: Pardon? 681 ADAMSON/CONWAY, presentation 1 MR. WARREN: They sign up with -- 2 MR. ADAMSON: They contract with 3 counter-parties in the market, which might be 4 generators, might be financial intermediaries, might be 5 marketers, might be, you know, any other party willing 6 to hedge prices for them, or there are expected 7 standard supply service loads. Now, an interesting 8 question and I believe a question the regulatory agency 9 in Ontario has probably been faced with before is: How 10 do we go from a set of costs to a retail test to be 11 offered? 12 We may have multiple classes of 13 service. We have to do some allocation of costs in 14 between those. I have not commented on this because I 15 believe that those principles are pretty familiar to 16 regulatory agencies around the world. So given a set 17 of contracts acquired by the SSS provider, one 18 challenge, I guess, for wont of a better phrase, is: 19 How does that get turned into a final rate? I assume 20 there is probably a methodology for doing that in 21 Ontario already, so I haven't laid great stress upon 22 it. 23 Then the next question is: How do I 24 make sure that the incentive mechanism actually 25 provides the incentive for them to cut those costs and 26 that is, actually, for the regulatory -- I'm sorry, the 27 yardstick mechanism that I described in the previous 28 section. You might just look at Figure 3 and Figure 4. 682 ADAMSON/CONWAY, presentation 1 MR. WARREN: Each individual LDC 2 making an assessment of its SSS requirements goes out 3 and finds a portfolio of potential providers of fixed 4 price contracts. Is that correct? 5 MR. ADAMSON: It would certainly have 6 to be active in the market to know what contracting 7 options were out there for it. 8 MR. WARREN: And it picks a contract 9 or contracts and those contracts are measured according 10 to your yardstick. Is that right? 11 MR. ADAMSON: Yes. 12 MR. WARREN: The role of the 13 regulator is, first, to set the yardstick. Is that 14 right? 15 MR. ADAMSON: And the surrounding 16 parts of the mechanism, yes. 17 MR. WARREN: Then the regulator has 18 to do an assessment as to where they are in the band, 19 whether they are in the penalty portion, the neutral 20 portion or the bonus portion of the band. Is that 21 right? 22 MR. ADAMSON: Yes, if you chose a 23 risk-sharing arrangement of that sort. You could make 24 it even simpler than that. 25 MR. WARREN: The regulator would have 26 to do this under your proposal. There are now some 27 270, I guess, LDCs in the province. The regulator 28 would have to make, I assume on an annual basis, this 683 ADAMSON/CONWAY, presentation 1 calculation of whether or not these contracts met -- 2 where they fell within the yardstick guidelines. Is 3 that the way it works? 4 MR. ADAMSON: Yes. 5 MR. WARREN: Under the proposal, are 6 you advocating as the most effective method your 7 incentive system, which has the bonuses and penalties? 8 MR. ADAMSON: I'm sorry, am I 9 advocating...? 10 MR. WARREN: Do you recommend that as 11 the most effective system of standard supply, which is 12 your incentive system with the bonuses and the 13 penalties? 14 MR. ADAMSON: As I mentioned, I do 15 want to harness comparative competition in the creation 16 of incentives. 17 MR. WARREN: I just want to stay with 18 this so I can understand the practical implications. 19 The Board makes the assessment on an individual basis 20 of the 260 or 270 contracts that have been entered 21 into -- 22 MR. ADAMSON: Or groupings thereof. 23 MR. WARREN: Or groupings thereof. 24 Fair enough. 25 MR. ADAMSON: It appears very likely, 26 at least from the discussions I have been hearing in 27 the last few days, that there would be far, far fewer 28 than 270. 684 ADAMSON/CONWAY, presentation 1 MR. WARREN: But as things stand now, 2 today there are 270 of them but the Board, if the 3 incentive system is adopted, it may impose a penalty on 4 some of the MEUs, depending on where they fall in 5 relation to the yardstick. Is that correct? 6 MR. ADAMSON: If you adopted the 7 penalty band system illustrated in Figure 4, yes. 8 MR. WARREN: Who pays the penalty? 9 MR. ADAMSON: Pardon? 10 I'm sorry. Hold, please. 11 --- Pause 12 MR. ADAMSON: I'm sorry. I assume 13 that in order to create an incentive, I mean I think it 14 is very clear from any principle of corporate law that 15 the incentive have to fall upon the shareholder of such 16 a firm in order to give management the incentives for 17 performance. 18 MR. WARREN: Now, have you made an 19 assessment, Mr. Adamson, of the regulatory costs, an 20 independent assessment of the regulatory costs, if your 21 scheme were adopted in Ontario? 22 MR. ADAMSON: No, I have not. 23 MR. WARREN: Now, on page 13 of your 24 paper you talked about an "adder". I'm not sure I 25 understand what it means. What are you talking about 26 when you talk about an "adder"? What is it intended 27 to be? 28 MR. ADAMSON: Are you making a 685 ADAMSON/CONWAY, presentation 1 reference to the fourth full paragraph in? 2 MR. WARREN: Yes. 3 MR. ADAMSON: Oh, okay. That was a 4 response to a very queer issue which has been raised in 5 some other jurisdictions, and I believe it has also 6 been raised in this one as well, that says: Well, we 7 need to ensure that there is an incentive large enough 8 for customers to shift into the retail market. 9 The regulatory mechanism needs to 10 ensure that there is a guaranteed margin for 11 effectively competitive retailers. 12 That is not a mechanism with which I 13 would agree. If you wanted to have that outcome that 14 there was a guaranteed margin, I would suggest that 15 instead of being tied up in a very complex and 16 contentious picot-style Pennsylvania Utility Commission 17 hearing that it be adopted as a transparent sheer adder 18 onto the price as a market incentive for people to move 19 away. 20 However, I'm not advocating that one 21 do that. I'm saying, however, if you wanted that to be 22 a policy objective, you could do it that way and it 23 would seem to me to be more transparent than some of 24 the mechanisms used in other jurisdictions. 25 MR. WARREN: Thank you for that. I 26 now understand your position on it. 27 I want to just briefly return to this 28 question of the yardstick mechanism which you talked 686 ADAMSON/CONWAY, presentation 1 about. 2 In the range of the 270 MEUs that we 3 have in this province, some of them are very small and 4 are in relatively remove areas. Various of the people 5 who have made submissions to the Board have recognized 6 the possibility that some of those smaller MEUs may not 7 be able to secure bids or may not be able to secure 8 supply on terms that are as favourable as, for example, 9 Toronto Hydro. 10 Do you acknowledge that is a risk in 11 Ontario? 12 MR. ADAMSON: It looks like you are 13 making an assertion of economies of scale for market 14 power in purchasing. 15 MR. CONWAY: I would also say that 16 that's the purpose of ENERconnect to make sure that -- 17 MR. WARREN: I wasn't asking you a 18 question, Mr. Conway. 19 I was asking a question of 20 Mr. Adamson about his analysis. 21 We will deal with ENERconnect later. 22 Thank you. 23 MR. POWER: I think we are here to be 24 helpful to the Board, aren't we? 25 MR. ADAMSON: First off, are there 26 likely to be large economies of scale in purchasing 27 power? The answer is yes, down to the level of the 28 size of some of the municipal utilities in Ontario, 687 ADAMSON/CONWAY, presentation 1 some of which are very, very small indeed, at least in 2 comparison to many in other jurisdictions. There are 3 likely to be economies of scale at those sizes. 4 That is why I fundamentally believe 5 that any procurement process almost guarantees some 6 form of aggregation in it because it is not going to 7 be -- is not going to be efficient to do almost 8 anything for that small number of customers. 9 The second point is perhaps a 10 different one, which is what is the -- is there a 11 downstream market power, if you will, the ability for 12 a Toronto Hydro, one of the largest of the utilities in 13 order to kind of get its way in the market through 14 effectively bullying, I guess, the other side, the 15 sellers of such contracts. 16 I don't know of any evidence that 17 suggests that Toronto Hydro would be that big or have 18 that type of pricing power in the market. I suggest 19 that it is probably relatively unusual that such market 20 power could be exerted upstream. 21 MS LEA: Mr. Warren, I'm sorry. 22 We have been on now for nearly two 23 hours. I'm going to have to take a break shortly. 24 Do you know how much longer you will 25 be? I know you have time constraints yourself. 26 MR. WARREN: I will be about 27 15 minutes, but I have risk managed my time constraints 28 to a limited degree or the Children's Aid Society hits 688 ADAMSON/CONWAY, presentation 1 me for not picking up my daughter. 2 We can take a break, and I will be 3 finished in about 15 minutes after that. 4 Thank you. 5 MS LEA: Thank you. 6 MR. WARREN: I appreciate Mr. Gibbons 7 courtesies during this time. 8 MS LEA: Mr. Brett? 9 MR. BRETT: Yes. Just before we do, 10 Ms Lea, I just want to say that I have with me now a 11 document which is a series of talking points for the 12 IPPSO panel which is going to appear tomorrow. It is 13 really an elaboration of the short document IPPSO filed 14 some time earlier. There is nothing new in it, but it 15 is a little more precise. 16 I am going to leave copies on the 17 sideboard there. I will try to hand them out so people 18 have a chance to read it, if they are interested, 19 before the IPPSO panel appears. 20 Thank you. 21 MS LEA: Thank you. 22 Let's take a 15 minute break then. 23 --- Upon recessing at 3:30 p.m 24 --- Upon resuming at 3:47 p.m. 25 MS LEA: Can we reconvene, please? 26 Do we have presenters? Yes, we do. 27 Mr. Adamson and Mr. Conway. Are you 28 content to begin, gentlemen? Your counsel isn't yet in 689 ADAMSON/CONWAY, presentation 1 the room. I think you are all right. 2 MR. ADAMSON: No. He will catch up 3 in a minute. 4 MS LEA: All right. 5 Mr. Warren. 6 MR. WARREN: I think actually I would 7 feel more comfortable if Mr. Power were in the room. 8 MS LEA: That's fine. Thank you. 9 All right, Mr. Warren. I think you 10 are safe now. 11 MR. WARREN: With apologies, 12 Mr. Adamson, I just want to go back one last time to 13 see if I can understand the way that what you are 14 proposing would actually work. 15 As I understand the exchanges we had 16 earlier, an LDC would go out in the market and would 17 determine what supplies were available for the SSS 18 service. Is it possible under your scenario that an 19 LDC might decide that, for example, it should make 20 available two or three or more fixed-price contracts to 21 fulfil its SSS obligation, in other words, to provide 22 options of fixed-priced contracts for its customers? 23 MR. ADAMSON: Pricing options to 24 final customers. Personally, that is not an option 25 that the mechanism I have proposed prevents. 26 Personally, I doubt it would be necessary to do so. 27 That somewhat depends upon the range of patterns of 28 consumption of various types of customers to be offered 690 ADAMSON/CONWAY, presentation 1 standard service supply. 2 If their consumption characteristics 3 were relatively similar as regards time of day, peak, 4 off peak, that type of thing, one might easily say 5 let's go for a great simplification and just say there 6 is one type of fixed-price standard supply service 7 offer on the table. Then it certainly would make it 8 even simpler. 9 If the consumption patterns between 10 different types of customers are different, I think we 11 are all familiar with the standard economic arguments 12 about matching prices and promotion patterns may make 13 for more efficient consumption. 14 MR. WARREN: Is it possible under 15 your scenario that an individual LDC might have to 16 enter into a number of supply contracts in order to 17 meet its SSS fixed-price obligations? 18 MR. ADAMSON: You mean it might have 19 to contract with more than one party. 20 MR. WARREN: Yes. 21 MR. ADAMSON: Upstream. I think it 22 certainly might choose to do so. I think most trading 23 portfolio approaches certainly might assume that one 24 had more than one barrel in one's gun, for example. 25 MR. WARREN: And what does the Board 26 make its yardstick assessment on? Does it make it on 27 the supply contracts or on the fixed-price contract -- 28 the supply contracts which the LDC has entered into or 691 ADAMSON/CONWAY, presentation 1 on the fixed-price contract which it makes available to 2 its SSS customers? 3 MR. ADAMSON: The mechanism, as I 4 have envisioned it in this preliminary description, is 5 that the yardstick is calculated from the purchase 6 contracts from the standard supply service provider to 7 whoever its contractual counter-party is. 8 Remember, what we are trying to do is 9 place incentives through this yardstick mechanism to 10 push down purchase costs. We still want rates set as 11 much as possible based on cost-of-service. That is 12 clearly economic efficient. 13 If we chose to do the other, you are 14 actually proposing that -- it sounds like your 15 uncertainty is over why don't we just do it for the 16 final retail tariffs. I think if you kind of sketch it 17 out on the board, you would see that it would be very 18 difficult to get the incentives right in order for 19 people to not just raise tariffs, since they would not 20 be cost-based in this case, and make more money. 21 So we are still aiming very much for 22 the traditional, that the requirement of regulation is 23 to determine what costs are and hopefully to push those 24 down as much as possible. 25 MR. WARREN: You just used the 26 modified preliminary to describe your proposal. Do I 27 take it that we are to take from the use of that 28 modifier that your proposal is a preliminary one that 692 ADAMSON/CONWAY, presentation 1 requires fuller fleshing out? 2 Is that what I am to conclude from 3 the use of that modifier? 4 MR. ADAMSON: Absolutely, and I would 5 not claim to have done all of the work to make this a 6 reality in this period of time and given this level of 7 resources. 8 MR. CONWAY: As a matter of fact, 9 Mr. Adamson was retained to give a framework which we 10 could move ahead with. He was not retained, although 11 it is a tempting proposition, to work all of the 12 mechanics through to the final analysis. We are still 13 doing that right now for the spot price pass-through. 14 MR. POWER: I also don't think it is 15 the suggestion here that it is the responsibility of 16 the parties to provide the ultimate solution, but 17 rather to assist the Board in understanding the issues. 18 MR. WARREN: Thanks, Mr. Power and 19 Mr. Conway, but I understood the answer that I got from 20 Mr. Adamson. 21 The Board makes its assessment under 22 the incentive systems after the fact as to whether or 23 not there should be a bonus or a penalty, is that 24 right? After the contract has been entered into. 25 MR. ADAMSON: I can envision a couple 26 of different options. 27 I would think that one wants the 28 ability to look at how contracts performed when all of 693 ADAMSON/CONWAY, presentation 1 the information is available. Why might you do that at 2 the end of the period, as opposed to the start? After 3 all, the contracts -- or at least it has been the 4 impression that the contracts have been signed upfront. 5 The answer is that there are a lot of contracts. 6 Remember, these contracts are being offered by 7 generators or other intermediaries who themselves face 8 risk, and you want to make sure -- they want to be able 9 to hedge their own risks. For example, they may want 10 some indexation against, I don't know, natural gas 11 prices or something. We may need the ability to see 12 the outcome of the market, and connected markets like 13 natural gas markets, in order to assess exactly what 14 the purchase cost was. 15 So, for example, if one of the 16 contracts that I as an SSC provider signed up was with 17 a new entrant gas-fired generator and he offered me an 18 uptake contract that some form of tolling arrangement, 19 so it included some variation with his gas purchase 20 cost, that might quite an efficient outcome, and we 21 don't want to preclude that. 22 So that is why I made my initial 23 recommendation that we kind of do this at the end of 24 the period so that all of that information gets 25 encapsulated. 26 MR. WARREN: Now, the penalty is paid 27 by the LDC, is that right? Have I understood that 28 correctly? 694 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: You need to create a 2 meaningful incentive on management. Exactly how that 3 is affecting the relationship between the standard 4 service provider and the LDC, or whatever, is somewhat 5 independent of my scheme. I don't think we need to be 6 too prescriptive about that at this time. 7 MR. WARREN: Who pays the bonus, if 8 one is awarded? 9 MR. ADAMSON: Pardon? 10 MR. WARREN: Your scheme is a 11 symmetrical scheme. There are some penalties, but 12 there are also some bonuses, as I understand it. Who 13 pays the bonus? 14 MR. ADAMSON: One strong possibility 15 is that the penalties get paid out as the bonus. 16 MR. WARREN: And who administers that 17 scheme? Is it the Board that administers that scheme? 18 MR. ADAMSON: Yes, but I think that 19 might involve relatively little more than an Excel 20 spreadsheet. 21 MR. WARREN: Does your scheme, in 22 order to function effectively, require the presence of 23 an aggregator of significant size? 24 MR. ADAMSON: Define how you are 25 using the term "aggregator". 26 MR. WARREN: Look next door at 27 Mr. Conway. 28 MR. ADAMSON: Oh, an aggregator of 695 ADAMSON/CONWAY, presentation 1 standard supply service provider, sir? Something of 2 that -- 3 MR. WARREN: Right. 4 MR. ADAMSON: No. I would find it 5 surprising that, particularly standard supply service 6 providers of the smaller sort, would want to do it all 7 on their own. It just doesn't seem a very efficient 8 way to go. I do believe that there would be economies 9 of scale in this. 10 But there is no theoretical reason 11 why you can't do it under that. It doesn't require 12 that Mr. Conway here exists, although I think it would 13 certainly give him a very substantial role and that he, 14 indeed, will exist. 15 MR. WARREN: Finally, on the issue of 16 the regulatory oversight, does your scheme -- first of 17 all, you have raised as an issue to be dealt with the 18 question of whether or not the Board actually has to 19 prove the individual rates charged. Is that correct? 20 In addition to assessing the 21 contract, does the Board, in your scheme, have to 22 approve the actual rates that are charged? 23 MR. ADAMSON: One needs in any 24 rate-making approach, I believe -- I need a 25 methodological machine that takes me from a set of 26 costs to a rate that I charge consumers. 27 Now, what if you took my suggestion 28 that, yes, these consumers don't look that different 696 ADAMSON/CONWAY, presentation 1 from each other, so we are only going to offer one 2 fixed rate. Particularly in that sort of simplified 3 case, it seems to me very, very simple to go from a 4 purchase contract portfolio to a final rate. But there 5 is a significant -- 6 If you simplified that, then it is a 7 completely trivial process. Even if you were to create 8 multiple cases, there is a lot of experience in a whole 9 number of jurisdictions about how one does cost 10 allocation. I suspect that it is not a set of 11 regulatory issues that hasn't arisen here before. 12 MR. WARREN: The final point on the 13 process is, in the event, under your incentive scheme, 14 that a penalty is charged against an LDC, does the LDC 15 have the right to a hearing to, in effect, challenge 16 the allocation of the penalty and say that there are 17 circumstances which make that inappropriate? Or have 18 you thought about that? 19 MR. ADAMSON: I have thought about 20 that. I can't say that I have thought hours and hours 21 about it, but I have thought about it. 22 One always needs sufficient 23 regulatory flexibility for dealing with the unforeseen 24 that often crops up in all markets and in all 25 regulatory circumstances. How would one deal with an 26 ice storm type of occurrence, which happened not too 27 long ago in Canada, and what might happen in the 28 ability of people to source electricity from generation 697 ADAMSON/CONWAY, presentation 1 that they thought was going to be available and could 2 contract for? 3 I mean, there is always a variety of 4 potential events which are unforeseen and 5 unforeseeable, to a large degree. 6 So you certainly would want to 7 maintain the flexibility, I believe, as you would in 8 any system, for the Board or an appropriate regulatory 9 authority to intervene where there is clearly something 10 that had come in the way of the normal functioning of 11 the market. 12 I would not see it as something where 13 there is an automatic right for everyone, a potentially 14 large number of standard supply service providers, to 15 say, "Gosh, we didn't do very well, so we will run off 16 and see if they will change it for us." One always 17 wants to maintain enough regulatory flexibility to deal 18 with situations as they occur. 19 MR. WARREN: Mr. Janigan isn't here. 20 He acts for the Vulnerable Energy Consumers Coalition. 21 I always want to call it "Venerable", but -- 22 MR. ADAMSON: Venerable as well as 23 vulnerable. 24 MR. WARREN: That is something I 25 reserve for people like Mr. Mark. 26 You did have in your overheads, on 27 page 8, some observations which I took to be 28 suggestions that you didn't like Mr. Todd's proposal 698 ADAMSON/CONWAY, presentation 1 for a tendering process. Just so that we have a record 2 which at some point Messrs. Janigan and Todd can 3 address, I wonder if you could just articulate for me 4 what you don't like about a tendering process as it is 5 envisaged by Mr. Todd in his paper yesterday. 6 MR. ADAMSON: I am sorry that I 7 didn't get to see all of Mr. Todd's presentation. I 8 had a devil of a time getting here from the airport 9 yesterday afternoon. 10 To use the old cliche, the vicar's 11 egg being good and bad in part, there is a great deal 12 about Mr. Todd's paper, which is the main thing I have 13 seen that I think he filed, which I actually did like. 14 I thought he showed a very good understanding, from my 15 perspective, of how this market works. He has shown a 16 very good understanding of the desirability of a fixed 17 price mechanism, all of which I wholeheartedly support. 18 The real differentiation between us, 19 I guess, if you want to call it that, to me seems to be 20 the mechanics of the process. He, from my reading, 21 seems to be expounding basically an option process and, 22 as I think I said in my slide, it is similar in many 23 ways to some of the standard offer options that have 24 been held in the U.S. in various restructuring efforts. 25 I mentioned the one in Massachusetts, for example. 26 There have been others. 27 The difference between us -- and it 28 is a relatively subtle difference -- is that the 699 ADAMSON/CONWAY, presentation 1 competitive mechanism is designed as an option process, 2 which is that the standard supply service provider 3 holds this RFP process, option, whatever you want to 4 call it, and waits for bids to come in. In my proposal 5 I was trying to harness incentives on the standard 6 supply service provider not to be sort of a pure 7 passive -- "I held my option. This is what came out. 8 My process if fine. It is approvable." It is to apply 9 that competitive pressure to make these guys not just 10 kind of wait for whatever comes out in the wash for 11 consumers, but get them out there with a very strong 12 incentive to make it happen. Because it is my belief 13 that these markets, particularly in the early days, 14 require a lot of work. There are options out there but 15 they need development. If you want those options to be 16 real options, you have to get people out and give 17 people a strong incentive to get out of their office 18 and find those deals on behalf of these customers. 19 So I think that is the real 20 difference. In many ways they are quite parallel. I 21 don't want to be seen in a position of saying, "No, no, 22 no, don't agree with what he says", because the vast 23 majority of what he says I agree with. The difference 24 is one of the mechanics of the implementation of two 25 different approaches. 26 MR. WARREN: Could I ask you to turn 27 up page 8 of your overheads. 28 MR. ADAMSON: Yes. 700 ADAMSON/CONWAY, presentation 1 MR. WARREN: I am looking at the 2 second large bullet item, "Implementation of Tendering 3 Process". You have two sub-bullet items. One is "No 4 incentives on providers to actively pursue the best 5 deal for customers." Is there, to your knowledge, a 6 way to get around that problem? 7 MR. ADAMSON: Yes. I think that part 8 of my proposal is the creation of those incentives. 9 MR. WARREN: That is your bonus and 10 penalty system? 11 MR. ADAMSON: Yes. Those were 12 designed to give strong economic incentives. 13 MR. WARREN: Thanks, Mr. Adamson. 14 I just have a couple of questions for 15 you, Mr. Conway. Perhaps you could turn up -- I don't 16 know that it is paginated, but I think it is the last 17 of your pages of your overhead presentation, where you 18 have the heading "These Risks Are Manageable". 19 Now, I have two areas of questions. 20 My note of your discussion today, Mr. Conway, was that 21 ENERconnect services are at no charge to the MEUs. 22 Have I misunderstood that? 23 MR. CONWAY: What I did say was that 24 they would be at cost. 25 MR. WARREN: They would be at cost. 26 Okay. 27 The other thing I wanted to explore 28 with you is risk -- sorry. It is at cost, so there is 701 ADAMSON/CONWAY, presentation 1 no profit in ENERconnect for the services it provided 2 for its partners. Is that right? 3 MR. CONWAY: Yes, I think so. We 4 would base our rates on expected cost. 5 MR. WARREN: But the use of 6 ENERconnect is a cost that the MEUs have to absorb, 7 right? 8 MR. CONWAY: Correct. 9 MR. WARREN: When you talk about risk 10 management, I just want to understand if I have this 11 correctly: Is ENERconnect going to act as a kind of 12 insurer for its partners in the event of, for example, 13 a fixed-price contract that goes sour? 14 Is that the function it is going to 15 provide? 16 MR. CONWAY: It depends how we 17 operate in the market. If we provide the services to 18 connect one of our members with a supplier, we would do 19 the credit assessment for that supplier and then 20 recommend that the contract go ahead if it passed. 21 But in that particular case, the 22 contract would be between the utility and the supplier. 23 And probably it would be a full requirements kind of 24 contract, if that was the case. 25 MR. WARREN: I apologize, Mr. Conway, 26 I didn't hear the last part of your answer. It would 27 have to be what? 28 MR. CONWAY: It would probably be a 702 ADAMSON/CONWAY, presentation 1 full requirements kind of contract in that case. 2 MR. WARREN: I don't know what that 3 means: full requirements kind of contract. 4 MR. CONWAY: It means a fixed price 5 with a floating volume basically. 6 MR. WARREN: I had just a narrower 7 question, Mr. Conway, to understand the function of 8 ENERconnect. 9 If an LDC enters into a fixed-price 10 contract and if, for example, changes in market prices 11 mean that it is stuck with a supply that no one is no 12 longer buying, is it the function of ENERconnect to 13 cover the costs of that contract that have gone bad, or 14 is the LDC on its own? 15 MR. CONWAY: In the particular -- I 16 didn't finish my answer, incidentally. 17 In the particular case that I 18 outlined, we would just provide the service of making a 19 marriage, in which case the contract would be between 20 the supplier and the affiliate. 21 In the case where we provided the 22 power ourselves, that is some kind of a portfolio pool, 23 we would guarantee the price. 24 MR. WARREN: Have you finished your 25 answer now, Mr. Conway? 26 MR. CONWAY: Yes. 27 MR. WARREN: Great. Now, my 28 question, then, is: In the circumstance of the first 703 ADAMSON/CONWAY, presentation 1 instance where you have a contract between the LDC and 2 the supplier, if that contract goes bad, does 3 ENERconnect ensure that on behalf of its member LDC? 4 Or is the LDC on its own? 5 MR. CONWAY: No. I think that we 6 would probably recommend some kind of protection, like 7 some kind of prudential requirement be put up. 8 But in the case I outlined, in the 9 first case, the answer is no. 10 MR. WARREN: Thank you very much. 11 MS LEA: Thank you, Mr. Warren. 12 Mr. Adams. 13 MR. ADAMS: Thank you. My questions 14 are addressed to Mr. Adamson, but please feel free to 15 pipe up. 16 I should introduce myself. My name 17 is Tom Adams. I represent a small charity called 18 Energy Probe. 19 It's a federally registered 20 charitable foundation under the board of directors of 21 Energy Probe Research Foundation, and it has no 22 fulltime employees. 23 Just picking up on a point near the 24 close of Mr. Warren's questions of you, Mr. Adamson, he 25 was asking for parallels between your proposal and 26 Mr. Todd's proposal. You were noting broad levels of 27 agreement between your basic concepts and his basic 28 concepts, which seems sensible enough to me. 704 ADAMSON/CONWAY, presentation 1 Would you agree that the mobility 2 implications of Mr. Todd's proposal are more or less 3 the same mobility implications of your proposal? 4 MR. ADAMSON: I can envision 5 circumstances where they might be. I am depending on 6 how one structured the kind of RFP and what one 7 required of people bidding in this standard offer 8 option. There are certainly circumstances where I can 9 see them being the same. 10 I think one kind of distinction in 11 this regard, which may be a relatively settled one but 12 which I think is worth noting, is that standard offer 13 options are basically held by the group of standard 14 service providers kind of once a year, and end up in 15 almost a cycle of the people entering into the option 16 cycle, the RFP cycle, if they are all at the same time, 17 in which case the number of kind of traded contracts in 18 other periods of the year might be somewhat smaller 19 than what I think in my scheme says you may -- people 20 such as Mr. Conway or some other party, on behalf of a 21 standard supply service provider. If they lost 22 quantity, they might have dealt with it by a kind of 23 full requirements contract, this variable quantity 24 contract that Mr. Conway spoke of. 25 That would be the kind of riskless 26 option to the provider, which is one way. Or they 27 might choose to rather more actively manage it, i.e., 28 say what I can do, if I am probably one of the larger 705 ADAMSON/CONWAY, presentation 1 standard supply service providers, is actively manage 2 my own kind of contract volumes. If I lose quantity of 3 standard supply service over the year, trade it off to 4 you, if you are another one, for example. 5 I think it would rather depend on the 6 rules of how the RFP options were written. Mr. Todd 7 may have described this in more detail, and I simply 8 missed it because I only caught the tail end of his 9 presentation or his questions yesterday. 10 So it is a bit hard to say. 11 I think we would both broadly 12 agree -- or I think I am broadly agreeing with him. I 13 shouldn't put words in his mouth that he would agree 14 with me since he is not here. 15 We both recognize that there is this 16 trade-off between offering full customer ability and 17 the attendant quantity risk. I think we both be 18 comfortable in recognizing that that is a factor under 19 any fixed-price scheme. 20 MR. ADAMS: Thank you. Just on the 21 mechanics of your yardstick proposal, you had suggested 22 that all these different contracting products 23 effectively would be compared against each other. 24 What happens if the duration of one 25 utility's contracts is not directly comparable to the 26 duration of another utility's contracts? There would 27 be, I guess, a difference in risk between the two of 28 them. 706 ADAMSON/CONWAY, presentation 1 How would your yardstick assessment 2 adjust for that? 3 MR. ADAMSON: Typically, in a form of 4 comparative competition scheme, you would have to 5 assess it on the basis of contract purchase costs in 6 the year. So, really, the question I -- let me say 7 what I think you are saying and see if you agree. I 8 don't want to put words in your mouth. 9 What about if I had a multiple year 10 contract that varied in pricing over time, or something 11 like that? So it was front-ended or back-ended, or 12 something like that? 13 MR. ADAMS: For example? 14 MR. ADAMSON: For example, where we 15 might have this assessment period one versus assessment 16 period two problem. You could try to aim to levelize 17 it or you could say: Well, you know, if it's 18 front-ended and you pay big costs in year one and lower 19 costs in year two, you will probably do worse in year 20 one but you will do much better in year two. And let 21 them wash out. 22 I was actually thinking of it as 23 assessing total purchase costs during the year, 24 basically divided by megawatt-hours, some form of 25 demand weighting, and not trying to introduce the 26 complexity of a kind of multi-year allocation 27 mechanism. 28 MR. ADAMS: The Ontario Energy Board 707 ADAMSON/CONWAY, presentation 1 has a good deal of experience with something similar to 2 this proposal, in the regulation of a couple of natural 3 gas distribution utilities that have system gas. 4 One of the difficulties is that the 5 rate cases are filed at different times of the year, 6 and the purchases are made, the utility gas purchases 7 are made at different times of the year. Those market 8 prices move from time to time. 9 You wouldn't see any kind of formula 10 that could correct for the difference in timing of 11 signing up a contract rather -- 12 MR. ADAMSON: No. It would be based 13 on purchase cost for the purchase of electricity during 14 the comparison period, which, for example, might be 15 January 1 to December 31. You are saying that is the 16 comparison we are going to make and really sort of 17 realizing that standard supply service isn't a kind of 18 a purely discrete phenomenon, that it goes on in year 19 two and goes on in year three. 20 But the comparison would be made 21 probably like on an annual basis for a defined time 22 period. I think that would help cut through some of 23 the complexities of a multiple -- of the kind of 24 lagging problems I think that you are talking about. 25 It is not perfect, because clearly 26 thee could be some absolute economic reason why. But 27 at some points we do have to choose simplicity over 28 perfection. 708 ADAMSON/CONWAY, presentation 1 MR. ADAMS: Are you aware of the use 2 of yardstick regulation elsewhere in Canada in the 3 example? 4 MR. ADAMSON: Well, I know there is 5 the proposed introduction of what I might call sliding 6 scale performance-based regulation in the distribution 7 wires company, which has many of the same types of 8 features in some ways. 9 I am not familiar enough with 10 probably Canadian regulatory practice, to be honest, to 11 know that many examples. I will plead ignorance, I am 12 afraid. 13 MR. ADAMS: That's fine. In your 14 paper you put some, I would say, emphasis on the need 15 to develop liquid intermediate markets. Would that be 16 a fair characterization? 17 MR. ADAMSON: Yes. 18 MR. ADAMS: What level of liquidity 19 should the Board aim for in these intermediate markets? 20 MR. ADAMSON: I certainly didn't -- I 21 can't say I have in mind what a pure liquidity target 22 might be. I guess my first recommendation would be 23 somewhat hippocratic of the first "do no harm" type 24 approach: make sure you don't do anything which 25 damages that liquidity. 26 So in order to encourage it, I think 27 a description of what a liquid forward market might be 28 is one in which it is possible for a significant 709 ADAMSON/CONWAY, presentation 1 transaction on the scale of the transactions that occur 2 in the market to occur without having an undue impact 3 on the forward price. 4 For example, would this market be 5 deep enough for me building a 200-megawatt combined 6 cycle plant or, I don't know, any form of generation? 7 Would it be liquid enough for me to at least partially 8 hedge that risk and to get a good price signal at the 9 size of my transaction? 10 That, I think you would -- I don't 11 know of a precise time numerical method to determine 12 whether you are there at any one point. I think that's 13 the kind of objective that I think we should keep in 14 mind. 15 MR. ADAMS: Let me see if I can get 16 this in some kind of concrete terms. You said many 17 times through your testimony here that the proposal for 18 spot price pass-through will cause the intermediate 19 market to be insufficiently liquid. 20 First of all, how liquid will it be 21 if we go with a spot price pass-through? And secondly, 22 how liquid would it be under your proposal? 23 MR. ADAMSON: I guess I'm only making 24 a relative statement. 25 I don't know. I could give you, with 26 a relatively little bit of analysis, ways of trying to 27 assess the liquidity in some other markets that are 28 already existent. 710 ADAMSON/CONWAY, presentation 1 One could look at the open interest 2 on the NYMEX Henry Hub gas contract, for example. One 3 could look at the open interest, look at the trade in 4 volumes and other market parameters regarding the 5 paloverde(ph) electricity forwards contract in the 6 southwestern part of the United States for example. 7 One could look at the volumes in some of the other 8 contract markets, most of which are more 9 over-the-counter markets than some of the other 10 electricity markets around the world, in Scandinavia, 11 in Australia. 12 I don't know how to put an exact 13 precise measure, because effectively the market now is 14 so illiquid until it is -- I suspect at this point 15 until the only one who is participating in it 16 day-to-day would be able to give you a very good 17 assertion of how liquid it is in Ontario. 18 I guess my assertion I will make is 19 that I do believe that the fixed price standard supply 20 service mechanism I propose would tend to encourage 21 greater liquidity. 22 I can't say I have done the analysis 23 or in fact even thought of a way to make a numerical 24 assessment of it. I guess my response, therefore, to 25 your question is necessarily rather conditional, but I 26 do believe it would definitely help it by encouraging 27 that what may be 60 to 70 per cent of the volume in the 28 market, physical volume in the market, to be traded 711 ADAMSON/CONWAY, presentation 1 forward in these intermediate markets rather than 2 served by the spot price pass-through. 3 MR. ADAMS: Who should decide what is 4 the appropriate level of liquidity in those 5 intermediate markets? 6 MR. ADAMSON: I assume to a very 7 significant -- to a significant degree, in the final 8 analysis over the long term, people trading in a market 9 determine -- and their preference and their needs 10 determine the liquidity, determine the depth, determine 11 the volume in forwards markets. 12 However, the point that I tired to 13 make relatively strongly in my presentation, in my 14 paper, is that, you know, we are not starting with the 15 normal formation of a market here. We are starting 16 with a set of rules -- and sets of rules have to be 17 written in these things. 18 We are starting with a set of rules 19 in which we take the broad number of consumers, and a 20 very large volume of demand, and have proposed to put 21 them in a very specific place from which we think they 22 will face substantial costs for moving. The mechanism 23 we have, the proposed spot price pass-through 24 mechanism, is relatively different than what one sees 25 in the vast majorities of the commodities which one 26 consumes. I tend not to buy many things that I don't 27 know the price of until after it has happened. 28 So that is why normally I would say 712 ADAMSON/CONWAY, presentation 1 it is the supply and demand of these types of Board 2 arrangements which should determine overall how deep 3 these markets are. 4 However, I do caution that we are 5 talking about starting in a very particular place by a 6 policy choice from which we think -- or I think there 7 is evidence to suggest may not be efficient for a lot 8 of people and for which they will find it relatively 9 costly to move. 10 So that is my concern that I would 11 strongly express about the normal statement that if the 12 market wants liquidity it will create it. It will 13 create it. It may take a very long time, and if the 14 transaction costs are high enough the participation of 15 smaller consumers and that may be constrained for many, 16 many years. 17 MR. ADAMS: Is it fair to 18 characterize your position as an expectation that most 19 consumers will want a fixed price? 20 MR. ADAMSON: As I mentioned before, 21 there is certainly the likelihood of some form of 22 trade-offs. We know, for example, in other things we 23 might buy that there are some trade-offs between cost 24 and risk or reward and risk. We know that from 25 financial markets for example. 26 I do think it very important to 27 realize -- which is even alluded to in the staff 28 background paper -- there is a degree of risk aversion, 713 ADAMSON/CONWAY, presentation 1 probably even more likely for smaller consumers and 2 that that needs to be recognized. 3 I do believe that given our choice 4 people tend to pick lower risk over higher risk for the 5 same price. I don't believe that any additional costs 6 in offering that fixed price will be much higher. So 7 in my mind -- and this is a judgment and a matter of 8 experience, not a matter that I am able to draw for you 9 on a whiteboard -- in my mind that trade-off seems 10 strongly favouring a lower risk fixed-price option for 11 small consumers. 12 MR. CONWAY: It is pretty clear that 13 people do generally prefer stable rates. The recent 14 price spikes and pump prices of gasoline indicated 15 that. You might recall two weeks ago pump price went 16 from 49 cents a litre to 59 cents, and there was wide 17 uproar and the media -- I have a report in the 18 Financial Post describing the outrage of many people. 19 The tag line on the article is that consumers seem to 20 appear to prefer stable rates. 21 MR. ADAMSON: But it is even worse 22 than that. Because what about if every time you went 23 to a gas station in Toronto there was no price posted 24 and you got sent a credit card bill at the end of the 25 month that said you bought how many litres, and you 26 don't know whether the price is 49 cents or 59 cents or 27 89 cents or 22 cents, and you only got the bill at the 28 end of the month after you have bought all the gas. 714 ADAMSON/CONWAY, presentation 1 Now, that is a very peculiar situation. 2 MR. ADAMS: Basically your view it 3 appears, Mr. Adamson, that the spot price will over 4 time be more costly than the fixed price because of 5 effect of risk. Is that correct? 6 MR. ADAMSON: I do believe that if 7 these intermediate markets don't form that risks are 8 higher for market participants, I think that, finally 9 over considerable periods of time, decreases the 10 dynamic efficiency of the market and increases the cost 11 of capital. So that is why I made my assertion that I 12 think it actually instead of over time actually giving 13 people a lower price, that it damages the dynamic 14 efficiency, the increasing those into the market. It 15 won't give lower prices over time, it is quite likely 16 to give higher prices over time. 17 MR. ADAMS: So the fixed price is 18 likely to be lower than the spot price, right? 19 MR. ADAMSON: Considering a long 20 enough time horizon that questions of entry become 21 important. 22 MR. ADAMS: Understood. 23 MR. ADAMSON: So I don't want to say 24 that next Tuesday by 10 o'clock, you know. Clearly, 25 these are market forces operating under slightly higher 26 time scales. 27 But I do think -- and a good 28 industrial organizations textbook can tell you this -- 715 ADAMSON/CONWAY, presentation 1 that intermediate markets are typically viewed as being 2 very important for the dynamic efficiency of these 3 markets -- or of markets period. 4 MR. ADAMS: In your slide No. 4 you 5 say on a risk-adjusted basis the spot price may not be 6 the lowest price. I assume that is what you are 7 speaking of just now, slide 4? 8 MR. ADAMSON: Yes. 9 MR. ADAMS: Circled? 10 MR. ADAMSON: That may even be a 11 slight -- it depends on the nature of the market, but 12 that might even happen even much more over the short 13 term of laying out a scenario where -- and again, 14 remember, lots of people in these markets have risk. 15 I believe we are going to hear 16 tomorrow from someone who is going to speak about the 17 risks of entering the Ontario market. Perhaps we will 18 even have sort of a firsthand report from it. 19 Clearly, if I am particularly a 20 smaller generator where I don't really get to determine 21 what the price is going to be, I am sort of subject to 22 market forces. If you are a consumer or a retailer or 23 a standard supply service provider who is willing to 24 offer me a longer term contract, that is actually of 25 quite immense value to me. 26 So in this sort of base of prices out 27 there with different risk profiles, different time 28 durations, so on and so forth, and me finding you as 716 ADAMSON/CONWAY, presentation 1 someone who is willing to offer me a longer term price 2 as a producer when I have this huge level of sunk and 3 fixed costs, is of immense value to me. 4 So I think that in that universe of 5 prices, even under quite initial circumstances, not 6 waiting for the long run, even in initial circumstances 7 there may be many circumstances where the risk premium 8 actually -- the person most benefitting from risk 9 mitigation is the generator, not the user. 10 MR. ADAMS: Is it fair to say that 11 the risk to producers under spot prices is matched by 12 the inverse risk to consumers, right? 13 MR. ADAMSON: Yes. And that is why 14 we own a contract. That's why we have this great 15 economic advantage potentially of signing this deal. 16 MR. ADAMS: I think I'm understanding 17 your position. 18 So would it be fair to say that you 19 are suggesting the electricity prices could be 20 described by a decline in yield curve? Isn't that the 21 implication of what you have just presented here? 22 MR. ADAMSON: Yes, I think as I am 23 understanding your use of the yield curve term. Yes, I 24 think I see your point and I think I agree with it. 25 There is value to multiple parties in 26 risk hedging. There are two sides to this equation. 27 It is an equation. That is the basic assertion. 28 MR. ADAMS: So you are asserting the 717 ADAMSON/CONWAY, presentation 1 yield curve for debt, comparing T-bills versus 30 year 2 Canada's, is an inclining yield curve, but you are 3 saying for electricity it is fundamentally then debt, 4 we are going to see a declining yield curve. This is 5 fundamental. 6 MR. ADAMSON: Quite possibly. 7 Because think about the mechanics. 8 I am sinking huge costs when I build 9 the plant. What makes merchant power plant finance 10 different than some other things is that it is very 11 hard to jack the thing up and take it somewhere else. 12 It is fundamentally different than like lease finance 13 of aircraft where if Air Canada is tired of the plane 14 it ships it off and sells it to somebody in Thailand. 15 There is a huge market for 767s out there. 16 You know, once they build a plant 17 somewhere in the province you can't do anything else 18 with it, so the longer I am able to secure my customer 19 for the lower price I would be willing to offer. So if 20 that is what you mean by the yield curve example, I do 21 fundamentally agree with you. 22 MR. ADAMS: Excellent. 23 Thank you very much. I appreciate 24 that. I think we are right on the wavelength here. 25 Just to close off, for Mr. Conway or 26 Mr. Adamson, can you describe for us the role that 27 Enron played in the preparation of Mr. Adamson's paper? 28 MR. CONWAY: Enron and myself 718 ADAMSON/CONWAY, presentation 1 prepared the terms of reference. 2 MR. ADAMS: And paid a portion of the 3 bill? 4 MR. CONWAY: That's right. Actually, 5 the bill was split between other parties. 6 MR. ADAMS: Sure. A portion of the 7 bill. 8 I assume there was a certain amount 9 of vetting that involved the parties? 10 MR. CONWAY: Yes. 11 MR. ADAMS: Was Power Budd involved 12 in the vetting of the presentation? 13 MR. CONWAY: No. I prepared the 14 presentation without -- actually and came up here 15 without them having even seen it. I guess this is sort 16 of a basic assertion, because we consultants are 17 always -- 18 MR. POWER: We wouldn't presume to 19 have the level of knowledge that Mr. Adamson has. 20 MR. ADAMSON: We always get comments 21 from people, as one always says in a client situation, 22 that I do offer a pretty strong personal assurance that 23 we don't accept assignments when we are forced to say 24 what somebody thinks. It has never worked. 25 Now, just to close, you have noted in 26 your paper, Mr. Adamson, that you have a concern with 27 the lack of competitiveness in the generation side of 28 this market that causes problems for consumers. Is 719 ADAMSON/CONWAY, presentation 1 that fair? 2 MR. ADAMSON: Yes. I must qualify my 3 statements by saying I have not made a very long and 4 exhaustive analysis of the potential Ontario market. 5 MR. ADAMS: I am not asking for a 6 long and exhaustive -- 7 MR. ADAMSON: I know, but I am just 8 saying I can't offer the degree -- I can't offer the 9 type of opinions, for example, that I offered the 10 Alberta government where I, clearly, had a long time to 11 study the question, and resources, and so forth. Given 12 the description of the market structure that has been 13 described to me and that I have been able to read 14 about, I agree I have a very strong level of concern 15 about the competitiveness of the markets for 16 electricity in the province. 17 MR. ADAMS: That is particular to the 18 generation side of this market. Right? 19 MR. ADAMSON: Yes. Certainly in the 20 retailing side, one generally expects the barriers to 21 entry to be substantially lower, anyway. So it's not 22 nearly an issue. Over the very short term, the 23 barriers to entry into generation are very, very large. 24 MR. ADAMS: Would you have a concern 25 if, for some reason, somehow it developed that there 26 were barriers to entry on the retail side and some 27 individual aggregator started to establish significant 28 market power on the retailing side? 720 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: Clearly, yes. I think 2 again anyone holding an economist's union card, if 3 there is such a thing, always -- the hairs stand up on 4 the back of one's neck when one hears barriers to 5 entry. It's my belief that probably the barriers to 6 entry are a little harder to establish probably on the 7 retailing side than they may be on the generation side 8 in the short term. But, yes, clearly that would, I 9 think, raise my hackles and I have raised the hackles 10 of Mr. Ronayne back there, for example, from the 11 Competition Bureau. 12 MR. ADAMS: Could regulatory policy 13 decisions create barriers to entry on the retail side, 14 conceivably? 15 MR. ADAMSON: Create barriers to 16 entry on the retail side, conceivably? I haven't 17 thought through the mechanism by which -- I mean I 18 haven't made any consideration of that, so, 19 conceivably, yes. 20 MR. ADAMS: That's great. Thank you 21 very much for your answers. 22 MS LEA: Thank you, Mr. Adams. 23 Mr. Stephenson? 24 MR. ADAMSON: Would anyone be 25 terribly offended if I take off my jacket? 26 MS LEA: Please do. 27 MR. STEPHENSON: Mr. Adamson, 28 Mr. Conway, my name is Richard Stephenson. I am 721 ADAMSON/CONWAY, presentation 1 counsel in this proceeding for the Power Workers Union. 2 Mr. Adamson, I think most of this is 3 for you. I take it from answers that you gave to my 4 friend Mr. Warren that, fundamentally, you don't have 5 any opposition to greater than one SSS option being 6 provided to consumers. You are agnostic on that issue. 7 MR. ADAMSON: I would say I haven't 8 studied that issue. In that I don't have a strong 9 belief, I guess you could characterize me as agnostic. 10 I think the trade-offs are there for whoever designs 11 the final mechanism to consider about what the costs 12 are of offering options versus the value of customer 13 choice, but I am certainly not opposed to the idea of 14 having a choice for spot price pass-through for people 15 who think that's the best way for them. If people 16 implementing the scheme think that option can be 17 included at a low cost, I think the costs and benefits 18 of trying to assess that are pretty straightforward. 19 MR. STEPHENSON: So, presumably, you 20 would not, for the reasons you have just indicated, be 21 opposed to a spot price pass-through being a required 22 SSS option, in addition to a fixed price offering? 23 MR. ADAMSON: I don't know what the 24 practical implications of offering multiple choices are 25 to people. I certainly haven't made any assessment of 26 that. One nice thing that you can say about it is that 27 it certainly offers a level of comfort and protection 28 to anyone who feels that the regulatory scheme might go 722 ADAMSON/CONWAY, presentation 1 off track or something, and so that's true. An option 2 is always worth something. It's always very true. I 3 don't know what it would cost to put it together. If 4 that's fairly low -- and I can see how it could be 5 quite low -- it may be very attractive. 6 MR. STEPHENSON: Let me turn to your 7 yardstick competition proposal and the relationship 8 between the average -- what is it, the demand average 9 cost of the supply? I have forgotten what your -- 10 MR. ADAMSON: I think I called it 11 demand weighted. "Demand weighted" is usually the 12 phrase that's used. 13 MR. STEPHENSON: Okay, demand 14 weighted cost of supply and the rate or rates being 15 charged to particular customers who are on that supply. 16 Obviously, in addition to the 17 commodity costs, there would be, presumably, the 18 overheads that are associated with supplying that 19 product to the customers. I assume that's right. 20 MR. ADAMSON: I'm sorry? Meaning 21 overheads in terms of...? 22 MR. STEPHENSON: The administration 23 costs -- 24 MR. ADAMSON: Administrative costs, 25 issues like that? 26 MR. STEPHENSON: -- the procurement 27 costs, risk management costs, whatever, all of the 28 reasonably related overhead costs in relation to 723 ADAMSON/CONWAY, presentation 1 supplying the service. 2 MR. ADAMSON: Yes, there certainly 3 would be some form of administrative costs. You might 4 want to separate those from "risk management" costs. 5 MR. STEPHENSON: Fair enough. 6 The question I have for you is: On 7 the commodity portion of the rate, whatever part of the 8 ultimate rate is attributable to the commodity costs, 9 under your scheme is there a margin on that for the LDC 10 or not, or do you have a view on it one way or another? 11 MR. ADAMSON: Is there a margin on 12 the pure -- 13 MR. STEPHENSON: Commodity. 14 MR. ADAMSON: On the pure commodity. 15 That sort of depends on how you choose to draw the 16 little bands in my picture. The simplest 17 implementation of these systems, I would say -- if you 18 are in the dead bands and there is no margin, if you 19 are in the lower -- one very simple implementation 20 might be that there is no margin in here, there may be 21 margin in here, and there may be margin the other way 22 up here. That would be one simple approach. 23 One, obviously, in designing any form 24 of these kind of systems needs to be cognizant that you 25 don't offer kind of nothing but downside and no upside. 26 A very simple form of any one of these forms of sliding 27 scale schemes might say this is where there may be no 28 margin, there may be margin down here, and there may be 724 ADAMSON/CONWAY, presentation 1 kind of a penalty up there. But you just need to make 2 sure you get the balance right. 3 MR. STEPHENSON: So is it fair to say 4 that you would not be philosophically opposed, in terms 5 of your incentive scheme, to the Board saying, "If you 6 are in the dead band, you get no margin on the 7 commodity. You are not permitted to pass on any margin 8 on the commodity", and your incentive is the incentive 9 created by virtue of the yardstick scheme itself. 10 MR. ADAMSON: Yes, in terms of a very 11 simple view of how it might be implemented, and again I 12 think in my -- 13 MR. STEPHENSON: Frankly, that is all 14 we can understand at this point, anyway. 15 MR. ADAMSON: Yes, it is rather late 16 in the day. 17 In response to the questions from 18 Mr. Warren, I didn't want to suggest that I have worked 19 out the details of everything when I haven't. What I 20 have done is tried to outline at a conceptual level 21 with some information on implementation, but I wouldn't 22 want to claim that everything is completely wrapped up 23 and here is the manual. One way one might consider 24 would be somewhat as you described. There may be some 25 level of administrative costs. There might be several 26 different ways of dealing with that. 27 To bring up an example, in England 28 and Wales, their regional electricity companies have a 725 ADAMSON/CONWAY, presentation 1 mechanism -- they don't have these bands, although they 2 considered it, but they decided that they were so close 3 to abolishing standard supply service now, which was in 4 1998, that they decided not to implement this because 5 they were going to get away from having a standard 6 supply rate and everyone was going to be in a 7 competitive market. 8 The mechanism traditionally used for 9 the equivalent of standard supply service, if I might 10 call it that, has what is called a supply price 11 control, which implements kind of a price cap 12 regulation approach to trying to make sure that, you 13 know, these kinds of administrative costs don't grow 14 too large, whoever in the standard supply service 15 provider has a strong incentive to keep those prices 16 down. 17 MR. STEPHENSON: I just want to be 18 absolutely clear that the form of competition or the 19 incentive mechanism that the yardstick entails is 20 purely comparative in that the yardstick itself is an 21 ex post calculation based upon the actual results. 22 There is no absolute number that is associated with the 23 yardstick, which is knowable in advance. 24 MR. ADAMSON: Right. The outcome is 25 one calculates the yardstick based on the results of 26 what, in this case, the SSS providers have achieved. 27 So it would be relatively difficult to say we know in 28 advance that the outcome is where the black line goes. 726 ADAMSON/CONWAY, presentation 1 So again this is a comparative competition mechanism. 2 It's the creation of an incentive effect of a 3 competitive mechanism, but between these people who are 4 providing standard supply service who are not directly 5 competing with each other. 6 Now, we might draw around this box. 7 There is still the competitive retail market which is 8 trying to access these customers, but you would still 9 be -- if you did not choose to enter that retail 10 market, you would be provided service by the standard 11 supply service company. 12 MR. STEPHENSON: I understand. 13 Have you given any thought to the 14 magnitude of the incentives and penalties which are 15 required in order to provide sufficient incentives for 16 people to compete effectively in this market? 17 What occurs to me, for example, is 18 that if you are outside the dead band, the maximum -- 19 theoretically, you could have a penalty as large as the 20 total dollars you collected in revenue that is greater 21 than the yardstick. That would be, theoretically, the 22 largest one you could have and then there would be some 23 number smaller than that. How big does it need to be? 24 MR. ADAMSON: Remember we are also 25 talking about very large volumes of electricity. So 26 there is a pretty substantial number of dollars 27 associated with the mechanism on a total volume basis. 28 So the percentages, I think, can be quite small. 727 ADAMSON/CONWAY, presentation 1 As you say, the strongest incentive, 2 certainly the strongest rational one, is the fact -- it 3 would be the system I was illustrating with my airplane 4 ticket things where, you know, you eat the difference 5 or make the difference. That's what I think a 6 regulatory economist would call a very strong 7 incentive -- a high-powered incentive mechanism. That, 8 I think, probably is too risky given the volumes we are 9 talking about. 10 I think the -- 11 MR. STEPHENSON: Sorry, I have to 12 interrupt. When you say "risky", you mean risky in the 13 sense that it would create jeopardy for the LDCs? 14 MR. ADAMSON: It would create too 15 much upside and downside as a -- it would create 16 probably too much upside and downside. 17 We want an incentive, but we don't 18 want the SSC provider turns out and this is their 19 lottery ticket. I don't think that would be a very 20 attractive regulatory outcome. 21 I have not made an assessment of what 22 I think the extra penalties would be. I haven't tried 23 to work through the numbers. 24 I would remark -- and it is a bit 25 anecdotal -- that the experience of firms under 26 incentive-based regulation for procurement or for the 27 operation of wire services and stuff is: Gosh, when 28 that's what there is for you, you work pretty hard for 728 ADAMSON/CONWAY, presentation 1 those dollars. 2 MR. STEPHENSON: Let me come back to 3 this question that Mr. Warren asked about where does 4 the incentive come from, assuming one is to be paid. 5 Would you agree with me that because 6 of the random distribution and the existence of the 7 dead band, there is no assurance that the amount of 8 penalty to be paid and the amount of incentive to be 9 paid is going to be the same in any given year? 10 MR. ADAMSON: No, they need not be 11 exactly the same. 12 MR. STEPHENSON: And it is at least 13 theoretically possible that there be no penalty at all, 14 if you had all of the ones below the yardstick all 15 within the dead band. 16 MR. ADAMSON: Yes. If the 17 distribution is not symmetric -- 18 MR. STEPHENSON: And there is no 19 reason to think it would. 20 MR. ADAMSON: No. I mean, one might 21 be surprised, not knowing anything, that it was 22 entirely asymmetric. But there is no reason to believe 23 that it is perfectly symmetric. I agree. 24 MR. STEPHENSON: In that case, where 25 does the money come from? 26 MR. ADAMSON: I think you could do it 27 from a couple of different ways. First off, we are 28 probably not talking about a huge amount of money as a 729 ADAMSON/CONWAY, presentation 1 proportion of the volumes flowing through the standard 2 service supply mechanism, which is going to be a very, 3 very large dollar amount, given the volume of 4 electricity we expect through it. 5 You could come up with it in several 6 different ways. You could effectively spread it over 7 the others in a subsequent year. I think there would 8 be any number of kind of claw-back mechanisms. 9 But again, I would say that we are 10 not talking of the dollar volume in these types of 11 markets. We are not talking about huge proportions. 12 So it is not like we can all of a sudden come out and 13 finance 5 per cent of the cost flowing through SSCs to 14 provide this kind of penalty mechanism. 15 MR. STEPHENSON: On another subject, 16 at page 17 of your prefiled material you have a 17 footnote that deals with this market power problem of 18 OPG in the near term, and you say: 19 "Accordingly, the introduction 20 of any standard supply pricing 21 model may need to incorporate 22 transitional mechanisms pending 23 decontrol." (As read) 24 The question I have for you is: What 25 transitional mechanisms do you foresee in the model 26 that you have proposed yourself here, or does it 27 already incorporate that? 28 MR. ADAMSON: No. I think it is 730 ADAMSON/CONWAY, presentation 1 somewhat external to that. Let me explain the issue in 2 a little more detail than that footnote, so that it is 3 clear what we are talking about. 4 My methodology or, for example, the 5 methodology of Mr. Todd that he described yesterday 6 require somebody to sell contracts. The natural 7 counter-party to selling contracts is a generator who 8 has generation. 9 So what my note of concern here at 10 the bottom of page 17 is saying is we need to ensure in 11 any mechanism that there is sufficient competition in 12 the contract market, short run, to make sure that for 13 the standard service supply providers there is enough 14 competing sellers of these contracts for them to be 15 able to purchase them economically. 16 If there is a situation of very large 17 concentration in the generation market, we might easily 18 worry that the concentration in the generation market 19 would be concentration in the contract market, i.e., 20 there is not enough counter-parties to go around to 21 offer these contracts sufficiently. 22 Now, this is a very distinct problem. 23 It affects everything you are trying to do here, beyond 24 standard service supply, in my opinion, as well. The 25 fact that there may be a problem with having enough 26 competitors in the contract market is in fact reflected 27 and reflective of that there in fact may not be enough 28 competitors in the spot market. These two, in some 731 ADAMSON/CONWAY, presentation 1 ways, almost might be considered as compliments to each 2 other. 3 So we need to assure ourselves before 4 implementing any mechanism, fixed-rate spot market 5 pass-through, or whatever, that indeed the upstream 6 market is going to be competitive. One thing we are 7 generally pretty cognizant of is that the potential of 8 market power in vertical relationships tends not to 9 stay there. That is an old adage of kind of people who 10 practise competition policy. And if you had a person 11 with market power, it is relatively easy for them to 12 exert it in the contract market as well as in the spot 13 market. 14 Just as a word of warning, I guess, 15 in terms of my proposal, I wanted to draw out the fact 16 that we need to assure ourselves that that market is 17 going to be sufficiently competitive. 18 Now, it may be that it may have some 19 advantages over the spot market model nonetheless, for 20 two reasons. First off, it is possible -- it may not 21 happen on day one but it is certainly possible -- that 22 in terms of offering contracts, that contract may help 23 stimulate new entry. And new entry, as we know, is a 24 very strong corrector of market power problems and 25 concentration over time in most industries. 26 The other thing is that there may be 27 scope -- and I put emphasis on "may" -- for 28 non-generator players to participate in the contract 732 ADAMSON/CONWAY, presentation 1 market. There are financial intermediaries who hedge 2 price risk and market. 3 One interesting phenomenon, for 4 example, has been the appearance of people from the 5 reinsurance industry in this market. We have recently 6 been working on a transaction where a large specialty 7 reinsurer in fact helped ensure prices in a competitive 8 electricity market. That was in Columbia. 9 Even though we don't believe that 10 those are going to provide sufficient competition and 11 we worry that these contracts need to come from 12 generators and there are simply not enough generators 13 to go around, then we certainly have to worry about the 14 viability of any one of these schemes. Market power, 15 if it exists and if it is not adequately controlled, 16 will come out. 17 The other point that I would make -- 18 I realize it is quite late in the day, and I have not 19 again made an extensive analysis of this that I am sure 20 some others have made -- is that -- and I believe there 21 is another little footnote floating around in my papers 22 somewhere. It is that mechanisms that tend to cap 23 average revenues may have a quite strong influence on 24 volatility. You need to be very careful about the 25 incentives that you put on dominant generators in that 26 case. 27 So will the MPMA deal with the 28 problem? Yes, it will help. Will it deal with it 733 ADAMSON/CONWAY, presentation 1 completely? I am yet to convince myself. I can't say 2 I have given it the level of time that I would like to, 3 but I have yet to convince myself. 4 MR. STEPHENSON: Let me just come 5 back to -- 6 MS LEA: Mr. Stephenson, do you have 7 many more questions? 8 MR. STEPHENSON: Actually, I have one 9 more. 10 MS LEA: Please go ahead. 11 MR. STEPHENSON: All right. Let me 12 come back to the issue of the connection between the 13 cost of the commodity and the rate charged to the 14 customer. 15 I took it that one of the advantages 16 of your scheme -- if you assume that we are doing this 17 yard-sticking over the course of say a calendar year, 18 for simplicity, you don't care what the folio of 19 contracts is that the SSS supplier has with the 20 generators and marketers, in the sense they could have 21 five-year ones that are in year three, and you could 22 have six-month ones, or whatever. You don't care what 23 the portfolio looks like. At the end of the day, for 24 yardstick purposes, you simply care what the actual 25 demand average cost or weighted demand cost -- 26 MR. ADAMSON: You mean actual demand 27 weighted cost is in the year, for example. 28 MR. STEPHENSON: How, for 734 ADAMSON/CONWAY, presentation 1 rate-setting purposes, assuming that we are setting a 2 rate in advance of the calendar year commencing January 3 1, 2000-and-something, and it is going to be for a 4 one-year period -- and it is going to be a fixed rate 5 and it is going to be approved by the Board. 6 It is going to be based on something 7 like the cost of the commodity, plus a mark-up covering 8 overhead. 9 MR. ADAMSON: And maybe an 10 administrative cost. 11 MR. STEPHENSON: Maybe an 12 administrative cost, exactly. 13 How do we know what the cost is for 14 the purposes of that exercise in setting the rate? 15 MR. ADAMSON: I think the majority, 16 if not the totality, of most of the contracts which you 17 are incorporating into the yardstick scheme need to 18 offer some fixed price, need to offer enough of a fixed 19 price to the SSS provider so that a fixed rate can be 20 offered from them. 21 MR. STEPHENSON: Is there a way of 22 doing that without matching the supply contract on the 23 one hand and the sales contract to the end customers on 24 the other, in the sense of term? 25 MR. ADAMSON: Are you saying -- no, 26 I'm sorry, I'm afraid I don't understand what you are 27 saying. 28 MR. STEPHENSON: I understand how you 735 ADAMSON/CONWAY, presentation 1 know what the cost is if you were going out and buying 2 from marketers one-year fixed electricity for the 3 period commencing January 1 to December 31, and you are 4 selling it to your end-users on the same time period. 5 MR. ADAMSON: Right. 6 MR. STEPHENSON: That's easy. But 7 what if there is a mismatch between those two? How do 8 you, setting it in advance, know what the cost is if 9 that is going to be the basis of your rate? 10 MR. ADAMSON: You are saying if you 11 have lots of contracts, instead of you signing them up 12 in advance to start on January 1, I have a whole bunch 13 ending March 30th and some other ones starting on 14 May 10th. 15 MR. STEPHENSON: Exactly. 16 MR. ADAMSON: If you had a whole 17 bunch of provisions. 18 I think in terms of the response I 19 just gave, one of the fundamental objectives is to be 20 able to offer a fixed price to final SSS customers, 21 unless one chose to have some variability in it, as an 22 initial design mechanism. 23 Personally, I think the way you would 24 do it is really not dissimilar to the way that the RECs 25 have done it in England and Wales. They really do 26 mainly buy fixed-price contracts. And will you have to 27 deal with a whole bunch of true-up mechanisms? 28 What I would suspect seems to happen 736 ADAMSON/CONWAY, presentation 1 is that the contract market starts to follow the time 2 horizon of the SSS yardstick assessment. 3 MR. STEPHENSON: So the contracts 4 have a matching -- 5 MR. ADAMSON: That's the easiest way 6 to do it. You can envision similar complicated ways, 7 but I am trying to keep this on the easy path as much 8 as possible. You could have multiple contract terms 9 and stuff. The simplest way would be to say: You are 10 going to offer a fixed price. The contract can match 11 the term of the fixed price. 12 MR. STEPHENSON: Thank you. Those 13 are my questions. I appreciate that very much. 14 MR. ADAMSON: Thank you. 15 MS LEA: Thank you very much, 16 Mr. Stephenson. 17 Before we close today, I have a few 18 scheduling matters. 19 Thank you very much, Mr. Adamson and 20 Mr. Conway, for your efforts today. 21 I presume, Mr. Power, that we can 22 continue with these gentlemen tomorrow morning? 23 MR. POWER: Yes. 24 MS LEA: Thank you. So I expect, 25 given the time estimates, that this panel will continue 26 until the morning break tomorrow, in any event, and 27 then your second panel will be available at that time? 28 MR. POWER: Yes. 737 ADAMSON/CONWAY, presentation 1 MS LEA: Thank you. That is helpful. 2 On Monday, we have Toronto Hydro at 3 9:00 a.m., followed by Mr. Rawson. 4 Mr. Brett, do you now have a 5 preference as to whether to bring your panel tomorrow 6 late in the day or on Monday? 7 MR. BRETT: I don't at the moment. I 8 have asked to hear from them about their availability 9 on both days. I probably won't know that until 10 tomorrow morning. 11 MS LEA: So Monday may be the safer 12 date in that sense. 13 MR. BRETT: Probably. What I don't 14 know is how long you expect the second panel to go 15 tomorrow. 16 MS LEA: Well, I have two and a half 17 to three hours of questioning, plus whatever 18 presentation time is taken for the second panel 19 tomorrow. 20 MR. BRETT: Whether that holds up in 21 light of all of the questioning of the first panel is a 22 question that -- 23 MS LEA: Will you let me know when 24 your witnesses know? 25 MR. BRETT: I will let you know in 26 the morning. 27 MS LEA: Mr. Gibbons, what is your 28 preference? To go tomorrow? 738 ADAMSON/CONWAY, presentation 1 MR. GIBBONS: Yes. 2 MS LEA: We will attempt to do that. 3 Can I ask anyone who has questions 4 for Mr. Mondrow, who is making a presentation on behalf 5 of HVAC -- is there anyone who would require his 6 attendance here for questioning if he chooses not to 7 attend specifically to make a presentation? 8 I am sure he is willing to come, but 9 is there anything who requires that he comes? 10 All right. Thank you. That is 11 helpful. We will let him know that there is no 12 requirement as such. 13 Thank you very much. So 9:00 a.m. 14 tomorrow. 15 --- Whereupon the hearing adjourned at 5:12 p.m., 16 to resume on Friday, July 16, 1999 at 9:00 a.m.
Allo;
 
How are you? I hope every thing is okay with dad.  Janet and I are looking forward to dinner on Sunday.  We'll see you around 2:00.  We've just about got our whole fence done.  It looks good and we did it all our selves with the neighbors.  No contractors.  Not bad eh?  I still have hope yet.
Open this program.  It's really cute.
 
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" 0D" 0D################ C 1 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Tuesday, July 13, 1999, commencing 26 at 9:35 a.m. 27 28 VOLUME 1 2 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Society 18 and Producers Society of 19 Ontario, IPPSO. 20 ELIZABETH DEMARCO Various interested parties 21 BRIAN McKERLIE Municipality of Chatham-Kent 22 ROBERT WARREN Consumers Association of 23 Canada. 24 DICK PERDUE Direct Energy and Enershare 25 Technology 26 DAVID POCH Green Energy Coalition, GEC 27 ZIYAAD MIA Coalition of Distribution 28 Utilities et al 3 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 RICK GROULX 11 MARK RONAYNE Competition Bureau 12 KEITH RAWSON TransCanada Power 13 ANDREW BARRETT Ontario Power Generation 14 Inc. 15 RICHARD BATTISTA Union Gas Limited 16 BARBARA BODNER Enbridge Inc. 17 AMIR SHALABY Ontario IMO 18 DAN PASTORIC Energy Advantage 19 JIM RICHARDSON/ Upper Canada Energy Alliance 20 PAUL FERGUSON 21 22 23 24 25 26 27 28 4 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 5 4 Presentation by Professor Dewees 54 5 Luncheon recess at 12:32 p.m. 113 6 Upon resuming at 1:45 p.m. 113 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 1 Toronto, Ontario 2 --- Upon commencing on Tuesday, July 13, 1999 3 at 9:35 a.m. 4 MS LEA: Good morning. Welcome to 5 the Ontario Energy Board's 25th floor hearing room. I 6 see we have sold a lot of tickets for the proceedings 7 this morning. 8 Welcome. Find a seat where you can. 9 There is a seat up at this table for anyone who is 10 actively participating in this proceedings this 11 morning. There is an empty chair up here if you need 12 it. 13 We are here to have a technical 14 conference on the SSS Code, which has been given the 15 Procedural No. RP-1999-0040. The Board is holding a 16 proceeding to allow further submissions to the Board on 17 the matter of the Standard Supply Service Code. In 18 particular, as you know from reading the procedural 19 orders, the Board identified the issues of pricing, 20 procurement, market restrictions and billing as those 21 topics which it felt that it needed further submissions 22 and advice on. 23 The purpose of the technical 24 conference today is to provide an opportunity for 25 intervenors to ask clarifying questions of the various 26 parties that will be making presentations here. The 27 presentations are related to the issues that have been 28 identified by the Board. 6 1 The Board has issued two procedural 2 orders in this matter. The latest one, I think late 3 last week, was Procedural Order No. 2. That procedural 4 order confirmed the issues list and also clarified some 5 of the submissions on the issues list or the Board's 6 ruling on the submissions on the issues list that were 7 made to it. 8 So the intent of the technical 9 conference for the next few days is to allow 10 intervenors a reasonable opportunity to seek 11 clarification of the proposals being presented. It is 12 not intended to be an opportunity to cross-examine in 13 detail a presenter on their presentation. Technical 14 conferences are generally an attempt to understand the 15 presentation rather than challenge it. The goal of the 16 technical conference is to ensure parties have a 17 sufficient understanding of each option to enable them 18 to make their submissions to the Board at the 19 proceeding in August on the appropriate resolution of 20 the issues. 21 So, as I understand the Board's 22 intention here, it is to get clarification. You may 23 well disagree with the presenter, and you have every 24 right to disagree. But I think that this is the place 25 to get an understanding, not to argue with a presenter. 26 The Board and all parties will have 27 access to transcripts of each day of this technical 28 conference. There are two ways you can get 7 1 transcripts: first, using the Board's Web site. That 2 Web site address is www.oeb.gov.on.ca. You can also 3 purchase a hard copy of the transcript from the court 4 reporters. If you want to do that, please speak to 5 them directly. 6 Staff have prepared a proposed agenda 7 for the technical conference setting out approximate 8 times for parties to give their presentations. We have 9 already had one person approach us to indicate that he 10 is not available to make a presentation on the 11 afternoon of Friday, July 16th. 12 I would request any party who is 13 making a presentation on the morning of the 16th to see 14 if he can switch with Mr. Keith Rawson, who is not able 15 to make his presentation at 2:00 p.m. He is requesting 16 a morning slot, so if anyone can accommodate him, we 17 would be pleased. 18 MR. GIBBONS: Where are copies of 19 this agenda? 20 MS LEA: They have been circulated. 21 Is there anyone else who does not have a copy? 22 All right. It is just this table 23 that has obviously been ignored. We will pass them out 24 to you. 25 By the way, my name is Jennifer Lea. 26 I am counsel to Board staff, and, with my colleagues 27 Brian Hewson and Una O'Riley, I will be helping them 28 chair the technical conference. 8 1 I would like to begin, if that is 2 agreeable with everyone, by getting everyone to 3 introduce themselves. We will start with the table 4 across from me, and we will just go around the room. 5 When you introduce yourselves, could 6 you indicate whether you will be taking an active part 7 in the proceedings. If you are merely observing, you 8 are very welcome of course to attend, but we would ask 9 that you not use a seat with a microphone unless you 10 are taking an active part in the proceedings because 11 there are obviously more speakers than we have 12 microphones. 13 So if we could begin, then, with the 14 gentleman across from me. 15 MR. GIBBONS: I am Jack Gibbons from 16 Pollution Probe. I will be taking an active part in 17 the proceeding. 18 MS LEA: Thank you. 19 MR. ADAMS: Tom Adams on behalf of 20 Energy Probe. With me is Mark Mattson. 21 MS LEA: You will be taking an active 22 role in the proceedings? 23 MR. MATTSON: Yes, we will. We don't 24 have an alternative position paper, but we should let 25 people know that we support the Board's standard 26 service position paper and we will be -- 27 MS LEA: The Board's staff paper? 28 MR. MATTSON: The Board's staff 9 1 paper. 2 MS LEA: I think we want to make it 3 clear, first of all, that this paper is not the voice 4 of the Board; it is the voice of Board staff. The 5 Board may say that they hate it all, as they have on 6 occasion with other submissions we have made. This is 7 a staff paper. 8 Thank you very much, Mr. Mattson. 9 MR. STEPHENSON: My name is Richard 10 Stephenson. I am counsel to the Power Workers Union, 11 and we intend to take an active role in the proceeding. 12 MR. BUDD: My name is Peter Budd. I 13 am sitting in for my partner, Robert Power. We act for 14 a number of intervenors in the proceeding, which are 15 listed in our July 7, 1999 letter to Peter O'Dell. 16 We intend to be very active 17 throughout the course of the proceeding. I will only 18 be here for the morning until Mr. Power gets here. He 19 is in court this morning. 20 MS LEA: Thank you very much. 21 I should have said earlier when I 22 asked people to introduce themselves, I wonder if you 23 could spell your last name for the reporters as we go 24 around. 25 MR. GRIEVE: My name is Alexander 26 Grieve, G-R-I-E-V-E. I am here with Power/Budd, as 27 well. 28 --- Pause 10 1 MR. MacODRUM: My name is Bruce 2 MacOdrum, M-a-c-O-D-R-U-M, and together with Mr. Mark 3 Rodger, R-O-D-G-E-R, we represent Toronto Hydro 4 Electric System Limited. 5 We will be taking an active part in 6 the proceeding. 7 MS LEA: Thank you. 8 MR. MARK: Alan Mark, M-A-R-K, 9 representing the Municipal Electric Association. We 10 will take an active part in the proceeding. 11 MR. BRETT: Tom Brett, B-R-E-T-T. I 12 represent the Independent Power Society and Producers 13 Society of Ontario, IPPSO. 14 We will take an active part in the 15 proceeding. 16 MS LEA: Thank you. 17 MS DeMARCO: Elizabeth DeMarco, 18 D-e-M-A-R-C-O, with Donahue and Partners. We represent 19 a number of clients who wish to remain nameless at this 20 point. 21 --- Laughter 22 MS LEA: I see. Ms DeMarco, these 23 nameless clients, will you be taking an active role on 24 their behalf in the proceeding? 25 MS DeMARCO: The level of activity 26 remains to be determined. 27 --- Laughter 28 MS LEA: All right. 11 1 MR. McKERLIE: Brian McKerlie, 2 M-c-K-E-R-L-I-E. I am with the Municipality of 3 Chatham-Kent. I expect to have some action during this 4 proceeding. 5 MR. WARREN: Robert Warren, 6 W-A-R-R-E-N, for the Consumers Association of Canada. 7 Our client will be active in the proceeding. 8 MR. PERDUE: Dick Perdue. I 9 represent Direct Energy and Enershare Technology. Yes, 10 we expect to be active. 11 MR. POCH: David Poch, P-O-C-H, for 12 the Green Energy Coalition, or the GEC. We expect to 13 be active. 14 MR. MIA: Ziyaad Mia. I will spell 15 both of those. Z-I-Y-A-A-D; last name, Mia, M-I-A. 16 I represent the Coalition of 17 Distribution Utilities: Brampton Hydro, Cambridge and 18 North Dumfries Hydro, Guelph Hydro, Niagara Falls 19 Hydro, Oakville Hydro, Pickering Hydro, Richmond Hill 20 Hydro, and Waterloo North Hydro. 21 I expect to be taking part in the 22 hearing. 23 MR. DADSON: I am Aleck Dadson. I 24 will spell both my names as well. The first name is 25 spelled A-L-E-C-K, and the last name is D-A-D-S-O-N. 26 I act for Enron Capital & Trade, and 27 I expect to be active. 28 MS LEA: Anyone who is at the back, 12 1 then, and also expects to take an active part, please 2 step forward. As I say, there is one seat over at this 3 table, if you wish to take it, or you can move to the 4 microphone when your turn comes. Thank you. 5 Mr. Mondrow. 6 MR. MONDROW: Thank you, Ms Lea. 7 My name is Ian Mondrow, 8 M-O-N-D-R-O-W, counsel for the HVAC Coalition. That is 9 the Heating, Ventilation and Air Conditioning 10 Contractors Coalition Inc. 11 HVAC Coalition has a relatively 12 narrow interest in the proceedings, but will be active 13 in the various phases on that interest. 14 MS LEA: Thank you. 15 MR. REGHELINI: My name is Marcel 16 Reghelini, R-E-G-H-E-L-I-N-I, and I represent the 17 Ontario Hydro Services Company. We will be taking an 18 active role. 19 MS LEA: Thank you. 20 MR. WHITE: I am Roger White, 21 W-H-I-T-E, and I am with Energy Cost Management. 22 Either myself or Rick Groulx, G-R-O-U-L-X, will be 23 taking an active role in the proceedings. We represent 24 a number of municipal electric utilities. 25 MS LEA: Thank you. 26 MR. RONAYNE: I am Mark Ronayne, with 27 the federal Competition Bureau. We may have some 28 questions to put to the various presenters as well. 13 1 MS LEA: Thank you. 2 MR. RAWSON: I am Keith Rawson, 3 R-A-W-S-O-N, TransCanada. I expect to take an active 4 role. 5 MS LEA: Thank you. 6 MR. BARRETT: I am Andrew Barrett, 7 B-A-R-R-E-T-T, with Ontario Power Generation Inc. We 8 will be something more than observers and something 9 less than an active participant. 10 MS LEA: Another mystery man. 11 MR. BATTISTA: I am Richard Battista, 12 B-A-T-T-I-S-T-A, Union Gas Limited. We may have some 13 questions throughout the proceedings. 14 MS LEA: Thank you. 15 MS BODNAR: I am Barbara Bodnar, 16 B-O-D-N-A-R, for Enbridge Inc. We do not expect to be 17 active in the technical conference. 18 MS LEA: Thank you. 19 Is there anyone else who is going to 20 be active in this proceeding? 21 Yes, sir? 22 MR. SHALABY: I am Amir Shalaby, 23 S-H-A-L-A-B-Y. I am with the Ontario IMO. We expect 24 to be seeking questions of clarification during the 25 proceedings. 26 MS LEA: Thank you very much. Is 27 there anyone else, then, who plans to be active in 28 these proceedings that we haven't yet heard from? 14 1 There appears to be no response. 2 By reference to your schedule, you 3 will see that the first presenter scheduled is 4 Professor Don Dewees; that is spelled D-E-W-E-E-S. He 5 is intended to be the first presenter here. 6 I haven't yet seen him this morning. 7 While we are waiting for him to appear -- I believe he 8 was told to be here by us, so we are responsible for 9 the fact he is not here yet -- are there any questions 10 with respect to anything related to this particular 11 technical conference? 12 MR. MacODRUM: Yes. I have just one 13 request, Madam Chair, and that is that in examining 14 Dr. Dewees' submission I noticed that of all the 15 commenters on the Standard Supply Code he singled out 16 Toronto Hydro for particular comments. I would 17 appreciate the opportunity of asking some clarification 18 questions of Professor Dewees first, since we have been 19 particularly singled out for comments in this paper 20 that has been tendered. 21 MS LEA: Okay. 22 With respect to the order of 23 questioning, I had assumed that we would do as we 24 frequently do at this Board, that is, start and go 25 around in order of appearances. I don't have any 26 problem with people setting up their own order, however 27 it is. 28 Does anyone have a problem with 15 1 Mr. MacOdrum's request that he go first with respect 2 to -- it is just Professor Dewees', I think, your -- 3 MR. MacODRUM: That's right. My 4 request is limited to Professor Dewees, and it is only 5 because we are particularly singled out in his report. 6 MS LEA: I don't have a problem with 7 that. Does anyone else have a problem with that? 8 MR. BUDD: I may not have a problem 9 with that, with respect to Toronto going first on that, 10 but I would like to see the Board staff go first in 11 terms of questioning. I will give you my reasons why. 12 MS LEA: Okay. Do we have any 13 questions? 14 --- Laughter 15 MR. BUDD: Sure. While we are 16 waiting for him, in any event. 17 Just on that note alone, and I will 18 have some other submissions afterwards, I think staff 19 should go first because they really are taking a role, 20 as they historically did as Board staff, by putting 21 forward a presenter. You are very familiar with the 22 Board procedures the way they used to be, in terms of 23 staff taking an active role and behaving effectively 24 like an intervenor. 25 I think you identified that today at 26 the outset, that this is not a Board paper that 27 Mr. Dewees is bringing forward, this is Board staff's 28 paper that Board staff is calling, and so we know what 16 1 it is that we are dealing with, I would like to hear 2 any questions that you may have, just as we go through 3 the order of questioning. I think that is appropriate. 4 MS LEA: Sure. Mr. Budd, I am not 5 sure that Mr. Dewees is really a staff presenter. I 6 hadn't understood that to be true. I don't have any 7 questions prepared for him. 8 Just one moment. 9 MR. MARK: Who is bringing him 10 forward, then? Who invited him? 11 MS LEA: Let me find that out. One 12 moment, please. 13 --- Pause 14 MS LEA: I think that he is coming 15 forward to present because the staff paper did draw on 16 the MDC report. So I guess if he is anybody's 17 presenter, he is our presenter. I understand that he 18 is here to talk about the relationship of the MDC 19 report to the staff paper and whether it matches, 20 whether it doesn't, that kind of thing. So if he is 21 anybody's presenter, he is ours, if anybody owns him at 22 all. 23 MR. MARK: Just following up on that, 24 Ms Lea, I have a couple of questions of clarification 25 for procedure. 26 The first one is, there seems to be 27 some issue, at least until now, about how Mr. Dewees 28 gets here and who is sponsoring him, if anybody, which 17 1 raises the issue of the role of Board staff in this 2 proceeding. It is not clear to me what that position 3 is. I don't think Board staff is on the list of 4 intervenors. Does Board staff intend to make 5 submissions to the Board in this proceeding and, if so, 6 under what rule or authority? 7 MS LEA: No, I don't think we are 8 going -- 9 We are not making submissions, are 10 we? 11 No, I don't think so. Let me defer 12 to Mr. Hewson, who has more knowledge about the history 13 of this matter. 14 MR. HEWSON: Board staff's paper was 15 put forward based on the MDC's proposals and 16 recommendations to the government. There was urgency 17 set out during initial consultations with municipal 18 utilities and stakeholders that some draft of a 19 standard supply service be provided. The only 20 alternative that was out there at that time was the MDC 21 proposal. Staff put forward a paper, a straw man for 22 want of a better phrase, that was there to raise issues 23 and seek input from people. 24 The comments that came back suggested 25 that there needed to be a further proceeding, which we 26 are now in. 27 In order to ensure that that proposal 28 was brought forward -- the MDC, which no longer exists, 18 1 that proposal was brought forward -- Board staff, in 2 consultation with the Board, got approval to provide 3 some funds to Dr. Dewees to come forward as a 4 representative from the MDC who could speak to the 5 reports of the MDC and the proposals put forward by the 6 MDC. 7 It is not staff's view and it is not 8 the Board's view that staff is here presenting 9 Dr. Dewees. Dr. Dewees, as anyone, was permitted to 10 come forward and present an alternative. You do not 11 have to be an intervenor. You do not have to be party 12 to the process. You could be someone who just came 13 forward and said, "Here is an alternative", and all of 14 the intervenors in the room would have the opportunity 15 to question that party presenting that alternative. 16 That party does not have to then present the 17 alternative to the Board. It is there as information 18 for the parties in the process. 19 Staff is taking the role, as it 20 currently does under the rules of the Board, as a Board 21 adviser, and it is here to seek clarification if there 22 are issues that are left unclear and to ensure that the 23 record is complete enough for the Board to be able to 24 understand the alternatives put forward so that when 25 people make their submissions on August 9 and following 26 the Board will have a better understanding of the 27 alternatives put forward. 28 MR. MARK: Is Board staff a 19 1 proponent -- 2 MR. HEWSON: No. 3 MR. MARK: -- of the proposal which 4 is the subject of discussion? 5 MR. HEWSON: No. 6 MR. MARK: So Board staff will not be 7 making a submission -- 8 MR. HEWSON: No. 9 MR. MARK: -- in support of that 10 proposal? 11 MR. HEWSON: No. It was simply a 12 discussion paper, Alan, put forward by Board staff in 13 order to establish some alternative for the Standard 14 Supply Code, which is now being discussed in more 15 depth. That was the intention of the comment paper 16 that was put out on February 29. It was never intended 17 to be seen as Board staff's decision on where they 18 expect standard supply to go. It is a proposal paper. 19 MR. MARK: If I could follow up on 20 another issue which you raised before. When will we 21 have the opportunity to cross-examine? 22 MR. HEWSON: You will not. The Board 23 has determined that following the technical conference 24 it only wishes to hear submissions from parties on 25 their alternative that they would propose to answer the 26 issues that the Board has raised. 27 MR. MARK: If there is no, if you 28 will, proposed code, so it's tabular, as lawyers would 20 1 say, what is the impact of the Board having restricted 2 the issues list? What is the Board going to do with 3 the myriad of issues which it has determined it doesn't 4 want to hear from people on, but yet there is no 5 proposal that the Board is advancing? 6 MR. HEWSON: I think, Alan, in 7 response to that, the Board has the original comments 8 of all parties on the balance of the Code. What the 9 Board did itself is look at those comments from the 10 original Code and determine that the only issues it 11 felt it needed to have a further airing of or further 12 information or testing of was -- 13 MS LEA: At least in an oral 14 proceeding. 15 MR. HEWSON: -- in an oral proceeding 16 was the issues it has identified on the issues list. 17 All other issues that were raised in 18 the comments are still being considered by the Board. 19 They are there. They are thinking of them. They feel 20 they have sufficient evidence from those original 21 comments to complete the Code other than on the issues 22 they have identified. 23 MR. MARK: In other words, we are not 24 having a hearing on this? 25 MR. HEWSON: No. 26 MR. MARK: Let me say that that 27 causes, I think, some concern on behalf of the 28 Municipal Electric Association and I think some other 21 1 intervenors as well. Let me tell you why, because I, 2 frankly, think this is an issue we have to deal with up 3 front and get some clarification on. 4 My concerns were heightened on 5 receiving Procedural Order No. 2, which came across my 6 desk as late as yesterday, where it became clear that 7 the Board was, indeed, going to be severely restricting 8 the issues list and was also firm in its position not 9 to consider section 2.5.7 of the Affiliates 10 Relationship Code despite what I believe is the 11 Minister's direction that the Board do so. 12 All of that raises for my client the 13 question of the procedures which are being invoked in 14 this proceeding and indeed the fundamental question of 15 what is the nature and jurisdiction of this proceeding. 16 It's an issue which I think troubles many people. 17 The MEA is anxious and desirous that 18 a consultative process proceed and proceed 19 expeditiously, but it is not anxious that that process 20 proceed if it is not accompanied by the rules and 21 safeguards which traditionally accompany a hearing 22 because, frankly, we think that is what we ought to 23 have. 24 The issue of the rates under 25 section 29 of the Electricity Act is an issue of 26 fundamental concern, a very fundamental concern not 27 only to the consumers but to the municipal utilities 28 and all participants in the market. There is a real 22 1 concern that the process of consideration of those 2 rates must be an open, complete and fair process, and 3 unanswered are a number of questions about these 4 proceedings. 5 It certainly was not clear to us what 6 the status of the Board's proposal was or the role of 7 Board staff. It now appears that there will be no 8 evidence. It appears there will be no opportunity to 9 test the positions of various parties through 10 cross-examination or any similar procedure, which has 11 led us to question and examine what, indeed, are the 12 legislative foundations for this proceeding. We raise 13 this in part because we are concerned about the process 14 and in part because it's imperative to deal with this 15 issue early rather than later so the process doesn't 16 get derailed by objections when it's further along. 17 I take it from staff's response to 18 some of my questions, as well as a review of the 19 procedural orders in this matter, that the Board is 20 proceeding to deal with matters under sections 57 21 and 70 of the Ontario Energy Board Act, which, if you 22 look at the title of proceedings, are the sections 23 which are referenced by the Board. That is sections 57 24 and 70. 25 Section 57 -- 26 MS LEA: Do you want a copy, sir, or 27 do you have one? 28 MR. MARK: Section 57 is the 23 1 provision of the Energy Board Act which requires that 2 anyone wanting to transmit, distribute, retail, et 3 cetera, be licensed by the Board. Section 70 is the 4 provision of the Act which sets out the Board's precise 5 powers with respect to licensing and indicates that the 6 Board may attach conditions to the licence. If you 7 look at 70(d), it authorizes the Board to require a 8 licensee to observe codes. 9 It's clear from the Board's 10 correspondence with parties, the public and the 11 procedural order that what is happening here is that 12 the Board is considering a code which will be attached 13 as a condition to a distributor's licence. I don't 14 think that is an issue; the correspondence is quite 15 clear. I see Mr. Hewson acknowledging that. 16 We are concerned whether the Board is 17 well advised in this regard and our particular concern 18 is this. The rates to be applied pursuant to 19 section 29 of the Electricity Act, which is what we are 20 here considering, are not established pursuant to 21 section 70 of the OEB Act but, rather, pursuant to 22 section 78. If you look at section 78 of the Energy 23 Board Act, it is very clear that the Board is given an 24 express and mandatory jurisdiction to make an order 25 fixing rates for the retailing of electricity under 26 section 29. In particular, subsection (3) says: 27 "The Board may make orders 28 approving or fixing just and 24 1 reasonable rates for the 2 transmitting or distributing of 3 electricity and for the 4 retailing of electricity in 5 order to meet a distributor's 6 obligation under section 29 of 7 the Electricity Act." (As read) 8 Over in the following section, under 9 subsection (5), "Duty of the Board": 10 "In approving or fixing just and 11 reasonable rates, the Board 12 shall, unless the applicant 13 consents otherwise, apply the 14 method or technique for fixing 15 the applicant's rates set out in 16 the applicant's licence if such 17 a method or technique is set 18 out." (As read) 19 It's clear from section 78 that the 20 Board is required to consider the question of rates and 21 make an order with respect to section 29 rates under 22 section 78, not under section 70. The Board's only 23 jurisdiction comes under section 78. If you look at 24 78(2) it specifically provides that: 25 "No distributor shall distribute 26 electricity or meet its 27 obligations under section 29 of 28 the Electricity Act except in 25 1 accordance with an order of the 2 Board." (As read) 3 So the Board is required to make an 4 order. 5 If the Board is required to make an 6 order, then the Board is required to hold a hearing. 7 That comes from section 21(2) of the Energy Board Act, 8 which says that: 9 "Subject to any provision to the 10 contrary in this or any other 11 Act, the Board shall not make an 12 order under this or any other 13 Act until it has held a hearing 14 after giving notice in such a 15 manner and to such persons as 16 the Board may direct." 17 (As read) 18 While there are certainly provisions 19 in the OEB Act to permit the Board to start the hearing 20 process towards making an order, even without an 21 application from an applicant -- there are various 22 sections that authorize the Board to do that -- 23 nonetheless, they are still hearing procedures. The 24 Board can only deal with these rates by an order which 25 under section 21(2) requires a hearing and, 26 respectfully, trying to dress up what is being proposed 27 here as a code not accompanied by a hearing obligation 28 is not consistent with the legislation, at least in our 26 1 view. 2 As indicated before, the MEA is not 3 anxious to derail this process. We are anxious that 4 the issues before the Board be aired and resolved in a 5 timely fashion and we are prepared to proceed on a 6 consensual basis. But before we do, we require 7 agreement on a procedure which satisfies the 8 intervenors that the interested parties have the same 9 rights, safeguards and protections that they have in a 10 hearing and that the Board is subject to the 11 requirements of fairness and due process that they are 12 in a hearing environment. 13 So we would like to see agreement on 14 issues such as filing of evidence, cross-examination, 15 onus of proof, rules for adequate opportunity to make 16 submissions and for agreement that the Board will 17 dispose of this matter by giving considered reasons for 18 its decision, which are essential on a matter so 19 fundamental to the public interest and the interest of 20 the participants in the marketplace. 21 Ms Lea, before we go further in the 22 process, I would respectfully suggest that we ought to 23 deal with these process issues and come to some common 24 understanding about precisely what it is that we are 25 doing here and how we are going to proceed because 26 obviously the later that issue is left to be dealt 27 with, the more resources we are all wasting and a 28 greater uncertainty we are all creating. 27 1 So I would be pleased to hear if 2 Board staff has considered this issue, if the Board has 3 considered this issue, and perhaps what other 4 intervenors have got to say about it. 5 MS LEA: Thank you very much, 6 Mr. Mark. I appreciate you taking the time to give us 7 these submissions. 8 Just so I understand thoroughly what 9 you have said, I wonder could you just assist me with 10 section 70(2)(e) also, please? Then I will certainly 11 be happy to -- we will all be happy to hear from anyone 12 else who has comments on this issue and then perhaps I 13 can assist parties with what the best way is to resolve 14 this. 15 70(2)(e) indicates that: 16 "The conditions of the licence 17 may contain provisions 18 specifying methods of techniques 19 to be applied in determining the 20 licensee's rate." (As read) 21 I was wondering how that related to 22 section 78, in your view. 23 MR. MARK: Well, it relates two ways. 24 Number one is, as you will hear in due course, that's 25 part of the problem. There is a decided distinction 26 between a "method" or a "technique" and a "rate". 27 The Act in section 78 clearly 28 contemplates the Board making an order to fix a rate. 28 1 I read to you the section that said in conducting a 2 proceeding the Board can consider the method or 3 technique applied, but they are clearly two different 4 things and the Board, with the greatest of respect, 5 cannot get around its section 78 obligation to have a 6 hearing on the question of whether the resulting rates 7 are just and reasonable by relying on section 70 -- 8 MS LEA: 70(2). 9 MR. MARK: -- (2)(e). If you look at 10 section 78, it's clear that the method or technique is 11 something distinct, both in nature and in time, from a 12 rate. 13 If you look at section sub (5) of 78: 14 "In approving or fixing just and 15 reasonable rates, the Board 16 shall, unless the applicant 17 consents otherwise, apply the 18 method or technique for fixing 19 the applicant's rates set out in 20 the applicant's licence if such 21 a method or technique is set 22 out." (As read) 23 In my respectful submission, it's 24 clear that even if the licence sets out a method or 25 technique, there must still be a hearing to consider 26 whether the rates are just and reasonable. You can't 27 get rid of the section 78 obligation in deserting a 28 method or technique in the licence. 29 1 MS LEA: Thank you very much, 2 Mr. Mark. 3 I do have a few comments with respect 4 to that. 5 Does anyone else wish to raise any 6 new issues that Mr. Mark has not touched on at this 7 time with respect to this? 8 Mr. Rodger, yes? 9 MR. RODGER: Thank you, Ms Lea. Just 10 a couple of comments. 11 I believe both you and Mr. Hewson's 12 comments about this process are helpful, particularly 13 the issues that the Board staff is here as an adviser 14 to the Board only, that the goal is for the Board to 15 understand different alternatives, that Board staff is 16 not a proponent, nor will they be making submissions on 17 the draft code to the Board. Toronto Hydro is 18 satisfied to proceed on this basis. 19 Just to respond to a couple of my 20 colleague's, Mr. Mark, comments. 21 Generally, we are in agreement with 22 him concerning section 78(7), the fixing of the rates, 23 but we would also refer to you section 129 of the 24 Ontario Energy Board Act which also I believe will have 25 to be addressed in terms of Mr. Mark's submissions. 26 I will just read the part of the 27 section that we believe is relevant, and that is: 28 "...despite the fact for a 30 1 period of one year from the date 2 this section comes into force 3 the Board may without a 4 hearing:" (As read) 5 And if you refer to subsection (b): 6 "issue an order approving or 7 fixing just and reasonable rates 8 under subsection 78(3);" 9 (As read) 10 We understand that this is the 11 section that the Board has already invoked to issue its 12 rate orders under the interim licences so we believe 13 that the instant technical conference could fall under 14 that category as well. 15 Those are all my additional 16 submissions, Ms Lea. 17 MS LEA: Thank you. 18 Mr. Mattson. 19 MR. MATTSON: Thank you, Ms Lea. 20 We too now have a great deal of 21 concern because our understanding of the process was 22 that it wasn't going to be an adjudicative process; it 23 was going to be a rule-making sort of process within 24 the power that the Board has, which is more 25 characteristic of a legislative process. 26 Therefore, we certainly expected the 27 Board staff's paper was being put forward as a 28 proposal, and that the Board staff was acting like a 31 1 ministerial department, or like the government would 2 act normally, put forward its proposal, and you are now 3 asking for comments, and you weren't going to have a 4 hearing, you weren't going to have cross-examination. 5 You were doing this as part of a rule-making process. 6 Well, you can't replace the 7 adjudicative process with a rule-making process unless 8 you have clear rules. You have to replace them with 9 clear rules that try to emulate the type of fairness 10 and safeguards that the adjudicative process provides. 11 If the Board is really just putting 12 this forward as, as Mr. Hewson says, a straw man, then 13 we don't feel that we have been protected such as that 14 we feel we would have a conquerable ability to put 15 forward our position such as we would have in an 16 adjudicative process. 17 We find ourselves very much in 18 agreement with Mr. Mark that, unless the Board has a 19 clear process in mind with respect to the Standard 20 Service Supply Contract where they see their role 21 clearly to see the role of the Board and they somehow 22 feel that this is more efficient and more 23 cost-effective and just as fair as the adjudicative 24 process that it's replacing, without that I don't think 25 that we feel this process, then, in any way should 26 replace that process that we have all become much more 27 familiar with, which is the adjudicative process. 28 I think Mr. Mark's points are very 32 1 well put. At this point, if the Board is just coming 2 forward and putting forth a straw man proposal and 3 there is no proponent, then certainly we would agree 4 that there seems to be -- we have a great many concerns 5 about the process and we don't see how the ultimate 6 decision of the Board, without a hearing, without 7 cross-examination, without filing of evidence and 8 without a proponent can in any way be determined to be 9 fair at the end of the day, which could ultimately put 10 back -- through a judicial review application, may put 11 back this whole process for years, not months. 12 That is really our concern: Are we 13 trying to put forward rules that are legislative, that 14 are put forward by the government, that are going to 15 govern this market, or are we trying to have a hearing 16 to determine what those rules should be? Are we 17 dealing with policy here or are we trying to have some 18 sort of adjudicative forum? 19 I think the Board has to decide what 20 forum it is choosing before we can begin to decide what 21 rules we are going to put in place. That is sort of 22 where we see ourselves coming from. 23 We certainly did think that the 24 Board's proposal was going to be at least seen 25 as -- the Board's -- what do you call it; it is not a 26 proposal -- whatever -- 27 MS LEA: Staff paper, comment, 28 proposal, whatever. 33 1 MR. MATTSON: -- staff paper would be 2 seen as at least your first attempt at the best 3 possible position that you could come forward with and 4 that you were looking for input. If it's not even 5 that, then we really are in the dark. 6 MS LEA: Okay. Thank you, 7 Mr. Mattson. 8 Any further comments on this issue? 9 MR. BUDD: I have some, Ms Lea. 10 First, I just wanted to say that our 11 13 clients who are acting jointly under one umbrella 12 intervention fully support what Mr. Mark has spoken to 13 this morning, so I won't repeat that, but I would add a 14 few things if I might. 15 First, it's our view that these are 16 incredibly serious and critical issues in terms of the 17 industry restructuring and we take them as seriously as 18 they are. 19 In terms of the history of this Board 20 in dealing with an industry restructuring, this Board 21 very successfully dealt with the gas industry 22 restructuring but held hearings, full-course hearings, 23 some of which lasted weeks, to deal with issues. 24 You will recall those were the 25 contract carriage hearings and the Board ushered in the 26 whole era of deregulation using proper procedures, 27 giving parties the opportunity to fully examine other 28 parties' positions and indeed question them through an 34 1 interrogatory process. Subsequently, the Board has 2 developed an alternate dispute resolution process. 3 But, in any event, the Board is very familiar with what 4 a proper process is. 5 We think that it is critical that the 6 Board on issues like this pursue that kind of process 7 and we have serious reservations about the process that 8 is being proposed. I think you know that. 9 I will have other submissions later 10 on, but I recognize you want to contain this on the 11 transcript at this point. 12 MS LEA: Thank you very much, 13 Mr. Budd. 14 Mr. Dadson. 15 MR. DADSON: Just a few comments. 16 I totally agree with Mr. Mark's 17 remarks. I should point out that I am already on the 18 record in that regard. Mr. Mark has set forth really 19 the arguments that we and our counsel set forth in our 20 initial submissions to the Board back in February in 21 response to the initial submissions from Board staff. 22 MS LEA: Thank you very much. 23 MR. MARK: Could I just respond 24 briefly to the section 129 issue raised by -- 25 MS LEA: Yes. You will have to put 26 your microphone right in front of you, Mr. Mark. 27 MR. MARK: I would just like to make 28 a brief comment with respect to the section 129 issue 35 1 raised by Mr. Rodger. 2 Firstly, of course, there is the fact 3 that the Board has not purported to make this an 4 order-making proceeding under section 129, so unless 5 and until it does it is moot. 6 As well, if you look at 129, it is 7 intended to deal with interim licences for a very short 8 duration. In fact, subsections 5 and 8 clearly provide 9 that once section 60 of the Act comes into force, any 10 rate order made under section 129 ceases to be valid. 11 So I am assuming that the Board has 12 no interest whatsoever in going through a process to 13 come up with a rate which may have a life span of a few 14 months only then to have that order invalidated by the 15 coming into force of the rest of the Act and then be in 16 the situation, whether it is four months, six months or 17 a year from now, of not having an approved rate and 18 then having to do this process afresh. 19 So assuming nobody is interested in 20 that procedure, we should put aside section 129 and get 21 on with the substance of what it is we are required to 22 do under the Act. 23 MS LEA: Thank you, Mr. Mark. 24 Mr. Stephenson, you just wanted to -- 25 MR. STEPHENSON: I just wanted to say 26 that, I must say, I did not understand this proceeding 27 to be a proceeding whereby a rate was to be set under 28 section 78. I understood this to be, as Mr. Mattson 36 1 has indicated, essentially a form of rule-making 2 function. There are many ways to engage in a 3 rulemaking process, including notice and comment, and 4 this is the procedure that I had understood that we 5 were engaging in, was a forum of facilitation of that 6 rulemaking process. 7 I don't think there has been any 8 indication from the Board that the output of this 9 proceeding will be an order setting just and reasonable 10 rates pursuant to section 78. 11 I had understood that of course 12 distributors and others, retailers, will require such 13 orders in order to engage in their section 29 14 obligations pursuant to the Act, but that is going to 15 occur after. There is going to be some other 16 proceeding going on, which is not this proceeding, in 17 which there will be a forum appearing, as prescribed by 18 the Act, in order to provide an order to permit people 19 to engage in their section 29 obligations. But that is 20 not what we are doing here. 21 If I am right about that, then I 22 don't think Mr. Mark's concerns really are -- they may 23 be just premature. 24 It seems to me that they are valid 25 concerns, because to the extent that there is any 26 confusion about what the intended output of this 27 proceeding is, those confusions or concerns should be 28 addressed. But I think, as far as I can tell, those 37 1 concerns are just premature. I don't think anybody, 2 the Board or anyone else, is purporting to make an 3 order as required by section 78, and that, while that 4 must be done, that is going to be done on another day, 5 in another time, in another room. 6 But I certainly think the Board 7 should make it very clear about where it is going. 8 MS LEA: Thank you. Anyone else that 9 we haven't heard from yet? Is there anything further? 10 The gentleman at the back, yes. 11 MR. WHITE: It's Roger White. 12 MS LEA: Yes, Mr. White. 13 MR. WHITE: I would just observe that 14 if the Board or Board staff were dependent upon the 15 language of the initial discussion paper to talk about 16 a direct pass-through of costs to make them fair and 17 equitable, to the extent that there are imperfections 18 in the billing system my clients would be worried about 19 their legal right to apply pass-through algorithms 20 which cannot match perfectly the proposed process that 21 is going forward. 22 MS LEA: Thank you very much. 23 I just have a couple of comments to 24 make with respect to this, then. 25 MR. BUDD: Just before you do, in 26 fact, somebody just a moment ago mentioned about the 27 Board's rule-making powers, and I thought I would just 28 mention that in section 44 of the OEB Act there indeed 38 1 are rule-making powers, but they just relate to gas 2 only, they don't relate to electricity, from what I can 3 read. 4 MS LEA: I took Mr. Stephenson's 5 comments to refer to the general power that a tribunal 6 might have to make small "r" rules as opposed to the 7 Board's official rule-making power under section 44, 8 which applies to gas, and which also involves 9 particular procedures and procedural requirements. 10 MR. MARK: If I may, Ms Lea, just one 11 thing briefly in response to Mr. Stephenson. 12 MS LEA: Could you use your 13 microphone, please. 14 MR. MARK: Briefly in response to 15 Mr. Stephenson, let's all recognize reality here that 16 if the proposal before the Board, for example, that has 17 been put by Board staff -- which I had understood was 18 the starting point for the discussion, if you will -- 19 is accepted, there is no further role for the Board to 20 play in establishing just and reasonable rates. What 21 is being proposed under that model is the setting of 22 the rate. With the greatest of respect to 23 Mr. Stephenson, it's sophistry to suggest that there is 24 another step in the process. This is it. 25 If you are looking at the substance 26 of it, when or where will the participants in the 27 marketplace get the opportunity to have a hearing on 28 what are just and reasonable rates, this is it, because 39 1 if what is proposed before the Board is adopted -- the 2 section 78 procedure, if it is adopted at all, will be 3 a rubber stamping. 4 You will hear my submissions at 5 another time that this whole idea of this method or 6 technique without a fixed rate is misguided and not 7 justified by the legislation. 8 But from a procedural point of view, 9 Mr. Stephenson's suggestion that there will be another 10 proceeding in which there will be an opportunity for 11 meaningful input on the question of what is just and 12 reasonable is simply wrong. 13 MS LEA: Thank you, Mr. Mark. I 14 think I understood your submission, indeed, to be that 15 even if the Board is not explicitly working under 16 section 78 now it is acting in a manner which would 17 preclude further consideration under the section. Is 18 that your submission? 19 MR. MARK: Yes. 20 MS LEA: Thank you. 21 My comments are as follows. 22 My understanding of this procedure -- 23 and I don't have as much history as other folk in the 24 room with it, but I will do my best to put forward my 25 understanding -- is that it is not a proceeding under 26 section 78. The Board is not exercising any statutory 27 power of decision. The Board is not acting under its 28 rule-making power under section 44. The Board is 40 1 acting under section 70(2)(d) to create a code, which 2 would be approved by the Board, which would become a 3 condition of licences. 4 Section 70(2)(e) may also be related, 5 that is, setting a method or technique for calculating 6 the rate. The method or technique can be included in 7 the licence. 8 As I understand the Board's intention 9 here, it is not intending to make any order arising out 10 of this proceeding, nor is it intending to render what 11 I would call a capital "d" decision in the sense that 12 we have come to be used to decisions from the Board 13 following lengthy hearing proceedings. 14 It is attempting to approve a code, 15 and in attempting to approve that code it is seeking 16 the assistance of parties in making the best approval 17 it can, that is, your wisdom on this issue is valued, 18 we need it in order to understand what the best code is 19 that we can put in place and make a condition of the 20 licence. 21 I have heard several people say here 22 that they do not want to derail this proceeding, 23 although they have significant concerns about the way 24 that the procedure has been set out, and I hear those 25 concerns. 26 I am not in a position today, of 27 course, and, pending any change in my status, I am 28 never going to be in a position to make a ruling on 41 1 this matter. I cannot give you procedural rights that 2 the Board has not given you by way of procedural 3 orders. So I don't think there is much point in 4 discussing what procedural rights should be given 5 today, but I will make a suggestion as to how we can 6 resolve this matter. 7 May I suggest that we proceed with 8 the technical conference as set out, with whatever 9 faults you may think it has. I think it will still be 10 a useful proceeding because we will get a clarification 11 of the presenters and their proposals as we plan to do. 12 The Board staff paper is used as a 13 starting point for discussion in this proceeding. 14 If you are concerned about the 15 procedures that have been followed, you need to get a 16 ruling from the Board on that, not from me and not from 17 staff. Our agreement doesn't help you. You need to 18 make a motion to the Board to seek clarification on the 19 procedures to be followed in creating this code. 20 In that motion document you could 21 argue that what the Board is in fact doing, without 22 saying so, is making a ruling on a section 78. You 23 could make that argument there, but I can't rule on it 24 today. 25 So I suggest that we proceed as 26 planned, and those who have significant concerns about 27 process seek a ruling from the Board. 28 MR. WARREN: Ms Lea, before you go 42 1 any further, I would like to take instructions on the 2 point about whether or not to proceed as you have 3 suggested, so could we take a break at some point to 4 take instructions on that point? 5 MS LEA: Certainly. We will 6 certainly take a break to do that. 7 I would encourage parties to proceed. 8 This technical conference will be useful. If the Board 9 rules that this is the only time you will have to 10 question presenters, let's not waste that opportunity, 11 I would suggest. 12 One moment, please. 13 --- Pause 14 MS LEA: Thanks. Then we will 15 take -- 16 MR. BUDD: I just have a few other 17 concerns that I would like to register, if you want to 18 hear them now. 19 MS LEA: On the procedural matter 20 that we have been dealing with? 21 MR. BUDD: No, some additional 22 concerns. Some of them may involve process, but I just 23 want to be sure that you are aware of the concerns. 24 MS LEA: If you think it's a good 25 time, fire away. 26 MR. BUDD: Let's do it and hear it 27 now. 28 With respect to the issues list, 43 1 which we only received yesterday, we have some 2 substantial concerns with that. They go to the root of 3 the Minister's letter dated March 31, 1999 and 4 assurances that in fact at least section 2.5.7 of the 5 Affiliate Relationships Code was going to be a part of 6 this proceeding. 7 I think that letter as been filed as 8 Exhibit D -- Appendix D, pardon me, to the -- I was 9 going to call it the prefiled evidence, but I will call 10 it the -- 11 MS LEA: Submission? 12 MR. BUDD: The submission by Fiona 13 Woolf, Cameron McKenna and Seabron Adamson, dated 14 July 2, 1999. 15 In that letter, on page 2, from the 16 Minister, the Minister indicates -- and I am just going 17 to read it into the record: 18 "Given the direct relationship 19 between customer transfers and 20 the broader issues regarding the 21 discharge of default supply 22 obligation, I expect that the 23 Board will defer section 2.5.7 24 of the Code pending the outcome 25 of your continued consultations 26 on the Standard Supply Service 27 Code." (As read) 28 I submit to you, even though I know 44 1 you are not the Board, maybe you can take it upstairs, 2 that in fact if you look at the chronology of this, 3 what is being said is that, as of the March 31/April 1 4 time frame when the Affiliate Relationships Code was 5 coming into effect, the Standard Supply Service Code 6 was being dealt with -- which is what is proposed for 7 these proceedings -- precisely that section of the ARC 8 was to be dealt with. 9 That is certainly my understanding 10 and that of our clients. So I don't know what proposed 11 methodology you have for us to deal with that now, 12 because I understand in the next four days the Board is 13 not going to be sitting here unless we bring a motion 14 this afternoon to adjourn the proceedings and have the 15 Board come and sit and determine this procedural issue. 16 But this is absolutely fundamental to our clients that 17 this be included. 18 We are unaware, other than through 19 the procedural order, of what the Board's thoughts are 20 on it, and we have not been able to put it to any Board 21 member. That is one issue. 22 MS LEA: All right. Just one moment. 23 Okay. Go ahead. Thank you. 24 MR. BUDD: The second one is just 25 more of an administrative matter with respect to 26 filings. 27 I am not sure that we have received 28 all the filings from all the parties. A number of them 45 1 drifted in fairly late. But we certainly are trusting 2 that there will be no new substantial evidence or 3 submissions filed after this date. 4 If there are some exhibits or 5 something through the course of the four days that are 6 being proposed, that might be acceptable, depending on 7 what they are, but there wouldn't be anything of any 8 substance to which we would have to react at this 9 point, and certainly nothing after the submission 10 stage, or after this is concluded, that is new prior to 11 the proposed August 9th date. 12 If there is any different 13 understanding on the part of the Board staff, I am sure 14 you will let us know. 15 On the issue of questioning, we are 16 trusting that during whatever process is ultimately 17 adopted, parties are not going to be unreasonably 18 limited in terms of asking their questions. They will 19 be able to appropriately probe. I share Mr. Mark's 20 concerns very much with respect to the issue of 21 cross-examination. That is the way to test parties' 22 submissions, and it's difficult without that right to 23 do so. 24 With respect to the presentations, we 25 again have another serious concern that on these kinds 26 of issues parties are limited to 30 minutes. In our 27 case, for example -- and we would ask you to take this 28 back upstairs -- we are acting for 13 parties. If each 46 1 one of those parties had come in individually, which 2 would have otherwise been allowed even though 3 interventions are encouraged to be grouped, there would 4 have been hours put forward. 5 Limiting the presentation to 30 6 minutes in that case of a group intervention, we 7 respectfully submit doesn't make a lot of sense, and we 8 are asking that the Board would consider expanding that 9 time frame to something more reasonable. So we put 10 that forward to you. 11 Then finally, on the issue of costs, 12 I haven't seen anything emanate out of the Board on 13 costs for this process, but I would like to register a 14 substantial concern if there is going to be a cost. 15 I notice that the Board staff is 16 funding Dr. Dewees coming to be the cornerstone of the 17 process. 18 In any event, I am interesting in 19 knowing what the Board staff can offer parties at this 20 stage, upfront, in the way of advice on costs. What is 21 it that you are saying we can -- 22 MS LEA: Personally, sir? 23 MR. BUDD: Here is the concern. I 24 will tell you. 25 MS LEA: On our salary? 26 --- Laughter 27 MR. BUDD: Our Municipal Electric 28 clients, there is a rumour floating around they are 47 1 going to be asked to pay twice: once because they have 2 put together a substantial intervention here to bring 3 forward evidence and experts to assist the Board; and 4 secondly, if the costs of the proceedings are then 5 collected from the MEUs, we would end up paying twice. 6 I am wondering if you can comment on 7 that or come back to us at a later time? 8 MS LEA: Yes. 9 Mr. Budd, I will help you to the 10 extent that I can, within the extent of my knowledge. 11 I cannot really help you on two of the issues. One is 12 the cost issue. That is something that the Board will 13 be making a determination on. I am not aware of what 14 is going on there. 15 I will see if there is any new 16 information. I will investigate that to see if there 17 is any new information that has come forward. 18 With respect to the 30-minute 19 limitation, this, I gather, applies to the submissions 20 to be made at the hearing in August. I think that you 21 had better put that request to the Board at that time. 22 I obviously can't help you with that. 23 With respect to cross-examination, my 24 understanding is that it is the intent here, at this 25 technical conference, not to enter into what I would 26 term aggressive cross-examination, but certainly we 27 will want to understand the parties' submissions 28 thoroughly. So I guess we will all have to exercise 48 1 our best judgment as to what limits to put on that. It 2 is partly constrained I think by the time we have for 3 this proceeding also. 4 With respect to the most substantive 5 issue which you have raised, which is that of the 6 issues list and section 2.5.7 of the Affiliate Code, I 7 understand your concerns with respect to that. 8 The way that I read Procedural Order 9 No. 2 -- and I do not have any direct pipeline to the 10 Board other than what is manifested in the documents 11 that it set out -- on page 2, paragraph 2 of that 12 procedural order, the Board indicated: 13 "This proceedings is being held 14 to assist the Board in its 15 consideration of provisions of 16 the Standard Supply Service 17 Code. The Board will not 18 consider amendments to other 19 codes through this proceeding." 20 (As read) 21 I read that as being: This is not 22 the place to make submissions with respect to the 23 Affiliate Code. That is how I read it and I expect 24 that is how you read it, too. 25 The Minister's letter, which you have 26 referred to, I understood suggested that the Board 27 defer its consideration of that section of the 28 Affiliate Code until after this proceeding, until the 49 1 outcome -- defer the implementation -- well, in any 2 event, something about deferring it -- perhaps you can 3 quote it to me, that would be helpful -- until the 4 outcome of its proceeding on standard supply service. 5 Could you read me that sentence again, please? I don't 6 have it in front of me. 7 MR. BUDD: Sure. 8 "Given the direct relationship 9 between customer transfers and 10 the broader issues regarding the 11 discharge of default supply 12 obligations, I expect that the 13 Board will defer section 2-5-7 14 of the Code pending the outcome 15 of your continued consultations 16 on the Standard Supply Service 17 Code." (As read) 18 So I think Mr. Hewson is correct, the 19 Minister was saying as of March 31, when the code was 20 going to come into effect April 1, do not implement 21 section 2.5.7 because you have got continued 22 consultations on the Standard Supply Service Code. I 23 am submitting to you, and ultimately to the Board, if 24 they are listening upstairs, that it is only sensible 25 to deal with those issues simultaneously, as was 26 anticipated by the Minister. That is certainly my 27 understanding of what this is about. 28 MS LEA: Thank you, Mr. Budd. I 50 1 didn't interpret the letter as suggesting that 2 simultaneous consideration was required, but certainly 3 that the final implementation or decision on 2.5.7 4 should be deferred pending our continuing consultation 5 on the SSS Code. 6 I did not read the Board as saying 7 that it will never reconsider 2.5.7, only that it 8 wasn't going to make a ruling on that or decide on that 9 code in this proceeding. 10 So as far as I am concerned, in terms 11 of our chairmanship of this technical conference, I 12 think that what we are proposing with respect to that 13 issue is as follows. 14 The Board may not be making any 15 finding with respect to the -- it sounds like it won't 16 be making any finding with regard to the Affiliate 17 Relationships Code as a result of this proceeding. But 18 for your presentations in this technical conference, I 19 don't have a problem with submissions being made about 20 that section. 21 MR. BUDD: Yes. In fact that forms a 22 substantial part, I think, or component of the 23 submission that has been put forward by Ms Wells. 24 MS LEA: I think what we are aiming 25 to do here, though, is to keep focused on the Standard 26 Supply Service Code, and as those policy matters relate 27 to the Standard Supply Service Code we want to hear 28 about them in this proceeding, but I would suggest that 51 1 I don't think the Board is going to deal with the 2 Affiliate Relationships Code as part of this 3 proceeding. That is how I read the procedural order. 4 So I think if we could now take a 5 15-minute break for those who -- 6 I'm sorry, Mr. Mattson. 7 MR. MATTSON: Ms Lea, is the Board 8 staff -- are you going to clear up, though, exactly 9 what then your position paper is? We know we have 10 alternatives. Mr. Mark calls it a starting point. 11 MS LEA: Mr. Mattson, can I ask that 12 I have 15 minutes also to take instructions on that? 13 MR. MATTSON: Okay. 14 MS LEA: Thanks. 15 MR. MATTSON: I would just like to 16 know what the Board's paper is. 17 MS LEA: That's fine. Perhaps we can 18 talk to you also to understand how your concerns 19 precisely relates to these things. 20 Let's take 15 minutes, please, and we 21 will fire up again at exactly 10 to 11:00. 22 --- Upon recessing at 10:35 a.m. 23 --- Upon resuming at 10:50 a.m. 24 MS LEA: I wonder if we could 25 reconvene, please. 26 One matter that I was speaking to 27 immediately before the break had to do with the issue 28 of costs. Unfortunately, I can't give parties any 52 1 further information with respect to the cost issue. I 2 also was aware that -- 3 MR. HEWSON: Order, please. 4 MS LEA: Thank you. 5 As I was saying, I don't have any 6 further information to offer on the issue of costs. I 7 also had heard what Mr. Budd had put forward, that 8 there was a possibility that the Municipal Electric 9 Utilities would be asked to fund the proceeding, but I 10 don't know that that has been confirmed. I don't have 11 any further information on that. Any rulings on costs, 12 of course, will come from the Board. 13 Are there any parties here present 14 now who were not present at the outset of these 15 proceedings and wish to put their names forward as 16 active participants? 17 Yes, sir. 18 MR. PASTORIC: My name is Dan 19 Pastoric. 20 MS LEA: Could you spell your last 21 name, please? 22 MR. PASTORIC: P-A-S-T-O-R-I-C. The 23 company is called Energy Advantage. We represent 60 24 large commercial and industrial users in this province 25 and we will be active in the proceedings. 26 MS LEA: Thank you. Are there any 27 other participants now coming forward? 28 Yes, sir? 53 1 MR. RICHARDSON: My name is Jim 2 Richardson, along with Paul Ferguson. We represent the 3 Upper Canada Energy Alliance, which represents 10 LDCs 4 in the province. 5 MS LEA: Thank you very much. 6 I believe our first presenter is at 7 the front of the room and ready to begin. Professor 8 Dewees is with us. I understand he has a presentation 9 to make and after that we will begin with questions for 10 Mr. Dewees. 11 MR. MARK: Ms Lea, if I could just 12 put it on the record that our further participation in 13 this technical conference is not to be taken as any 14 acquiesence in the propriety of the process and it is 15 with reservation of our full rights to object to the 16 procedures. 17 MS LEA: Thanks very much, Mr. Mark. 18 I am glad you decided to stay. 19 MR. MARK: If we participate. 20 MS LEA: If you participate. All 21 right. So you are not sure either. That's fine. I 22 will look forward to whatever level of participation 23 you present. 24 Mr. Budd? 25 MR. BUDD: And we are likewise. 26 I just wanted to reiterate as well 27 for the record that Mr. Power will be joining us 28 shortly, as soon as he is out of court, and he will be 54 1 having questions for Dr. Dewees. 2 MS LEA: Thank you. 3 MR. WARREN: I'm sorry, Jennifer. I 4 apologize. I was late getting into the room. What is 5 the status of the issues which were raised by Mr. Mark 6 beforehand? 7 MS LEA: There has been no change in 8 the status. I think what I said was that we will 9 proceed with the technical conference and use it as an 10 opportunity to get clarification on the presentations. 11 Those parties who feel they are aggrieved by the 12 procedure in the formation of this code should bring 13 the matter to the Board by way of a motion. 14 MR. WARREN: Okay. Thanks. 15 MS LEA: Professor Dewees is with us. 16 Professor Dewees is going to be using slides. I 17 believe he has some copies of those available for 18 active participants, and we can make more as the need 19 arises. Perhaps I will help to pass those out while 20 Professor Dewees begins his presentation. 21 Thank you. 22 PRESENTATION 23 PROFESSOR DEWEES: Thank you, Ms Lea. 24 My name is Don Dewees. I am a 25 Professor of Economics and Professor of Law at the 26 University of Toronto. I served as a vice-chair of the 27 Market Design Committee through its life from February 28 1998 through February 1999. I was asked by the Board 55 DEWEES, presentation 1 to make a submission and to appear at this technical 2 conference, providing some background on the Market 3 Design Committee's recommendations and deliberations as 4 they relate to the draft Standard Supply Service Code, 5 and I have made a submission, which went into the Board 6 on the 5th of July. 7 For today I prepared a set of slides 8 which is a more compact form of that submission. In a 9 couple of places in the slides I respond to some of the 10 other submissions that were made which I have seen 11 between July 5 and now, so I will have a few comments 12 of my own on that. 13 Let me begin by outlining what I 14 propose to talk about. 15 I will say a few words about the 16 Market Design Committee and the way in which we work. 17 I want to give a brief overview of the retail design 18 that the Market Design Committee came up with, and then 19 I will move to the four issues that were specifically 20 raised by the Board for consideration at this technical 21 conference: the piping mechanism, procurement, 22 limitations on third parties, and billing. 23 The Market Design Committee began its 24 work in February of 1998 and worked through February of 25 1999. The committee consisted of 14 stakeholders. 26 They were the members of the committee, representing a 27 wide variety of interests in the electricity industry 28 and in energy retailing more generally. There was a 56 DEWEES, presentation 1 four-person executive: the chair, two vice-chairs, and 2 the director of research. There was a consultant. 3 Putnam, Hayes & Bartlett was retained by the Market 4 Design Committee as the lead consultant and they put in 5 an enormous amount of time working with the committee 6 over the course of that year, bringing their experience 7 in other electricity restructurings to Ontario. 8 By the middle of the year, by July, 9 we began to set up technical panels to begin to work 10 out some of the details to implement the overall market 11 design, the high level market design that the committee 12 had developed. We had over 100 people working on those 13 technical panels by late in the year. 14 The Market Design Committee 15 recommended rules for wholesale and retail markets for 16 licences. We made recommendations regarding most 17 aspects of electricity restructuring in Ontario. 18 We were guided by the White Paper of 19 November 1997. Part of our mandate was to follow the 20 White Paper as our terms of reference, and we looked 21 there, among other things, for goals. One of the 22 goals, one of the number that are identified in the 23 White Paper, is moving from monopoly to competition, 24 driving price to the lowest level. That was one of the 25 elements that the Market Design Committee considered in 26 its work. 27 In the second quarter report, our 28 second interim report -- I will refer to those reports 57 DEWEES, presentation 1 as Q2, Q3 and Q4, for the four quarters -- in our 2 second quarterly report we identified one goal of 3 retail competition as providing the best combination of 4 price and service for customers in Ontario. That is on 5 page 4-1 of the second interim report. 6 Our retail recommendations are 7 contained predominately in the second, third and fourth 8 quarter reports, most of them in Q2. 9 Additional goals that we identified 10 were avoiding cross-subsidy and creating a level 11 playing field, trying to create conditions under which 12 competition would be fair and free from cross-subsidy. 13 The Market Design Committee spent an 14 enormous amount of time on retail issues. We began in 15 March or April and they consumed many meetings of the 16 Market Design Committee as a whole and of its retail 17 subcommittee, of which I was the chair, which turned 18 out to have all of the members of the committee on 19 it -- nobody wanted to miss retail -- and in its retail 20 technical panel. 21 We had extensive deliberations on 22 what we called default supply, which is now called 23 standard supply service. Excuse me if, during the 24 course of this morning or today, I kind of switch back 25 and forth between the old terminology and the new 26 terminology, but we gave this a great deal of attention 27 for reasons that you will see as I go through the 28 presentation. 58 DEWEES, presentation 1 Of course, once we wound up at the 2 end of January, beginning of February of this year, 3 further market design was passed to the independent 4 market operator for refinement of the market rules and 5 to the Ontario Energy Board for the wide variety of 6 matters that are within the OEB's purview. 7 At a general level, the design that 8 the Market Design Committee came up with for retail 9 competition was there will be a distributor that is 10 regulated and performs only regulated functions. The 11 primary duty of the distributor is to operate the 12 wires, it passes through the spot price and is 13 responsible for billing. 14 The design minimizes risk-taking by 15 this regulated wires company and provides that 16 risk-taking and competitive activities would be 17 performed either in a separate affiliate, if that 18 municipal council wants to be engaged in those 19 activities, or by third parties, who could be anybody 20 else interested in those activities. 21 The MDC recommended that the default 22 supply or SSS, if I can use that abbreviation, would be 23 a smoothed spot price. It said that the SSS would be 24 the responsibility of the distributor, that is, it is 25 the responsibility of the distributor to offer SSS to 26 its customers, but this could be offered directly or 27 through a third party, including an affiliate. That is 28 also what is provided in the legislation. 59 DEWEES, presentation 1 The MDC said that customers should be 2 free to leave SSS for competitive retailers at any 3 time, that is, in order to encourage competition, 4 customers should not be locked into the standard supply 5 service for any substantial period of time. 6 What is retail competition? Let's 7 step back for a moment. 8 Under the wholesale market design 9 that the MDC developed, the independent market operator 10 will dispatch generation sufficient to satisfy all 11 those within the Province of Ontario. This is like 12 what Ontario Hydro has done in the past. In doing 13 that, it will establish a market-clearing price which 14 provides sufficient generation, the electricity will 15 flow through the wires, as it always has, according to 16 the laws of physics, to all customers. 17 So retail competition isn't about 18 getting the electricity to the customer -- that is the 19 responsibility of the IMO and its dispatch and of the 20 transmission and distribution companies keeping the 21 wires up and operating effectively -- retail 22 competition is about the price and other terms and 23 conditions under which the retail customer pays for 24 that electric power. 25 The pricing mechanism recommended by 26 the Market Design Committee was a smoothed spot price. 27 We said that the distributor should pass through to all 28 customers who are on default standard supply service, 60 DEWEES, presentation 1 the wholesale spot price subject to some smoothing 2 mechanism. In our report, in the second quarter 3 report, we looked at several smoothing mechanisms, but 4 made no recommendation -- I'm sorry, I think it was the 5 third quarterly report where we talked about smoothing. 6 We made no recommendation with regard to the specific 7 smoothing mechanism. 8 We talked about several, but then 9 said it would be up to the OEB to determine what was 10 the appropriate mechanism of smoothing. We talked 11 about possibly smoothing over the period of a year, 12 maybe a quarterly rolling average, but we left the 13 choice of that to the discretion of the OEB. 14 The draft code proposes smoothing 15 over the billing period. The billing period is 16 typically one, two or three months and by charging the 17 price over that period, you are effectively averaging 18 out variations in the spot price over the one, two or 19 three-month period. That is certainly consistent with 20 the MDC's suggestion that there be a smoothed spot 21 price and that it's up to the OEB to determine the 22 specific mechanism. 23 The MDC also considered fixed price 24 alternatives to the smoothed spot price pass-through. 25 We did that in the second quarter and in the third 26 quarter and again in the fourth quarter. After great 27 deliberation and a lot of investigation, in each case 28 we returned to the original recommendation of a 61 DEWEES, presentation 1 smoothed spot price pass-through. 2 Some of the reasons that were 3 identified by various MDC members for not choosing the 4 other alternatives that we looked at at the time were 5 the difficulty and costs associated with regulating 6 fixed-price offerings. The absence of a guarantee that 7 all areas would secure reasonable prices -- the 8 smoothed spot price, there is no question that will be 9 available to every MEU in the province, but for a fixed 10 price based on a procurement procedure there is no 11 guarantee. 12 Some members felt that all areas 13 would be able to secure a reasonable price for their 14 customers. Prices might differ significantly among 15 service areas. A fixed-price offering does not 16 eliminate risk. We have seen in the United States in 17 the last year or two cases where price gyrations led to 18 the failure of retailers, that is, those who had made 19 fixed-price commitments were unable to fulfil those 20 commitments and then somebody is left holding the bag. 21 That could be the distributor or it could be the 22 customers. 23 As I recall, one or more of the 24 submissions that were made during this month noted that 25 under a fixed-price offering, were there a failure of 26 that sort, then the spot price would be the back-up. 27 Customers could at least get the spot price if the 28 fixed price became unavailable because of failure. But 62 DEWEES, presentation 1 that was the concern that the MDC had. 2 Finally, there was a feeling that the 3 fixed-price offerings would likely be higher than the 4 expected spot price. The reason for that is if 5 customers are entitled to leave standard supply service 6 at any time, then the supplier of that standard supply 7 service has to promise a price for a requirement's 8 quantity. You can't be guaranteed a quantity because 9 customers may leave, particularly if the spot price 10 falls to a level better than the fixed-price offering. 11 So the supplier is going to have to 12 charge a premium because if the price is low the 13 customers will stay with the -- I'm sorry, will move to 14 the spot price -- if the price is high, they will stay 15 with the fixed price, and so the supplier will lose 16 customers just when it would have been easiest to 17 supply them. This means there is going to have to be 18 some sort of premium charged. 19 The MDC was certainly concerned about 20 the customer response to price variability. We were 21 not insensitive to this matter. We debated at great 22 length what the extent of that variability would be and 23 how customers would respond to it. In the end, the 24 members concluded that at least for the first few years 25 the 3.8 per cent was a new cap on OPG, Ontario Power 26 Generation. It would limit the price risk to 27 consumers. There would be a rebate if the wholesale 28 price drifts above 3.8 cents, and the alternative to 63 DEWEES, presentation 1 variable prices seems to be higher prices. 2 The question is: Do you think 3 consumers are going to prefer a fixed price or a low 4 price? They would like both, but, as between the two, 5 I believe the members of the Market Design Committee 6 were not persuaded that customers were better served by 7 a higher fixed price and so they chose to stay with the 8 spot price pass-through. 9 One way to look at this is that the 10 smoothed spot price pass-through gives every retail 11 customer in the province access to the wholesale market 12 price. Without doing more, everybody has the benefit 13 of wholesale competition simply by staying on standard 14 supply service. None of the other schemes seem to 15 offer that benefit. My conclusion, looking at the 16 draft code, is that it is consistent with the 17 recommendations that were made by the Market Design 18 Committee with respect to the pricing mechanisms. 19 We had some debate at the Market 20 Design Committee about the effect of different standard 21 supply service offerings on competition in Ontario and 22 some submissions both back in February and in July 23 addressed this issue. 24 I wanted here to step back a bit from 25 the MDC and offer what I thought was a useful way to 26 try to understand what is being said on this score. 27 Some comments suggested that 28 retailers will have trouble beating the smoothed spot 64 DEWEES, presentation 1 price, and in fact I quote Toronto Hydro for that 2 proposition in my written submission, that is, Toronto 3 Hydro's submission last February. If that's true -- 4 that is, if most customers elect to stay with the 5 smoothed spot price despite its volatility because it's 6 a good price -- this means that there will not be a lot 7 of retail residential customers anyway interested in 8 switching to retail suppliers, but that leaves retail 9 suppliers with the industrial and commercial customers 10 to focus on, and that's a large market. 11 Actually, I want to show another 12 transparency here. 13 Just over the weekend, I was trying 14 to get a handle on the relative size of the various 15 markets and found the following data. Putting together 16 data from Ontario Hydro, now Servco, and data from the 17 MEUs -- I think this is approximate because the data 18 doesn't quite match up -- I have done this quickly. I 19 haven't been able to reconcile all the numbers, but all 20 we need here is general guidance. 21 Large customers -- that is, customers 22 over 5 megawatts and there are about 250 of them 23 throughout the province -- consume about 25 per cent of 24 total Ontario demand, according to these figures, some 25 of them through MEUs, some of them as Ontario Hydro 26 direct customers. Residential customers consume about 27 27 per cent of total Ontario demand and general service 28 customers smaller than 5 megawatts consume about 48 per 65 DEWEES, presentation 1 cent of total Ontario demand. Those customers of 2 course are the full range, from some who are just a 3 little smaller than 5 megawatts down to some whose 4 consumption is probably no larger than that of a 5 typical household. 6 In response to some of the concerns 7 expressed in some submissions that residential 8 customers may not switch from the standard supply 9 service to retail offerings, even if that is true there 10 is still the 25 per cent of very large customers and 11 some substantial fraction of the general service 12 customers who are still large enough to be 13 sophisticated energy purchasers who could, if they feel 14 it's better for them, make a deal with a retailer or a 15 marketer or even with a generator to secure some 16 alternative to the standard supply service. 17 So, it seems to me that there is a 18 substantial opportunity for retailers to deal with 19 larger customers, even if it should turn out that 20 residential customers are not greatly interested in 21 competitive offerings. 22 With that in mind, if instead of the 23 smoothed spot price we were to move to a standard 24 service offering that was a fixed price, that 25 eliminates one possibly significant motive for 26 customers to switch from SSS to competitive retailers, 27 namely the variability of price. 28 It seems to me that if this fixed 66 DEWEES, presentation 1 price is not so high that it's unattractive -- that is, 2 if you don't price it so high that SSS customers are 3 taken advantage of and have to be allowed, in order to 4 get a good price -- if it's a reasonable fixed price, 5 then it seems to me this necessarily lessens 6 competition because there would be even less incentive 7 for customers to move from a fixed price, from a good 8 fixed price, to retail offerings, and if this offering 9 was made an affiliate of the distributor, an affiliate 10 that has a familiar brand name, it seems to me the 11 possibility for retailers to pry the customers away 12 from SSS offered by the affiliate would be even less. 13 My sense of it is -- this is not 14 something that was set explicitly by the MDC -- is that 15 I think the smoothed spot price would be a good deal 16 for customers and I think that either a fixed price 17 alternative would be such a high price that it's not a 18 good deal for customers and they will have to bail out 19 of that or if it's a good price it will then reduce the 20 opportunity for other competition. 21 I think that the smoothed spot price 22 provides a middle ground. It's not perfect, there is 23 variability, but in a competitive market price, the 24 wholesale market price, if consumers don't like that, 25 I'm sure other retailers will be available to offer 26 them fixed price alternatives. 27 On the issue of procurement, the MDC 28 recommendation for a smoothed spot price as the system 67 DEWEES, presentation 1 standard supply service employs, I believe, no need for 2 the distributor to purchase power in advance. 3 An important qualification, the MDC 4 did not say the distributor may not purchase power in 5 advance, neither did it say explicitly the distributor 6 must purchase from the spot market and only the spot 7 market in order to fulfil the defaults wire SSS 8 offering. The MDC simply said the distributor should 9 pass through the spot price to default customers. 10 Simply passing through the spot price 11 means the distributor pays the IMO for the electricity 12 that flows through its meters into its service 13 territory, it turns around and calculates the smoothed 14 bill according to the smoothing mechanism that is 15 chosen, and then it bills customers for their usage. 16 There is no need, clearly no need for 17 any procure requirement. The electricity will be 18 there. It's going to be dispatched by the IMO. It's 19 going to flow through the wires unless somebody repeals 20 clear cost laws. So the electricity will get to the 21 customer. There is no need for the distributor to 22 procure. 23 The draft code requires the 24 distributor to purchase from the spot market and this, 25 I believe, minimizes the risks for the distributor in 26 offering smoothed spot directly. 27 One of the concerns that the MDC had, 28 as I indicated in my overview of the design, was the 68 DEWEES, presentation 1 distributor should be engaged in low risk activities to 2 regulated operation. High risk stuff belongs in the 3 competitive retailers, whether affiliates or third 4 parties. So the Code, by saying the distributor has to 5 purchase from the spot market, I think is consistent 6 with the MDC recommendation and consistent with the 7 philosophy of minimizing risk to the distributor. 8 If you allow distributors to purchase 9 fixed price power for their SSS customers, one thing 10 that I believe this does is that it may pass the risks 11 inherent in new generation investment to those 12 customers. 13 Some of the submissions suggested 14 that new generation should be financed by allowing the 15 distributor to buy at a fixed price from that new 16 generator and pass that on to the SSS customers. 17 To me, I don't quite follow that 18 mechanism. If the price of the new generation is going 19 to be low, then it seems to me that the new generator 20 should be able to sell that power to the 25 plus per 21 cent of large and medium size industrial and commercial 22 customers in the province. 23 There is a huge market out there, 24 maybe half the final market, that is sophisticated 25 enough to be able to enter fixed price contracts if 26 they feel this is attractive. 27 If you can't sell the power from that 28 new generator to the big sophisticated customers, then 69 DEWEES, presentation 1 why should the standard service customers be required 2 to buy it? It seems to me that one way to look at this 3 would be to say, "If we can't sell it in the 4 competitive market, we will make the SSS customers take 5 it." That strikes me as inconsistent with the White 6 Paper philosophy that we are trying to move from a 7 monopolistic market with some regulation to a 8 competitive market. 9 The White Paper says that one purpose 10 of restructuring is to have more businesslike 11 investment decisions; that means letting investors take 12 the risks associated with those investments. To pass 13 those risks directly on to SSS customers, it seems to 14 me, goes back to where we were before: to make a 15 mistake and the power is too high priced, the SSS 16 customers are stuck with it. 17 Actually, they won't be stuck with it 18 if you follow the MDC recommendation that the customer 19 should be free to switch at any time. So I'm not sure 20 this even helps the generator that wants to make a new 21 investment, because if the contract with the 22 distributor is, "You buy my power at a fixed price 23 unless your customers go away because the price is too 24 high, in which case you won't buy it", I'm not sure the 25 bank is going to say, "This is a terrific contract. We 26 are going to lend you the money." 27 This means a couple of issues. One, 28 what about the MEU that currently owns low cost 70 DEWEES, presentation 1 generation. I believe Sault Ste. Marie made a 2 submission, pointing out that they have a contract with 3 Great Lakes Power that is at a good price and they 4 said, "Why can't we pass this on to our SSS customers?" 5 I think Orillia is in the same 6 position. There may well be other municipal utilities 7 that have their own generation and have access to 8 particularly low cost power. 9 The MDC didn't really address that 10 issue directly. I don't think as you look through the 11 report you will find a clear answer to what to do with 12 that. 13 My own answer, and here I am not 14 speaking for the MDC, this is just my own thought, is 15 that it would keep things simpler to say: SSS is going 16 to be smoothed spot price, but if an MEU has access to 17 existing low cost generation, it should assign that to 18 its retail affiliate and let that affiliate offer low 19 price fixed power to everyone in the service area. 20 My guess is you wouldn't have to 21 spend very much on marketing in Orillia or in Sault 22 Ste. Marie for the affiliate to point out to customers 23 that the same old cheap power that has been available 24 to them before is still available, so I'll just sign up 25 with the retail affiliate. 26 It seems to me this is a way to allow 27 the municipality to continue to pass on the benefits of 28 that existing low cost generation to its residents 71 DEWEES, presentation 1 without creating exceptions to the SSS regime and I 2 believe creating more complexity. 3 There was a suggestion in one or more 4 of the submissions regarding the affiliate buying at a 5 fixed price and selling it at spot. I confess I don't 6 understand the commercial motivation for that. I go 7 into that at some length in the written submission. 8 I'm conscious of the time and will 9 try to finish up quickly. 10 The MDC was conscious of time. Right 11 from the first day we met, there was a concern whether 12 we could do our job within a year, whether it was going 13 to be feasible to have a competitive retail market in 14 the year 2000. There were many suggestions that this 15 was not going to be possible and hadn't been done at 16 that pace anywhere else in the world. 17 So, as we look for a retail design, 18 we were looking for something that could be put in 19 place quickly, something that would be simple -- 20 relatively simple, nothing is simple -- something that 21 would be relatively simple and could be implemented 22 fairly quickly. 23 The MDC believed at the time that it 24 made the recommendation that the smoothed spot price 25 pass-through would be simpler for the distributors to 26 implement than any of the alternatives that we had 27 looked at and that was one factor in it making that 28 recommendation. 72 DEWEES, presentation 1 So overall, in my view, the draft 2 code that has been put forward is consistent with the 3 MDC's recommendations with respect to procurement. 4 Limitations on third parties. The 5 Market Design Committee, in more than one place, but 6 explicitly in its fourth quarterly report, acknowledged 7 the language of the OEB Act, section 70(9). The MDC 8 recommended that -- actually, in part of the same 9 report -- if a distributor fulfils its SSS obligation 10 through a third party, the OEB, through codes of 11 conduct or otherwise, should ensure that there is no 12 cross-subsidy of competitive activities, no 13 preferential access to customer data and that SSS 14 customers should remain contestable. 15 These goals have been enunciated by 16 the MDC back in its second quarterly report and the 17 matter of substantial concern was that in order to 18 ensure a level playing field for our competitors you 19 have to guard against cross-subsidy by related 20 companies, affiliates, cross-subsidy of competitive 21 activities by regulated affiliates, and preferential 22 treatment of competitive affiliates vis--vis other 23 competitors. That led to the MDC's expression of 24 concern in the fourth quarter and its recommendations 25 in Q-2. 26 As I look at the draft code I think 27 that it accomplishes these goals. It provides separate 28 accounts for SSS. It provides that the price to the 73 DEWEES, presentation 1 customer must be the same whether the SSS is provided 2 directly or through a third party. It says that if the 3 distributor is going to provide directly, it must 4 purchase from the spot market, and a third party 5 provider may only charge the spot price. This ensures 6 that there is no way that the regulated distributor 7 activity can be used to cross-subsidize an affiliate 8 activity. It says the third party provider may not use 9 customer information. We said that in that fourth 10 quarter recommendation. It says the third party 11 provider may not retail in the service area. 12 That goes beyond what the MDC had 13 said explicityely, but it is consistent with our 14 concern, with the MDC's concern, that opportunities for 15 cross-subsidy and preferential treatment be minimized. 16 Certainly some members of the MDC 17 were very concerned as to whether any code of conduct 18 could ensure that prior laws within an organization 19 could prevent the misuse of data or cross-subsidy if 20 those things were put together. 21 I think the probable result of the 22 draft code would be that some distributors will do 23 their own accounting and billing -- that is, they will 24 handle all the functions required to provide SSS 25 internally -- others will contract out, just as some 26 small MEUs currently contract out some of their 27 accounting and billing functions. I don't see any 28 reason why there won't be forums ready and willing to 74 DEWEES, presentation 1 provide that sort of data management services in 2 Ontario for any MEU that needs it. 3 Finally, with respect to billing, the 4 MDC recommended unbundling the customer's bill to 5 display the cost of each service separately, including 6 energy. That's an essential for competition. The 7 customer needs to know what's the cost of various 8 components of this service before the customer can 9 decide whether to choose some competing service. So 10 their unbundling is a central element in providing a 11 competitive retail market. 12 The draft code, it seems to me, is 13 consistent with this recommendation in suggesting a 14 list of things that may be provided in the customer 15 bill. 16 The MDC recommended that an affiliate 17 of the distributor not have preferential access to 18 customer data or markets, I have referred to that 19 already, and the draft code prohibits the distributor 20 from sending promotional material with customer bills. 21 It seems to me that is a reasonable part of trying to 22 avoid preferential access. 23 It's hard to summarize in 30 minutes 24 a very intensive year's work by the Market Design 25 Committee, so I have only hit the high points, but I 26 have tried to summarize the MDC's recommendations with 27 regard to standard supply service and some of the 28 thinking behind those recommendations. 75 DEWEES, presentation 1 In my view, the draft code that is 2 under discussion today is consistent with that set of 3 recommendations. I have to say when I first saw the 4 draft code I was quite pleased because it did seem to 5 me that it was consistent with the MDC recommendations. 6 Thank you. 7 MS LEA: Thank you very much, 8 Professor Dewees. 9 I think you can take a seat. We will 10 put you right up on the bench there. 11 I believe there was a request by 12 Mr. MacOdrum to begin. Unless there is any objection, 13 I think that is probably appropriate. 14 MR. MATTSON: Mr. MacOdrum wants the 15 people who support the position of this paper to go 16 first. You may want that, otherwise -- 17 MR. MacODRUM: No. I would prefer to 18 go first. 19 MR. MATTSON: All right. 20 MS LEA: I think we will just move 21 around the room, unless there is some difficulty. 22 Professor Dewees, could you speak 23 into your microphone briefly to make sure it is 24 working, please. 25 PROFESSOR DEWEES: Testing 1, 2, 26 testing. 27 MS LEA: Thank you. 28 Mr. MacOdrum. 76 1 MR. MacODRUM: Thank you very much, 2 Ms Lea. 3 Professor Dewees, I would like to 4 obtain clarification on four aspects of the Market 5 Design Committee's proposal and on your analysis of the 6 Board staff proposal for standard supply service. 7 The four aspects I would like to 8 discuss with you this morning are: 9 First, what is an appropriate 10 allocation of the risks associated with standard 11 supply? 12 Secondly, what option will best 13 encourage customer choice and promote retail 14 competition? 15 Thirdly, what is the level playing 16 field and what constitutes a participant having an 17 unfair advantage? 18 Fourthly, what kind of standard 19 supply services does the customer want from its local 20 distribution company? 21 Turning to the first point, the 22 question of allocation of risk, I would refer you to 23 page 1 of your written submission in this proceeding, 24 to the third paragraph, in which you say: 25 "Out of these concerns came a 26 retail market design in which 27 the distributors engage only in 28 regulated functions involving 77 1 minimal risk-taking; they 2 operate the distribution system 3 and pass through to consumers 4 the spot price, either directly 5 or smoothed. All risk-taking 6 and competitive activities must 7 be performed in a separate 8 corporation not engaged in 9 regulated functions." 10 Similarly, on page 4-6 of what you 11 call your Q2 report you say -- and this is in the first 12 full paragraph of text: 13 "Second, it is not clear how the 14 LDC could offer a fixed price to 15 its customer without exposing 16 itself to significant financial 17 risks, which seems more 18 appropriate to the competitive 19 side of the industry rather than 20 the regulated side. Such risk 21 taking by a publicly owned 22 entity raises the question of 23 who bears the risk: consumers 24 or ratepayers." (As read) 25 So with those two references and sort 26 of benchmarks, I would like to explore with you just 27 what is the nature of these financial risks. 28 What risks do you see that a 78 1 distributor would bear under the OEB staff proposal? 2 The spot price pass-through? 3 PROFESSOR DEWEES: Under the OEB's 4 proposal the distributor would be left with credit 5 risks -- that is, payment from customers -- something 6 that MEUs have faced all along. I am not sure what 7 risks beyond that. 8 MR. MacODRUM: Given that a large 9 number of the LDCs' customers are not on interval 10 meters, even with the spot price pass-through, will 11 there not be a load forecasting and load profiling 12 risk? 13 PROFESSOR DEWEES: I don't see why 14 that would be. With this new spot price pass-through, 15 the interval metered customers are called according to 16 their interval meters, and the cost of the remaining 17 electricity is divided according to one or more 18 profiles among the remaining customers. 19 It is not clear to me what risk this 20 leaves with the distributor. 21 MR. MacODRUM: I was really 22 questioning about the OEB staff proposal, the direct 23 spot price pass-through. I will get to the smoothed 24 price pass-through. 25 Even with the spot price 26 pass-through, there is a dependency on load forecast 27 and load profiles to properly allocate the cost to the 28 customer. 79 1 PROFESSOR DEWEES: There is a 2 dependency on load profile, that's correct. But it is 3 not clear to me how that creates a risk for the MEO. 4 With respect to forecasting, although 5 I haven't seen any mechanics of how the draft code 6 would be implemented, my understanding is that the bill 7 would be determined based on the actual usage over the 8 course of the billing period. 9 So it is not clear to me the role of 10 forecasting, unless the distributor is going to be 11 offering equal billing as part of its service. 12 MR. MacODRUM: Turning to your own 13 recommendation of the smoothed spot price pass-through, 14 there is a financial risk just created by the smoothing 15 process. 16 PROFESSOR DEWEES: If you smoothed 17 for longer than the billing period the LDC winds up 18 performing essentially a banking function, just as MEUs 19 currently do with equal billing, just as gas companies 20 do with equal billing. 21 The smoothed spot price pass-through, 22 as recommended by the MDC, would require that if a 23 customer left default supply or standard supply 24 service, he would then calculate the actual usage by 25 that customer as at the date they leave, and the 26 average price or the price for the electricity being 27 consumed. So there would be a true-up, which could be 28 either plus or minus depending on how things had been 80 1 going and the customer would then pay for their 2 electricity use in total at that time. That does not 3 leave any risk on the distributor. 4 MR. MacODRUM: What time period did 5 the MDC assume between a meter reading taking place and 6 the LDC obtaining the information, the optical spot 7 price information from the IMO? 8 PROFESSOR DEWEES: Between a reading 9 of the distributor's meter or the customer's meter? 10 MR. MacODRUM: The customer's meter. 11 PROFESSOR DEWEES: I don't recall 12 that the MDC addressed itself to that question in 13 particular. 14 MR. MacODRUM: Would it surprise you 15 if you understood that distributors had been advised 16 that it will take 10 days to get preliminary 17 information and 20 days to get final information from 18 the IMO? 19 PROFESSOR DEWEES: I'm sorry, this is 20 from the IMO regarding what? 21 MR. MacODRUM: What the spot price 22 was on the period that the meter was read. 23 PROFESSOR DEWEES: I had not formed 24 an opinion on when they would do that one way or the 25 other. 26 MR. MacODRUM: If there is that delay 27 in getting the spot price information, doesn't that add 28 an additional financial risk and need for working 81 1 capital? 2 PROFESSOR DEWEES: Because there is 3 delay in the customer's bill and delayed payment by the 4 customer? 5 MR. MacODRUM: That's correct, 6 because you can't send the bill out for 10 to 20 days 7 after the meter is read, where customarily distributors 8 send out the bill the day after the meter is read or 9 perhaps at the most two days after the meter is read. 10 PROFESSOR DEWEES: Sure. The 11 distributor would then have to cover that period of 12 time or else there would have to be an estimate and 13 then a reconciliation, one or the other. 14 MR. MacODRUM: What risks did the MDC 15 assume that distributors take today in their purchase 16 and sale transactions? 17 PROFESSOR DEWEES: We talked about 18 the MDC-discussed credit risk. I don't recall other 19 risks that were discussed by the MDC. 20 MR. MacODRUM: Would it surprise you 21 if I indicated to you that their recent peak day, last 22 Monday, is estimated to have cost Toronto Hydro up to 23 $4.9 million because of the fact that we buy on a 24 demand and commodity basis and sell to a large number 25 of our customers on a strictly commodity basis? 26 PROFESSOR DEWEES: It is interesting. 27 I am not sure I am surprised. 28 MR. MacODRUM: So that in the present 82 1 supply and resale arrangement that the distributors 2 have, there is already a significant financial risk 3 which the distributors are able to handle. 4 Is that not correct? 5 PROFESSOR DEWEES: You have suggested 6 that. 7 MR. MacODRUM: Would you agree with 8 that? 9 PROFESSOR DEWEES: I don't have 10 firsthand knowledge about that. 11 MR. MacODRUM: As an economist, would 12 you agree with that? As a lawyer, as an engineer? 13 PROFESSOR DEWEES: As a lawyer, I am 14 sure I wouldn't agree with you. As an economist, I am 15 not familiar with the arrangements you have discussed. 16 If there is a difference between the 17 basis on which you are buying and the basis on which 18 you are selling, then I presume there is some risk 19 involved in that. 20 MR. MacODRUM: I would like to turn 21 to what the MDC might have considered in how an LDC 22 could address the question of its risk of purchasing 23 and reselling if it was reselling on a fixed price 24 basis. 25 Could an LDC not have a portfolio of 26 electricity supply contracts which matched its forecast 27 resale obligation, including appropriate financial 28 instruments, and therefore eliminate or greatly 83 1 mitigate any financial risk from selling at a fixed 2 price? 3 PROFESSOR DEWEES: Certainly the MDC 4 considered precisely that. The concern was on several 5 levels: one, once you establish a portfolio management 6 system, there are inherently some risks in that. If 7 you operate it perfectly you can control those risks. 8 But history is replete with examples of risk management 9 schemes that weren't quite perfect and that means that 10 there is inherently some risk in engaging in portfolio 11 purchase. 12 The SSS -- because the Market Design 13 Committee believed that customers should not be locked 14 in to SSS, there is a volume risk, that is, if there is 15 a fixed price SSS and the spot price drops below that 16 for a significant period of time, customers may decide 17 that they would rather have the spot price than the 18 fixed price, and if they are allowed to switch, then 19 they will leave. 20 So the question is: What sort of 21 contract has the distributor entered into? Is it a 22 requirements-only contract or is it a fixed-quantity 23 contract? 24 If it's fixed quantity, then the 25 distributor is left with having to buy some quantity 26 that is now out of market. It is a higher price than 27 the spot price and that is a substantial risk for the 28 distributor. 84 1 I think the important thing here is 2 that the position of the distributor in offering a 3 fixed price SSS is different from the position of a 4 retailer or the distributor's affiliate in offering 5 fixed price competitive contracts, because in a 6 competitive contract you can lock the customer in, you 7 can sign a one year or a two year -- I don't know how 8 long they go, but you can lock customers in for a 9 period of time -- whereas in order to encourage 10 competition, the MDC's design did not permit locking in 11 customers on SSS. 12 That means that there is a volume 13 risk there which either the distributor avoids by 14 entering into a requirements contract, which means a 15 higher price, or it faces that risk if it has entered 16 into a fixed quantity contract. 17 In any event, with customers coming 18 and going during the course of the year, the 19 distributor has to take back a customer that requests 20 FSS service, and customers may leave at any time. The 21 distributor would be continually having to adjust its 22 portfolio, selling off some power when customers leave 23 and buying more when customers come on. That means it 24 is going to be a regular participant in the energy 25 market, and it seems to me there are inherently some 26 risks associated with managing a portfolio in that 27 fashion. 28 MR. MacODRUM: So it was the MDC's 85 1 conclusion, then, that the local distribution companies 2 really weren't sophisticated enough to handle those 3 risks? 4 PROFESSOR DEWEES: It was the MDC's 5 conclusion that it was neither appropriate nor 6 necessary for the distributors to handle that risk. 7 Some may well be sophisticated, although I don't think 8 anyone with experience has had experience with doing 9 that sort of portfolio assembly in the face of a spot 10 market. The regime we have had in Ontario I believe is 11 quite different from the regime we are going to be 12 entering into. 13 It may be that some distributors have 14 or will have that sophistication. We used to have 270 15 and we used that much. I don't know how many we have 16 now, but it is still close to that number I believe. 17 It seems to me unlikely that all of them would acquire 18 that sophistication at the time of market opening, and 19 it would be irresponsible to require them to do 20 something for which they might be unequipped, whereas 21 passing through spot price would be relatively 22 straightforward by comparison. 23 MR. MacODRUM: You mentioned that you 24 didn't address the issue of LDCs that had their own 25 generation in any depth. Did you look at all, for 26 example, how a company like what used to be Gananoque 27 Light and Power, or Granite as it is now called I 28 believe, manages its risk where it buys from its own 86 1 hydroelectric generation? It has a gas-fired peaking 2 facility, so it has to play off the gas price and also 3 buys electricity from Ontario Hydro. 4 That seems to me like a fairly 5 sophisticated portfolio management operation that they 6 have been doing for a number of years, and they are not 7 really one of the larger distributors in the province. 8 PROFESSOR DEWEES: I am not familiar 9 with Gananoque. In fact, Gananoque was mentioned at 10 some point during our discussions, but not in great 11 detail as I recall, and I have no personal knowledge of 12 the complexity of that operation or of its 13 sophistication. 14 MR. MacODRUM: Did you look at all of 15 the other risks that are inherent in the business of 16 operating a local distribution company? I think of the 17 risks that are inherent in long-term capital programs, 18 having to construct facilities that may not be fully 19 used for 20 to 30 years, and the risks of changing 20 technology, particularly information technology. 21 A local distribution company is not 22 really a risk-free operation, is it? 23 PROFESSOR DEWEES: The advantage the 24 local distribution company has, both today and in the 25 competitive market, is that it is a regulated monopoly. 26 No one has suggested that we will have anything other 27 than one set of wires running down the streets, and the 28 White Paper and the Act recognize that both 87 1 transmission and distribution are going to continue to 2 be monopoly activities and therefore they will have to 3 be regulated. 4 When you have regulation, that 5 mitigates risk for the distributor, that is, the 6 distributor is not in a competitive position where it 7 makes an investment in a transmission line and somebody 8 else drives down the price of distribution, and so it 9 can't recover the cost of that line. I don't know what 10 procedures the OEB will use in regulating distribution 11 tariffs but, in general, if the distributor behaves 12 prudently, I would expect it to recover those costs 13 through their regulated tariffs. 14 MR. MacODRUM: So whatever risks the 15 LDC gets itself into, they can be mitigated by the 16 regulatory treatment of the LDCs? 17 PROFESSOR DEWEES: That is my 18 understanding of the way rate regulation typically 19 works, within reasonable limits. 20 MR. MacODRUM: If it is not 21 appropriate, in your view, for the LDC to bear the 22 risks, I take it that you feel it is, however, 23 appropriate for the customer to take the risks. 24 I would point you to page 4.5 of your 25 Q2 report, at the bottom of the page, where you say, in 26 talking about the spot price pass-through option: 27 "In this option customers take 28 all the risks of price 88 1 fluctuation, unless they turn to 2 a competitive retailer for 3 supply at a contract price as 4 discussed below." (As read) 5 So customers take all the risks. 6 Why are customers, particularly those 7 who are on fixed incomes, better able to take the risks 8 than the local distribution company? 9 PROFESSOR DEWEES: The local 10 distribution company gets all its money from its 11 customers, so its ability to absorb risks, it seems to 12 me, is no greater than that of its customers. If the 13 customers take the risks directly, they at least have 14 the benefit of what the MDC anticipated would be the 15 lower price under the spot price pass-through. It 16 seemed to us that it was not an unreasonable trade-off 17 to have, in general, a lower price and face some of 18 this risk. 19 The MDC didn't reach a conclusion as 20 to what proportion of customers would, under its 21 proposals, elect to choose competitive retailers. If 22 it turns out that customers really don't want to accept 23 the risks of price variation and are prepared to pay 24 the premium requested by retailers in order to avoid 25 those risks, that is what competitive retailing is for. 26 They can move to that. 27 My understanding of the MDC thinking 28 was that customers aren't locked into this forever. If 89 1 it turns out to be something that they don't care for, 2 they can move to competitive retailers, whether an 3 affiliate or otherwise. But particularly in the first 4 few years of the market where OPG is under a 3.8 cent 5 revenue cap I think many members felt that the risks 6 would be pretty small and that the customers would 7 prefer to have a low price in exchange for accepting 8 those risks. 9 MR. MacODRUM: In your analysis of 10 the chart you presented this morning, you really said 11 "Well, I think there will really only be competition 12 with respect to the large over 5 megawatt customers and 13 the general service customers", and that in the first 14 few years, at least, there wasn't really going to be 15 much retail competition with respect to the 27 per cent 16 of the market which you identified as residential. 17 I am just wondering, isn't that the 18 very sector of the market where you have pensioners, 19 people on disability allowances and welfare recipients 20 who are on fixed incomes? How are they going to cope 21 with a spot price pass-through type of system? 22 PROFESSOR DEWEES: I think, actually, 23 in the month that I made I was referring back to 24 Toronto Hydro's suggestion that retailers would have 25 great difficulty beating the spot price. If that is 26 the case, then very few retail customers will move to 27 competitive retailers and then the scenario that I 28 spelled out. 90 1 I would have a strong feeling as to 2 what customers would likely do, and it seems to me one 3 of the merits of the MDC proposals is that the market 4 will decide whether customers wish to face the price 5 variability or to go with competitive retailers for a 6 fixed price option. 7 Customers face variations in all 8 kinds of prices as it is. In fact, today a customer of 9 Toronto Hydro faces bill variability as a result of 10 differences in the quantity of electricity consumed at 11 different times of the year. Many people use more 12 power in the winter than they do in the spring and 13 fall. Certainly my electricity bill is larger in the 14 winter period than it is in spring and fall, and since 15 we don't have much air conditioning it is also pretty 16 low in the summer. 17 If you look at what happens to 18 consumer bills today, they vary significantly from one 19 season to another because of variations in quantity. 20 Many consumers seem to manage that quite 21 satisfactorily. 22 The analysis that was done for the 23 Market Design Committee of price variability suggested 24 that variations in customer bills arising from price 25 fluctuations was likely to be of the same order of 26 magnitude as the variation in customer bills arising 27 from quantity variations. 28 So it is not as if the Market Design 91 1 Committee's proposals impose a new level of risk unlike 2 that faced by consumers of electricity in the past. In 3 fact, from the evidence that was before us, it looked 4 as if the price variation risk was similar in magnitude 5 to quantity variation risk, which consumers currently 6 face. 7 In addition, some MEUs -- and I don't 8 know what proportion -- offer equal billing options for 9 their customers precisely to smooth over those quantity 10 variations, and I see nothing in the draft code that 11 would prevent MEUs from continuing to offer equal 12 billing plans under a spot price pass-through, in which 13 case the customer's bill could be pretty steady 14 throughout the year, as it is today with equal billing. 15 MR. MacODRUM: Is that just a 16 suggestion you are making today or was that a proposal 17 of the MDC that equal billing plans could continue with 18 standard supply service? 19 PROFESSOR DEWEES: As I recall, we 20 looked at equal billing as one of the smoothing 21 mechanisms. We left it to the OEB to decide how 22 smoothing should be done. As I read the draft code, it 23 neither requires nor prohibits equal billing. If I am 24 correct in that reading, it is up to the distributor to 25 decide whether it wishes to offer that service to its 26 customers. 27 MR. MacODRUM: Did the MDC look at 28 the various charges that exist that require an annual 92 1 forecast of electricity prices to be incorporated? I 2 am thinking of commercial and many residential rents 3 that have an electricity component to them, or, for 4 example, certain welfare payments and things like that, 5 that have an electricity component or a utility 6 component to them that require an annual forecast. 7 PROFESSOR DEWEES: No, I don't recall 8 that we looked at that issue specifically. 9 MR. MacODRUM: I would like to touch 10 upon something you just mentioned a little while ago, 11 and you refer to it again. 12 On page 8 of your submission, in the 13 first full paragraph, you say: 14 "In summary, the MDC concluded 15 that ... [standard supply] 16 customers would be best served 17 by a ... spot price, which would 18 give every household in Ontario 19 the full benefits of wholesale 20 competition." 21 What are the full benefits of 22 wholesale competition? 23 PROFESSOR DEWEES: I think one of the 24 principles underlying the entire restructuring exercise 25 is that by moving toward wholesale competition we will 26 provide incentives for generators to minimize their 27 costs, stronger incentives than exist under a monopoly 28 regime, and will therefore produce a wholesale 93 1 electricity price that is the lowest possible price for 2 consumers every day. 3 MR. MacODRUM: On page 3 of the 4 submission -- and you alluded to this earlier -- you 5 say: 6 "In addition, the MDC recognized 7 that the price/revenue cap 8 regime recommended by the MDC 9 for Ontario Power Generation ... 10 for the first few years of the 11 competitive market's operation 12 would pay rebates for any amount 13 over the price cap for most of 14 the OPG's share of the energy, 15 limiting the average cost to all 16 Ontario consumers to 17 approximately the level of the 18 cap. Therefore, customer 19 exposure to risks associated 20 with movements in the wholesale 21 price will be limited for the 22 first few years." 23 Your analysis is that there isn't 24 much wholesale risk in the first few years. 25 PROFESSOR DEWEES: I'm sorry, I 26 missed your last sentence. 27 MR. MacODRUM: Is your analysis that 28 there will not be much risk associated with the 94 1 wholesale market volatility in the first few years? 2 PROFESSOR DEWEES: My personal view 3 is that that risk is likely to be relatively small. 4 The uncertainty is the speed at which OPG moves to 5 decontrol. As you know, in our market power mitigation 6 measures we recommended that within 42 months Ontario 7 Power Generation be required to decontrol all but 8 35 per cent of its price-setting generation capacity. 9 By that time, the behaviour of the wholesale market 10 should be reasonably competitive. It is possible. 11 In fact, in our fourth report we 12 encouraged OPG to move faster than that 42-month 13 deadline. So it's entirely possible, depending on how 14 that works out, that the market may become fully 15 competitive or at least workably competitive before 16 42 months. If it does, as OPG decontrols its 17 price-setting plant, the price cap is reduced. 18 What is the effect of that going to 19 be? I think it does create some price risk, but, in my 20 view, that is largely down-side price risk. 21 Jack Gibbons was associated with this submission. I 22 guess it was a Pollution Probe submission that said 23 that the marginal cost of generation with coal-fired 24 power plants was around 2.5 cents. 25 If that's true and if the result of 26 any competitive market under decontrol of the 27 price-setting plants is that we move toward a 28 competitive price, that price is likely to drop from 95 1 3.8 cents downward. I think that is a risk that most 2 Ontario consumers would welcome. As decontrol is 3 achieved as the price cap comes off, it's also possible 4 that the price might go up, although I think that's 5 quite a bit less likely in a competitive market. 6 MR. MacODRUM: That is your personal 7 analysis, I think, as you put it today. 8 PROFESSOR DEWEES: Yes. 9 MR. MacODRUM: I would like to take 10 you back to what the MDC's analysis was when they 11 recommended the smoothed spot price pass-through. 12 Was the analysis on which they based 13 that recommendation being that the wholesale market 14 would not be very volatile? 15 PROFESSOR DEWEES: At the time when 16 the MDC first made the recommendation for a smoothed 17 spot price pass-through -- that was in the second 18 quarterly report submitted at the end of June 1998 -- 19 at that time, we had made only moderate progress on the 20 market power mitigation measures and in fact the 21 measure that we wound up recommending at the end of our 22 deliberations, I think, was not clearly in view at that 23 time. So when we first recommended the spot price 24 pass-through, I don't believe that the members of the 25 MDC had in mind the stabilizing effect of the Market 26 Power Mitigation Agreement. 27 My recollection on that isn't crystal 28 clear and there are several members of the MDC who are 96 1 present here today. They might have other views, but 2 my recollection is that that was not a central element 3 in our decision to recommend the smoothed spot price 4 pass-through. 5 The MDC, as I recall, was comfortable 6 with it, even without having thought through the 7 implications of market power mitigation. Near the end 8 of our deliberations, we re-affirmed the smoothed spot 9 price pass-through and at that time we saw what the 10 market power mitigation measure was going to be like 11 and I believe the members took additional comfort from 12 that. 13 MR. MacODRUM: So your analysis today 14 is that the lack of volatility in the wholesale price 15 makes the smoothed price pass-through option more 16 attractive? 17 PROFESSOR DEWEES: Yes. 18 MR. MacODRUM: Ms Lea, I am looking 19 at the clock. I am just through the first of my four 20 aspects and I wondered if perhaps you could advise me 21 of when you would like to take the luncheon break. 22 MS LEA: Well, I had thought of 23 around of 12:30. No fixed time was in my head. It's 24 now about five past 12:00 by that clock. You can let 25 me know sometime around 12:30. If there is a good time 26 for you to pause, that would be agreeable. 27 Thank you. 28 MR. MacODRUM: Thank you, Ms Lea. 97 1 The second area I would like to turn 2 to now is the question of retail competition. We have 3 just concluded that we are looking at either a smoothed 4 or a direct spot price pass-through which is going to, 5 at least in the initial years, have little price 6 fluctuation. I would like you to address how you think 7 that model will encourage retail competition. 8 PROFESSOR DEWEES: I think there are 9 two elements to that. Let me actually back up a step 10 to ask and then answer: What is the objective of 11 retail competition? My personal view -- and I think 12 this is a view of many, although not necessarily all of 13 the members of the MDC -- was that the purpose of 14 retail competition was to give consumers a good 15 combination of price and service. That's the end goal. 16 I don't think that anywhere we said 17 anything that suggested that having lots of competitors 18 or having lots of customers switch to competitors was 19 the right measure of successful retail competition. So 20 for me the starting point -- and, as I say, I think for 21 many, but probably not all members of the MDC -- the 22 question is how well a customer is being served. 23 The smoothed spot price pass-through, 24 the MDC believed, would offer a good price and, as you 25 have noted, because of the market power mitigation, at 26 least in the initial stages, a pretty stable price. 27 That seems to me to be a good deal for customers and I 28 think that the MDC was comfortable with spot pricing 98 1 partly because customers would be well served. 2 There is concern about volatility. 3 We spent a lot of time at the MDC talking about that, 4 discussing how great would price variability be, what 5 do consumers really want, how much of that are they 6 prepared to face. I think another source of comfort 7 with the SSS that the Market Design Committee proposed 8 was that if in fact customers are not content with 9 whatever price risk exists they can seek the services 10 of competitive retailers and get price security. 11 So that means if customers want it, 12 the competition will be there, that is, if there is a 13 demand for fixed price alternatives or more stable 14 price alternatives there is every indication that 15 retailers would be prepared to present it. As I 16 suggested earlier, I expect retailers will be pounding 17 on the doors of the large and medium-sized customers at 18 least. 19 We may, indeed, be doing that as soon 20 as we get our licences -- have they been issued -- when 21 they are issued, and that retailers who are engaged in 22 that business could easily move on to residential and 23 small general service customers should then be there. 24 The MDC didn't really have a perception of how much 25 retail activity there would be under this option, but 26 my sense was the members thought there would be about 27 as much as customers wanted. 28 MR. MacODRUM: If you turn to page 99 1 4.9 of your Q2 report, at the very bottom of the page 2 it says: 3 "When a consumer signs up with a 4 competitive retailer, the 5 consumer is choosing financial 6 terms and conditions of its 7 electrical service and perhaps 8 other valued services." 9 (As read) 10 So is your model of retail 11 competition that at least in the early years it's not 12 really price competition, it's over financial terms and 13 conditions and other value-added services? 14 PROFESSOR DEWEES: I think it's 15 clearly a combination of those things. 16 Certainly price is central, but other 17 terms and conditions may well be a basis for 18 competition. 19 For larger customers, we recommended 20 that metering be competitive. We could imagine a 21 service provider offering some combination of metering 22 price and energy management services. The MDC didn't 23 try to set limits on what the set of offerings from 24 competitive retailers might be, but it would be more 25 than price. I think everybody assumed that. 26 MR. MacODRUM: But taking into 27 account what you have said about the attractiveness of 28 the initial wholesale price as a result of the 100 1 arrangements that have been agreed to with OPG -- and 2 there isn't going to be much fluctuation around that 3 price -- how would there be much retail price 4 competition in the early years? 5 PROFESSOR DEWEES: I don't know how 6 much there is going to be. There were some 7 suggestions, both during the MDC and in some of the 8 submissions, that retailers may be able to secure power 9 at a price lower than the expected spot price. If they 10 can do that, then they should be in a position to 11 engage in some very serious price competition. I 12 confess personally to some skeptism about that, but I 13 would look to the market to tell us whether that's 14 possible. 15 MR. MacODRUM: Did the MDC consider 16 that there is an incentive in the 3.8 cent 17 arrangements, together with their recommendation for a 18 spot price pass-through based on the wholesale spot 19 price, to bring on new generation and cogeneration 20 projects? 21 PROFESSOR DEWEES: Did the MDC 22 consider that there was an incentive? 23 MR. MacODRUM: Their regime that they 24 proposed, did they feel it provided an incentive to 25 bring on new generation and cogeneration projects? 26 PROFESSOR DEWEES: The MDC's approach 27 to new generation and cogeneration was that those 28 decisions should be based on commercial considerations, 101 1 that they should be market-based and that new 2 generation should be encouraged by prices of whatever 3 sort, whether spot prices or contract prices, that are 4 sufficient to attract investors to building new 5 generation. 6 I don't think that the MDC took a 7 position as to whether 3.8 cents would yield 8 substantial amounts of new investment or not, but my 9 read on the MDC's approach to new generation was that 10 the market will decide whether new generation is needed 11 and we will see new generation coming onstream when the 12 price is above that which the new generation requires 13 in order to make the investment worthwhile. 14 MR. MacODRUM: You say the MDC 15 assumed the market will decide, but then you structured 16 the market in the initial years. Didn't the MDC direct 17 its mind to what impact that proposal was going to have 18 on attracting new generation and new cogeneration 19 projects? 20 PROFESSOR DEWEES: I don't recall 21 that we addressed it specifically in any report. There 22 was some discussion around the table. There was quite 23 a lot of discussion about new generation. Some of that 24 discussion was of the form that new generation is going 25 to be more expensive than 3.8 cents and so this price 26 won't encourage it. 27 One response to those suggestions was 28 3.8 cents is already above the competitive price -- and 102 1 this is following the sort of argument that the 2 Pollution Probe submission made -- so if we had a truly 3 competitive market on day one, the price would be even 4 lower and even less chance for new investment. The low 5 price means we don't need new investment. Why is the 6 price low? Because we have plenty of capacity. 7 Even with seven nuclear units made 8 up, OPG and other generators were able to meet the 9 recent demands during hot weather periods. If MAOP 10 works, if those nuclear plants come back, we have quite 11 a bit of generation available and if we have quite a 12 bit of generation, if we have as much as we need and 13 the result of that is that a truly competitive price is 14 not high enough to reduce other generation, it seems to 15 me that the price is sending exactly the right signal. 16 I don't personally have firsthand 17 knowledge as to what price a new generator would 18 require to build a new plant, but if 3.8 cents won't do 19 it, then waiting a while before those plants are built 20 strikes me as exactly the right thing to do because 21 there is no need for that power right at the moment. 22 MR. MacODRUM: Did the MDC do any 23 analysis of other jurisdictions that it used at spot 24 price pass-through and what the impact was there on 25 retail competition? 26 PROFESSOR DEWEES: We looked at all 27 the other jurisdictions we could find. One problem we 28 had was at the time, during 1998, there were in fact 103 1 very few jurisdictions that had achieved full retail 2 competition. 3 The U.K. was only moving toward it, 4 early this year I guess, or I believe they are there 5 now. New Zealand was moving in that direction. 6 California just came onstream in April or May of 1998. 7 Yes. We looked at other 8 jurisdictions to see what they were doing, but we 9 didn't find very much in the way of guidance. In the 10 case of California, they have a spot price 11 pass-through, but they also have a competition 12 transition charge, a stranded debt charge, that varies 13 inversely with the spot price so that the customer gets 14 a fixed price. Then they reduce the fixed price by 10 15 per cent so the customers will be happy. 16 The result of that is nobody can beat 17 that price, but that's not because of the spot price. 18 That is because they have essentially a regulated price 19 that was driven down 10 per cent. So we don't learn 20 anything about the effect of a spot price pass-through 21 from looking at the California market. 22 I don't recall that at the time we 23 met we found very much guidance from other 24 jurisdictions. As I recall -- I can't remember if it's 25 Argentine or Venezuela is using a spot price 26 pass-through. Interestingly, one of the effects of 27 restructuring that market has been quite a lot of new 28 generation. 104 1 MR. MacODRUM: Venezuela was the only 2 example you found that had used the model that you were 3 recommending. 4 PROFESSOR DEWEES: No, but I can't 5 identify now the range of mechanisms used by the 6 jurisdictions. Well, if I think about it, that may in 7 fact be true. There is probably a little experience 8 with that and I think we are moving toward breaking new 9 ground here, with others in breaking new ground. 10 I believe I recall one member at a 11 meeting saying it is presently concerned that -- 12 responding to some sort of reassurance about this new 13 spot price pass-through by saying in fact there is 14 little or no experience with this elsewhere. There is 15 now a bit, but it's not very much. On the other hand, 16 there's not a lot of experience with other mechanisms. 17 MR. MacODRUM: I would like now to 18 turn to the third aspect to explore with you. That is 19 the issue of the level playing field. You referred to 20 that in your presentation today. 21 Again in your submission on page 11, 22 you said at the bottom of the page: 23 "However, the MDC emphasized 24 that if a distributor chooses to 25 satisfy its SSS obligations 26 through a competitive affiliate 27 or other third party, the 28 appropriate protection methods 105 1 must be in place to ensure that 2 cross-subsidization does not 3 occur and a level playing field 4 is protected." 5 Would you agree with me that a level 6 playing field involves no party having an unfair 7 advantage? 8 PROFESSOR DEWEES: That sounds right, 9 no party having an unfair advantage arising out of the 10 design of the playing field. You have to distinguish 11 between a level playing field and equal teams. You can 12 have a level playing field and unequal teams and the 13 playing field is still level. 14 MR. MacODRUM: But you didn't look at 15 the advantages that the various participants bring to 16 the playing field. 17 PROFESSOR DEWEES: We certainly 18 talked. We had quite a bit of discussion about what 19 various participants might bring to the playing field. 20 MR. MacODRUM: For example, did you 21 take into account the fact that natural gas 22 distributors that wished to enter into the retail 23 competitive market already have a historic relationship 24 with the customers in, for example, an MEU service 25 area? 26 PROFESSOR DEWEES: Yes, we certainly 27 did. 28 MR. MacODRUM: That is an advantage 106 1 to them in selling that market, isn't it? 2 PROFESSOR DEWEES: I would presume. 3 I don't know how their customers feel about their 4 service, but assuming that that has gone well, I 5 presume it would be an advantage. There would be some 6 customers that would regard it as a disadvantage. 7 MR. MacODRUM: Certainly we 8 understand that in the market that Toronto Hydro 9 serves, there is an interest from major U.S. and other 10 foreign electricity suppliers with a large capacity to 11 cross-subsidize from other businesses into their entry 12 into the market and they have established technologies, 13 established brands, established products. 14 Don't they bring an advantage to the 15 retail market? 16 PROFESSOR DEWEES: If that's true, 17 they bring a competitive advantage. You are telling me 18 that there are some retailers out there who are going 19 to be pretty good at retailing. I would suppose, 20 because there is gas retailing both in Ontario and 21 elsewhere in North America and there is some 22 electricity retailing elsewhere in North America, I 23 would presume there are some players who have some 24 experience and capability in that area. 25 MR. MacODRUM: From your year's 26 deliberation, didn't you conclude from just who took an 27 interest in your work that players like Enron and 28 Southern Company and Duke and AET and Detroit Edison 107 1 and a whole list of them, British Energy, may be active 2 in the Ontario market? 3 PROFESSOR DEWEES: I can't vouch for 4 all of the names that you mentioned, but I believe most 5 members understood that there was considerable 6 interest, at least potential interest, in the Ontario 7 market, by various players in the energy industry. 8 MR. MacODRUM: And these players with 9 an established record in electricity markets bring 10 advantages that the local Ontario distributors don't 11 have. 12 PROFESSOR DEWEES: I think there are 13 sort of, if you will, competing strengths. The import 14 of your question, I guess, is that the local Ontario 15 companies don't have experience and competence. Was 16 that the implication? Did you say the others have 17 experience, capabilities and product established? 18 If the Ontario players don't have 19 that, it's something they have to overcome. On the 20 other hand, in our recommendations we did not prohibit 21 affiliates from using brand names that were similar to 22 those of the existing MEU. 23 I would presume that many MEUs have a 24 positive image and brand name and reputation for their 25 customers. I would think that would be a very valuable 26 asset that a retail affiliate would bring to retail 27 competition in Ontario. 28 MR. MacODRUM: But the staff proposal 108 1 which you are endorsing or which you feel is supportive 2 of the MDC's recommendations suggests that a LDC which 3 arranges for its affiliate to provide standard supply 4 service isn't going to be allowed to compete in that 5 market, its own market. 6 PROFESSOR DEWEES: That's right. 7 Frankly, I don't see why a distributor would do that so 8 long as the distributor can either do the standard 9 supply service itself or contracted a third party that 10 is not engaged in retailing to do the data processing 11 and thereby leave its affiliate free to compete as 12 extensively and vigorously as it wishes in its own 13 service area. 14 It seems to me that the draft code 15 doesn't prohibit affiliates from retailing in the 16 service area. It only says the affiliate has to choose 17 is it going to provide standard supply service or is it 18 going to retail, but it can't do both. 19 The reason, it seems to me, asking 20 the affiliate to make that choice or asking the 21 municipality to make that choice is consistent with the 22 MDC's concerns about cross-subsidy and preferential 23 access to information. 24 MR. MacODRUM: Any one of the 25 reasons, though, that distributors are looking to do it 26 through a retail affiliate is that the Act in fact 27 envisages that the right to do it directly will end at 28 some point in time. 109 1 PROFESSOR DEWEES: Yes. The Act 2 allows for that possibility. 3 MR. MacODRUM: Don't other major 4 customer service organizations -- I am thinking like 5 people like Sears and Canadian Tire and The Bay, 6 Zellers, aren't they going to be bringing very strong 7 assets and advantages into a competitive retail market? 8 I'm thinking of their billing and credit card customer 9 service systems. 10 PROFESSOR DEWEES: I have no idea 11 whether those companies are interested in the 12 electricity market in specific or the energy market in 13 general. If they were, I suppose they would bring 14 billing and credit card experience with them. 15 They would bring, I suspect, profound 16 ignorance of the electricity market which strikes me as 17 a substantial disadvantage, but as the MDC recommended 18 and as the draft code provides, I don't see any 19 limitation on what forums could get into the energy 20 retailing business so long as they are not already 21 privy to electricity customer specific information. 22 MR. MacODRUM: In using the analogy 23 of a level playing field, you said it's going to be a 24 level playing field but with unequal players on it, 25 that the level playing field was all that the Market 26 Design Committee was concerned with designing. 27 Aren't you, in effect, not just 28 designing the level playing field, but you are also 110 1 designing the strength of some of the players? You are 2 handicapping some of the players, aren't you? 3 PROFESSOR DEWEES: The draft code has 4 a uniform requirement that no one who provides, no 5 third party that provides standard service supply can 6 also engage in retailing. 7 It seems to me that's a rule of 8 general application to all parties. It would affect 9 Sears or Enron or Toronto Hydro's affiliate equally. 10 It seems to me that's perfectly fair. 11 MR. MacODRUM: But the proposed 12 Standard Supply Code only applies to existing 13 distributors. 14 PROFESSOR DEWEES: The Code applies 15 to existing distributors. 16 MR. MacODRUM: If it's going to be a 17 code that is attached to the distribution licence? 18 PROFESSOR DEWEES: Yes. 19 MR. MacODRUM: Isn't the effect of 20 that and the effect of your endorsation of the staff's 21 proposal or even the MDC's proposal itself, in effect, 22 to handicap one of the players on this so-called level 23 playing field? 24 PROFESSOR DEWEES: I'm sorry? I 25 don't see why. 26 MR. MacODRUM: What I tried to 27 suggest to you was you have got gas utilities who have 28 historic relationships with your customers that they 111 1 can exploit. 2 PROFESSOR DEWEES: If Toronto Hydro 3 has an affiliate, it has at least a brand name 4 associated with the historic relationship which I would 5 presume it can exploit. It doesn't seem to me there's 6 a difference there. I don't see a handicap there. 7 MR. MacODRUM: Remember your model. 8 You have got the retail segment not wanting to go 9 anywhere for the first few years. The competition is 10 all going to be in the large -- above 5 megawatts in 11 the general service. 12 PROFESSOR DEWEES: I didn't say it 13 was not going anywhere. I said that if customers are 14 content with the smoothed spot price pass-through, then 15 there would likely not be very much retail activity at 16 the residential level. I am not in a position to be 17 confident, but that's the outcall. 18 MR. MacODRUM: What you are saying 19 is, to that market which is going to be less inclined 20 to enter the competitive sphere that the local 21 distribution companies as part of their standard supply 22 offering be equivalent to, which your report says is 23 equivalent to existing rates and rate offerings, are 24 not going to be able to offer a combination of services 25 and price that is attractive to their customers and 26 their customers want? 27 PROFESSOR DEWEES: The affiliate can 28 offer that combination just as Enron or any other 112 1 retailer can. 2 MR. MacODRUM: You are saying they 3 can't offer it as part of their standard supply 4 service. 5 PROFESSOR DEWEES: No. 6 MR. MacODRUM: They are not going to 7 want to move to a competitive service? 8 PROFESSOR DEWEES: But if the 9 affiliate is allowed to market directly to the SSS 10 customers, then it seems to me that it is just a 11 playing field that nothing but affiliates will operate. 12 I don't see how anyone else is going to get into the 13 market if the affiliate provides standard supply 14 service and particularly if they do that on a fixed 15 price basis, even if it is through the smoothed spot 16 price pass-through and is in a position to market 17 directly to those customers using those data. It seems 18 to me that that is a market that will discourage any 19 other competitors from entering. 20 I am reminded of the experience in 21 PJM -- Pennsylvania and New Jersey area -- where they 22 have, I think unwisely, made standard supply service so 23 unattractive that people have to be allowed in in order 24 to get a good price and so there has been some 25 significant switching there. 26 The experience there is that half of 27 the customers who switch go with the affiliate of the 28 distributor. I don't know whether that experience 113 1 would generalize here; but if it did, that suggests 2 that the affiliates may do reasonably well. 3 MR. MacODRUM: What is the nature of 4 those? Are they owned by the communities in which they 5 serve? 6 PROFESSOR DEWEES: No. Those are 7 private investor owned utilities. 8 MR. MacODRUM: So the community 9 doesn't have the direct stake in them that they do in 10 Ontario. 11 PROFESSOR DEWEES: That's right. 12 MR. MacODRUM: Ms Lea, perhaps we 13 could break here. I do have part of this area and my 14 fourth area to cover, and perhaps we could resume that 15 after lunch? 16 MS LEA: Thank you very much, 17 Mr. MacOdrum. 18 Is an hour and a quarter for lunch 19 acceptable? Object now or hold your peace. 20 Okay. Thank you. 21 We will reconvene at a quarter to 22 2:00, a few minutes after quarter to 2:00 by that 23 clock, please. 24 --- Upon recessing at 12:32 p.m. 25 --- Upon resuming at 1:45 p.m. 26 MS LEA: Good afternoon. 27 MR. MacODRUM: Before I return to the 28 aspect that I was discussing with you before the lunch 114 1 break of the level playing field, I would like to get 2 two matters clarified. 3 Did the MDC view the smoothed spot 4 price option as a transitional option for standard 5 supply? 6 PROFESSOR DEWEES: No, I don't 7 believe it did. When the proposal was first 8 introduced, when we first considered it, there was some 9 discussion that it might be a transitional method, but 10 when we came to make a decision in June and then to 11 reassess that decision, my recollection is that the 12 committee members were thinking of this as the 13 mechanism for default supply or standard service. 14 MR. MacODRUM: That would be the 15 basis upon which standard supply would be provided 16 until a distributor could avail themselves of the 17 provisions of section 20.9.4 of the Electricity Act, 18 where the Board can exempt a distributor if the Board 19 is satisfied that there is sufficient competition among 20 retailers in the distributor service area? 21 PROFESSOR DEWEES: I don't recall 22 that we discussed what would happen in that situation. 23 MR. MacODRUM: Obviously, there would 24 be no obligation to provide default supply under that 25 circumstance if an exemption is obtained, so wouldn't 26 it logically follow, then, that the option would then 27 no longer have to be used by the distributor? 28 PROFESSOR DEWEES: I don't know. 115 1 MR. MacODRUM: When we discussed the 2 smoothed spot price pass through option before we 3 talked about the need for forecasts to implement that 4 option and that a forecast of spot prices would have to 5 be provided. Who would provide the forecast of spot 6 prices for the smoothed spot price pass through option? 7 PROFESSOR DEWEES: I don't recall, 8 again, that the MDC specified who would be responsible 9 for that, as between the OEB or the IMO, and here my 10 memory may simply be failing me. I would have to look 11 back at the report to see if we spoke specifically to 12 that issue. We talked about both of those, as I 13 recall, but I don't remember where we came out on that. 14 MR. MacODRUM: But it is the MDC's 15 view that it should be either the IMO or the OEB who 16 provides the forecast? 17 PROFESSOR DEWEES: Or who would 18 secure the forecast, whether they do the forecasting or 19 whether somebody else does. 20 But, as I say, my memory is not 21 crystal clear on that. I would have to go back and 22 review our reports to be sure. 23 As I understand the draft code that 24 we are discussing here, because the smoothing would 25 take place simply over a billing period, there is no 26 requirement for forecasting in order to implement this 27 draft code. 28 MR. MacODRUM: No, but there is a 116 1 requirement for there to be load profiles available to 2 allocate the spot price among various customers. 3 PROFESSOR DEWEES: That's right. 4 MR. MacODRUM: Just following that 5 up, the effect of that could be that, because you might 6 have an area load profile, there could be two customers 7 living side by side who have very different actual load 8 profiles, but they would get the same price charged to 9 them. 10 PROFESSOR DEWEES: That's right. As 11 with electricity today, two customers living side by 12 side would face the same price. 13 MR. MacODRUM: Returning to the 14 aspect of the level playing field, on page 15 of your 15 written submission, in the third last paragraph, the 16 sentence last sentence reads: 17 "Firms operating in a service 18 area will have to choose whether 19 to engage in competitive or 20 regulated activities, but they 21 cannot do both." 22 If you look at the structure of the 23 OEB Act where section 71 says that a municipal 24 distributor cannot retail except through an affiliate, 25 and then section 3 which restricts a distributor as 26 long as they are over 50 per cent municipally owned to 27 certain specific activities, including the retailing of 28 electricity, but does enable the municipal electric 117 1 utility to retail electricity, isn't your comment on 2 page 15 depriving a municipally owned electric utility 3 of one of the rights afforded to it under section 73 of 4 the Act? 5 PROFESSOR DEWEES: What the Market 6 Design Committee did in writing rules for the entire 7 market was to constrain the activities of participants 8 in the marketplace within the limits that had been set 9 by the legislation, that is, if the legislation was all 10 we needed, we wouldn't have had a Market Design 11 Committee, we would just pass legislation and the 12 market would start. The purpose of the Market Design 13 Committee was to provide lots of detail, and in this 14 area, as in others, the recommendations that we made 15 would require participants in the marketplace to act 16 within a more narrow set of constraints than is 17 provided by the legislation itself. 18 So it is true that the MDC 19 recommendations would foreclose some things that might 20 otherwise be provided in the Act, but that is not 21 unique to this area, that is true of many of the 22 recommendations that we made. 23 MR. MacODRUM: But the goal of the 24 government, as I read the legislation, and the 25 Electricity Act, which requires municipal electric 26 utilities to convert within two years of the 27 proclamation certain parts to a business corporation, 28 if that is all that were said there is no restriction 118 1 on the businesses that that business corporation could 2 get into under the Ontario Business Corporations Act. 3 PROFESSOR DEWEES: Okay. 4 MR. MacODRUM: An OBCA corporation 5 has the powers of a natural person and can get into -- 6 I am relying on your expertise as a 7 law professor here, Dr. Dewees. 8 PROFESSOR DEWEES: This sounds 9 familiar. 10 MR. MacODRUM: It has unlimited 11 businesses within the Province of Ontario that it can 12 get into, an OBCA corporation? 13 PROFESSOR DEWEES: At least a range 14 of businesses. 15 MR. MacODRUM: But then, the 16 compromise that was made and is reflected in section 73 17 of the Act, that as long as those business corporations 18 are owned more than 50 per cent by a municipal 19 corporation, they are restricted to the numerated 20 headings in section 73(1), which include the retailing 21 of electricity. 22 PROFESSOR DEWEES: Okay. 23 MR. MacODRUM: Is that your 24 understanding of the legislation? 25 PROFESSOR DEWEES: I haven't looked 26 at that part of the legislation for some time, but it 27 sounds plausible. 28 MR. MacODRUM: So what you are 119 1 saying, if I understand correctly your earlier 2 testimony, is that the MDC took it upon itself to 3 further restrict the restrictions that had been placed 4 upon municipal electric utilities by the Act, 5 restrictions that they wouldn't have to otherwise have 6 upon them if they had the full powers of an OBCA 7 corporation. The MDC took upon itself to further 8 restrict the areas of business that a municipally owned 9 OBCA corporation could get into. 10 PROFESSOR DEWEES: The MDC was 11 concerned, as I indicated earlier, about the risks of 12 cross-subsidy and preferential access to consumers, and 13 so it set restrictions on what affiliate companies 14 could do. That's correct. 15 MR. MacODRUM: Were you concerned at 16 all that those restrictions were contrary to the intent 17 of the White Paper and contrary to the language of the 18 statute? 19 PROFESSOR DEWEES: On the contrary. 20 I don't know what was in the minds of the various 21 members of the MDC, but it seemed to me personally that 22 what we were doing was perfectly consistent with both 23 the White Paper and with the legislation. The White 24 Paper talks about creating a level playing field. The 25 White Paper talks about not having preferential access. 26 And the Market Design Committee was trying to develop a 27 set of rules that would provide that protection. 28 MR. MacODRUM: In your presentation 120 1 this morning, in the slide entitled "The Effects of SSS 2 Design on Retail Competition", you say that the MDC's 3 purpose of retail competition is to provide the best 4 combination of price and service for the consumer. 5 At page 4.1 of what you call the Q2 6 report, you say -- and this is principle No. 2: 7 "Customers who do not wish to 8 make a conscious choice or 9 cannot receive service from a 10 competitive retailer should be 11 able to receive electricity 12 service from their local MEU 13 with service and price 14 attributes similar to what they 15 have historically received." 16 (As read) 17 What was the MDC's understanding of 18 the service and price attributes that customers had 19 historically received from their local distribution 20 company? 21 PROFESSOR DEWEES: I don't recall a 22 specific discussion of that phrase. The MDC must have 23 felt that what it recommended in the smoothed spot 24 price pass-through qualified, but I am not sure exactly 25 what the understanding of those particular words was. 26 MR. MacODRUM: Was the MDC aware that 27 a number of utilities -- and I am thinking here of the 28 former Toronto Hydro and Etobicoke and North 121 1 York -- offered and continue to offer a residential 2 time of use option? 3 PROFESSOR DEWEES: I suspect that 4 came up. I don't recall extensive discussion on it, 5 but I believe that at least a number of members were 6 aware of that. 7 MR. MacODRUM: Were you aware that 8 the take-up of that option by customers in each of the 9 utilities I have enumerated -- the former Toronto 10 Hydro, Etobicoke and North York -- has been 11 disappointing compared to the customers who, I think 12 the utilities expected, could realize savings from it? 13 PROFESSOR DEWEES: I am not familiar 14 with either the expectations or the take-up rate. 15 MR. MacODRUM: The MDC didn't look 16 into that at all? 17 PROFESSOR DEWEES: I don't recall 18 that we looked at it in any detail. 19 MR. MacODRUM: If that is the case, 20 if I am correct in that assertion, wouldn't that 21 indicate that customers historically want to receive a 22 flat rate, an annual price -- want annual price 23 stability? 24 PROFESSOR DEWEES: Again, I am not 25 familiar in any detail with the time of use pricing 26 program, but it was not my impression that that was 27 offered and advertised widely for general residential 28 consumers. As I say, I don't know what the practice 122 1 for that program was. It is not clear to me that 2 that's a fair test of the consumer interest in this 3 regard. 4 MR. MacODRUM: You are hurting us 5 deeply, Professor Dewees, because that says you don't 6 read your bill stuffers. 7 --- Laughter 8 PROFESSOR DEWEES: I actually have 9 one in my briefcase right now, which I have been 10 intending to read for at least two weeks. 11 MR. MacODRUM: Did the MDC do any 12 customer research to test whether a spot price 13 pass-through or the smoothed spot price pass-through 14 would meet customers' needs and desires? 15 PROFESSOR DEWEES: No, we didn't 16 commission any research of that sort. 17 MR. MacODRUM: You didn't do any 18 market surveys? 19 PROFESSOR DEWEES: No. 20 MR. MacODRUM: Did you do any focus 21 groups? 22 PROFESSOR DEWEES: No. 23 MR. MacODRUM: Did the Market Design 24 Committee look at the experience of the restructuring 25 of the natural gas industry and the introduction of 26 retail competition and the handling of system supply, 27 as it's called, the system supply customers in the 28 natural gas industry in Ontario? 123 1 PROFESSOR DEWEES: Yes, we had some 2 submissions from the natural gas industry about their 3 experience. 4 MR. MacODRUM: Hasn't the experience 5 been, with respect to retail competition in the natural 6 gas industry, that a large number of the smaller 7 customers, residential customers particularly, would 8 prefer a stable price from an established supplier, 9 even if that price is slightly higher than the prices 10 being offered by discounters and brokers? 11 PROFESSOR DEWEES: I don't recall 12 that from the discussions that we had. 13 MR. MacODRUM: Did you look at all at 14 what the impacts would be on the in-year fluctuations 15 in the bill of people on fixed incomes? 16 PROFESSOR DEWEES: We looked at what 17 the effect of the smoothed spot price pass-through 18 might be with in-year fluctuations in the bill 19 generally. 20 MR. MacODRUM: Would it surprise you 21 if I indicated that if you took an April and July, July 22 being the year to date, comparison that the residential 23 customer with -- and this is comparing an April load 24 profile for both examples, in Ontario and a PJM 25 example -- that the fluctuation would have been 12 per 26 cent for the customer between April and July on a 27 fixed-rate basis and 42 per cent on a spot price basis? 28 PROFESSOR DEWEES: Using what data 124 1 for the spot price? 2 MR. MacODRUM: The actual prices in 3 the PJM market. 4 PROFESSOR DEWEES: So you are 5 referring now to the PJM experience? 6 MR. MacODRUM: Yes. If you compare 7 the PJM using the same customer load profile for April 8 for both PJM and Ontario and the same, but different 9 from the April one, the same profile for July and make 10 a comparison, whereas there is a 12 per cent 11 fluctuation in Ontario -- well, these are Toronto Hydro 12 figures -- and a 42 per cent fluctuation if you factor 13 in a spot price comparison? 14 PROFESSOR DEWEES: I would expect a 15 fluctuation in Philadelphia in the PJM area to be 16 greater than here simply because it's a much warmer 17 climate and the summer air conditioning load is going 18 to be heavier down there, in general, than it is up 19 here. So I would expect more spring-to-summer 20 variability there than I would expect here. 21 MR. MacODRUM: We are using the same 22 load profile, though, for both. We are just varying 23 the price? 24 PROFESSOR DEWEES: Yes, but the 25 variation in price is driven in part by shifts in 26 demand and the demand increase in PJM I would expect to 27 be later in the summer. In general, my understanding 28 in the past is Ontario Hydro has frequently exported 125 1 power to the U.S. in the summer because we have a 2 winter peak and they have a summer peak. So I would 3 expect their peak prices to be higher in the summer 4 than ours would be. 5 MR. MacODRUM: Did the MDC consider 6 that under a spot price model customers with identical 7 consumption patterns, but with different meter-reading 8 dates, could have significantly different bills for the 9 same period? 10 PROFESSOR DEWEES: I don't recall 11 that issue specifically, but I would -- I am not sure 12 what phenomenon you are referring to. 13 MR. MacODRUM: The fact that it 14 varies with the actual -- the fact that it would vary 15 not just with different dates, but I am advised that if 16 you read the meters at different hours of the day it 17 would produce different bills for the same period? 18 PROFESSOR DEWEES: That's possible. 19 I would expect that over a number of meter reads these 20 things would average out, though. I don't sense in the 21 issue that you have identified any particular bias 22 either for or against an individual customer. 23 MR. MacODRUM: How would you suggest, 24 though, that the distributor explain this to neighbours 25 talking over the back fence or the Board handle the 26 calls to answer questions about this? 27 PROFESSOR DEWEES: At this point I 28 don't have any reason to believe that those differences 126 1 would be substantial. I wouldn't expect them to be. 2 MR. MacODRUM: As I understand your 3 analysis, you don't expect there to be in the early 4 years much wholesale competition. Is that correct? 5 Because of the 3.8 cent arrangement with OPG, there is 6 not going to be much -- 7 PROFESSOR DEWEES: It is not because 8 of the 3.8 cent arrangement. It's because on OPG's 85 9 or 90 per cent market share, this is not a competitive 10 structure. Until there is decontrol of a number of the 11 price-setting units for OPG, it's going to continue to 12 exercise considerable -- it will have considerable 13 market power. 14 MR. MacODRUM: Just as an aside from 15 that comment, when you talk about a smoothed spot price 16 pass-through or a spot price pass-through, in what 17 sense, given that market power, is the spot price a 18 competitively-set price? 19 PROFESSOR DEWEES: It will be a 20 competitively-set price to the extent that the market 21 becomes competitive, but it's a fact of life here that 22 as long as OPG has 85 or 90 per cent of the market, 23 whether it's spot price pass-through or negotiated 24 contract, we are dealing with a party that has 25 considerable market power. The exercise of that power 26 is limited by the 3.8 cent cap, but that doesn't make 27 it competitive. 28 MR. MacODRUM: So that initially at 127 1 least we are not going to have a competitively-set spot 2 price, but you are recommending a spot price-based 3 standard supply option? 4 PROFESSOR DEWEES: The proposal that 5 we made was to mitigate OPG's market power, limit its 6 pricing to 3.8 cents. We felt that was reasonable and 7 that, therefore, makes that a reasonable price to pass 8 through to end-use consumers. As price-setting plant 9 is decontrolled and the market becomes more 10 competitive, the price will move from a protected 3.8 11 cents to competitive, whatever competition produces. 12 MR. MacODRUM: Returning to page 6 of 13 your brief where you said: 14 "Having weighed the arguments, 15 the MDC recommended the smoothed 16 spot price. I believe that the 17 MDC choice is consistent with 18 the principle that the purpose 19 of competition is to provide 20 consumers with a desirable 21 combination of price and service 22 and with the belief that a 23 majority of consumers would 24 prefer a low smoothed spot price 25 to a higher fixed price. 26 Indeed, I view the assertion 27 that retailers may be unable to 28 beat the spot price as a tribute 128 1 to the smoothed spot price 2 pass-through. It means that 3 without effort small consumers 4 will have the best deal 5 available." 6 Based on that analysis, you are not 7 envisaging much retail competition, are you, in the 8 early stages? 9 PROFESSOR DEWEES: There are some 10 "ifs" there, but if that's correct, then I would not 11 expect much retail competition particularly at the 12 small end of the market. 13 MR. MacODRUM: So you are not 14 expecting much wholesale competition, you are not 15 expecting much retail competition, and even in that 16 climate you are recommending that a local distribution 17 company like Toronto Hydro be prohibited from providing 18 its existing customers with the full range of services 19 and prices and pricing options and financing options 20 directly or through its affiliate that they are 21 entitled to by the new legislation? 22 PROFESSOR DEWEES: They can offer all 23 of those things through the affiliates, as provided by 24 the legislation, but in the Standard Supply Service the 25 MDC recommended that customers be given direct access 26 to the wholesale market by passing through the 27 wholesale spot price. If customers really prefer a 28 more stable price, however stable this smoothed spot 129 1 price turns out to be, if it's a far more stable price, 2 they will be able to get that from retailers. 3 It's my view, and I think it was the 4 view of many on the MDC, that if we are going to 5 restructure and try to create competitive markets -- 6 and we tried to do that on a wholesale level, although 7 we realized it will be a few years before that 8 wholesale market is truly competitive -- then we should 9 set up retail competition that will provide for 10 competition, provide something straightforward for 11 consumers, but allow the market to decide -- that is, 12 allow consumer choice to decide -- when they prefer to 13 stick with the smoothed spot price or to move to a 14 different offering that is made available to them by 15 retailers. 16 If the standard supply service, the 17 SSS, is a regulated price -- that is, a fixed price -- 18 that would have to be regulated by the OEB. If that is 19 going to be a regulated price, then right out of the 20 box you haven't been able to move away from regulation 21 at the consumer level. The smoothed spot price, 22 because the price of the commodity itself comes right 23 from the wholesale market, means that the regulatory 24 role for the OEB is minor. 25 They have to regulate the 26 distribution tariff, they have to regulate whatever the 27 costs of administering this are, but the commodity 28 price itself is just a pass-through of the wholesale 130 1 price. Anything else means regulating the price of 2 electricity itself. That seems not to be moving 3 towards the competitive model that it seems to me the 4 White Paper is talking about. 5 MR. MacODRUM: But that's what they 6 have done with respect to the natural gas industry in 7 their review of system gas? 8 PROFESSOR DEWEES: That's right, but 9 gas is different from electricity. In the case of 10 electricity, it's produced the instant that it's 11 consumed. There is no storage, unlike natural gas, and 12 there is dispatch by the IMO of generation on an 13 hour-by-hour basis that will yield a market-clearing 14 price. They take bids, arrange them in the merit 15 order, and dispatch the least expensive power that will 16 satisfy the needs for that hour. 17 So the electricity dispatch and 18 wholesale market automatically generates a spot price 19 that reflects the marginal cost or at least the bid 20 prices of generation in every hour. There is no 21 comparable mechanism in gas. I don't know what you 22 would turn to. You couldn't turn to a market where 23 power is being bid in the way it is at the IMO and find 24 a spot price that you could readily pass through to 25 consumers. This is something that's different for 26 electricity and it provides an opportunity for a 27 Standard Supply Service that's different from what can 28 be done in natural gas. 131 1 MR. MacODRUM: The final area I would 2 like your help with, Professor Dewees, at the time of 3 the MacDonald Report and the White Paper, MEUs like 4 Toronto Hydro, and certainly Toronto Hydro, were 5 enthusiastic supporters of the move to wholesale and 6 retail competition. Certainly after the second report 7 of the Market Design Committee, we really questioned 8 whether our enthusiasm was well placed. The staff 9 report proposal shook that support even more 10 dramatically. 11 I wonder what you would advise us in 12 the light of your analysis at the MDC as to why a 13 distributor like Toronto Hydro should continue to 14 support these changes in the industry. 15 PROFESSOR DEWEES: I think you have 16 to ask the question: What are we trying to achieve 17 with these changes? My sense of the purpose of 18 restructuring was to provide for market-based decisions 19 on investment. That's one of the things that the White 20 Paper talks about, so that we don't have a regulated 21 utility making investments which can turn out to be 22 expensive or unneeded, the cost is passed on to 23 consumers, and providing incentives for the 24 participants at all competitive levels to look for 25 efficiencies to try to reduce costs to get lower cost 26 electricity for Ontario consumers. 27 If you are going to do that, the way 28 that restructuring works is by taking power away from 132 1 monopolists. You can't restructure the wholesale level 2 without OPG losing its ability to control parts. 3 We recommended decontrol over a 4 period of time so that the wholesale market would 5 become competitive, so there would be enough firms 6 bidding power into that market or selling it under 7 contract so that the price at the wholesale level would 8 be a competitive price. 9 Then the puzzle is: If you achieve 10 competition at the wholesale level, how do you get 11 these benefits to consumers? Some of the experience in 12 other jurisdictions suggests that if you don't have 13 retail competition, if retail customers don't have the 14 ability to choose, the benefits of wholesale 15 competition may not be passed down to them. They may 16 be absorbed at the distribution level. 17 The distribution is going to remain a 18 monopoly. Then why is business or transmission and 19 distribution still natural monopolies? You need a 20 mechanism to ensure that the benefits get passed to the 21 monopoly. 22 If the concern by MEUs is that they 23 don't want to give up monopoly power, then they would 24 oppose this restructuring or any other restructuring 25 that was effective. So I think the MEUs have to decide 26 are they prepared to abandon their monopoly over the 27 provision of power to customers. 28 They will have the power over wires. 133 1 That's a good business, an absolutely essential 2 business, and I presume the MEUs and their successors 3 will continue to operate those businesses well. Then 4 if they want to be in the retailing the business is 5 another question. I guess for me the puzzle is: 6 What's the sticking point for MEUs with respect to the 7 proposals on the competitive side? 8 You talked about a level playing 9 field and advantages and disadvantages. One way to 10 look at this would be to say it's about who has the 11 best position in the emerging market. I can understand 12 MEUs wanting to get the best position they can get, but 13 surely there has to be some limits on the position they 14 are offered if there is going to be an opportunity for 15 other competitors at all, if there is going to be a 16 truly level playing field. 17 I think the MEUs need to decide where 18 their interests lie and to what extent they really want 19 to participate in a truly competitive market and let 20 that guide their enthusiasm through this restructuring 21 process or not. 22 MR. MacODRUM: Thank you very much, 23 Mr. Dewees. 24 MS LEA: Thank you very much, 25 Mr. MacOdrum. 26 Dr. Dewees, I think the next 27 questioner then is Jack Gibbons. Just as a note, and 28 this isn't directed particularly at you, Jack, I would 134 1 ask all questioners that follow other questioners to 2 try and not to go over ground that has already been 3 covered or clarified by previous questioners. 4 We do have some time constraints upon 5 us, so we will try to proceed on that basis. 6 Thank you. 7 MR. GIBBONS: Thanks, Jennifer. 8 Don, as you know, I represent 9 Pollution Probe in this proceeding. 10 PROFESSOR DEWEES: Yes. 11 MR. GIBBONS: Don, in your paper you 12 have provided three rationales for choosing the 13 smoothed spot price pass-through as the SSS option: 14 first, to minimize risk to municipal electric 15 utilities; second, to minimize regulatory costs; and, 16 third, to achieve the lowest price for consumers over 17 time. 18 I would like to explore with you 19 those three rationales for deciding what should be the 20 SSS option. 21 If we could turn first to the 22 rationale of minimizing risk to municipal electric 23 utilities. 24 Under your proposal, the portfolio 25 would simply be the spot price, the spot purchases. 26 Another possible portfolio for the 27 municipal electric utilities would be a mixed portfolio 28 which would include spot purchases and a mix of medium 135 1 and long-term contracts which could have fixed prices. 2 That portfolio, as a regulatory 3 regime, could allow the municipal electric utilities to 4 pass all the costs of that portfolio, all the recently 5 incurred costs of that portfolio, on to their 6 customers. It could have a variety of supply options 7 in the mix, but doesn't imply necessarily that the 8 price the retail customer faces is fixed. They would 9 still be subject to certain price fluctuations, but 10 maybe less than a spot pass-through option. 11 I'm just wondering, under this 12 portfolio would this still be a low-risk portfolio or a 13 low-risk option for municipal electric utilities? 14 PROFESSOR DEWEES: I think it depends 15 on the terms and conditions in the portfolio contracts 16 that were blended in with a smoothed spot price. If 17 those contracts are fixed quantity, then there is the 18 risk that if the contracts are seriously out of market, 19 spot price drops unexpectedly, the nukes come back and 20 the price declines. Then the distributor faces the 21 risk that it has bought some power that is more 22 expensive than consumers want. They may leave. Then 23 the blended portfolio and those other straight spot 24 prices and the utility now is buying price at a fixed 25 level and having to sell it at spot, so there is a 26 risk. 27 As you made the fixed price portfolio 28 smaller and smaller, that risk becomes less and less, 136 1 but the benefit to consumers, if any, would become less 2 and less. Any time you introduce some fixed price 3 purchases, you then impose a regulatory regime. The 4 spot price comes out of the wholesale market. We don't 5 have to regulate that. 6 The IMO will be supervising the spot 7 market. For retail purposes, we can take that that as 8 competitive prices as we can have given the market 9 structure, but once you have power purchase portfolios, 10 then you have got to regulate. That gears up the 11 apparatus that we see today. 12 It's analogue to the OEB trying to 13 regulate the rate in the purchase portfolios and 14 potentially 270 distributors across the Province of 15 Ontario, and I believe one of the concerns of the MDC 16 was that's potentially very expensive. 17 I can't think of any other 18 jurisdiction that has the number of distributors that 19 we have that tries to regulate them in a way that would 20 be necessary to deal with even a blended portfolio of 21 the kind you have suggested. That means either 22 substantial costs from the OEB and substantial 23 aggregate costs from the distributors as they file and 24 respond and defend and appeal or it means the 25 regulation is not going to be very effective. 26 The distributors will simply assemble 27 a portfolio and pass that on to consumers and the 28 consumers will pay it. If it's high, well it's high. 137 1 There was concern about both of those 2 issues there, so there is a risk concern and there is 3 also a regulatory cost concern. It's not in the 4 portfolio, the level of the risk, but the regulatory 5 concern remains. 6 MR. GIBBONS: Okay, Don. I'm going 7 to get to the issue of regular cost in a minute. I'm 8 trying to focus now just on risk in municipal electric 9 utility. We can leave the mandatory cost issue for a 10 few minutes. I will come to that. 11 PROFESSOR DEWEES: Okay. 12 MR. GIBBONS: You certainly pointed 13 out how the portfolio that I have outlined with long 14 term and medium-term contracts could have imposed some 15 risks if there was a fixed quantity, but there are ways 16 that that can be mitigated. 17 MR. GIBBONS: Of course, 18 sophisticated municipal electric utilities, I think you 19 alluded to them in your opening remarks this morning, 20 is that not correct, that there could be ways to -- it 21 wouldn't be fixed quantities but that could be 22 mitigated? 23 PROFESSOR DEWEES: Yes. There is a 24 variety of risk mitigation measures that a 25 sophisticated utility could undertake. Part of the 26 concern in Ontario is: With 270 utilities, is it 27 reasonable to expect that all would be able to do that? 28 Even with a good risk management system, it doesn't 138 1 always work out. 2 Good risk management doesn't mean no 3 risk. It means you try to control the risk, try to 4 mitigate it, but I don't see a way to make the risk to 5 go away. 6 MR. GIBBONS: Oh, no, I was never 7 suggesting that, Don. 8 PROFESSOR DEWEES: Okay. 9 MR. GIBBONS: I'm just talking 10 about -- I certainly agree with you the spot price 11 pass-through is least risk. I'm just kind of trying to 12 explore with you whether there are other options that 13 aren't least risk but are acceptable risks or not too 14 high a risk. 15 If there are ways, and I am not 16 trying to suggest even that this is necessarily a 17 desirable option for 270 municipal utilities, but we 18 have a very wide range of municipal electric utilities. 19 We have Toronto Hydro which is a very large electric 20 utility, for example. 21 I am just wondering if with a company 22 of that size, this could be a low-risk option that they 23 could manage it, have a low risk option. 24 PROFESSOR DEWEES: I wouldn't want to 25 speculate on what the risk would be. I take the point 26 that if the -- as the proportion of fixed price power 27 is reduced, the risk is reduced. Maybe that's 28 acceptable. 139 1 The MDC in our deliberations 2 considered a variety of options. That was not one that 3 it found put forward to the smoothed spot price 4 pass-through. At this point I hadn't heard enough to 5 persuade me that I would prefer that myself. 6 MR. GIBBONS: Right. Don, I do 7 realize when we removed competition in the natural gas 8 industry in Ontario in 1985, the Ontario LDCs had long 9 term contracts with TCPL or its successor company. 10 Under that competitive market, when the LDCs lost 11 market share because customers went to non-LDC 12 suppliers, there was a mechanism to reduce the contract 13 volumes that the Ontario LDCs were obliged to purchase 14 from TCPL. 15 PROFESSOR DEWEES: I don't know the 16 details of that at all. I have heard of it. 17 MR. GIBBONS: Yes. 18 PROFESSOR DEWEES: I am just 19 wondering, you know, if there could be a similar 20 mechanism for an MEU here. 21 The problem is the draft code has a 22 particular mechanism which has been thrashed out pretty 23 extensively by the MDC and is getting considerable 24 hearing here and has received comments over a period of 25 time. 26 In order to choose something else, it 27 seems to me you need a totally thrashed-out alternative 28 examined in some detail. Could I imagine a mixed 140 1 system of the type you are suggesting? Sure, I could 2 imagine that. I don't know what it would be like 3 because without seeing a lot of detail, I would be hard 4 pressed to assess it. 5 MR. GIBBONS: Given the amount of 6 knowledge you have now, you couldn't make a categorical 7 statement that, "That is the end of it, I am stretched 8 out for you", would be a high risk or too high a risk 9 for an MEU, a large sophisticated MEU? 10 PROFESSOR DEWEES: My sense of the 11 MDCs' view is that it felt that the spot price 12 pass-through represented the appropriate level of risk. 13 This would be somewhat more of a risk. Would that be 14 appropriate? For myself, I'm not persuaded yet and I 15 wouldn't want to try to speak for the MDC on a 16 particular question that I don't think it addressed 17 precisely. 18 MR. GIBBONS: But you as a person and 19 as an economist don't have a view about the level of 20 risk this scenario I have sketched out would entail? 21 PROFESSOR DEWEES: No. I would need 22 more details to be able to do that. 23 MR. GIBBONS: Thank you. As you 24 know, the MDC has recommended the spot price 25 pass-through be available to all retail customers in 26 Ontario. 27 PROFESSOR DEWEES: That's right. 28 MR. GIBBONS: Let's assume that is 141 1 done and that option is available to all customers in 2 Ontario through their municipal electric utility or 3 through the Ontario Hydro Services Company. Let's 4 assume that option is available for everyone. 5 If certain municipal electric 6 utilities, presumably maybe the larger municipal 7 electric utilities, also wanted to offer their 8 customers another option, which would be this option I 9 have sketched out to you, "I have a mixed portfolio 10 which would have a mix of spot and medium and long term 11 contracts", would you see any municipal electric 12 utility wanting to do that, the Board of Directors 13 approving it, the shareholders approving it? Would 14 there be any harm in allowing that municipal electric 15 utility to do so? 16 PROFESSOR DEWEES: I see no harm 17 whatsoever in the municipal electric utility doing that 18 through its retail affiliate. It seems to me that's 19 exactly the place to make an offering of that sort. 20 There are two problems in trying to 21 do it through the utility. Number one, the MDC was 22 discussing defaults upon how we ask the question, 23 "What's going to happen to the customer who doesn't 24 choose, who doesn't fill out any forms, doesn't respond 25 to phone calls, solicitation and whatnot? What service 26 will they get?" You can't have two things that will 27 happen to that customer. It has to be one thing or 28 another. There can only be one standard supply 142 1 service, the standard supply service that those who 2 don't choose are going to receive. 3 It was the MDC's view that that 4 standard supply service should be the smoothed spot 5 price pass-through. Having decided that, we then spent 6 quite a lot of time discussing whether the distributor 7 should be allowed to offer something else. This isn't 8 the thing that would happen to people who don't choose, 9 but it would allow people to say, "I don't want the 10 standard supply offer. I want something else." 11 We debated whether a second offer 12 should be allowed and the MDC decided no, it should 13 not. I believe one of the reasons was that offering a 14 fixed price or semi-fixed price, which is what you were 15 suggesting, that sort of offering is exactly the kind 16 of thing that retail affiliates or other retailers 17 should be in the business of doing and it would confuse 18 things to have the regulated distributor engaged both 19 in the regulated function of passing through the spot 20 price and doing something that is exactly like what a 21 competitive retailer could be doing. 22 I think the MDC's recommendations 23 were consistent with the view that the distributor 24 should simply pass through the spot price -- that's the 25 default for those who don't choose or anyone else who 26 wants it -- and that anything more complicated can and 27 should be offered by an affiliate, if that MEU forms 28 one, or by another retailer in the province. 143 1 That is a clean division of 2 responsibility between the distributor and other 3 entities. 4 Going down the path you have 5 suggested, in a sense John Todd is one step farther 6 down the path, because in his submission he suggests, 7 if I recall, offering maybe three options through the 8 distributor. The more options the distributor has, the 9 less possibility there is for competitive retailers to 10 get into the business. 11 The MDC, in trying to strike a 12 balance between giving a good deal to consumers but 13 also providing opportunities for retailing, felt that 14 the right balance was the distributor has what offer. 15 That is the standard supply service, and anything else 16 is offered by retailers, whether affiliated or not 17 affiliated. 18 So those are the two problems that I 19 see and that I think the MDC saw in having two options 20 within the distributor. 21 MR. GIBBONS: Don, I certainly 22 understand the rationale for your proposal in terms of 23 simplicity, that it is the simplest option, but I am 24 wondering whether simplicity is being achieved at the 25 expense of other legitimate goals. 26 Under the option that I have sketched 27 out, the customer of the utility has two options, two 28 electricity supply options from his regulated utility. 144 1 And that gives him greater customer choice. One of the 2 benefits that is often linked with competition is 3 increasing customer choice. 4 So I would have thought that 5 increased customer choice would be another benefit. 6 Maybe you should comment on that one. 7 You also said that the fixed price or 8 the semi-fixed price could be an option that could be 9 provided by a non-MEO, by the competitive market. That 10 again is true. 11 The thing is, what the customer 12 doesn't get when he gets the fixed price or the partly 13 fixed price from some other company, some non-utility, 14 is he no longer gets a supply option which is regulated 15 by the Ontario Energy Board. 16 I would like to suggest to you that 17 for many small customers, being able to purchase an 18 option which is regulated by the Ontario Energy Board 19 provides significant benefits. Basically, they know 20 it's regulated by the Ontario Energy Board, and they 21 know they are getting a fair price. It removes them 22 from the need of shopping around. 23 For many small customers for whom 24 electricity is a small portion of their total consumer 25 purchases, for many of whom both adults are working and 26 have lots of responsibilities, they don't really want 27 to spend a lot of their time shopping around for the 28 best price and are really happy if the OEB can reduce 145 1 their transaction costs by just regulating these 2 different options and ensuring them that they are 3 getting a fair price. 4 PROFESSOR DEWEES: I think you are 5 worried about many people not wanting to spend much 6 time on making electricity choices, and I think that is 7 one reason why in other jurisdictions the rate of 8 switching to competitive retailers has been relatively 9 low. But we come back to the problem of the difficulty 10 of regulating this. 11 Customers may take some comfort from 12 the fact that the OEB is regulating. But if it is a 13 costly process, if it's a difficult process, if it's 14 not a very effective process -- all of which I think 15 are possibilities -- then the customer's sense of 16 security may not be terribly well placed. 17 So I am not sure that the customer 18 actually gains as much as he or she would like to from 19 that. 20 MR. GIBBONS: Sir, I take it that, at 21 least on a personal level, your objections, if any, to 22 having the MEUs offer two supply options are that you 23 believe the regulatory costs will either be excessive 24 or that the OEB won't really do a good job, or both. 25 PROFESSOR DEWEES: That is a concern 26 not just with offering the two offerings, but that was 27 one of the concerns that the MDC had with fixed price 28 offerings in general; and to a lesser extent with the 146 1 blended price offering that you suggested. 2 MR. GIBBONS: Thank you. Now let's 3 turn to the issue of regulatory costs. 4 Again, I certainly concede that your 5 proposal, the smoothed spot price pass-through, 6 minimizes regulatory costs. There are no regulatory 7 costs to speak of. 8 Let's try to examine this other 9 proposal, and let's try to figure out if the regulatory 10 costs would be significant. 11 Again going back to when the natural 12 gas industry was deregulated in Ontario in 1985, are 13 you aware that at that time there were three large 14 natural gas LDCs in Ontario? 15 PROFESSOR DEWEES: That sounds right. 16 MR. GIBBONS: When those utilities 17 were deregulated in 1985, all three of them went to 18 mixed portfolios, a combination of spot, medium and 19 long-term contracts. Those supply portfolios were all 20 regulated by the Ontario Energy Board. 21 PROFESSOR DEWEES: Yes, that is my 22 understanding. 23 MR. GIBBONS: Is it your 24 understanding that there was a general consensus that 25 the Ontario Energy Board did a good job of that 26 regulation? 27 PROFESSOR DEWEES: My understanding 28 is that that -- 147 1 MS LEA: I think I am going to object 2 to that question. 3 PROFESSOR DEWEES: I want to express 4 my deepest confidence in the degree of energy of the 5 Ontario Energy Board before I answer this question. 6 My understanding -- and I have not 7 been close to the gas industry myself -- is that in 8 fact that process has been a difficult one for the 9 participants and perhaps for the Board. 10 Part of the problem is: What is the 11 nature of a portfolio purchase arrangement? Somebody 12 comes in and says: "Here's what I bought. What do you 13 think?" 14 Well, what is the answer to that? It 15 looks good? It doesn't look good? Does the Board wind 16 up saying: "Well, you know, on this contract maybe if 17 you had pressed harder, you could have gotten a lower 18 price." 19 It is very difficult, I believe, for 20 the Board to try to evaluate regulation of that sort as 21 opposed to more traditional rate regulation say in 22 electricity, where you have some physical plant and 23 some capital operating and maintenance costs. You 24 submit those and ask for a rate of return, and the 25 Board can look at it and ask the question: Are these 26 costs reasonable? What is the rate of return? What is 27 the rate base? 28 There, you have something tangible to 148 1 grab on to. 2 Here, trying to judge the reasonable 3 purchases after the fact I think has proven difficult 4 for the Board, although there are others in this room 5 who participated in that process extensively and 6 perhaps can inform us better. 7 My sense is that the utilities 8 themselves have come to the point where they are not 9 excited about the process, partly because on occasion, 10 having made some purchases, they find that something is 11 disallowed. What do you do now? You bought the gas. 12 You can't undo that. And yet the Board says you can't 13 cover all that cost. 14 My understanding is that the gas 15 distributors are trying to move out of the standard 16 supply service precisely because with this regulatory 17 regime, they just haven't found it very attractive. 18 Again, I am not an expert on gas 19 regulation, that that is my sense of what has happened 20 there. 21 There was some discussion of that 22 history at the MDC, and I think that contributed to a 23 sense of unease at the MDC about trying to apply the 24 same process to electricity. 25 MR. GIBBONS: Don, do you think that 26 one of the reasons why the gas LDCs may be wanting to 27 move out of a regulated gas supply for their customers 28 that the Ontario Energy Board doesn't allow them to 149 1 make a profit on those gas supplies and that if they 2 could have all their customers move out to an 3 unregulated affiliate, they could make a profit on 4 those gas supplies? 5 PROFESSOR DEWEES: I don't know 6 enough about it to be able to comment on that. 7 MR. GIBBONS: Okay. 8 PROFESSOR DEWEES: I can easily 9 imagine that profit is on their minds somehow. 10 MR. GIBBONS: Yes. Getting back to 11 the issue of regulatory costs -- and again, I certainly 12 can see that your option is in minimizing regulatory 13 costs and some kind of mixed portfolio where the Board 14 has to scrutinize it with a high regulatory cost. I 15 can see that. The whole question is not whether or not 16 there is regulatory cost but whether the regulatory 17 cost may be less than the benefits of going this way. 18 I think you are quite right in saying 19 that if the Board allowed an option or MEUs could go 20 for a mixed portfolio of spot and medium and long term 21 contracts, it is reasonable to assume that not all of 22 them would take up that option. 23 It just seems to me that if the Board 24 created that option, there would be relatively few that 25 would take up that option. The possibilities are 26 companies like Toronto Hydro, which is very large; 27 maybe the G6 group, that I think Mr. Budd represents, 28 they might do it collectively; the Enerconnect group 150 1 might do it collectively. So far I have just listed 2 three groups or three companies that could do it. 3 I think it is reasonable to assume 4 that there would be a relatively small number of these 5 types of portfolios of supply contracts that the Board 6 would have to regulate. They would certainly be way, 7 way below 270. 8 I am just wondering, first, if you 9 think my assumptions are reasonable, and, if you do 10 think they are reasonable, could it be in the public 11 interest, or do you see any reason why the Board should 12 rule out that option just automatically without even 13 weighing the costs and benefits? 14 PROFESSOR DEWEES: I don't have a 15 good sense of how many MEUs would be interested in that 16 particular option. I would certainly be astonished if 17 it turned out that it was 270, or anything like that. 18 Beyond that, I don't have a basis for 19 judging how many there would be. Because we have so 20 many MEUs, certainly the risk is there that the more 21 who take up this option, the greater the regulatory 22 burden. 23 I think there would be some concern 24 about having a form of standard supply service that was 25 going to be available in some parts of the province and 26 not in others. That is a political problem, an equity 27 problem, and I am not sure how great that is. 28 The MDC is focused on looking for a 151 1 single approach that would be uniform across the 2 province. At this point, I think I would still favour 3 that in the absence of real evidence, in the terms you 4 put, that the downside is too great. At this point, I 5 don't see that. 6 MR. GIBBONS: So you are open to be 7 convinced, if a person can bring the case, that the 8 benefits would exceed these regulatory costs. You 9 wouldn't shut the door just on that matter of principle 10 or dogma. 11 PROFESSOR DEWEES: I try always to be 12 flexible on matters that I have to consider. I have 13 some concerns about the proposal. I think it is fair 14 to say that I could never imagine it. But at this 15 point, I still prefer what is in the draft code. 16 MR. GIBBONS: I would now like to 17 turn to the third and final criteria for the SSS, and 18 that is its lowest price. I believe you have made the 19 case that you believe that the smoothed spot price 20 pass-through will give customers the lowest price over 21 time, and that is one of the commendable features of 22 it. 23 PROFESSOR DEWEES: Yes. Just to be 24 clear, I believe it would be lower than a fixed price 25 SSS. I am not too confident that a retailer couldn't 26 simply undercut it with a fixed price/fixed quantity 27 offer. But with respect to an SSS offer, the MDC said 28 it thought that the smoothed spot would be lower than 152 1 an SSS fixed price offer could be. I agree with that. 2 MR. GIBBONS: Is it your belief that 3 it is in the public interest for a regulatory board 4 like the OEB to motivate municipal electric utilities 5 to purchase supplies of electricity which have the 6 lowest financial costs when the prices of electricity 7 do not include their external public health and 8 environmental costs? 9 PROFESSOR DEWEES: Yes, I do, subject 10 to three qualifications. 11 One, I was pleased that the MDC 12 recommended that the Ministry of the Environment should 13 set pollution limits for electricity generation, and it 14 specifically recommended a cap and trade program for 15 the relevant pollutants. It seems to me that is an 16 essential element in environmental protection. You 17 can't get the right amount of pollution if you don't 18 regulate it. The market by itself is not going to 19 provide that. That is why we have regulations on air 20 and water pollution throughout the province and that is 21 why the Market Design Committee recommended 22 specifically that pollution control measures be adopted 23 for the electricity generation industry. That is an 24 important qualification. 25 Second, here we are talking about 26 standard supply service, and there I think the 27 municipality, the distributor, should get the lowest 28 price. But, again, I was pleased that the Market 153 1 Design Committee recommended both green power marketing 2 and power labelling which would first allow retailers 3 to sell to consumers power that had particular 4 environmental characteristics, that qualified as green 5 power under the eco-logo definition, and that would 6 allow consumers to express their preference for green 7 power in the marketplace by paying for it. 8 Second, the energy labelling 9 recommendations would provide that all energy consumers 10 would see the environmental and fuel characteristics of 11 the power that they purchased. So that the consumer 12 who is on standard supply service would receive a 13 report with the electricity bill that showed the fuel 14 source and emissions that were associated with that 15 supply. This would allow competing retailers, whether 16 affiliated or otherwise, to offer a package of power 17 with a different price and also the different 18 environmental characteristics. 19 I think those are excellent things 20 for the competitive electricity market to do to allow 21 consumers to express their preferences for clean power. 22 Having said that, it seems to me that 23 the Standard Supply Service should be based on price. 24 If it turns out that is dirty power, hopefully energy 25 labelling will lead consumers to move away from it. 26 MR. GIBBONS: But, Don, as you 27 alluded to, according to chapter 7 of the MDC's final 28 report, the MDC's cornerstone environmental 154 1 recommendation was for the establishment of an air 2 pollution cap and trade program which would ensure that 3 the generation of electricity for Ontario would not 4 contribute to the degradation of air quality in the 5 province. You refer to that as an important 6 qualification for your commitment of purchasing at the 7 lowest financial cost. 8 If it isn't the case that before 9 competition starts in the year 2000 the government has 10 not established strict emissions caps for all of the 11 relevant electricity-weighted air pollutants, do you 12 still think it is in the public interest for the OEB to 13 tell the electric utilities that they must purchase 14 solely on lowest financial cost when that could mean 15 large purchases of coal-fired electricity? 16 PROFESSOR DEWEES: Certainly the 17 problem becomes more difficult then. 18 The MDC, as you correctly point out, 19 in its fourth report emphasized the importance of that 20 earlier environmental recommendation. If it should 21 turn out that the government is not pursuing that, the 22 problem then is, is there a reasonable second-best 23 strategy that makes sense? The risk with the proposal 24 to allow municipalities to purchase other than on the 25 basis of price is whether they are going to be in fact 26 accurately representing the wishes of their consumers 27 in balancing higher price and cleaner, if that turns 28 out to be what the choices look like. 155 1 It is certainly far preferable to 2 have a competitive electricity market and regulation 3 strictly limiting the emissions. Once you get into 4 saying that the lowest price isn't the only criterion, 5 I think there are big risks to consumers about cost 6 being raised for a number of purposes which seem 7 worthwhile, but may not in fact best represent the 8 preferences of those consumers themselves. 9 I think that is a very difficult 10 situation. 11 MR. GIBBONS: Let's explore that 12 situation and let's assume that Toronto Hydro, which is 13 a large municipal electric utility -- that the Board 14 gave Toronto Hydro the permission to offer the Standard 15 Supply Service option and a mixed portfolio like I have 16 talked about, which would include purchasing power from 17 the Boralex co-generation plant and some wind turbines 18 from the Lakeview new generation project. Let's assume 19 they did that. You postulate that the risk for that is 20 that consumers of Toronto Hydro may end up paying too 21 much for power. But under this scenario, if the 22 consumers don't like this mixed portfolio that we are 23 talking about, this mixed relatively cleaner portfolio, 24 they have the option of buying the spot price 25 pass-through option from Toronto Hydro, which is the 26 lowest, dirtiest cost option, or they have the option 27 of purchasing power from a non-regulated company, from 28 Consumers Gas or Sunoco or American Electric Power. 156 1 PROFESSOR DEWEES: I like your 2 proposal, except that I think the alternative that you 3 identified, which sounds to me like it could be an 4 attractive alternative, I think should be offered by 5 the retail affiliate, which Toronto Hydro has clearly 6 indicated they intend to set up and operate. I think 7 that is the body that should do the retailing of the 8 mixed portfolio, of the greener power, of, I would 9 expect, a whole variety of options. Leave the smoothed 10 spot as the Standard Supply Service and let the 11 competitive retailer offer a variety of products with 12 environmental and price characteristics and let's see 13 how consumers move to those. 14 If that is really what consumers 15 want, then they will buy it. If they aren't prepared 16 to buy competitively, then I am nervous about Toronto 17 Hydro or any distributor essentially force feeding it 18 to its SSS customers. And remember, I am still 19 uncomfortable with having more than one SSS, so I 20 wouldn't want to see that as the only SSS. If that is 21 the only one, then I think it should be on the 22 competitive side. 23 MR. GIBBONS: Let's explore this. 24 You are saying under the proposal that I am outlining 25 that customers are being forced to purchase the green 26 option and that is somehow wrong. Isn't it equally 27 valid to suggest, under your proposal, where the 28 default option is coal, that customers are forced to 157 1 purchase the dirtiest option unless they actually 2 positively elect to go to some other non-regulated 3 company and buy a cleaner source? 4 Under both cases there may be a 5 default option. You are saying that the best default 6 option is the dirtiest option. We are proposing a 7 default option which is cleaner than the dirtiest 8 option, and under our option, if they don't like it, if 9 they really don't like paying slightly more for 10 electricity to get cleaner air, they are free to go to 11 the SSS or they are free to go to a non-regulated 12 supplier. What is wrong with that any more than your 13 proposal? 14 Both may limit customer choice -- 15 MS LEA: Mr. Gibbons, I don't wish to 16 cut anybody off during this proceeding, but, remember, 17 this is an attempt to get clarification from 18 Dr. Dewees, not to debate the issues with him. We 19 certainly hear the debate of the issues in time. So if 20 you could try to restrict your questions to 21 understanding Dr. Dewees' position -- 22 MR. MARK: When might that be? 23 --- Laughter 24 MS LEA: Oh, well. My instructions 25 are -- 26 If you could attempt to restrict your 27 questions to clarification at this time. Thanks very 28 much. 158 1 MR. GIBBONS: Do you want to respond, 2 Dr. Dewees? 3 PROFESSOR DEWEES: Sure. 4 There are several things at play 5 here. The MDC, I believe, was trying to maintain some 6 separation between environmental regulation, which it 7 said should be the responsibility of the Ministry of 8 the Environment to do, and do it right, providing 9 standard supply of service, which it said should be the 10 responsibility of the distributor and can build simply 11 on the smoothed spot price, and retailing competitive 12 products, which the Market Design Committee fully 13 anticipated would include green power, that should be 14 done by retailers, whether affiliated or 15 non-affiliated. 16 Once you start breaking down those 17 divisions, then all of the concerns about 18 cross-subsidy, about consumers subsidizing high-cost 19 production it seems to me come into play. So my 20 preference would still be to try to keep them separate, 21 but to encourage Toronto Hydro or any other utility, 22 through its retail arm, to aggressively market green 23 product. I would be delighted to see that and see it 24 working very successfully. 25 MR. GIBBONS: Don, could you just 26 explain to me, if Toronto Hydro had two options, the 27 spot option and the cleaner option, why there would 28 necessarily be a cross-subsidy? 159 1 PROFESSOR DEWEES: I am not sure that 2 between those there would be a cross-subsidy. My 3 concern is with what you described as the cleaner 4 option. Once that has opened up, how do we prevent the 5 distributor from simply investing in slightly above 6 market generation, new generation, because it wants to 7 build some new generation, passing that cost on to its 8 SSS customers, whether cleaner or not? 9 I think we have worked hard in 10 restructuring to put the risks of new investment on 11 investors and I am concerned, and I think the MDC 12 recommendations reflect the concern, about attempts to 13 come back and load those new investment risks on to 14 default or standard supply service customers. That is 15 an area of real concern. 16 MR. GIBBONS: Thanks, Don. Those are 17 all of my questions. 18 MS LEA: Thank you very much, 19 Mr. Gibbons. 20 Mr. Adams, how long do you expect to 21 be? We are thinking of a break in about 15 minutes. 22 MR. ADAMS: I will be finished in 15. 23 MS LEA: Thank you. 24 MR. ADAMS: My name is Tom Adams. I 25 represent Energy Probe. 26 The procedures for this discussion 27 group have not permitted those parties in support of 28 the Board staff's position and Dr. Dewees' position to 160 1 put their position on the record, and I will do that 2 now, in advance of asking two brief questions. 3 Energy Probe supports the position 4 that Dr. Dewees has articulated, out of concern for the 5 regulatory complexity of fixed price options, and also 6 view that SSS, through spot price pass-through, is 7 likely to be the cheapest long-term option for ordinary 8 consumers. 9 We are very concerned about the many 10 proposals articulated by the critics of the spot price 11 pass-through that, in our view, are simply arguments 12 for increasing prices. 13 We share the view of those spot price 14 supporters that a spot price pass-through will provide 15 economically efficient prices to the best of the 16 ability with the metering technology that we have in 17 the field. 18 Finally, we also support the views 19 that Dr. Dewees has articulated with regard to having 20 environmental protection undertaken as the 21 responsibility of the appropriate authorities, which is 22 not the Ontario Energy Board. 23 Dr. Dewees, there are just two areas 24 that I want to ask you to expand on slightly. 25 In your presentation you discussed 26 the implications for a fixed price distributor offering 27 in the event that market prices fall and customers exit 28 the regulated supply, creating, effectively, a stranded 161 1 cost. 2 Walk us through the implications for 3 an open fixed price offering in a situation where 4 market prices rise. What would you expect to see 5 happen? 6 PROFESSOR DEWEES: If the standard 7 supply service is at a fixed price and the spot price 8 rises over not just a few days, but over a period of 9 time, then when the spot price is above that fixed 10 price offering one would expect to see -- 11 If the SSS is a fixed price, 12 consumers on SSS will stay there as the spot price 13 rises, because there is no reason for them to leave. 14 If the spot price falls, presumably they will leave SSS 15 to take the straight spot pass-through, or competitive 16 offerings if those competitive offerings have dropped 17 below. That then means that the quantity that is going 18 to be taken under SSS is potentially quite variable, 19 varying inversely with the spot price -- varying 20 directly with the spot price. 21 MR. ADAMS: Can you outline the 22 customer mobility advantages of the spot price 23 pass-through for competing commercial retailers? 24 PROFESSOR DEWEES: I think there are 25 a couple of advantages for competing retailers, whether 26 affiliated or not affiliated, in the smoothed spot 27 price pass-through. 28 One is that the distributor has no -- 162 1 because all the distributor is doing is recovering 2 costs, the distributor doesn't have an incentive to try 3 to prevent the customer from leaving. 4 One thing that has happened in other 5 jurisdictions is that a distributor that's offering a 6 fixed price which just happens to have some profit in 7 it leaves the distributor very keen not to have those 8 customers leave and distributors in other jurisdictions 9 have shown some substantial ingenuity in creating 10 roadblocks for competing retailers who try to sign up 11 customers, actually getting those customers 12 transferred. So there is concern that a fixed price 13 offering could lead to that sort of behaviour on the 14 part of the distributor discouraging other retailers. 15 The other is that one of the 16 marketing advantages that a retailer offers, whether an 17 affiliate or independent, under the draft Code is price 18 stability. There is no doubt that is going to be a 19 concern. A big concern, a little concern we are not 20 sure, but if the SSS is a fixed price, then that takes 21 away one of the marketing tools that any retailer, 22 including an affiliate, would have. It seems to me 23 that that reduces the likelihood of competing retailers 24 emerging or succeeding in Ontario. 25 MS LEA: Thank you very much, 26 Mr. Adams. 27 Mr. Stephenson, did you wish to begin 28 at this time? 163 1 MR. STEPHENSON: I think I am going 2 to be quite short, so why don't I start and if it 3 carries on, you will cut me off. 4 Professor Dewees, I think you had 5 indicated that one of the effects of the smoothed spot 6 market pass-through mechanism, whether or not it's the 7 purpose of it, but one of the effects of it is in a 8 sense to produce a postage-stamp commodity price in 9 Ontario in the sense that it will be uniform 10 geographically. 11 PROFESSOR DEWEES: Yes. To the 12 extent that the wholesale price is uniform 13 geographically, which it will be during the first 18 14 months of this market, then the SSS would be uniform 15 geographically. 16 MR. STEPHENSON: Let's look at it the 17 other way. If there were a fixed price SSS that was 18 the same for all LDCs in Ontario, there was a single 19 fixed price for whatever period of time it was in 20 place, can you assist us in what the implications of 21 that would be in terms of the effects of that on the 22 various LDCs in Ontario ranging from the smallest to 23 the largest if the offering was a single fixed price 24 geographically? 25 PROFESSOR DEWEES: I think the 26 problem that you raise is how to implement the single 27 fixed price all across the province were the OEB to 28 decide that the SSS should be, say, 3.8 cents plus 164 1 administrative costs. If distributors across the 2 province have to purchase portfolios of power in order 3 to meet that, even if the OEB has done its job very 4 well, presumably those portfolio purchases are going to 5 be at different prices. It would be kind of surprising 6 if everybody managed to make the same deal. 7 Very large MEUs may be more 8 successful in bargaining than some of the small ones 9 would be, so they would wind up with different purchase 10 prices, but we would then have to supply their 11 customers at the same price. If the OEB-regulated 12 price is sort of in the middle, then you have some 13 distributors losing money and some distributors making 14 money. 15 Alternatively, the OEB-regulated 16 price could be equal to the highest price that the 17 worst negotiator in the province managed to secure, 18 which would mean a pretty high price falling on 19 consumers and real profits for every other distributor 20 in the province, thereby raising the concern about 21 distributors' lack of enthusiasm for customers leaving 22 more than anything else. 23 So we looked at the single price 24 across the province, but it's a puzzle as to how to 25 move from that simple attractive notion to actual 26 implementation in the real world and make it work and 27 be fair both to all customers across the province and 28 to all the distributors across the province. My 165 1 recollection is that we didn't see how that would 2 achieve all the objectives. 3 MR. STEPHENSON: Thank you. 4 Moving to another area, as I 5 understand it, obviously one of the things that the Act 6 provides is that a utility can provide SSS through an 7 affiliate. As I also understand -- I believe it was an 8 MDC recommendation and it's certainly in the draft 9 Code -- that if they choose to do that, then the 10 affiliate may not engage in competitive retailing 11 activities within the service area of the SSS. I think 12 I have that right. Is that right? 13 PROFESSOR DEWEES: Yes, that's right. 14 MR. STEPHENSON: Okay. 15 From the perspective of the MDC and 16 its considerations, did it recommend anything that 17 would inhibit or restrict the ability of an LDC or a 18 utility to set up two separate affiliates, one of which 19 would engage in SSS activities within the service 20 territory and the other which would engage in 21 competitive retailing anywhere in the province? 22 PROFESSOR DEWEES: No, there is 23 nothing in our recommendation that would prohibit that 24 and, indeed, during the extended discussions that we 25 had at the MDC about this set of issues, exactly that 26 alternative was raised and I think it was acknowledged 27 that any municipality could set up two affiliates, one 28 to do the SSS and the other one to do competitive 166 1 retailing. 2 MR. STEPHENSON: In terms of the 3 draft Code, do you see anything there that would 4 inhibit the ability of a utility to structure itself in 5 that form? 6 PROFESSOR DEWEES: No, I don't. 7 MR. STEPHENSON: Similarly, in terms 8 of having a third party provide SSS, I understand the 9 draft Code contemplates that scenario. Am I right 10 about that? 11 PROFESSOR DEWEES: Yes. 12 MR. STEPHENSON: In that scenario, 13 would there be anything which would impede a utility 14 from setting up an affiliate to engage in competitive 15 retailing anywhere in Ontario? 16 PROFESSOR DEWEES: The municipality 17 would be perfectly free to do that, as I understand the 18 draft Code. 19 MR. STEPHENSON: The last item I have 20 for you is I understood that in terms of the issues 21 relating to the limitation on third parties, one of the 22 issues that you were concerned about was that there be 23 no preferential access to customer data. Is my 24 understanding on that right? 25 PROFESSOR DEWEES: That's correct. 26 MR. STEPHENSON: As I understand it, 27 that issue can be resolved in, fundamentally, one of 28 two ways: either nobody gets the utility's customer 167 1 information -- that is, neither the utility's affiliate 2 nor any other retailer -- or, in the alternative, 3 everybody gets it in the sense that there is certain 4 information which any licensed retailer would be able 5 to access, some body of information. Would you agree 6 with me that either of those two alternatives deal with 7 the issue of the preferential access to the 8 information? 9 PROFESSOR DEWEES: Yes, I would. The 10 MDC talked some about the widespread provision of that 11 information and one of the recommendations of the MDC 12 in the second quarter report was that customer 13 information should be kept confidential, except with 14 express written authorization. There was concern 15 around the table about the idea of making customer 16 lists widely available. 17 With great respect to the gas 18 industry, I think some people had some recollections of 19 marketing experiences in gas and were concerned about 20 being besieged -- about the electricity consumers 21 across the province being besieged by marketers, all of 22 whom had just gotten the customer list. So there was 23 not a lot of enthusiasm for the broadcast of that 24 information. But, you are right, both of those methods 25 deal with the under-advantage issues. 26 MR. STEPHENSON: Just to be clear 27 about that, this issue concerning the broadcasting and 28 the concerns about the broadcasting, I take it those 168 1 are driven by, in essence, privacy-related concerns on 2 the part of individual customers, but not by, shall we 3 say, market-design concerns? 4 PROFESSOR DEWEES: That's right. 5 Those are concerns about privacy issues rather than 6 market-design or competition concerns. The unfair 7 access is a competition concern, but not this one. 8 MR. STEPHENSON: Okay, thank you. 9 Those are my questions. 10 MS LEA: Thank you, Mr. Stephenson. 11 I have been asked by several parties 12 to get time estimates for those folks who intend to 13 question Dr. Dewees. I wonder if during the break 14 those people who are intending to ask questions of 15 Dr. Dewees could come up and tell me how long they 16 expect to be. If I am not here, just write it down on 17 this piece of paper what time estimates. It's just 18 sitting on my desk here. Thanks very much. 19 Let's take a 20-minute break, please. 20 At 25 to 4:00 we will be returning. Thank you. 21 --- Upon recessing at 3:15 p.m. 22 --- Upon resuming at 3:35 p.m. 23 MS LEA: I don't see Mr. Budd here. 24 Doesn't anyone know if he is prepared to begin his 25 questioning now? 26 Whoever is here can begin. Who is 27 ready to begin? There is also the gentleman from 28 Chatham-Kent I think who is sitting next to Mr. Budd. 169 1 Is he ready to begin? 2 You are there. I beg your pardon. I 3 wasn't sure. Mr. Mark. 4 MR. MARK: Dr. Dewees, I have a note 5 of a response you gave I believe to Mr. Stevenson 6 toward the end of his questioning, that one of your 7 problems with a fixed price standard supply regime was 8 that it would be difficult to have uniform pricing 9 across the province. Did I understand you correctly? 10 PROFESSOR DEWEES: Yes. 11 MR. MARK: Where in the legislation 12 do you find the imperative or the guideline that there 13 is to be geographical uniformity in pricing? 14 PROFESSOR DEWEES: I don't recall 15 that being a requirement in the legislation. 16 MR. MARK: I take it, sir, you 17 understand that in the competitive service environment 18 there will not be geographical uniformity in pricing. 19 PROFESSOR DEWEES: I would not expect 20 it to be perfectly uniform across the province. 21 MR. MARK: That's right. I will ask 22 again: What is the basis, sir, for your presumption 23 that geographically uniformity should be an objective 24 of the standard suppliers? 25 PROFESSOR DEWEES: My comment was a 26 reference to concerns raised by one or more MDC members 27 when we discussed the alternative pricing regime. One 28 of those concerns held by some MDC members was that 170 1 this would introduce non-uniform pricing across the 2 province. 3 MR. MARK: I take it, sir, we are 4 agreed that in the competitive environment that is 5 envisioned down the road, the uniformity of pricing 6 across the province is not going to happen and is not 7 one of the objectives, correct? 8 PROFESSOR DEWEES: I'm not aware that 9 it's an explicit objective of that competitive regime, 10 but it was a concern of some members of the market 11 design committee. 12 MR. MARK: On the topic of concern of 13 members of the market design committee, am I correct, 14 sir, that the issue of standard supply service was one 15 of the issues on which there was not consensus at the 16 MDC? 17 PROFESSOR DEWEES: The recommendation 18 for a smoothed spot price as they developed the buy or 19 standard supply service was approved in June by a 20 substantial consensus of the Market Design Committee. 21 MR. MARK: I'm advised, sir, that 22 there were several members of the market design 23 committee who were not in support of the smoothed spot 24 price. Do you say that's not the case? 25 PROFESSOR DEWEES: The substantial 26 consensus was not unanimity. I don't recall the 27 specific vote, but I believe there was substantial 28 consensus, but there was some opposition. 171 1 MR. MARK: Now, you indicated a 2 moment ago that there was nothing in the legislation 3 dealing with geographical uniformity, but let me ask 4 you this, sir: Did you undertake a review of the MDC's 5 standard supply service proposal in terms of its 6 conformity with the legislation? 7 PROFESSOR DEWEES: Did I undertake a 8 review? 9 MR. MARK: Well, let's start with 10 that. Did you yourself, sir? 11 PROFESSOR DEWEES: Just now you mean? 12 MR. MARK: No, when you were doing 13 your work or when you completed your work, did you sit 14 down and say, "Well, we have had this discussion about 15 the standard supply service. Now let's go back and 16 touch base with the legislation and see if we conform 17 with its requirements"? 18 PROFESSOR DEWEES: Yes. We looked at 19 the legislation as we were discussing standard supply 20 service. 21 MR. MARK: Did you get the advice of 22 counsel with respect to the conformity of the proposal 23 with the legislation? 24 PROFESSOR DEWEES: We sought the 25 advice of counsel on a variety of issues from time to 26 time. I simply can't recall the extent to which we may 27 have sought the advice of counsel on specifically the 28 standard supply service issue. I don't remember. 172 1 MR. MARK: You indicated in one of 2 your comments earlier today, sir, and I want to make 3 sure I have it right, that you expected that once there 4 is decontrol of generation pricing, you expected that 5 prices would go down. 6 PROFESSOR DEWEES: That's my 7 expectation. It's not a forecast, but that's my 8 expectation. 9 MR. MARK: Was that a working 10 assumption that you had when doing your work on this 11 matter at the MDC? 12 PROFESSOR DEWEES: Now we are talking 13 about me personally, or are you talking about the MDC 14 in general? 15 MR. MARK: Either. Firstly, what 16 about yourself? 17 PROFESSOR DEWEES: We had some 18 discussion at the MDC about the relationship between 19 the 3.8 cents and what a competitive price would be. 20 My recollection is that there was a general feeling 21 that 3.8 cents was above a competitive price, that is 22 the price that would result from competition among all 23 the generation units of Ontario Hydro. 24 That was my understanding at the 25 time. I believe that was shared by most MDC members. 26 MR. MARK: I haven't found any, 27 Professor, and I'm sure you have seen it. It is an 28 Ontario Ministry of Finance document which is the 173 1 preliminary asset valuation in calculation of stranded 2 debt and it is dated October 26, 1998. 3 The Ministry of Finance forecast that 4 in about 2003, which coincides roughly with the end of 5 the control period, that electricity prices will rise. 6 Are you familiar with that document, sir? 7 PROFESSOR DEWEES: I have seen that 8 document. I haven't looked at it for a long time. 9 MR. MARK: In light of that did the 10 MDC go back and reconsider any of its findings and 11 recommendations? 12 PROFESSOR DEWEES: The MDC received 13 one or more presentations from the Ministry of Finance 14 as it did its work on the financial structure. We had 15 that in mind as we wrapped up our work. I don't think 16 it led us to reconsider the assumptions that we had. 17 MR. MARK: I take it, Professor, we 18 can agree that the spot market is not the only market 19 that is expected to develop as a result of the 20 restructuring of the industry? 21 PROFESSOR DEWEES: That's correct. 22 MR. MARK: You will anticipate and 23 hope, I gather, to see the development of forward 24 markets as well. 25 PROFESSOR DEWEES: Yes. 26 MR. MARK: To maximize the benefits 27 from competition, would you agree the customer should 28 have the ability to access both the spot market and the 174 1 forward markets if they so choose? 2 PROFESSOR DEWEES: If they choose, 3 sure. 4 MR. MARK: Would you agree with me 5 that a consumer who does not have access to forward 6 markets does not get the full benefits of wholesale 7 competition? 8 PROFESSOR DEWEES: No. It depends on 9 what the consumer wants. I would think lots of 10 consumers may not be interested in forward markets and 11 may be perfectly content to work with short term 12 markets and may be well satisfied. Others may wish to 13 access forward markets. 14 MR. MARK: No, but I'm talking about 15 a customer who is precluded from accessing the forward 16 markets. That customer is not getting the full benefit 17 of wholesale competition. Is that correct? 18 PROFESSOR DEWEES: That customer is 19 getting the full benefit of short term competition, but 20 isn't getting the benefit of a forward market. 21 MR. MARK: That's right. Would you 22 agree with me that SSS customers getting the smoothed 23 spot price are not getting the full benefits of 24 wholesale competition? 25 PROFESSOR DEWEES: No. I think that 26 customers on SSS are getting the full benefits of 27 wholesale competition now. Those who wish to hedge 28 against future price changes I expect will have access 175 1 to retailers, marketers or others, to contract to 2 provide them with those services. 3 MR. MARK: No, but to be clear, a 4 customer who chooses to take his or her supply from his 5 or her local distributor does not get the full benefits 6 of wholesale competition. Would you agree with that? 7 PROFESSOR DEWEES: No. I think they 8 do get the full benefits of competition. They don't 9 get the benefits of forward markets. 10 MR. MARK: You say if they don't get 11 the benefits of forward markets they still nonetheless 12 get the benefits of wholesale competition? 13 PROFESSOR DEWEES: At the present 14 time, yes. 15 MR. MARK: I'm sorry. I don't 16 understand that, "At the present time". 17 PROFESSOR DEWEES: If it's not priced 18 today, you have got the benefits of wholesale 19 competition today. 20 MR. MARK: Yes. 21 PROFESSOR DEWEES: If you want to 22 enter into a contract regarding future, if you do that, 23 you get the benefits of forward markets, if not, then 24 you are not getting the benefit of the forward market. 25 So I would separate that from getting the benefits of 26 today's price today. 27 MR. MARK: Well, the customer on 28 standard supply service, as I understand the proposal 176 1 that was advanced by Board staff and which you concur 2 in, does not make access to the forward markets 3 available to the customer who chooses to have the local 4 distributor as his or her supplier. Is that correct? 5 PROFESSOR DEWEES: That's correct. 6 MR. MARK: You also indicated that 7 one of your objections to the fixed price standard 8 supply regime, and I want to make sure I understand it 9 and hope I get some clarifications, is you say that 10 that involves, if I can put it this way, heavier 11 regulation than the proposal that has now been 12 advanced. 13 PROFESSOR DEWEES: That's right. 14 MR. MARK: You say, sir, that that is 15 because it involves the Board in the exercise of what? 16 PROFESSOR DEWEES: The exercise of 17 the regime of the prices offered by the various 18 distributors under the fixed price regime. The 19 smoothed spot price, the spot price arises out of the 20 operation of a wholesale market. If we pass that 21 through, there is no need for the Board to review that 22 price further. That is simply the wholesale price. 23 Any other price, a price arrived at 24 as a result of the settling of price of portfolio 25 purchase contracts is not this price that arises from 26 the economic dispatch of generation in Ontario and, 27 therefore, would have to be subject to regulation by 28 the Board to see whether it was reasonable or not. 177 1 MR. MARK: Perhaps I'm interested in 2 your definition of "regulation". Do you not consider a 3 ruling by the Board that standard supply customers can 4 have one option and one option only in terms of how 5 they buy electricity to be heavy regulation? 6 PROFESSOR DEWEES: No. I regard that 7 as regulation, but in terms of the effort -- maybe we 8 are speaking at cross-purposes here. My concern was 9 about the effort required in regulation. 10 MR. MARK: Okay. You will agree with 11 me that it is pretty heavy regulation, what is being 12 proposed here, to say to standard supply service 13 customers that despite the fact that we want to 14 introduce competition in customer choice, you are only 15 going to get one choice if you want to purchase from 16 your LDC. That is regulatory intervention in a 17 significant way, is it not, sir? 18 PROFESSOR DEWEES: It's regulation, 19 but for the customer who makes no choice, there must be 20 a single service that that customer gets. You can't 21 get two things or three things. You have to get one 22 thing. 23 It's necessary to define what is 24 nothing that a customer doesn't choose. What does that 25 customer get? That's the standard supply service. 26 What else might they get? I think they should get a 27 wide range of things. The question is who should offer 28 them? Should it be the wires company or should it be 178 1 some other entity? 2 What the MDC said was it should be 3 some other entity. 4 MR. MARK: What about the customer, 5 though, who is not a no-choose customer but comes 6 within section 29(2) or 29(3)? Did the MDC turn its 7 mind that it's apparently not on the face of the report 8 that you did, did the MDC turn its mind to whether 9 those customers who are making an election to take 10 service from their LDC should be so restricted in the 11 options available to them as LDC customers? 12 PROFESSOR DEWEES: I believe so, and 13 the MDC said that there should be one thing available 14 from the distributor, and that if you want other things 15 you should go to competitive retailers, one of which 16 could be an affiliate with the same brand name and some 17 of the same friendly folks you dealt with over the 18 years. But the marketing of competitive alternatives 19 should be done by a competitive retailer, affiliated or 20 otherwise, and not by the regulated LDC, distributor. 21 MR. MARK: Do I have it correct, sir, 22 that earlier in your presentation you indicated that 23 you were guided in your deliberations by the White 24 Paper? 25 PROFESSOR DEWEES: Yes, we were. 26 MR. MARK: Did the MDC guide itself 27 by the statement in the White Paper that customers were 28 to be free to choose, if they wished to do so, to 179 1 continue to take supply from their local distributor? 2 PROFESSOR DEWEES: Yes, we did, and 3 that is why we provided that SSS would be provided by 4 the local distributor. 5 MR. MARK: But am I correct, sir, 6 that if a customer wants something other than a spot 7 price pass-through under the MDC proposal, that 8 customer cannot take supply from the LDC. 9 PROFESSOR DEWEES: That's right. 10 MR. MARK: Sir, I think you indicated 11 a couple of times in your presentation today, and I 12 want to be sure I understand it: Was it the MDC's view 13 that spot price pass-through is the most beneficial 14 rate that can be made available to customers today? 15 PROFESSOR DEWEES: I think it was the 16 MDC's view that it was the best price that could be 17 made available to customers as the standard supply 18 service. 19 MR. MARK: I want to explore that. 20 I had understood you to say that the 21 spot price was simply the best price that could be made 22 available, period. Do I have that wrong? 23 PROFESSOR DEWEES: Close. But I 24 wouldn't rule out the possibility that a retailer that 25 was buying fixed quantity and fixed price might at some 26 times be able to get a price that would be better than 27 the expected spot price. 28 I think it is unlikely, but I think 180 1 it is possible. 2 That is different from being able to 3 get a requirements contract at a fixed price, which it 4 seems to me -- and I think most members of the MDC 5 accept it -- would have to be at a price higher than 6 the expected spot price because of the volume risk. 7 MR. MARK: Given those assumptions, 8 then, how is it that you expect that there will be 9 significant retail activity if it appears that the spot 10 market simply can't be beat, especially amongst larger 11 customers? 12 PROFESSOR DEWEES: I don't know what 13 the larger customers will do, but I think the larger 14 customers are sophisticated enough so that they can 15 wisely choose among any options that are presented to 16 them. 17 With respect to the smaller 18 consumers, I think retailers have several things going 19 for them. 20 Number one, as comments on the draft 21 code and at this meeting have suggested, there is some 22 concern about the variability or uncertainty of the 23 spot price, and I expect retailers to remind customers 24 of that uncertainty and use that as a basis for 25 marketing fixed price options. 26 That is one reason not to let the 27 distributor offer a fixed price. So if fixed prices 28 are going to be offered, they are offered by 181 1 competitive retailers. 2 Secondly, there is the green power 3 issue. Competitive retailers can sign up green power 4 of various sorts and market that to consumers, who may 5 be prepared to pay more for that particular type of 6 power. Therefore, for customers where metering is 7 deregulated, there can be offerings combining power 8 purchase, particular types of meters and energy 9 management services. 10 I think there is a range of 11 opportunities for retailers to compete for end-use 12 customers. 13 MR. MARK: That's fine. I appreciate 14 that clarification. But I want to go back a step. 15 Do I take it now that the MDC does 16 not say that it has made a determination that spot 17 price is thee best thing that can be made available for 18 customers? Rather you recognize that there are 19 customers who won't share that view. 20 PROFESSOR DEWEES: I think the MDC's 21 view was that the spot price was the best standard 22 supply service that could be offered to customers, but 23 it recognized that some customers may prefer something 24 else and did not really express an opinion as to what 25 proportion might choose something else, because that 26 would depend on the price and other characteristics of 27 other offerings. 28 MR. MARK: Did the MDC not accept 182 1 that there may be a significant body of customers out 2 there who would not agree that spot price pass-through 3 is the best standard supply format? 4 PROFESSOR DEWEES: I don't think that 5 the MDC ever said that. How you decide -- the smoothed 6 spot price, I believe, was accepted by the MDC. It was 7 recommended by the MDC on the grounds that that was the 8 best standard supply service that could be offered to 9 customers. 10 That doesn't mean that some wouldn't 11 choose something else. 12 If you ask the question a little 13 differently: Do people want high prices or low prices? 14 They want low prices. Do you want steady prices or 15 variable prices? You want steady prices. 16 But as between a lower variable price 17 and a higher fixed price, which do they prefer? The 18 MDC recommended the lower variable price, recognizing 19 that another option would be available for those 20 consumers who wished to choose it. 21 MR. MARK: Did the MDC consider the 22 wisdom of letting the local distribution companies 23 decide, in conjunction and in consultation with their 24 customers, what the preferred standard supply offering 25 should be? 26 PROFESSOR DEWEES: We were asked to 27 consider simply leaving it up to the local distributor 28 to decide what the form of the standard service 183 1 offering would be, and the MDC rejected that offering 2 in favour of the one that we see reflected in the draft 3 code. 4 MR. MARK: Did you consider the 5 option of leaving it to the local LDC to propose the 6 preferred option and have it subject to approval by the 7 Ontario Energy Board under its jurisdiction under 78 of 8 the Ontario Energy Board Act? 9 PROFESSOR DEWEES: I think in our 10 discussions of this -- I don't remember whether that 11 specific option was before us, but we did talk a lot 12 about this. My recollection is that we talked about 13 various ways in which the distributor might have some 14 choice about what was going to be offered, rather than 15 a standard offering that would be the same across the 16 province. And that did not garner support. 17 MR. MARK: I gather that there was no 18 consideration of a proposal such as I have suggested, 19 whereby the LDC makes a proposal regarding the 20 preferred standard supply option which is subject to 21 regulatory approval by the Board. 22 PROFESSOR DEWEES: I think that was 23 implicit in the range of things that we talked about. 24 If there was going to be an option, if there was going 25 to be something other than "one size fits all", then 26 presumably it would have to be approved by the OEB. 27 So I don't think that is outside the 28 range of proposals. 184 1 MR. MARK: And that was rejected why? 2 PROFESSOR DEWEES: All things 3 considered, the Committee felt that the smoothed spot 4 price pass-through was a good price. It would be 5 straightforward to administer, both for the 6 distributors and for the OEB. And for those who 7 preferred something else, other things would be 8 available. That is, it would not eliminate competitive 9 opportunities. 10 One of the concerns that the MDC had 11 was if the distributor offers a range of products -- 12 smoothed spot price, fixed price, blended price -- 13 every addition to the portfolio of options that the 14 distributor offers reduces the opportunity for 15 competitive retailers, whether affiliates or otherwise, 16 to enter the market. 17 The MDC is not in the business of 18 promoting competitors, nor was it in the business of 19 trying to preclude competition. My sense is that the 20 support for the smoothed spot price felt that it struck 21 a reasonable balance between those things. 22 MR. MARK: So the two considerations 23 were the inherent benefits of the rate itself and your 24 desire, if I can put it this way, to impose some 25 constraints, if you will, on the ability of the LDC to 26 compete with other retailers. 27 PROFESSOR DEWEES: And the concern 28 about regulatory complexities. 185 1 MR. MARK: In terms of the 2 complexities -- let's talk about that for a moment -- 3 how complex is that going to be, given that for the 4 next several years there is a price cap on generation? 5 What do you see as the complexity in having the Board 6 determine a price cap for fixed price offerings? 7 PROFESSOR DEWEES: How would the 8 Board do that? 9 MR. MARK: How did you set 3.8 cents 10 for the GENCO cap? You didn't pull it out of a hat, 11 did you? 12 PROFESSOR DEWEES: Not out of a hat. 13 MR. MARK: No. So you opened up the 14 sock drawer. 15 Why can't the OEB do the same thing 16 for the retail level? Where is the complexity? 17 PROFESSOR DEWEES: The 3.8 was chosen 18 as a limit, not the only price but a limit on the 19 exercise of market power by GENCO, by OPG during the 20 first 42 months of the operation in the market. If the 21 OEB is to regulate a price for standard supply service 22 across the province for the long run, you need to have 23 some basis for the OEB to choose that. 24 If the mechanism for distributors is 25 going to be going out and purchasing a portfolio of 26 supply, on what basis would the OEB choose a price, 27 either during the 3.8-cent regime or later, that will 28 apply either for all of Ontario or that it can apply to 186 1 each proposal that comes in, if they are all to be 2 treated differently? 3 You look, in the third quarter, at a 4 variety of fixed price options, and looking at how to 5 implement them. None of them seem to dominate the 6 smoothed spot price faster. 7 MR. MARK: So your concern is that 8 the OEB would not be able to find a way to determine 9 what would be a just and reasonable rate in absolute 10 dollars and cents terms. 11 PROFESSOR DEWEES: I think they would 12 find that difficult. It would be costly for both the 13 OEB and for the participants to deal with whatever 14 process they manage to set up to try to do that. 15 I turn again to the gas industry, 16 where something like this has been going on, as I 17 understand it, to some dissatisfaction by a number of 18 the parties with that regulatory process. There, there 19 are only three distributors. We have 270 distributors 20 now, perhaps less in the future. 21 The quantitative problems of dealing 22 with the vast array of distributors requires regulatory 23 process be something pretty straightforward if it is 24 going to have any effect at all. 25 MR. MARK: You have made several 26 references, I believe, in your paper and in your 27 presentation, sir, to one of your motivations being to 28 ensure that the distribution companies do not take on 187 1 risk. 2 Is that fair? 3 PROFESSOR DEWEES: I have tried to 4 minimize the risk of distribution companies, yes. 5 MR. MARK: And is that because they 6 are distribution companies, or is that because they are 7 publicly owned? 8 PROFESSOR DEWEES: There is a 9 combination. They are regulated distribution 10 companies. The wires business, compared to other 11 things, is not a very high risk business. Potentially 12 portfolio management, risk management for electricity 13 is. The MDC was concerned that this was a high risk to 14 put into what is otherwise a relatively low risk 15 operation. 16 It is also a concern that it was 17 desirable to separate regulated activities from 18 competitive activities and that risk management was 19 more appropriately done in a competitive environment 20 than in the rather more conservative -- 21 MR. MARK: I am not sure that answers 22 my question. I am still looking to see, for example, 23 what it is about the fact that they are publicly owned 24 that causes you not to want them to be assuming any 25 risk. 26 PROFESSOR DEWEES: One of the 27 concerns that arose regarding public ownership was 28 that, in the absence of shareholders to absorb risk, if 188 1 the activities turn out badly and losses are incurred, 2 either the customers are going to pay for them or the 3 taxpayers are going to pay for them. Since the 4 municipality is the owner and since the taxpayers and 5 the customers are a largely overlapping set, the 6 distributor is taking risks, to some extent, with the 7 customers' money. 8 MR. MARK: But is there some reason 9 why the directors of the corporation, who will 10 presumably be representative of the local populous, 11 aren't able to make an assessment as to what is an 12 appropriate degree of risk for the LDC to assume? 13 PROFESSOR DEWEES: They may be able 14 to make an assessment, but the MDC had some concerns 15 about exposure to those risks nonetheless. 16 Let me expand. I think there was a 17 third concern, and that was if the distributor is 18 engaged in assembling relatively fixed priced 19 portfolios, then, in a sense, they are competing with 20 retailers, whose major advantage would be to offer 21 fixed priced contracts, and if the taxpayers are 22 standing behind the loss, then there is an unlevel 23 playing field if taxpayers subsidize losses by the 24 distributor, as compared to the private retailer who 25 has shareholders that would bear the loss. 26 MR. MARK: So the concern is a little 27 bit different then. The concern is that you don't want 28 the LDC to have pockets which are deeper than Union Gas 189 1 and Consumers Gas and all of those companies. 2 PROFESSOR DEWEES: It was a concern 3 about using public moneys for those management 4 activities. 5 MR. MARK: Why is putting those 6 riskier functions in the retail affiliate any better? 7 PROFESSOR DEWEES: Because it is 8 separate from the -- it is the competitive unregulated 9 activity. 10 MR. MARK: But you do understand, 11 sir, do you not, that the ultimate shareholders of the 12 retail affiliate are the same body as the shareholders 13 of the distribution company? 14 PROFESSOR DEWEES: That's right, so 15 long as those affiliates continue to be municipally 16 owned, and I presume they will be, at least in the 17 initial stages. 18 MR. MARK: So then how is the risk 19 allocated any differently if it is put in the retail as 20 opposed to the distribution, and how are the pockets 21 any deeper or shallower if the function is put in the 22 retail affiliate as opposed to the distribution 23 company? 24 PROFESSOR DEWEES: The expectation, I 25 think, was that the character of these firms would be 26 very different. 27 MR. MARK: No, I am talking about the 28 criteria that you mentioned, sir. How is it any less 190 1 risky for the taxpayers, or the populous of a 2 municipality, to have the risky venture carry on in the 3 retail affiliate than it is in the distribution 4 affiliate if they both have the same shareholders? 5 PROFESSOR DEWEES: For the 6 municipality that elects to establish a competitive 7 retail corporation, not just for setting the lights and 8 hot water heaters but for electricity purchase and 9 resale, that is a corporation that is in the business 10 of entering into and managing risks. That is at the 11 core of its activity. At least that corporation will 12 be set up specifically to deal with those sorts of 13 higher risk activities. The distributor starts, as a 14 basis, with a wires operation and -- 15 MR. MARK: Is the risk, sir, rather 16 than with risk allocation, is it with risk management? 17 Is that really the issue here? 18 PROFESSOR DEWEES: Certainly risk 19 management is an issue. 20 MR. MARK: Because I don't see the 21 distinction. Unless you have something else to tell 22 me, I still don't understand why there is any different 23 result in terms of the shareholders, depending on 24 whether you put the risky activity in the retail 25 affiliate or the distribution company. I have only 26 heard you say it is a difference in the ability to 27 manage the risk. Is that it? 28 PROFESSOR DEWEES: That may be. That 191 1 is all I can think of now. 2 MR. MARK: I have a couple of final 3 points, sir. I am going back to the level playing 4 field issue. Do the rules of the game, as you see it, 5 permit competitive retailers to bring their existing 6 customers and customer lists to the game? 7 PROFESSOR DEWEES: Allow a 8 competitive retailer to bring their existing retail 9 customer lists? 10 MR. MARK: Yes. 11 PROFESSOR DEWEES: I don't see any 12 problem with that. 13 MR. MARK: So you would expect that 14 the gas companies who decide to get into the 15 electricity retailing business will be allowed, as part 16 of their equipment, to have their customer contacts and 17 their customer lists? Is that fair? 18 PROFESSOR DEWEES: I would expect so. 19 MR. MARK: And am I correct that what 20 you are proposing is that the retail division of the 21 distribution company is not permitted to bring that 22 piece of equipment? 23 PROFESSOR DEWEES: It is not 24 permitted to bring the customer list and information 25 that arises out of performing the standard supply 26 service to that operation, that's right. Because that 27 is a regulated activity and that would confer a -- 28 MR. MARK: In your view of the rules 192 1 of the game, could they bring the present day list of 2 utility customers? 3 PROFESSOR DEWEES: No. 4 MR. MARK: All right, then we will go 5 back to my question, sir. You are telling them that 6 they can't bring any list to the game. They can't play 7 with this piece of equipment. Do I have it right? 8 PROFESSOR DEWEES: No, because my 9 understanding is that some MEUs currently have 10 activities that would not fit in the regulated sector 11 that could be handled in the retail part of the 12 business. Hot water heaters -- the MDC never -- we 13 talked about hot water several times, but we never came 14 to any recommendations on it. 15 I am not aware that the Board has 16 made a decision, but I could imagine that hot water 17 heaters might wind up in the retail -- 18 MR. MARK: Respectfully, sir, my 19 question wasn't about hot water heaters. I just want 20 to clarify -- 21 PROFESSOR DEWEES: If your question 22 is about customer lists and if the hot water business 23 goes to the competitive side, presumably that takes 24 with it the customer list. If there are other retail 25 activities that are put into the retail affiliate, 26 surely, in order to handle those activities the retail 27 affiliate has to have the information for those 28 customers. 193 1 MR. MARK: What is the difference 2 between the list of customers who have water heaters 3 and the list of customers who consume electricity? 4 PROFESSOR DEWEES: The hot water 5 heater customers are -- if a hot water heater rental is 6 a competitive activity, then that is an activity that 7 in the retailer. 8 The MDC didn't, in fact, say that you 9 can transfer the hot water heater customers to the 10 retail side. We wound up saying nothing about it. But 11 if that is where they are ultimately transferred, that 12 provides some customer base with at least the hot 13 water -- 14 MR. MARK: So are you saying, sir, 15 that with respect to competitive activities, you accept 16 that it is appropriate for the retail affiliate to 17 bring into its business the list of utility customers 18 with respect to that service? 19 PROFESSOR DEWEES: That is my 20 feeling. The MDC did not express itself -- it didn't 21 say that. It didn't express itself on this issue. 22 MR. MARK: But that is your view? 23 PROFESSOR DEWEES: That is my view. 24 As I recall, the MDC said, simply, that no customer 25 list can be transferred from the distributor to the 26 affiliate. 27 MR. MARK: Thank you, those are my 28 questions. 194 1 MS LEA: Thank you, Mr. Mark. 2 Mr. Brett, did you have questions for 3 Dr. Dewees? I don't have an estimate for you on my 4 list. 5 MR. BRETT: Yes, I do have questions. 6 MS LEA: About how long do you expect 7 to be, sir? 8 MR. BRETT: Between 20 minutes and 9 half an hour. 10 MS LEA: Thank you. 11 MR. BRETT: Dr. Dewees, my name is 12 Tom Brett. I act for the Independent Power Producers' 13 Society of Ontario. My first question has to do with 14 the last exchange that you had with Mr. Mark. Did the 15 MDC look at the issue of whether the ownership of the 16 utility changed? If the distributor became privately 17 owned would you be more inclined to allow it to engage 18 in either a fixed price contract for its default supply 19 or some other aspect of what you have called risk 20 management? Do you see a difference if it becomes 21 private? 22 PROFESSOR DEWEES: No. The issue we 23 were talking about was one of the concerns, but the MDC 24 recognized that both affiliates and distributors may 25 become privately owned over the course of time and its 26 recommendations did not contemplate any change in 27 regime should private ownership emerge. 28 MR. BRETT: And your reason for that 195 1 is what, just as a matter of interest? You are not 2 using public funds any more. 3 PROFESSOR DEWEES: As I recall, that 4 was only one of several concerns that led the MDC to 5 recommend that the distribution company only offer 6 standard service supply. Other concerns included a 7 concern about cross-subsidy. 8 MR. BRETT: Let me ask you, just 9 going back to the table that you had as an appendix to 10 your proposal this morning -- 11 PROFESSOR DEWEES: Yes. 12 MR. BRETT: You have a large area in 13 the middle here that you describe as general service 14 customers between 5 megawatts and the residential size 15 and you pointed out that, by your rough calculation, 16 that constituted about one-half of the marketplace in 17 Ontario. My question for you is this: Do you have any 18 further breakdown of that market -- of that number? 19 Let me preface that by saying that I 20 understand that 48 per cent was taking everything from 21 very small, let's say mom and pop retail organizations, 22 a small store somewhere -- in other words, not really 23 any bigger than a residential customer, except 24 commercial in nature -- all the way up to a mid-sized 25 industrial. I take it you don't have any sense of what 26 the breakdown is within that 50 per cent of the market 27 as between smaller, less sophisticated customers and 28 larger, very sophisticated customers, ones that would 196 1 just be below the threshold of the over 5 megawatt 2 customer. 3 PROFESSOR DEWEES: That is correct. 4 I don't have any further -- 5 MR. BRETT: You don't know what that 6 is. 7 PROFESSOR DEWEES: No, I don't know 8 what that is. 9 MR. BRETT: Okay. I want to ask you, 10 if you turn up page 5 of your paper from this 11 morning -- this is a question with respect to profits 12 and I want to make sure I am not confusing two things. 13 PROFESSOR DEWEES: I'm sorry. Are 14 you on the presentation or on the submission? 15 MR. BRETT: I am on your filed 16 presentation; not your slides, but your filed 17 presentation that you filed on the 5th of July. 18 On page 5 of that, toward the bottom, 19 in the last and second-to-last paragraphs you talk 20 variously about distributors making excessive profits 21 on a fixed price offering, and then below, in the last 22 paragraph, you say that distributors profit handsomely 23 from a regulated service and so on. I want to make 24 sure that I understand this. 25 If I put to you the situation where a 26 distributor would offer a fixed price default supply 27 option, but he would also purchase on a fixed rate 28 basis to do that, in that instance the distributor is 197 1 not making any profit, he is simply passing through to 2 his customers whatever price he pays for the 3 electricity. I want to make sure that we are not sort 4 of collectively -- at least I am not confusing two 5 things. We always have had the tradition in Ontario in 6 the gas industry of the distributor passing through at 7 his cost the commodity. There is never any question of 8 him making a profit or otherwise. That doesn't occur. 9 I am assuming in the electricity 10 industry that if the distributor were to offer a 11 fixed -- let me put it another way. Whatever default 12 service the distributor offers, he is not making a 13 profit on it. It is a profitless transaction. He is 14 passing through his cost -- his price at his cost, 15 whatever that happens to be. 16 Do you concur with that? 17 PROFESSOR DEWEES: That is certainly 18 one way to arrange it. If that could be managed 19 successfully, then I presume it would simply be cost 20 recovery by the distributor. 21 These comments were, in part, a 22 response to some suggestions that were made at the MDC 23 that the standard supply service price should be a high 24 price, intentionally set high, and one motive for that 25 would be to encourage customers to choose competitive 26 retailers. 27 But if you intentionally set that 28 price high, then you are generating profits for the 198 1 distributor, thereby creating an incentive for the 2 distributor to hold on to the customer and not giving 3 the customer the best price. 4 So that is different from what you 5 were suggesting -- 6 MR. BRETT: That's fair enough, but I 7 guess what I am hoping is that we could agree that in 8 discussing whether or not it is appropriate to have a 9 fixed price default supply or standard supply service 10 option, we don't have to mix that up with the notion of 11 the distributor earning a profit. We could arrange 12 things such that the distributor -- without earning a 13 profit and without therefore having an incentive to 14 hold the customer as opposed to letting him or her 15 migrate -- could offer that option. 16 There are many other considerations 17 that come into the debate, but you can isolate the 18 profitability issue. 19 PROFESSOR DEWEES: I think you would 20 separate the two issues. I would agree with that. 21 MR. BRETT: Thank you. 22 Now, on page 1 -- and you touched on 23 this today in different forums, but I am still a little 24 bit not clear myself on this. On your first page of 25 your paper that you submitted on July the 5th, in the 26 third paragraph toward the bottom you say: 27 "The smoothed spot price is 28 supported by the belief --" 199 1 "By the belief", my emphasis: 2 "-- that it will be lower than 3 any fixed price SSS could be..." 4 My question is really that I take it, 5 first of all, the main reason for that view is that 6 what you have reasoned is that if the distributor were 7 to offer a fixed volume -- sorry, were to offer a fixed 8 price for its supply in order to be able to operate 9 fixed SSS to its customer, it would have to pay a 10 somewhat higher price than the spot price to deal with 11 this issue of volume risk. 12 Because of the mobility provisions in 13 the statute which give this sort of untrammelled 14 ability to the customer to swing back and forth however 15 many times he wishes, he might very well do that in 16 certain circumstances and, therefore, the generator or 17 the marketer who is supplying that distributor would 18 want a premium from that sort of contract because he 19 doesn't know what his volume is going to be. 20 I understand that, although I guess I 21 would note in passing, as Mr. Gibbons mentioned 22 earlier, we have had those kinds of contracts in the 23 gas industry since 1987 with so-called commodity demand 24 reduction ratchet provisions in them. Some might argue 25 that those contracts have been higher than they would 26 otherwise have been had it not been for those 27 provisions. 28 It's difficult, I suppose, to know 200 1 that with certainty, but the reason it is difficult to 2 know that is because the gas utility is also a very 3 attractive customer. He is a large customer, so he has 4 a certain amount of leverage by virtue of his size. 5 Just going to the question of price, 6 I understand that reason, the volume risk reason. Is 7 there any other reason why you make the statement that 8 the belief is that it would be lower than a fixed SSS 9 price could be? If the answer is "yes", if there is 10 another reason, is there any evidence -- what is the 11 evidence for that? Do we have any evidence based on 12 where we are at now in the restructured market as to 13 how those prices would compare over time? 14 PROFESSOR DEWEES: I think that's the 15 principal reason and an additional reason is that, 16 aside from the volume risk, the supplier with that 17 fixed price electricity is taking price risk. My 18 understanding is that generally a premium is charged 19 for engaging in risk management, so there would be 20 likely some premium charged simply for providing that 21 service. 22 In terms of evidence, I don't think 23 we -- we certainly don't have any evidence from 24 Ontario, obviously. I don't think the other 25 jurisdictions give us -- let me think. I would have to 26 reflect on that. Off the top of my head, I can't think 27 of evidence from other jurisdictions that would be 28 helpful with this issue, but there may be some. My 201 1 impression is that -- well, no. I would have to 2 reflect on it. 3 MR. BRETT: Just as an aside, I would 4 note that again in the gas industry it's quite common, 5 as I think you know, certainly for many, many customers 6 to wish to hedge their pricing decisions -- sorry, to 7 wish to hedge their prices over at least part of the 8 year, to have firm prices, particularly through the 9 winter season. 10 I would be very surprised if you 11 would find too many direct purchasers of natural gas in 12 this room or anywhere else today who would be 13 contemplating going through the upcoming winter on a 14 floating rate price, either indexed to Empress or any 15 one of the transaction points out west. They don't 16 want to be on the floating rate price. 17 In terms of the regulatory burden 18 issue -- I guess this would be on page 4 -- there is a 19 comment that these are the various reasons why the MDC 20 did not recommend a fixed price. We have been over 21 that some today. The reasons start at the bottom of 22 page 4 and the first one is the burden on the OEB. 23 Mr. Mark discussed this with you at 24 some length, but it seems to me that you have the OEB 25 moving now toward a PBR system for these 270 municipal 26 utilities in every other aspect of their operation, 27 their O&M, their capital, all of that, and one of the 28 things the PBR tries to do, as you know, is to simulate 202 1 competition for the utility, to make it operate more as 2 it would under competitive conditions and, therefore, 3 reduce costs and, if they are successful in reducing 4 costs, share those reductions with the ratepayers. 5 What is, in your view, so different 6 about the electricity commodity? Why would it not be 7 possible to have some kind of request for proposal 8 process or, to cite some of the ideas that other 9 parties have laid on the table here in their papers, a 10 benchmarking process or guidelines of some sort that 11 the Board would publish within which they would deem 12 electricity purchases to be prudent? 13 I am wondering out loud about this, 14 but it strikes me that this may be a bit overdone. Why 15 is the commodity so different than the other aspects 16 that the Board has to regulate and which they propose 17 to regulate through PBR guidelines and the rate 18 handbook? 19 PROFESSOR DEWEES: I think there are 20 a couple of factors. As between gas and electricity, 21 we have a very large number of distributors in 22 electricity compared to a very small number of 23 distributors in gas. So there is simply a number of 24 parties that have to be dealt with that renders this 25 regulation much more difficult. 26 With respect to the actual process of 27 regulation, I don't know what the final PBR process 28 will look like, so I can't really comment on how that 203 1 would apply here, but there is an overriding question 2 of what does the OEB do in the case where it's not 3 happy with, for example, the parties of the portfolio 4 that the distributor has assembled. If it doesn't 5 disallow the cost, then the consumers pay a price that 6 the OEB has said is too high; if they disallow the 7 cost, then the distributor takes a loss at least early 8 in the market where most of the distributors are 9 municipally owned. 10 That means it's passed on to the 11 taxpayers who are, to a substantial extent, ratepayers. 12 So either they pay the higher price or they pay through 13 their taxes. It's not clear that this is saving the 14 consumers from the consequences of the purchase that 15 the Board deemed not to have been prudent or economic 16 or fitting within the PBR guidelines. 17 With respect to at least one of the 18 proposals that was made, we have a variety of MEUs, 19 different size, density, other characteristics across 20 the province. As they go out to secure supply in the 21 contract market, if some of them are able to secure 22 lower prices than others, are the small municipalities' 23 customers always going to get higher prices -- that is, 24 is the OEB going to have to have a sophisticated 25 regulatory regime that makes allowances for different 26 characteristics of the municipalities -- or are they 27 going to say, "We will treat everyone the same", in 28 which case are the small or late-bidding municipalities 204 1 going to find that they are regularly penalized? 2 There just seems to me a lot of 3 unanswered questions about how you would actually apply 4 this with this large number of distributors and make it 5 work fairly for all the consumers. 6 MR. BRETT: Could you give them the 7 option, for example? Could you give the distributors 8 the option of using the spot market or some alternative 9 method? 10 PROFESSOR DEWEES: It seems to me 11 that still raises all the problems. Sure, some would 12 choose spot, others would choose this method, but for 13 those that choose this method, all the problems I have 14 identified would still remain. 15 MR. BRETT: In gas over the years 16 there wasn't really much difficulty regulating the 17 price of gas at which the distributors bought gas, in 18 my recollection. That was fairly straightforward. For 19 the first five or six years they bought on one-year 20 fixed prices, or two-year or three-year or five-year 21 fixed prices, and they had portfolios of contracts. 22 Very seldom, if ever -- I can only 23 recall once when a utility was actually deemed to be 24 imprudent in respect of -- and "imprudent" may be not 25 quite the accurate way to put it in terms of the small 26 piece of its purchase. That was fairly recently. 27 That's in 15 years. What caused the problem was a 28 separate issue, which was that the price was being used 205 1 for another purpose as well. The price was being used 2 to set the buy price for so-called buy/sell agreements. 3 If you go back and analyze a lot of 4 the debate, it seems to me -- my recollection is that 5 the debate was usually over the fairness of using the 6 price in two different ways. It was over the notion of 7 how you would use this average utility cost of gas for 8 a different purpose as opposed to the actual prices 9 that were paid themselves. That never seemed to take 10 up, in my recollection, a lot of regulatory time. 11 I don't know how closely the MDC 12 examined the history of the regulation of the gas 13 commodity in the province since 1987. Did you get into 14 this in any great detail or were there papers presented 15 and analyzed? 16 PROFESSOR DEWEES: We had some 17 discussion. There was some information presented. I 18 can't say we went into great detail. My impression was 19 that there was more recent experience that we thought 20 to be problematic. 21 MR. BRETT: With respect to the 22 options that a distributor might give to its customers, 23 I believe the MDC essentially said that they get two 24 options. They get the smoothed price, but then you 25 also said that they would have to offer the unsmoothed 26 spot price as a second option. So you gave them two 27 options and you have discussed with others today the 28 notion of giving them another option, which would be, 206 1 in my hypothetical, a fixed price option as well. 2 It seemed to me what you ended up 3 coming down to there was that you were concerned about 4 the complexity of that perhaps confusing people and, 5 secondly, concern that in some fashion you would steal 6 the retail affiliates' thunder, as it were. Is there 7 anything else or are those the two main things, adding 8 an extra option onto what people could get? 9 PROFESSOR DEWEES: Let me distinguish 10 between the two things that you have identified. For 11 standard supply service, the Market Design Committee 12 recommended smoothed spot price pass-through. In order 13 to facilitate retail competition, we recommended that 14 every distributor be required to provide simply the 15 spot price to any customer that asked for it. 16 The purpose of that is not to give 17 another option, although it does give a slightly 18 different option. The purpose of that was because 19 that's the basis for retail competition. If a customer 20 wants to sign up with a retailer, whether affiliated or 21 unaffiliated, they request a direct spot price 22 pass-through and request that their bill be sent to the 23 competing retailer. So that's really to facilitate the 24 competitive mechanism. 25 There is only standard supply service 26 and that is the smoothed spot price. The MDC was not 27 enthusiastic about adding anything to that option in 28 the way of offerings by the distributor. 207 1 MR. BRETT: You had mentioned in one 2 or two of your conversations, you talked about risk 3 management activities as being inappropriate or not 4 being a monopoly service. At the same time, you would 5 agree that, for example, there are a number of items 6 that considered in isolation might be said to be not 7 monopoly in the sense that they are not like the wires 8 or the pipe. 9 Billing would be an example. Billing 10 has been historically bundled by the distributors, gas 11 and electric, into their business, even though it 12 wouldn't really be viewed, I think, by most people as 13 an intrinsic monopoly service. 14 Risk management has been something 15 that the gas utilities have practised, again for about 16 some seven or eight years, with some success in some 17 years, less success in other years. These are tools 18 that the monopolies have used in effect in part to 19 hedge themselves against risks on the spot market such 20 as we were discussing earlier. 21 I'm not sure why you -- I heard your 22 conversation with Mr. Mark, but that said, I'm not sure 23 why you see that -- assuming they are done subject to 24 Board guidelines, which they are in the case of gas, 25 subject to a plan put forward by the monopoly as to how 26 they are going to do this, why would this be so 27 inappropriate or impractical, seeing that there were a 28 set of guidelines that allowed a certain amount of this 208 1 activity, in the event the distributor felt it was 2 necessary. 3 PROFESSOR DEWEES: I'm not sure I can 4 add much to what I said before. 5 MR. BRETT: One of the things you 6 talk about that seems to underlie your reluctance, and 7 I guess this would be page 7 of the paper, you talk 8 about -- here we go, toward the bottom -- and you echo 9 this in various, I think, phases of the MDC reports. 10 The last paragraph on page 7: 11 "If most power is sold through 12 fixed price contracts rather 13 than through the spot market, 14 the spot market could be thinly 15 traded and more volatile." 16 What if you had not an either/or, 17 black or white situation, what if you allowed both 18 bilateral distributors, both bilateral arrangements and 19 spot market arrangements, does it have to be all one 20 way or the other? 21 I guess what you are saying in part 22 here is if everybody goes bilateral, if distributors 23 have the right to contract on a fixed price basis for 24 their SSS supply and they all do that, you have got to 25 stop the spot market. You don't have a spot market, it 26 seems to me what you are driving at there. 27 Isn't there some sort of a mid point 28 or an in between position that could be developed where 209 1 you have a certain amount of activity that is 2 channelled through the spot market but a certain amount 3 of activity that can go on a bilateral basis? Why does 4 it have to be 100 per cent zero with respect to the 5 default of the standard service supply? 6 PROFESSOR DEWEES: My expectation and 7 hope would be at the wholesale level there would be a 8 combination of spot market transactions and bilateral 9 transactions of the supplies if there wasn't a 10 substantial contract market developing. 11 For the standard supply service, the 12 MDC felt that that should be done way, standard across 13 the province, recommended the smoothed spot, and if you 14 did it one way across the province by power purchase 15 portfolios, you would then swing this large block of 16 power from spot to the contract market. 17 It seems to me you might then run the 18 risk of having an activity created spot market. This 19 is I think not a drive. This concern is not a driving 20 force in the choice, but it is partly a response to the 21 concern that there wouldn't be a futures market if we 22 used the spot price. In fact, I think there would be 23 and the data that I showed this morning showing there 24 are 25 per cent large customers and another bunch of 25 medium size customers. If these people want to engage 26 in future transactions, that's a large enough part of 27 the market to sustain the futures market satisfactorily 28 it seems to me. 210 1 I think that would give us a blend. 2 I don't think that's an argument for putting it 3 into -- for converting the standard supply service into 4 fixed parts. 5 MR. BRETT: Just a general question. 6 Do you see the wholesale markets and the retail markets 7 being linked or do you see them as two quite separate 8 markets? 9 I get the sense from listening to 10 your presentations that you see these as two markets 11 that are totally disassociated one from another. 12 PROFESSOR DEWEES: No, I don't think 13 so. I think they are a link. In fact, in our proposal 14 there is a very clear linkage. You pass through the 15 spot price to the standard supply service customer and 16 then the retail market operates in competition with 17 that. 18 What goes on in the wholesale market 19 has a direct bearing on the opportunities for reach out 20 competition. 21 MR. BRETT: Is it fair to say though 22 that one of the things that you should take into 23 account in designing the retail aspect of the market is 24 to do whatever you can to enhance competition of supply 25 in the wholesale market? After all, it was competition 26 of supply in the investment and jobs that it purports 27 to bring that seem to be the cornerstone of the White 28 Paper. 211 1 That's where it all started, it seems 2 to me. I wonder whether we are losing sight of that as 3 we progress along the road here. 4 PROFESSOR DEWEES: I certainly 5 support a competitive wholesale market and to the 6 extent that that competition will drive down prices and 7 so new investment that is more costly, you might argue 8 will enhance competition, but if it's raising prices 9 for consumers, it seems to me there is no benefit to 10 consumers from that. 11 I don't see new investment in 12 generation as an object in itself. I see it as when it 13 happens in response to a market demand, terrific. If 14 not, okay. 15 MR. BRETT: Thanks. Those are my 16 questions. Thank you. 17 MS LEA: Thank you very much, Mr. 18 Brett. 19 Ms DeMarco, do you have questions? 20 There is a blank line on the estimates page. Sorry, 21 I'm just teasing. 22 MS DeMARCO: I have no questions at 23 this time. 24 MS LEA: Thank you. 25 Mr. McKerlie, do you believe that you 26 can accomplish sufficiently by five o'clock to make it 27 worth your starting now? 28 MR. McKERLIE: I would prefer that. 212 1 Many more hours, I might forget my questions. 2 MS LEA: Then please go ahead. 3 MR. McKERLIE: Thank you. 4 There were some questions earlier 5 about the SSS smoothing. If I could perhaps just focus 6 on that particular option for a moment. It's with 7 respect to the SSS smoothing period. 8 It appears to me that in the market 9 design committee report that there was some sense of 10 preference for a smoothing period that was longer than 11 a potential one month, two month billing cycle that is 12 envisioned in the code. Would you agree? 13 PROFESSOR DEWEES: The MDC didn't 14 express any preference, but the range of smoothing 15 period that it looked at was between billing period and 16 the year, so the draft code comes out at the low end of 17 the range that we were looking at, but the MDC really 18 at the end said "We don't have any opinion on this and 19 we leave it to the OEB to look at it in more detail and 20 then make a decision". 21 MR. McKERLIE: Recognizing that some 22 of the concerns are around price volatility, I am just 23 wondering about your thoughts then on the perspective 24 of the other end of the spectrum, which would be the 25 benefits of a longer term versus a shorter term. 26 PROFESSOR DEWEES: There are benefits 27 and costs both. The longer term is a little more 28 stability for the consumer. It raises the risk of 213 1 larger true-ups for customers that leave during the 2 course of the year and it involves managing a larger 3 flow for the distributor. 4 In fact, you can achieve more or less 5 the same thing through an equal billing plan. As I 6 read the draft code, it would be open to a distributor, 7 it would be his option to offer equal billing if it 8 felt that a one year stability in price was preferred 9 by its customers. At least attempting to smooth those 10 variations with equal billing would be preferred. The 11 utility could do that. 12 MR. McKERLIE: Even equal billing 13 though would have a requirement for some form of 14 forecasting and true-ups at the end of the year though. 15 PROFESSOR DEWEES: Yes. It would 16 raise the same concerns that are raised by the annual 17 smoothing. 18 MR. McKERLIE: I'm wondering from the 19 perspective of the discussions that took place, the 20 true-ups in managing the true-ups of, let's call it, an 21 annual smoothing period. 22 Did you view that being managed 23 through a formula adjustment or do you see the OEB 24 having an oversight role in actually managing that 25 true-up amount as opposed to a formula process? 26 PROFESSOR DEWEES: The MDC didn't get 27 into that level of detail. I don't have an opinion on 28 that myself. 214 1 MR. McKERLIE: I'm sorry, you don't 2 have -- 3 PROFESSOR DEWEES: I don't have an 4 opinion on that myself. 5 MR. McKERLIE: Did you have any 6 discussion then about what a maximum smoothing term 7 would be in your mind? 8 PROFESSOR DEWEES: I don't recall 9 that we discussed anything longer than a year. I think 10 it was billing period up to a year was the range that 11 the MDC considered. 12 MR. McKERLIE: Okay. Under the SSS 13 code as presented, there is provision for SSS including 14 billing services to be managed using a non-retail 15 affiliate, non-retailing affiliate. That is provided 16 for in the code as laid out, correct? 17 PROFESSOR DEWEES: Yes. 18 MR. McKERLIE: I guess I'm wondering. 19 You talked a little bit about billing in your 20 submission. Do you have an opinion on the type or the 21 brand or the corporate identity that would be reflected 22 on that bill? Whose name would the bill go out under? 23 PROFESSOR DEWEES: There again the 24 market design committee talked about the sum, but as I 25 recall, did not make any recommendations. I don't have 26 an opinion. There's a lot of complicated issues 27 associated with billing that the MDC didn't come to a 28 resolution on and I don't have a position to offer the 215 1 Board at this time. 2 MR. McKERLIE: Okay. 3 Thank you. 4 MS LEA: Thank you very much, 5 Mr. McKerlie. 6 I do notice there is one party that 7 indicates it has five minutes of questions, if they 8 hold to their estimate, Upper Canadian Energy Alliance. 9 If you can hold to your estimate, sir, perhaps we can 10 finish you today. 11 MR. RICHARDSON: We will attempt to 12 do that. It certainly won't drag on for 10 or 15. 13 I just have a few questions here, 14 Don. I would like to clarify some issues. 15 I was a member of the Market Design 16 Committee, so sometimes Don and my recollections 17 coincide and sometimes they might be a little 18 different. 19 MS LEA: I'm sorry, sir, I am going 20 to have to interrupt you to get your name for the 21 reporter. 22 MR. RICHARDSON: Yes. Jim 23 Richardson. 24 MS LEA: Mr. Richardson. Thank you. 25 MR. RICHARDSON: Let me just go 26 through the Market Design Committee and the decisions 27 that were made. 28 Certainly, some of the decisions were 216 1 unanimous. I would say the majority of the decisions 2 were substantial consensus. Ron would say "Does anyone 3 have a problem with this?" and there might be one or 4 two people who would nod their heads that they have a 5 problem, and Ron would say that's substantial consensus 6 and away we would go. 7 Your interpretation of the second 8 quarter decision or vote on the SSS was that it was 9 substantial consensus. I don't remember that quite as 10 well as you do. 11 So let's move on to the third quarter 12 and the fourth quarter, where we redebated it. We 13 obviously redebated it because there is a very 14 contentious issue. Certainly when it was voted on 15 again in the third and fourth quarter, it certainly 16 wasn't substantial consensus. I think at one point 17 there was probably a bare majority. 18 I would just like us to be aware that 19 I think the decision on SSS was more a squeak-through 20 in the end as opposed to a solid majority of the Market 21 Design Committee, albeit I will acknowledge the Market 22 Design Committee did eventually come up with that 23 result. But it certainly wasn't, in my estimation, a 24 third and fourth quarter substantial consensus. 25 PROFESSOR DEWEES: If I could just 26 respond very briefly to that, I think we are in 27 agreement that the second quarter recommendation was 28 substantial consensus. There was certainly lots of 217 1 debate in the third quarter. 2 My recollection is that what we were 3 considering was: Should we add something else to the 4 smoothed spot price that we had agreed to in the second 5 quarter? My recollection is that we did not agree that 6 we would add anything to that. 7 I think you are correct that there 8 was heated debate over that issue. 9 MR. RICHARDSON: So certainly this 10 issue is very contentious and took a lot of the MDC's 11 time. 12 PROFESSOR DEWEES: Yes. 13 MR. RICHARDSON: So I certainly think 14 the Board wants to make sure they study this from every 15 angle they can. It certainly wasn't clear-cut, 16 whatever the MDC came up with, and I am sure the Board 17 will give it the weight that the MDC had given it. 18 PROFESSOR DEWEES: Just to round that 19 out, though, as I recall it, the paragraph that we put 20 in the final report was at least substantial consensus 21 and perhaps unanimous. 22 MR. RICHARDSON: That was a 23 compromise position, would you not say? 24 PROFESSOR DEWEES: That's why it got 25 such broad support. 26 MR. RICHARDSON: When you have a 27 compromise position, it probably isn't a good one 28 either way. It's something down the middle. So I 218 1 don't know if it is in the -- 2 PROFESSOR DEWEES: The lawyer in me 3 could never agree with that proposition. 4 MR. RICHARDSON: Did the MDC get 5 legal advice on how the Act related to the MDC's 6 interpretation of the SSS? 7 PROFESSOR DEWEES: As I said before, 8 my recollection isn't clear on this. When concerns 9 were raised by some members, we said: "The Act says 10 this and we are saying something else". 11 We talked to the lawyers, but I don't 12 recall whether we got a formal opinion or not on that. 13 We certainly never got an opinion that said that what 14 we were doing was in any way a contravention of the 15 Act. 16 MR. RICHARDSON: That certainly would 17 be a concern of ours; that decisions were made and it 18 wasn't legally compared with the intention of the Act 19 and whether the MDC recommendation covered off all the 20 options that the Act seemed to imply. 21 PROFESSOR DEWEES: I think I agreed 22 earlier that the MDC's recommendations did not 23 implement everything that the Act allows for. We spent 24 most of our time during the year writing rules that 25 would constrain people not to do everything you could 26 possibly imagine under one aspect of the Act or 27 another. 28 MR. RICHARDSON: Mr. MacOdrum I think 219 1 had asked earlier on if the MDC had done any customer 2 surveys, any customer polls to see what the customers 3 of the province would like, and I believe your answer 4 was no, they had not done that. 5 I remember that I had brought to the 6 retail subcommittee a pollster in the province who had 7 done some customer surveys, and there seemed to be a 8 bit of reluctance on the part of the committee. But I 9 insisted that we bring someone who had done some 10 customer surveys. 11 If I remember, the gist of what they 12 are saying is that customers in the province of Ontario 13 liked the way they are getting electricity now. They 14 wanted to be left alone. They didn't want to be 15 disturbed by people phoning them up and knocking on 16 their door and giving them all sorts of offerings and 17 everything else. 18 I remember when we were debating this 19 after the fact, I was saying: Well, this seems to be 20 what the customer want. They like the fixed price they 21 are getting now. They like the service they are 22 getting from the LDC. Why does the MDC want to 23 recommend something that is totally different from 24 that? 25 One of the comments I got from, not 26 an MDC member but from someone around the table was: 27 "Well, who cares what the customer wants? We are here 28 to provide a competitive market." 220 1 This thoroughly upset me, because -- 2 MS LEA: Mr. Richardson, do you have 3 a question for Dr. Dewees? This is an attempt to get 4 clarification of his views. 5 MR. RICHARDSON: I am just trying to 6 clarify a point when he was asked whether we did any 7 customer surveys. The MDC did not specifically, but a 8 customer survey was presented to the Market Design 9 Committee. 10 MS LEA: That is certainly something 11 that the Board will hear from, no doubt, when it hears 12 your submissions. But do you have a question for 13 Dr. Dewees? 14 PROFESSOR DEWEES: On that, Jim is 15 absolutely right. We did have a presentation from a 16 pollster. I don't recall now the details of it, but it 17 wasn't a study that we commissioned. It had been 18 commissioned by someone else for another purpose. But 19 we did receive that input. 20 MR. RICHARDSON: I just want to make 21 that clarification. That's it. Thank you. There is 22 my five minutes. 23 MS LEA: Thank you. Well, your 24 estimate was certainly accurate. Thank you for that. 25 MR. RICHARDSON: I think my comments 26 were too. 27 MS LEA: The original scheduled 28 start-up time for tomorrow morning was 9:30. 221 1 Dr. Dewees, I don't want to put you 2 on the spot -- and it's quite permissable for you to 3 say no -- but would you be available to start at 9:00? 4 If you are not, that's fine; we will start at 9:30. 5 PROFESSOR DEWEES: How long do you 6 anticipate running tomorrow or how long do you 7 anticipate me being on tomorrow? 8 MS LEA: If I look at the estimates 9 and the estimates are accurate, we would finish your 10 testimony at about 12:30, allowing for a 15-minute 11 break. 12 But whether these estimates are 13 accurate or not, of course I can't say. 14 That's where we are at in terms of 15 adding up the minutes that have been put down here. 16 PROFESSOR DEWEES: I am prepared to 17 come at 9:00. I would very much like to be out by 18 12:30. 19 MS LEA: I am not in complete control 20 of that, but we will certainly work on that. If you 21 are available at 9:00, I think that would facilitate 22 you getting out in the morning. 23 Are you prepared to do that? 24 PROFESSOR DEWEES: I am prepared to 25 come at 9:00. 26 MS LEA: Thank you. 27 Are there counsel who are available 28 at 9:00 a.m. to begin their questioning? 222 1 I am seeing nods from Mr. Poch and 2 Mr. Mia. That would probably take us through the first 3 half hour anyway. Thank you very much. 4 Then we will begin promptly at 5 9:00 a.m. tomorrow, and hope to send Dr. Dewees home by 6 12:30. 7 --- Whereupon the hearing adjourned at 5:04 p.m., 8 to resume on Wednesday, July 14, 1999 at 9 9:00 a.m. gW gW1 CCAT976B.PQFd68 "p4ON.8q@IbbPG{ԒI&Ab@) d'?~Kf W@M K'LIWPC  ή+ţdA\M"-]hv9,L~.AZYV=t nw̋ȷf?NkXЉ1>ё,S3df\ ICP^C&}.~sPWٝ(xU}U=؁hT o9|'SJ[DF:5 @ \῰A>@l2 Wbϖ̭ͨ:=i$kJl|:0ORGPRAC.ACL@0 0 "(`C`Co|7Arial  Arial@p88d@`@o@`@o@0o@` @`@ `@o?@ `@ `  o@@ o@Arial`@ o@ ` Arialo@`@o@`@Arial@ 8d@`@o@`@o@0o@` @`@ `@o?@ `@`  o@@ o@ ArialArialArialArialArialArialArialArialArialArialArialArialArialArialArialArial8 #8pP38 #8P#8P#8 #8P#8P#8 #8P#8 #8p#8P#8P#8P# @ @ @ @ @  Software General IncorporatedGIF89a3f3333f333ff3fffff3f3f̙3f3333f3333333333f3333333f3f33ff3f3f3f3333f3333333f3̙333333f333ff3ffffff3f33f3ff3f3f3ffff3fffffffffff3fffffff3fff̙ffff3fffff3f̙3333f33̙3ff3ffff̙f3f̙3f̙̙3f̙3f3333f333ff3fffff̙̙3̙f̙̙̙3f̙3f3f3333f333ff3fffff3f3f̙3f WPC# U} !YM1j@HTluĮ%jg5 6>C7PC$jaҊ'5E"6X,C™<<g 9)uZCSr4ґVM r} @+`Gj3ԙ8| ٮ=lP܋Sl#'=9ZJtm;6Ưq0SSo_uk Z4oY bvO\D8N@MJzyD*%vZ}\A_́cΗgzEu P5 _^MT$!|UU+ :xf.e"MLr{LiRHCc/յ$(PŏK%2yd 57P"@-*/Pruupha1Q5۸gf7^LL4zfo9e1WPC $=蝢0OKSu0_89$=|=g|evۏ 'ʼn192c)| 1994 1 RP-1999-0001 2 3 THE ONTARIO ENERGY BOARD 4 5 IN THE MATTER OF the Ontario Energy Board Act, 1998; 6 7 AND IN THE MATTER OF an Application by The Consumers Gas 8 Company Ltd., carrying on business as Enbridge Consumers 9 Gas, for an order or orders approving or fixing rates 10 for the sale, distribution, transmission and storage of 11 gas for its 2000 fiscal year. 12 13 14 15 16 B E F O R E : 17 P. VLAHOS Presiding Member 18 S.K. HALLADAY Member 19 20 21 Hearing held at: 22 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 23 Toronto, Ontario on Thursday, September 9, 1999, 24 commencing at 0902 25 26 RATES HEARING 27 28 VOLUME 12 1995 1 APPEARANCES 2 JENNIFER LEA/ Counsel, Board Technical 3 HIMA DESAI/ Staff 4 JAMES WIGHTMAN 5 J.H. FARRELL/ Enbridge Consumers Gas 6 F. CASS/ 7 T. LADANYI 8 H. SOUDEK 9 ROBERT WARREN Consumers Association of 10 Canada 11 TOM BRETT Ontario Association of 12 School Business Officials of 13 the Metropolitan Toronto 14 Separate School Board 15 IAN MONDROW Heating, Ventilation and Air 16 Conditioning Contractors Coalition 17 Inc., HVAC Coalition 18 GEORGE VEGH Coalition for Efficient 19 Energy Distribution 20 MARK MATTSON/ Energy Probe 21 MICHAEL HILSON 22 MURRAY KLIPPENSTEIN Pollution Probe 23 DAVID POCH Green Energy Coalition, GEC 24 MICHAEL JANIGAN Vulnerable Energy Consumers 25 Coalition 26 STAN RUTWIND TransCanada PipeLines 27 Limited 28 1996 1 APPEARANCES (Cont'd) 2 MICHAEL MORRISON Ontario Association of 3 Physical Plant 4 Administrators 5 JOEL SHEINFIELD Enbridge Services Inc. 6 MARK ANSHAN Canadian Association of 7 Energy Service Companies 8 MARK STAUFT TransCanada Gas Services 9 DAVID BROWN/ Coalition of Eastern Natural 10 RICHARD PERDUE Gas Aggregators and Seller 11 (CENGAS) 12 PETER THOMPSON Industrial Gas Users 13 Association (IGUA) 14 BETH SYMES Alliance of Manufacturers & 15 Exporters Canada 16 LYNDA ANDERSON Union Gas Limited 17 GLEN MacDONALD Ontario Hydro Services 18 Company 19 20 21 22 23 24 25 26 27 28 1997 1 Toronto, Ontario 2 --- Upon resuming on Thursday, September 9, 1999 at 0902 3 PREVIOUSLY SWORN: JIM G. STEPHENS 4 THE PRESIDING MEMBER: Good morning everyone. 5 MR. FARRELL: Good morning. 6 THE PRESIDING MEMBER: Any preliminary 7 matters, Mr. Farrell? 8 MR. FARRELL: Yes. 9 PRELIMINARY MATTERS 10 MR. FARRELL: You and Ms Halladay should have 11 two documents that I put up there. One is the template, 12 the E.R.O.'s template, for the monitoring reports. 13 This is what you asked for, Mr. Chair, in 14 Volume 10 of the transcript, page 1773. So, on behalf 15 of Board Staff, we are filing it. 16 MS LEA: Well, thank you very much, sir. 17 That will be K12.1, please. 18 EXHIBIT NO. K12.1: E.R.O.'s template for 19 the monitoring reports 20 MR. FARRELL: The other is just another -- the 21 other document, rather, is just another update to the 22 hearing schedule to keep us current. At least to this 23 morning. 24 Another preliminary matter, Mr. Chair, is the 25 Undertaking J8.1. This is Mr. Janigan's undertaking 26 that we discussed yesterday. Mr. Ladanyi was able to 27 speak with Mr. Janigan yesterday afternoon and he has 28 consented to our ending our inquiries. 1998 STEPHENS, Preliminary Matters 1 So I think, just so it's on the record, I will 2 read an answer for Undertaking J8.1 and it will then be 3 deemed to be answered on the transcript. 4 The response is as follows: 5 "As a result of the passage of time since 6 the BPR work was done, there have been 7 numerous personnel changes at each of 8 these consulting organizations. The 9 company has not been able to determine, 10 to date, whether or not these 11 organizations would object to filing 12 their respective consulting contracts 13 with the company. With Mr. Janigan's 14 consent, no further inquiries will be 15 made." (As read) 16 There is an outstanding matter from page 481 17 of the transcript. I thought I would just have this 18 recorded. It was a question that Mr. Brett asked of 19 Ms Gould, having to do with telecommunications 20 deregulation, and Mr. Brett is checking into the 21 accuracy of this comment and will advise us, either 22 today or in writing, whether it is accurate or needs to 23 be changed, and that's quite acceptable to us. 24 That's all I have. 25 THE PRESIDING MEMBER: Mr. Farrell, just a 26 couple of items. 27 Is it necessary to change the argument 28 schedule because of a one-day delay? 1999 STEPHENS, Preliminary Matters 1 I guess it all depends on the company, whether 2 they will be able to file their in-chief by September 3 22nd. 4 MR. FARRELL: I was just consulting with 5 Mr. Ladanyi. 6 I think that we would be more comfortable if 7 we just then keyed off the 9th so it would then become a 8 series of Thursdays for argument. The last day of the 9 hearing, presumably, is today. Argument-in-chief would 10 be Thursday, September 23rd, intervenor argument, 11 Thursday, October 7th, and reply argument Thursday, 12 October 21st. 13 THE PRESIDING MEMBER: Okay. The second item. 14 Here we are middle of September. Fiscal year commences 15 October 1st. Is there any thought of the company filing 16 for interim rates for the commencement of the fiscal 17 year? 18 MR. FARRELL: We have the request for an 19 interim rate to pick up the gas costs that were settled 20 and our thinking, at the time, that those were the rates 21 that would come into force on October 1st, adjusted for 22 the gas costs which have been settled, and then it would 23 be followed by a final rate order which would pick up 24 the effects of your decision on the outstanding issues. 25 So that was our plan, in terms of staging it 26 through one interim, having to do with the settled gas 27 costs. 28 THE PRESIDING MEMBER: Okay. So the new 2000 STEPHENS, Preliminary Matters 1 rates, then, are interim rates? 2 MR. FARRELL: Yes. 3 THE PRESIDING MEMBER: All right. That's 4 fine. That addresses -- 5 MR. FARRELL: And we have -- I'm assuming we 6 are working on what you requested; and that is, an 7 interim rate order to be filed with the Board for 8 processing and approval. 9 We haven't done that yet, but I'm assuming 10 that it's in the works and will be filed with the Board 11 in enough time for you to review it and then have it 12 come into force, on an interim basis, on October 1st. 13 MS LEA: Yes, we will need some time to review 14 it, Mr. Farrell. So we will need that in advance, 15 considerably in advance, of October 1st. 16 MR. FARRELL: Yes, we understand that. 17 MS LEA: Thank you. 18 THE PRESIDING MEMBER: All right. Thank you. 19 Mr. Farrell, over to you. 20 MR. FARRELL: I don't know whether 21 Mr. Thompson has any preliminary matters. 22 MR. THOMPSON: Yes, thank you, Mr. Farrell, 23 Mr. Chairman. 24 I have some preliminaries concerning some of 25 the undertaking responses that were filed yesterday. I 26 thought I would leave those until Mr. Stephens is 27 finished. I just mentioned them to Mr. Farrell off 28 line, and I will discuss them further, but I don't want 2001 STEPHENS, Preliminary Matters 1 to interrupt the flow dealing with those at the moment. 2 We are in a position to respond to one 3 interrogatory and part -- sorry -- one undertaking and 4 part of a second. 5 Undertaking J11.1, at transcript 1940. 6 Mr. Stephens undertook to check and advise when he asked 7 Mr. Galluzzi to produce the documents entitled, "A 8 Customer System Industry Perspective Position Paper", 9 dated August 9, 1999, which is attached as Appendix 8 to 10 his testimony. 11 Could you provide the response to that 12 undertaking, please, Mr. Stephens? 13 MR. STEPHENS: Yes. After checking through my 14 schedule, here is what I determined -- and it's not dead 15 accurate, because of voice mail sometimes you miss 16 people. 17 My first discussion with Greg Galluzzi was 18 July 12th or 13th. Following that, I met with 19 Mr. Thompson, in Ottawa, and we talked about whether we 20 should, in fact, hire him and bring him here. It was 21 probably not going to be allowed, according to his 22 schedule, so, instead, we had this position paper 23 created. 24 The second was July 19th or 20th. I know, at 25 that time, we talked about, you know, what I wanted in 26 the paper. 27 The third was August 3rd, where we talked more 28 specifics about what was in that paper. 2002 STEPHENS, Preliminary Matters 1 The report, I got the evening of August 9th, 2 while in the hotel, and reviewed it there. 3 And the morning of August the 11th, Greg 4 Matwichuk -- who is a person I used from Stephen Johnson 5 in Calgary -- and I talked to Greg Galluzzi, on the 6 phone, about the report and what was in it and, you 7 know, some questions I had about it. 8 Is that satisfactory? 9 MR. FARRELL: Yes, I think it is. 10 I'm just looking at the transcript page where 11 the undertaking is recorded. 12 --- Pause 13 MR. FARRELL: I had asked you, on page 1940, 14 starting at line 4, whether you knew if the report was 15 an original work after you spoke to him or is it 16 something he took off the shelf. And I'm just reading 17 your answer to me and I'm prepared to accept it, so 18 that's fine. 19 MR. THOMPSON: The next one was Undertaking 20 J11.2, which is recorded in the transcript, at page 21 1983, but there was some discussion about it after that. 22 My understanding is that this undertaking 23 really has two parts to it. The first was to clarify 24 whether the next release of Enlogix' SCT, scheduled for 25 the autumn of 1999, will be the existing version of the 26 software currently being used to serve 280,000 customers 27 of Union, formerly the Centra customers, and also being 28 used, as I understand it, to serve Union Energy, or an 2003 STEPHENS, Preliminary Matters 1 enhanced version of the software. 2 I believe we are in a position to answer that 3 part of the question. 4 Could you help us there, Mr. Stephens? 5 MR. STEPHENS: Yes. I talked to John Roberts, 6 who is the VP of Enlogix' customer service and he 7 confirmed that, for nearly all transactions, terminal 8 response time is subsecond with what were the 280,000 9 Centra Gas Ontario customers. 10 He also confirmed that to be true at Union 11 Energy Inc. 12 He went on to explain that the Enlogix is 13 adding significant function in what they term Phase II, 14 which will be implemented at the original 795,000 Union 15 Gas customers. This additional function provides 16 service order and dispatch function. 17 It's also needed at Centra Gas Manitoba and is 18 being implemented, in the next month, there, as well. 19 Now, I was not able to talk to Kalim Sheikh, 20 who is the technical director, and he might be able to 21 give me some of these things you want from -- or sort of 22 a benchmark indicator. 23 MR. THOMPSON: Yes. I was going to say the 24 second part of the undertaking response, as I interpret 25 it, was that we were asked to determine the database, 26 on-line transaction parameters, batch volume demands, 27 concurrent users and hardware capacity; and parameters 28 of the development or test environment which 2004 STEPHENS, Preliminary Matters 1 Mr. Stephens witnessed operating at Enlogix. 2 And we were also asked, as I understood it, to 3 determine whether the response time on the production 4 environment was subsecond. I believe Mr. Stephens has 5 answered that. 6 We have not been able to reach Mr. Sheikh, is 7 it? 8 MR. STEPHENS: Yes, he was out of town. 9 MR. THOMPSON: We will try again this morning. 10 He is supposed to be back today, so hopefully we will be 11 able to answer that question at the break. 12 But in terms of the response time in the 13 production environment, you have provided information on 14 that this morning, have you? 15 MR. STEPHENS: Yes, I did. 16 MR. FARRELL: Just to be clear, Mr. Stephens, 17 is the existing application -- 18 MR. STEPHENS: Its function is an add-on 19 module, and it is still the same SCT version. 20 MR. FARRELL: Okay. It is the one that is 21 serving the 280,000 Centra customers, and you said also 22 Union Energy. 23 MR. STEPHENS: Agreed. 24 MR. FARRELL: Not to belabour this, but one of 25 the other things, in addition to the technical 26 information you were going to obtain, is whether the 27 demonstration you saw was running in a test environment 28 or a development environment. 2005 STEPHENS, Preliminary Matters 1 MR. STEPHENS: Until I talk to Kalim, I do not 2 know that. 3 MR. FARRELL: I appreciate that. I just 4 wanted to confirm that that is something you are going 5 to ask him when you do talk to him. 6 MR. STEPHENS: The more I think about it, I 7 don't think he is going to know the answers to these 8 questions. We just walked over to this person that was 9 a developer as one of many developers in that area, and 10 he showed me this function. 11 MR. FARRELL: Let's see what you can do. 12 MR. THOMPSON: We will speak to him first and 13 then we will report back. 14 The only other point on the topic of Enlogix, 15 Mr. Chairman, that I wanted to draw your attention to 16 and the attention of others is that in Professor 17 Trebilcock's prefiled evidence in this case, which is 18 evidence filed on behalf of Cengas -- I don't happen to 19 have the exhibit number, but I have borrowed staff's 20 version of the evidence. 21 This is the evidence of Michael J. Trebilcock. 22 The exhibit number is L7.2. It is entitled "Unbundling 23 of LDC Merchant and Distribution Functions in Ontario". 24 In Appendix B of this testimony, he has 25 detailed Internet information on selected revenue cycle 26 function suppliers, and there is in that information the 27 Web site for Enlogix which describes both the release 28 for the 280,000 former Centra customers and also the 2006 STEPHENS, Preliminary Matters 1 900,000 Union Energy users. 2 I thought I should flag that in connection 3 with this discussion of Enlogix. 4 Thank you. Those are my preliminaries. 5 THE PRESIDING MEMBER: Thank you, 6 Mr. Thompson. 7 Mr. Farrell? 8 MR. FARRELL: We will look at the Enlogix 9 promo material in due course. 10 CONTINUED CROSS-EXAMINATION 11 MR. FARRELL: Could you turn to page 13 of 12 your evidence, Mr. Stephens. 13 MR. STEPHENS: Yes. 14 MR. FARRELL: Bear with me while I read my 15 notes, because at this point I was going to discuss with 16 you your impressions from the two demonstrations, which 17 appear under 4.8, CIS Solution Demonstrations. But I am 18 not sure that we can have a fruitful discussion without 19 the responses to the undertaking that you need to speak 20 with the technical director about. 21 Could I have a moment, Mr. Chair? 22 THE PRESIDING MEMBER: Certainly. 23 --- Pause 24 MR. FARRELL: Mr. Stephens, we had a 25 discussion yesterday about the variability of CIS 26 solutions, and we went through these factors that I then 27 asked you to find out from Enlogix. I don't think it 28 would be fruitful to go through the same factors again 2007 STEPHENS, cr-ex (Farrell) 1 in relation to the demonstration you saw until you have 2 the information from the technical director. It may be 3 sufficient to put that on the record in writing 4 depending on when you are able to get hold of him. 5 Before I leave this point, would you agree 6 with me that in terms of a customer service function, 7 the important thing overall is the total response time 8 it takes a CSR to respond to a customer's inquiry or 9 inquiries in any given phone call? 10 MR. STEPHENS: Yes, absolutely. 11 MR. FARRELL: If the customer makes a number 12 of inquiries or one inquiry that requires the CSR to 13 call up a lot of data -- and here I am sort of venturing 14 into a technical area. I hope you will bear with me. 15 My understanding is that, depending upon the 16 amount of data that is called up, the packet size may 17 determine how many packets are needed to bring the data 18 from the database to the screen. 19 MR. STEPHENS: It depends how you have 20 designed and written the application. 21 We went into this yesterday. 22 MR. FARRELL: The point I was trying to direct 23 your attention to -- and we did talk about a denser 24 screen with more data on it. 25 The point that I was seeking your assistance 26 on is -- using an analogy of the postal system: If you 27 need 100 pages of data but their packet size is only 25 28 like an envelope, you would need to take the 100 pages, 2008 STEPHENS, cr-ex (Farrell) 1 divide them into four, put 25 in each envelope, call 2 them up, and then on the screen they would be 3 re-assembled. 4 Is that a fair analogy? 5 MR. STEPHENS: Well, it might work. 6 MR. FARRELL: My point is that if you have a 7 screen that has more information on it to answer the 8 customer's inquiry, it then may take less inquiries to 9 satisfy the customer's needs and so the overall response 10 time could be less than if you needed only two screens 11 compared to six. 12 Is that fair? 13 MR. STEPHENS: Yes, I would agree with that. 14 Also in screen design, when you are designing 15 the screens if you put too much information on them, 16 they are usually somewhat confusing to the operator. So 17 when you are going through this design, you make these 18 trade-offs when you are designing and implementing the 19 system. 20 MR. FARRELL: Okay, I take your point. 21 MR. STEPHENS: You and I are pretty technical 22 right now. 23 MR. FARRELL: I am told that I am, yes. 24 I think that -- I will just check my notes on 25 your answer. I had a question for you about your third 26 bullet point on page 13, in Section 4.8, about the 27 Enlogix solution being operational and the ECG solution 28 being developed. 2009 STEPHENS, cr-ex (Farrell) 1 I think you might have addressed this 2 yesterday but just to confirm: Your comment is that it 3 is operational because it is serving, in its current 4 version, the 280,000 Centra customers. This is the 5 Enlogix SCT solution. 6 MR. STEPHENS: Yes. And maybe just as 7 importantly, it allows both the inquiry and the update 8 of information. ECG gets to that in November when they 9 get that capability added to their application. 10 MR. FARRELL: Yes, and I am not quibbling with 11 you over that. But you would agree, I take it, that 12 with the first release, the ECG solution is also 13 operational. It is in production mode. 14 You saw it. 15 MR. STEPHENS: Well, whatever you want to 16 interpret. It is difficult to think that if I want the 17 application to do this much and all I have done is 18 replace the technology, so it kind of does what it did 19 before -- whether that is operational is your 20 interpretation. 21 MR. FARRELL: And yours. 22 MR. STEPHENS: And mine. 23 MR. FARRELL: I think you touched on this 24 yesterday, but I just want to make sure that I 25 understood your answer. 26 You say the Enlogix SCT solution was less 27 technically complex than the ECG solution, and then you 28 made reference to the ECG solution being a four-tier 2010 STEPHENS, cr-ex (Farrell) 1 system. 2 MR. STEPHENS: Yes. 3 MR. FARRELL: I am advised that that is not 4 the case, that the ECG solution is a three tier system 5 consisting of the mainframe, a Unix server and the PC 6 and that the Intel server that you referred to has no 7 role whatsoever in relation to CIS. 8 MR. STEPHENS: If that's true, then it is 9 three tier. I understood that they put on to the Intel 10 server some of the display formats -- is that 11 correct -- so that would make it a four tier, but 12 anyway, if you say its only three. 13 MR. FARRELL: Mr. Kent is confirming that it's 14 three. If this is a point in dispute, we will have to 15 see whether we need Mr. Kent to be a rebuttal witness. 16 Maybe the two of you can speak off line at the break. I 17 would hate to have to call rebuttal evidence just to 18 deal with this point, but we regard it as an important 19 one. 20 MR. STEPHENS: But just to clear up the 21 complexity, you also move part of the database from the 22 DB2 B frame server on to the Unix cybase server, so you 23 have two separate databases. You move a piece of that 24 in order to improve response time out of the terminal. 25 The other is basically take it from the 26 database server out through that other Unix server to 27 the terminal. It's certainly not as complicated, I 28 don't think. And maybe complicated is good because it 2011 STEPHENS, cr-ex (Farrell) 1 might improve response time some time. 2 MR. FARRELL: Okay. I have your answer. Now, 3 can I take you to page 18. 4 MR. STEPHENS: I have it. 5 MR. FARRELL: This is your functionality 6 summary which you say the chart summarizes at a high 7 level the characteristics of the three solutions we have 8 been discussing. 9 You might have mentioned this yesterday in 10 your examination-in-chief, and if you did, forgive me 11 for taking you back there. Can you tell me which of 12 these characteristics are the significant ones in terms 13 of identifying differences between or among the three 14 systems that you are showing or depicting in this chart? 15 MR. STEPHENS: Well, I would say the 16 significant ones are the fact that the other two use a 17 package solution versus this tool set that you 18 customized. And then the fact that the functionality 19 inside of the ECG solution is not as complete as those 20 in the others. 21 MR. FARRELL: Where do I see that on the 22 chart? 23 MR. STEPHENS: Oh, under function -- well, 24 technology is the top line, under technology there, and 25 functionality are the bottom three points, so the fifth 26 4D deregulated business model, the flexible billing 27 options and the Internet access and bill payment. 28 MR. FARRELL: Okay. We will deal with that. 2012 STEPHENS, cr-ex (Farrell) 1 We have dealt in part with the fifth 4D regulated 2 business model and we had our discussion of Mr. 3 Galluzzi's unregulated business model versus the state 4 of the deregulated market in Ontario and what may be 5 coming. Do you recall that discussion? 6 MR. STEPHENS: Yes. 7 MR. FARRELL: And is it fair of me to say that 8 you have simply assumed that Mr. Galluzzi's or TMG's 9 deregulated business model is in fact a model that is 10 applicable to the Ontario market now and the Ontario 11 market as it's envisioned, at least in -- 12 MR. STEPHENS: I think I said, you know, I 13 couldn't be sure, but it seemed to make sense. 14 MR. FARRELL: That's your assumption. 15 MR. STEPHENS: Yes. 16 MR. FARRELL: Thank you. In terms of flexible 17 billing options, what do you mean by that? 18 MR. STEPHENS: Well, there are a number of 19 billing options that are described, I guess, best in the 20 P software solution at BC Gas, but more importantly, the 21 program that today does the billing at ECG and that will 22 do it in the future is an older system that's mainframe 23 based. When it was designed, it wouldn't have used the, 24 you know, table driven structures that are in today's 25 more modern software products. 26 MR. FARRELL: The table -- 27 MR. STEPHENS: Table driven. 28 MR. FARRELL: I didn't hear the "driven". 2013 STEPHENS, cr-ex (Farrell) 1 Thank you. 2 You describe the BC Gas flexible billing 3 options on page 15. 4 MR. STEPHENS: Yes. 5 MR. FARRELL: That's the second last 6 paragraph. 7 MR. STEPHENS: Agreed. 8 MR. FARRELL: The first is summary billing. 9 MR. STEPHENS: Yes. 10 MR. FARRELL: Are you familiar with the term 11 "statement billing"? 12 MR. STEPHENS: No, I'm not. 13 MR. FARRELL: But you accept, subject to 14 check, that it's the same thing as you are describing as 15 summary billing. 16 MR. STEPHENS: Yes. 17 MR. FARRELL: Can you confirm or do you know 18 whether Enbridge now offers summary billing, to use your 19 term? 20 MR. STEPHENS: Well, I haven't seen the 21 system. I assume that since they wrote it that way, it 22 must. They said they were going to provide that kind of 23 function. 24 MR. FARRELL: Well, maybe to see whether we 25 can do this, do you know whether or not Enbridge 26 currently provides and can continue to provide each of 27 these billing services that you have described here? 28 MR. STEPHENS: I do not believe that they can 2014 STEPHENS, cr-ex (Farrell) 1 do the electronic billing, nor the on demand billing. 2 MR. FARRELL: What do you mean by on demand 3 billing? 4 MR. STEPHENS: Basically that someone requests 5 that they get a bill right now and that it's produced. 6 MR. FARRELL: I am advised that Enbridge can 7 do that, for example, when a customer changes locations, 8 sells his house, for example, and that it's also done 9 for large volume customers. Are you disagreeing with 10 that? 11 MR. STEPHENS: If they say that, that's true. 12 MR. FARRELL: In terms of electronic billing, 13 I have been advised that it is a function that can be 14 added at a reasonable cost. Would you confirm that? Is 15 that your experience? 16 MR. STEPHENS: I don't know the answer to 17 that. 18 MR. FARRELL: You don't know the answer to 19 that. All right. Would you regard equal billing as a 20 desirable billing option? 21 MR. STEPHENS: You mean the same bill each 22 month to the consumer? 23 MR. FARRELL: Yes. 24 MR. STEPHENS: And adjusted at the end of the 25 year. 26 MR. FARRELL: Yes. 27 MR. STEPHENS: Yes, they have that today at BC 28 Gas. 2015 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: Yes. 2 MR. STEPHENS: So most utilities have that 3 capability. 4 MR. FARRELL: And third party billing. 5 MR. STEPHENS: That someone else would send 6 out the bill? 7 MR. FARRELL: No, just the reverse. The 8 utility would send out a bill, for example, of gas 9 marketer. 10 MR. STEPHENS: Good. What's the question? 11 MR. FARRELL: Would you regard third party 12 billing as I have defined it as a desirable billing 13 option? 14 MR. STEPHENS: Absolutely. 15 MR. FARRELL: It is not included here, I take 16 it. 17 MR. STEPHENS: They have that capability. 18 MR. FARRELL: I see, so it's a billing service 19 previously provided, is that what you are telling me? 20 MR. STEPHENS: I don't know the answer to 21 that, but -- 22 MR. FARRELL: Okay. I didn't know who you 23 meant by "they". Sorry. 24 MR. STEPHENS: Sorry. That's one of my 25 faults. It appears to happen to me quite often. 26 MR. THOMPSON: Who are you speaking of, BC 27 Gas? 28 MR. STEPHENS: BC Gas. 2016 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: You are saying they do have that 2 function now. 3 MR. STEPHENS: Yes. 4 MR. FARRELL: And are you aware that Enbridge 5 does as well? 6 MR. STEPHENS: No. 7 MR. FARRELL: The Board is and that's good 8 enough at this point. 9 Back to page 18, Mr. Stephens, please. You 10 have discussed Internet access. I think you were 11 probably in the room at Mr. Thompson's side when he 12 asked Mr. Kent about Internet access. Mr. Kent's answer 13 was that the system as power system as it is currently 14 in service does not have Internet capability, but we 15 believe that this capability can be added at a 16 relatively low cost. That's from Volume 8, page 1490. 17 Do you agree or disagree with Mr. Kent's 18 comment that the capability can be added at a relatively 19 low cost? 20 MR. STEPHENS: I don't know the answer, but if 21 he has researched it right and they figured out how to 22 do it and he says that, why would I not, you know, agree 23 with it? 24 MR. FARRELL: I take that to be a qualified 25 "Yes, I agree". 26 MR. STEPHENS: The real issue is if these 27 other products have them built in, you know, like the 28 maintenance of those other products and their 2017 STEPHENS, cr-ex (Farrell) 1 enhancement adds to these capabilities, it's just an 2 additional cost to add it to the ECG solution. 3 MR. FARRELL: I think we have conceded that, 4 Mr. Stephens. 5 But my point in asking the question is 6 Mr. Kent has described it as a relatively low cost and I 7 was asking whether you knew enough about the ECG system 8 to agree or disagree. I take it you have given me a yes 9 you agree with the qualifier you expressed. 10 MR. STEPHENS: Although I don't know what ECG 11 means as a relatively low cost because, based on what I 12 have seen, they are quite significant sometimes. 13 MR. FARRELL: On page 19 you give us your 14 functionality conclusions and you say, in the middle 15 paragraph just by the middle ring in the -- well, you 16 don't have a three-ring binder -- in the middle of the 17 page, your conclusion that the fair market value of the 18 ECG solution should be approximately 25 per cent below 19 other competitive solutions such as those at BC Gas and 20 Union Gas. Correct? 21 MR. STEPHENS: Yes. 22 MR. FARRELL: When you say "the ECG solution", 23 are you talking about the outsourcing to Newco? 24 MR. STEPHENS: No. I'm talking about the 25 application itself. 26 MR. FARRELL: Let me put it another way. 27 Are you speaking outside the demarcation 28 point, inside the demarcation point, or both? 2018 STEPHENS, cr-ex (Farrell) 1 MR. STEPHENS: As you have described it, if 2 the application gets moved outside the demarcation point 3 that is where we will run. 4 MR. FARRELL: Okay. 5 So on this page we are talking about outside 6 the demarcation point? 7 MR. STEPHENS: We are really talking about the 8 application, the functionality of the application 9 itself. 10 Now, I agree it runs outside the demarcation 11 point, but -- 12 MR. FARRELL: Okay. Let me go at it this way. 13 What is the fair market value of BC Gas? 14 MR. STEPHENS: The fair market value? 15 MR. FARRELL: Yes. 16 MR. STEPHENS: The fair market value is 17 determined by looking at either arm's-length 18 relationships in the marketplace -- 19 MR. FARRELL: No. I'm not asking you how you 20 got it. I'm asking you to give me a number that I can 21 write under "BC Gas" on this page. 22 MR. STEPHENS: The answer is $6 to $8. 23 MR. FARRELL: Okay. 24 Is it the same for Union Gas? 25 MR. STEPHENS: Yes. Outside the demarcation 26 point. 27 MR. FARRELL: Right. 28 What about the cost inside the demarcation 2019 STEPHENS, cr-ex (Farrell) 1 point, or are you not considering that on this page? 2 MR. STEPHENS: This page did not consider 3 that, no. 4 MR. FARRELL: Thank you. 5 Can I take you to page 20. This is your Fair 6 Market Test No. 1, CIS Project Costs. 7 MR. STEPHENS: Yes. 8 MR. FARRELL: If I understood what you told 9 Mr. Thompson yesterday, this is an indicator as opposed 10 to a measure of fair market value. This is a way you 11 test your fair market value conclusions. 12 MR. STEPHENS: Basically, I tried to find as 13 many ways as I could to see if this cost was in 14 relationship or comparable to others. 15 MR. FARRELL: Are you quibbling with my use of 16 the term "indicator"? 17 MR. STEPHENS: No. 18 MR. FARRELL: Okay. 19 MR. STEPHENS: It's fine. 20 MR. FARRELL: Is this test outside the 21 demarcation point, inside the demarcation point, or 22 both? 23 MR. STEPHENS: This is outside the demarcation 24 point. It is in fact the project costs to implement the 25 solution inside the relative gas utility companies. 26 MR. FARRELL: Can we go to Appendix 2. 27 MR. STEPHENS: Yes. 28 MR. FARRELL: Excuse me. I wanted to go to 2020 STEPHENS, cr-ex (Farrell) 1 Appendix 1. I'm ahead of myself. 2 This is perhaps, and I indicate that I'm not 3 all that technically astute -- but the total project 4 costs you show for BC Gas for Program Mercury is 5 $26,444,510. 6 MR. STEPHENS: Yes. 7 MR. FARRELL: The reason that I want to have 8 you confirm this is, in the Program Mercury excerpts 9 that I handed out yesterday, on page 6 of that 10 document -- this is part of Exhibit K11.2 -- 11 MR. STEPHENS: I have it. 12 MR. FARRELL: Yes. As you will see, just 13 about a little bit more than halfway down page 6, it's 14 the first page after the title page, Mr. Stephens, in 15 the excerpt, it talks about implementation costs of 16 $28.2 million and then a revenue requirement of 17 $33.2 million. I take it that you have calculated a 18 subset of those two numbers to derive your $26,444,510? 19 MR. STEPHENS: Right. They had within that 20 Program Mercury two applications, so they had their call 21 centre application and they had their CIS application. 22 So in order to try and get to apples and apples I took 23 out the implementation costs for the call centre 24 technology. 25 MR. FARRELL: Did you take out the -- still 26 looking at page 6 -- $500,000 or the $0.5 million for 27 anticipated inflation? 28 MR. STEPHENS: I will have to go through the 2021 STEPHENS, cr-ex (Farrell) 1 details. 2 --- Pause 3 MR. FARRELL: Maybe we can do it an easier 4 way, Mr. Stephens, rather than have you take the time to 5 read through a lot of numbers. 6 I would like to know whether you eliminated 7 the item I just mentioned, and following down on page 6, 8 whether you eliminated the $3.5 million for the 9 Pathfinder pilot and whether you eliminated the 10 $1 million in deferred Theseus costs. 11 MR. STEPHENS: What I eliminated was 12 $1,925,784 plus those costs -- $1,925,784, which is the 13 call centre -- 14 MR. FARRELL: Right. 15 MR. STEPHENS: -- plus those costs. 16 MR. FARRELL: Plus the other three that I just 17 mentioned to you? 18 MR. STEPHENS: Does that add up correctly? 19 I'm not sure. 20 MR. FARRELL: I guess if you eliminated that 21 and you have a capital cost, a total project cost of 22 almost $26.5 million, I would just assume that you did 23 eliminate the Pathfinder pilot and the Theseus costs. 24 --- Pause 25 MR. STEPHENS: I would have to check. 26 MR. FARRELL: Will you take it, subject to 27 check, what you did? 28 MR. STEPHENS: Fine. 2022 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: The reason I am pursuing this is 2 that you didn't eliminate the $30.3 million of BPR 3 costs, analysis phase costs and so on in showing the 4 total project costs for ECG. In other words, you didn't 5 eliminate Theseus from BC Gas, subject to check, but you 6 didn't make an elimination of anything from the Enbridge 7 costs. Is that correct? 8 MR. STEPHENS: If I did that, I made a 9 mistake. 10 MR. FARRELL: The BC Gas costs should be 11 higher. Is that what you are saying? 12 MR. STEPHENS: If that's true, yes. I took it 13 off this one schedule and I don't think that schedule 14 does have those Theseus costs in it. It does have the 15 contingency, though. 16 MR. FARRELL: Yes. All right. 17 So then, that being the case, the total 18 project cost per customer would be higher by whatever 19 amount. 20 MR. STEPHENS: Agreed. 21 MR. FARRELL: My rough calculation, which you 22 might take subject to check, would then become $45.17. 23 MR. STEPHENS: That would be quite a bit, 24 but -- that would be $7.35 million. That would be quite 25 a bit. 26 MR. FARRELL: Never trust my arithmetic. It 27 would be higher by whatever amount. 28 MR. STEPHENS: Okay. 2023 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: Okay. 2 And your methodology was to take whatever 3 amount is correct, divide it by the number of customers 4 and that gives you the per-customer cost. 5 MR. STEPHENS: Agreed. 6 MR. FARRELL: Thank you. 7 Would you agree that the dollars that you are 8 using here from the Program Mercury application is the 9 initial filed estimate? 10 MR. STEPHENS: Agreed. 11 MR. FARRELL: And only time will tell how 12 accurate it is? 13 MR. STEPHENS: Agreed. 14 MR. FARRELL: Now, for the Union Gas, you show 15 an in-house option? 16 MR. STEPHENS: Agreed. 17 MR. FARRELL: And as events have transpired, 18 that's really hypothetical? 19 MR. STEPHENS: Yes. Agreed. 20 MR. FARRELL: And the amount that you took as 21 project cost, the $35,679,000, that was also from a 22 filing, in this case, with the Ontario Energy Board? 23 MR. STEPHENS: Yes. 24 MR. FARRELL: And that filing was made a 25 couple of years ago? 26 MR. STEPHENS: It was made September, 1997. 27 MR. FARRELL: And you don't know what the 28 current amount may be because that's -- the project is 2024 STEPHENS, cr-ex (Farrell) 1 now with Enlogix? 2 MR. STEPHENS: Yes. 3 MR. FARRELL: And Enlogix is currently working 4 and has a little bit more work to do to complete the 5 application to accommodate 1.05 million customers? 6 MR. STEPHENS: Yes. 7 MR. FARRELL: So there would be additional 8 costs? 9 MR. STEPHENS: Not -- I don't agree with that, 10 but -- 11 MR. FARRELL: Are you saying you don't know 12 whether the 35.6 -- I guess it's 35.7, with rounding -- 13 million dollars is a good estimate today? You don't 14 know that, do you? 15 MR. STEPHENS: I don't know for sure, but they 16 have indicated, at Enlogix, that it's less than 40 17 million. So I don't know the answer. 18 MR. FARRELL: Do you know whether that 19 includes Y2K remediation costs? 20 MR. STEPHENS: No. 21 MR. FARRELL: But, again, like BC Gas, only 22 time will tell how accurate the estimate is? 23 MR. STEPHENS: Yes. 24 MR. FARRELL: And then, only if Enlogix 25 chooses to disclose it? 26 MR. STEPHENS: Yes. 27 MR. FARRELL: Now, moving to the ECG in-house 28 option. 2025 STEPHENS, cr-ex (Farrell) 1 You have included the $30.3 million of BPR and 2 analysis phase costs, SIM start-up and overhead costs 3 and IDC. That's just that lump sum: 119.9 million. 4 Correct? 5 MR. STEPHENS: Yes, and I told you why most of 6 that, if not all, should be there. 7 MR. FARRELL: I understand that. But for the 8 sake of argument, if we were to remove that 30.3 million 9 and follow your methodology by dividing the number of 10 customers into the reduced amount, would you accept, 11 subject to check, that the per-customer cost becomes 12 approximately $61.00? 13 MR. STEPHENS: I answered that in one of your 14 interrogatories. So the answer should be here 15 somewhere. 16 MR. FARRELL: My recollection is that we asked 17 you -- 18 MR. STEPHENS: It's No. 17. Okay. So it 19 would become 60.98 per customer. Is that what you -- 20 MR. FARRELL: I see. Just let me read it. 21 --- Pause 22 MR. FARRELL: Yes. I'm sorry. We overlooked 23 that. Thank you. 24 For the record, that's Exhibit I, Tab 25, 25 Schedule 46, Question 17, on page 8. 26 Now, the "ECG replace in-house cost for 27 customer", that's also hypothetical? 28 MR. STEPHENS: Yes. 2026 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: And it's based on TMG's rules of 2 thumb? 3 MR. STEPHENS: It's based on those rules of 4 thumb, but in discussions I had with some other software 5 suppliers, when I was working on the Centra Gas Manitoba 6 case, I believe those to be pretty accurate. 7 MR. FARRELL: All right. Well, you have 8 relied on TMG's rules of thumb, as I understand your 9 evidence? 10 MR. STEPHENS: Absolutely. 11 MR. FARRELL: And those are at page 49 of 12 Appendix 8? To your evidence. 13 MR. STEPHENS: Yes, I didn't use those ones. 14 I then uplifted them to get them to Canadian funds. 15 MR. FARRELL: Okay. So, this is the starting 16 point? 17 MR. STEPHENS: That is the starting point. 18 Page 49, actually. 19 MR. FARRELL: Right. And using the starting 20 point, you paid attention to Mr. Galluzzi's introductory 21 sentence, on page 49, which reads: 22 "Regardless of the size of the utility, 23 the out-of-pocket costs appear to range 24 from $20.00 to $50.00 per customer." (As 25 read) 26 And then he breaks them down in the table on page 49? 27 MR. STEPHENS: Yes. 28 MR. FARRELL: You are comfortable with those? 2027 STEPHENS, cr-ex (Farrell) 1 Mr. Galluzzi's disclaimer doesn't bother you? 2 MR. STEPHENS: No. 3 MR. FARRELL: So, could we move to -- I think 4 to get into the ones that you uplifted, as you said, as 5 opposed to the ones you didn't, we need to go to 6 Appendix 7. 7 Now, you have, at the first box of categories, 8 "Utility SIC Characteristics". Do you see that? 9 MR. STEPHENS: Yes. 10 MR. FARRELL: What do you mean by "number of 11 services for Enbridge's gas only" and then for "in-house 12 product" it's "single" and -- excuse me -- "in-house 13 product low", which is column 2, it's "single", and 14 "in-house product high", it's "multiple". 15 What do all those terms mean? 16 MR. STEPHENS: Okay. If a utility has both 17 gas and electric, or gas-electric-water, they are 18 multiple. If they have only gas or only electric or 19 only water, they are single. So I described ECG as "gas 20 only". 21 MR. FARRELL: Right. But you are not -- I 22 just wanted to follow up on this. 23 Are you implying that a gas distribution 24 utility has only one service? 25 MR. STEPHENS: No, I'm implying that they only 26 have gas. They only have one meter. 27 MR. FARRELL: Okay. 28 MR. STEPHENS: It's the gas meter. 2028 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: Okay. Well, we were just 2 confused by your use of the term "services", 3 Mr. Stephens, so we just wanted to make sure that 4 this -- so, basically, it's one type of energy versus 5 either multiple types of energy or another function, 6 such as water I think you said? 7 MR. STEPHENS: Right. And that's the term 8 Mr. Galluzzi uses, so I followed his -- 9 MR. FARRELL: All right. You also have, as 10 the last row under this heading "utility CIS 11 characteristics", "user PCs part of project". "No" for 12 "ECG replace". "No" for "in-house product low". "Yes" 13 for "in-house product high". 14 We didn't understand what you meant by that. 15 MR. STEPHENS: Under "project cost category", 16 there was the "desktop/network solution"; so if you had 17 to replace all of your PC technology in order to 18 implement the application and put in, you know, the 19 servers and whatever, you would need an additional $5.00 20 per customer to do that. 21 MR. FARRELL: And just while we are at that, 22 that's $5.00 U.S.? 23 MR. STEPHENS: That's $5.00 U.S. or -- I 24 probably should have uplifted that. 25 MR. FARRELL: I don't know. I wanted to take 26 you through your uplifting exercise. 27 It appears to be selective. In other words, 28 if you look under "project cost category", the first two 2029 STEPHENS, cr-ex (Farrell) 1 rows have been uplifted, to use your term, using a 1.5 2 factor? 3 MR. STEPHENS: Yes. 4 MR. FARRELL: And if you go down to 5 "application software", which is a little over halfway 6 down the rows under "project cost category", you uplift 7 "application software" but you use a factor of 1.25? 8 MR. STEPHENS: Yes. 9 MR. FARRELL: And for the categories -- just 10 to use this as an example -- below it, "application 11 services", "project vendor/expenses", "project 12 contingency/IDC" and "quality management", the figures 13 in column 1, in "ECG replace", I take it, are all 14 Canadian dollars? 15 MR. STEPHENS: Yes. 16 MR. FARRELL: And the figures for "in-house 17 product" low, I take it they are U.S. dollars? 18 MR. STEPHENS: No. They have been uplifted. 19 MR. FARRELL: You don't indicate that in 20 "application services" or the last four rows under -- 21 MR. STEPHENS: Oh, well, let me explain that. 22 Mr. Diamond filed this information where he 23 lifted the "customer support costs" by .69, and I said I 24 didn't agree with that. I talked to several 25 associations to determine that -- and I knew this from 26 working at SHL. If I hire a project manager from the 27 U.S., they will come at, let's say, 1600 to 2,000 a day, 28 U.S. If I hire a project manager in Canada, the same 2030 STEPHENS, cr-ex (Farrell) 1 rules will apply, only it's Canadian dollars. And IBM 2 confirmed that for me. I talked to Diversified Staffing 3 and they confirmed that. And I talked to a company 4 Telebackup or Veritas and they confirmed that. And we 5 have had some -- 6 MR. FARRELL: They confirmed what? 7 MR. STEPHENS: That the costs -- if I had been 8 a consultant from the U.S. -- 9 MR. FARRELL: Yes, I got that part. I got the 10 $1,600 to $2,000. 11 Are you telling me that if you hired someone 12 locally, it would be $1,600 to $2,000 Canadian? Is that 13 your point? 14 MR. STEPHENS: Yes. Therefore, I don't uplift 15 the costs. 16 Mr. Galluzzi didn't uplift these at all when 17 he has been doing work in Canada. I suggest that he had 18 to uplift the server and database solutions. 19 I know, from my experience as an SAP buyer, 20 that we don't uplift them the whole 50 per cent when we 21 move from Canada to the U.S. That was also somewhat 22 true when we were at IBM. 23 MR. FARRELL: SAP and Peace are both non North 24 American companies; correct? 25 MR. STEPHENS: That's true. 26 MR. FARRELL: If you were to bring one of 27 their people in, would you pay them in Canadian dollars? 28 MR. STEPHENS: If you had brought them from 2031 STEPHENS, cr-ex (Farrell) 1 Germany -- 2 MR. FARRELL: New Zealand? 3 MR. STEPHENS: Or New Zealand. Well, you 4 would hope you could pay New Zealand dollars, but they 5 would probably nick you a little more. 6 MR. FARRELL: What about Germany? 7 MR. STEPHENS: I don't know the answer for 8 Germany. But for SAP, there are lots of resources in 9 Canada. 10 MR. FARRELL: Mr. Kent is telling me that I 11 should have asked you about SCT. 12 MR. STEPHENS: SCT? I believe they have staff 13 primarily out of the U.S., and I don't know the answer. 14 MR. FARRELL: They would be paid in U.S. 15 dollars, I take it. 16 MR. STEPHENS: I don't know what the 17 arrangement is with Enlogix. 18 MR. FARRELL: Just coming back to this table, 19 I want to make sure we are able to read it. 20 Certainly all of the costs, as I understand 21 it, in the ECG column, ECG replace column, are all in 22 Canadian dollars. 23 MR. STEPHENS: That whole table is in Canadian 24 dollars, everything here. 25 MR. FARRELL: Everything is in Canadian 26 dollars. So when you don't have an uplift factor -- 27 let's just take desktop network solution. If you have 28 zero Canadian dollars for ECG replace, you have zero 2032 STEPHENS, cr-ex (Farrell) 1 whatever dollars for in-house product low, and you have 2 $5.00 for in-house product high, are you telling me that 3 that $5.00 is Canadian dollars? 4 MR. STEPHENS: That's what I put down. 5 MR. FARRELL: I see. If you go back to page 6 49 of Appendix 8 -- this is TMG's report, which I 7 presume was stated in U.S. dollars -- he has the same 8 value: $5.00. 9 MR. STEPHENS: And I said I maybe should have 10 uplifted that one. 11 The point is ECG has no -- they have all the 12 PCs and the network in place, so there is no cost in 13 there. 14 MR. FARRELL: I would like to know whether all 15 of these are in the same currency; and if they are not, 16 I would like to ask you to put them in the same 17 currency. 18 So if we argue about whether or not the 19 applicable comparator is in-house product high, I want 20 to have a Canadian dollar amount to compare to ECG 21 replace. 22 MR. STEPHENS: I would have to ask 23 Mr. Galluzzi about the desktop network solution. If it 24 should be uplifted, I will correct that. 25 MR. FARRELL: I am talking about the other 26 values, the ones that you show a zero value for ECG 27 replace, but in the in-house product high you are 28 showing some value. My reading of page 49 of Appendix 8 2033 STEPHENS, cr-ex (Farrell) 1 to your evidence would indicate that these are U.S. 2 dollar values. 3 All I am trying to get, so I can have a 4 comparison and so the Board can have a comparison, is 5 the values expressed in Canadian dollars. 6 MR. STEPHENS: Mr. Galluzzi is comfortable 7 that those will represent Canadian dollars. 8 MR. THOMPSON: I don't know if I can be of any 9 assistance to you, Mr. Farrell, but I think the only -- 10 they are all Canadian dollars on the premise that none 11 of them need to be uplifted, except those that 12 Mr. Stephens has uplifted, shown on lines 1, 2 and the 13 application software. There are three of them. 14 I think what he is saying is that perhaps I 15 should have uplifted one more line, which was the 16 desktop network solution. 17 MR. FARRELL: Are you saying then, 18 Mr. Stephens, that the "project/vendor expenses" row, 19 which is the third-last under "Project Cost Category", 20 they are all expressed in Canadian dollars? 21 MR. STEPHENS: Yes. 22 MR. FARRELL: And likewise Project 23 Contingency? 24 MR. STEPHENS: Yes. 25 MR. FARRELL: So if it costs three bucks in 26 Mr. Galluzzi's table, if we were doing this in the 27 States and you brought it to Canada, it would cost three 28 bucks in Canadian currency. 2034 STEPHENS, cr-ex (Farrell) 1 MR. STEPHENS: Yes. 2 MR. FARRELL: Notwithstanding that you may be 3 paying a U.S. vendor or an offshore vendor. 4 MR. STEPHENS: You might be. 5 MR. FARRELL: It is your evidence that the 6 offshore vendor or the U.S. vendor would take Canadian 7 dollars. In the States he would get three bucks, and if 8 he came to Canada he would get three Canadian and would 9 be happy to take it. 10 Is that your evidence? 11 MR. STEPHENS: Let me give you an example from 12 SAP, since I know it well. 13 The SAP costs in Canada -- and there are lots 14 of people who support that application in Canada, so it 15 depends if there is any support at all in Canada. 16 If I am a remarketer in Canada and I use 17 Canadian resource, I will charge about the same in 18 Canadian dollars that they do in the U.S. for U.S. 19 dollars. 20 For example, if you are Thintex Services, we 21 would charge between $800 and $1,200 per day Canadian, 22 depending whether they were a programmer or a project 23 manager. 24 MR. FARRELL: We don't agree with you, but I 25 think we are reaching the stage of arguing with one 26 another. 27 I think, to remain with this page notionally, 28 I want to talk to you a little bit about whether 2035 STEPHENS, cr-ex (Farrell) 1 Enbridge is properly compared to in-house product low or 2 in-house product high. 3 To facilitate our discussion, could you go to 4 your interrogatory responses, Exhibit I, Tab 25, 5 Schedule 46, interrogatory no. 26, on page 14. 6 As we understand this response, you are in 7 effect saying that Enbridge is properly compared to 8 in-house product low. Correct? 9 MR. STEPHENS: I uplifted those because -- 10 based on the experience and what you have been through, 11 I uplifted them some. 12 MR. FARRELL: That's not my point. My point 13 is -- 14 MR. STEPHENS: It's closest compared to low. 15 MR. FARRELL: You are confirming that. 16 So if we look at page 14, there are four 17 bullet points that you have there that would produce an 18 in-house product high value. 19 MR. STEPHENS: Yes. 20 MR. FARRELL: You did not ascribe those 21 solutions to Enbridge. 22 MR. STEPHENS: I said that those typically 23 were included in the high costs. 24 MR. FARRELL: Right. And that wouldn't apply 25 to Enbridge. I am just trying to have you confirm that. 26 MR. STEPHENS: I didn't -- I answered the 27 question, and I didn't directly compare those to 28 Enbridge. 2036 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: Let me come at it this way, 2 Mr. Stephens. If we look at the values you show in this 3 Appendix 7, which is the better comparison, in your 4 view: to compare the Enbridge replace cost per customer 5 to in-house product cost per customer low or in-house 6 product cost per customer high? 7 MR. STEPHENS: Low. Do you want me to explain 8 why? 9 MR. FARRELL: We are going to get there. 10 Going back to page 14, is that because you say 11 these features -- beneath the first column or bullet 12 point you say: 13 "These functions should meet the needs of 14 ECG." 15 Then you go on to say: 16 "Solutions to be added to produce the 17 inhouse product high values included." 18 Then you list four more. 19 MR. STEPHENS: Yes. 20 MR. FARRELL: I take it you are saying that 21 those four more are not applicable to Enbridge. 22 MR. STEPHENS: Well, you have told me they do 23 third party bill management, right? 24 MR. FARRELL: Right. 25 MR. STEPHENS: So I guess that does apply to 26 ECG. What I'm saying is maybe I should take you through 27 and explain the major factors that say whether you are 28 low or high. 2037 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: Before we get off that, do you 2 know whether Enbridge can perform the complex billing as 3 it's described in Mr. Galluzzi's material? 4 MR. STEPHENS: I'm not sure. 5 MR. FARRELL: And retail management, would 6 your answer be the same? 7 MR. STEPHENS: Yes. 8 MR. FARRELL: And just for the record, what 9 I'm referring to here is appendix 8, which is the TMG 10 position paper, page 18. On page 18 through 19, 20, 21 11 and 22 the section numbers correspond to the numbers in 12 parenthesis on page 14. 13 MR. STEPHENS: Yes. 14 MR. FARRELL: Okay. So it would be there we 15 would go to, those pages in appendix 8, to find the 16 description for each of these titles, I will call it. 17 MR. STEPHENS: Yes. 18 MR. FARRELL: Okay. If it were the fact that 19 Enbridge can qualify, as it were, for third party bill 20 management complex billing and retail management, then 21 you would adjust appendix 7 accordingly. 22 MR. STEPHENS: If they had those functions in 23 there, we should put in some add-on solutions. 24 MR. FARRELL: I don't know what you mean by 25 that. 26 MR. STEPHENS: In the table in appendix 7 27 there's something called add-on solutions. Basically, 28 if you add on solutions, right, you can start to 2038 STEPHENS, cr-ex (Farrell) 1 increase the costs of implementing the solution. 2 MR. FARRELL: Okay. But if we can do it now, 3 is that where you would make the adjustment in the line 4 you just mentioned to me? 5 MR. STEPHENS: In all likelihood, yes. 6 MR. FARRELL: Where would you make the 7 adjustment that Mr. McGill was just mentioning to me. 8 It would seem to me if Enbridge could do the 9 last three things on page 14, wouldn't you be using the 10 values that appear in inhouse product cost high? In 11 other words, it would just move Enbridge from being 12 compared to inhouse product low to being compared 13 inhouse product high? 14 MR. STEPHENS: No. 15 MR. FARRELL: And why is that? 16 MR. STEPHENS: The major definer of the 17 inhouse product low and the inhouse product high is the 18 number of customers in the utility and whether or not 19 they have what Greg Galluzzi calls number of services or 20 number of meters. 21 MR. FARRELL: On page 49 of appendix 8, which 22 is the TMG report, in the introduction to the table that 23 presents the inhouse product low and high costs, Mr. 24 Galluzzi has written: 25 "Regardless of the size of the utility, 26 the out of pocket costs appear to range 27 from $20 to $50 per customer." (As read) 28 I took that to mean that the number of 2039 STEPHENS, cr-ex (Farrell) 1 customers didn't matter. It was whether or not these 2 functions, if you will, that are listed in section 5 of 3 Mr. Galluzzi's position paper were applicable to a 4 utility or not. 5 MR. STEPHENS: Yes, and I asked him very 6 specifically about that. He went through and explained 7 that they differentiate them into three different size 8 groups, those that are more than 500,000 customers, 9 which they call large, medium is between 25,000 and 10 500,000 customers and small is below 25,000 customers. 11 Now, if you go to page 48 of his -- 12 MR. FARRELL: Appendix 8 now? 13 MR. STEPHENS: Of his position paper, right. 14 That's appendix 8. You have a couple of examples. 15 That's why I called them "gas only" or "electric only". 16 If there are single meters, single service, as he terms 17 them, then their costs are lower than the ones on the 18 next page where they have multiple services. That's 19 something that they see in general. 20 MR. FARRELL: I see. So you are telling me 21 that the table on page 49 is a multiple service utility 22 only. Is that what you are saying? 23 MR. STEPHENS: The table at the top of 49. 24 MR. FARRELL: Yes. 25 MR. STEPHENS: That's the one with four 26 examples. 27 MR. FARRELL: No. The table in the middle of 28 page 49. 2040 STEPHENS, cr-ex (Farrell) 1 MR. STEPHENS: No. I'm not saying that. 2 MR. FARRELL: Okay. Then back to the 3 regardless of the size of the utility statement. 4 MR. STEPHENS: And I asked him about that 5 because, you know, I said well, is there no economy of 6 scale? I think quite a few people, including Stuart 7 Diamond, have referenced that an economy of scale does 8 happen as you get larger utilities. 9 His experience here is that if you have a 10 large utility with a single service, their costs are 11 lower and they go to the low side of this table. 12 MR. FARRELL: Now, this is a very good example 13 of why Mr. Galluzzi has a disclaimer. 14 MR. THOMPSON: What was that? 15 MR. FARRELL: It's a good example of why Mr. 16 Galluzzi has his disclaimer. 17 MR. STEPHENS: Everybody will put a disclaimer 18 on their consulting work. I probably should have one 19 somewhere. 20 MR. FARRELL: I have never seen it on filed 21 evidence before, Mr. Stephens. 22 MR. STEPHENS: Fortunately it was an appendix. 23 MR. FARRELL: Can you agree with this 24 proposition, Mr. Stephens, that if Enbridge was in the 25 middle of TMG's range, using your approach, the total 26 project cost per customer would be approximately $60, 27 using your mixed bag of currencies. 28 MR. STEPHENS: Yes, I can live with that, half 2041 STEPHENS, cr-ex (Farrell) 1 way between 80 and 40. 2 MR. FARRELL: Can we move to your fair market 3 value test No. 2, the CIS operating costs, which is at 4 page 21 of the main body of your -- 5 MR. STEPHENS: Yes, I have it. 6 MR. FARRELL: Okay. Is this similar to the 7 first test, that is it's an indicator and it 8 applies -- I have forgotten what you responded to me in 9 the first test. Is it outside of the demarcation point, 10 inside the demarcation point, or both? 11 MR. STEPHENS: This one shows both because 12 they now have operating costs on them. 13 MR. FARRELL: Okay. Thank you. 14 So the BC Gas we have discussed. It's an 15 inhouse rate based solution. The Union Gas, if inhouse, 16 is hypothetical. The estimated ECG replace is a 17 hypothetical. 18 The two columns on the right hand side, if we 19 were to compare Union and Enbridge, they are both -- I 20 take it you have Union Gas outsourced. I take it I 21 could add to that "through an affiliate". 22 MR. STEPHENS: Yes, you could. 23 MR. FARRELL: And, similarly, the title of the 24 Enbridge column could read "ECG outsourced through an 25 affiliate". 26 MR. STEPHENS: The reason I differentiate 27 these two, I don't consider the ECG through the period 28 to really be an outsourcing arrangement. It's really a 2042 STEPHENS, cr-ex (Farrell) 1 financial arrangement. They are not serious about 2 getting into the business of being an outsourcer. 3 MR. FARRELL: How do you know that? 4 MR. STEPHENS: How do I know that? Because it 5 sure looks like a financial transaction to me. 6 MR. FARRELL: But you didn't speak to anyone 7 who told you that Newco or the entity that will be 8 providing this service wasn't serious about getting into 9 the business. That's your supposition, I take it. 10 MR. STEPHENS: Well, let's see. 11 No one would directly say they were not going 12 to get into the business. But everybody thought it 13 would be very difficult to, you know, sell their 14 solution to other people, and I would suggest that makes 15 a lot of -- you know, it does make a lot of sense. 16 Now, the other thing, the only thing in this 17 case you have talked about is moving I think 10 people 18 from ECG to this affiliate and -- 19 MR. FARRELL: In the test year? 20 MR. STEPHENS: In the test year, too. 21 MR. FARRELL: I don't think we are going to 22 gain anything by quibbling over the headings. I have 23 your answer. 24 Could we move to Appendix 2. 25 MR. STEPHENS: I have it. 26 MR. FARRELL: Do you have Appendix 2? 27 MR. STEPHENS: Yes. 28 MR. FARRELL: For the purpose of this 2043 STEPHENS, cr-ex (Farrell) 1 discussion I'm just going to focus on the right-hand 2 column, so I'm notionally if not really just drawing a 3 bright line down there, down between columns, the third 4 column and the fourth column, and we are going to 5 examine the fourth and the fifth columns. 6 Starting with the estimated number of CIS 7 users, you show 300 for Union and 800 for Enbridge. 8 Correct? 9 MR. STEPHENS: Yes. 10 MR. FARRELL: What do you mean by the term "CS 11 system users"? 12 MR. STEPHENS: Those are the people within the 13 customer support services department that have a 14 terminal that accesses the CIS function. So it does not 15 include all the people inside the company. 16 MR. FARRELL: Do you know -- let me go at it 17 this way. 18 One category of user or one tier of user would 19 be the customer service reps. 20 MR. STEPHENS: Yes. 21 MR. FARRELL: And they would be using it all 22 the time, that's their job. 23 MR. STEPHENS: Yes. 24 MR. FARRELL: Would you agree that another 25 category or tier of users would be people in the credit 26 collection functions of billing support? 27 MR. STEPHENS: Yes. 28 MR. FARRELL: Would you agree that they do not 2044 STEPHENS, cr-ex (Farrell) 1 use it 100 per cent of the time? They go, for example, 2 in to adjust for metering problems or whatever. They 3 are not full-time users. 4 MR. STEPHENS: I didn't visit with them, 5 but -- 6 MR. FARRELL: Does it sound reasonable? 7 MR. STEPHENS: -- if you say that's true it's 8 true. 9 MR. FARRELL: And then there would be 10 occasional users, someone like Mr. McGill, for example. 11 MR. STEPHENS: Yes. 12 MR. FARRELL: Okay. 13 Now, are all three tiers of users included in 14 your 800 number? 15 MR. STEPHENS: I have the total CSS cost -- or 16 number of people in that number. 17 MR. FARRELL: Okay. 18 Have you had a chance to review Exhibit J8.4, 19 which was a response to an undertaking given by 20 Mr. McGill? 21 MR. STEPHENS: J8.4? 22 MR. FARRELL: Yes, J8.4. 23 MR. STEPHENS: Yes, I have. 24 MR. FARRELL: That shows that customer support 25 equates to 416 full-time positions which will be reduced 26 in the test year to 363 FTEs. 27 MR. STEPHENS: Yes. 28 MR. FARRELL: Should I be using 363 instead of 2045 STEPHENS, cr-ex (Farrell) 1 your 800? 2 MR. STEPHENS: No. 3 MR. FARRELL: Why is that? 4 MR. STEPHENS: First of all, I can't reconcile 5 the response in J8.4 with information I was given when I 6 visited ECG and with the information contained in some 7 other filed information -- so E.B.R.O. 497, Exhibit D5, 8 Tab 9, Schedule 1 -- and some information that was sent 9 in answer to a question of Mr. Kent that allowed me to 10 try and line up the costs in the customer support 11 services area with the information in the CISWorld 12 article that Stuart Diamond referenced. I was actually 13 working on this last night and I just cannot reconcile 14 it. 15 But do you want me to tell you what I was told 16 by each? 17 MR. FARRELL: Are you just going to tell me 18 why -- the information that led you to write in "800"? 19 MR. STEPHENS: Right. It's the same in all 20 the companies. Like, I haven't -- you know, I have used 21 apples to apples as well as I could. 22 MR. FARRELL: Did you talk to the others? 23 MR. STEPHENS: Have I talked to the other 24 companies? 25 MR. FARRELL: Yes. 26 MR. STEPHENS: Yes. I have talked to Union 27 Gas. The BC Gas information is contained within their 28 Program Mercury application. 2046 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: May I have a moment, Mr. Chair? 2 --- Pause 3 MR. THOMPSON: I was just going to say, 4 Mr. Farrell, if you don't ask him to give you the 5 information, then I will be asking him in reply. So you 6 might want to deal with it now. 7 I have the material that was sent to 8 Mr. Stephens which I propose to file because it also 9 relates to some of the concerns I have with the 10 responses to undertakings, one of which is the one you 11 have referenced. 12 So one way or another we are going to get the 13 information on the record. 14 MR. FARRELL: That's fine. I'm not trying to 15 keep it off the record, Mr. Thompson. I just was 16 consulting with Mr. Kent who informed me that he spoke 17 with someone at BC Gas within the past week who 18 confirmed to him that the 200 number for BC Gas is 19 customer service reps only and that he spoke with 20 Mr. Bell at Union Gas who confirmed to him that the 300 21 number is the number applicable to -- the number of 22 customer support FTEs applicable to the customer base of 23 Centra only, that is to say the customer base in respect 24 of which the Enlogix solution is currently running. 25 I take it that is at odds with your 26 information, Mr. Stephens. 27 MR. STEPHENS: That is at odds with what I 28 understood. 2047 STEPHENS, cr-ex (Farrell) 1 Let me just bring up the BC Gas information. 2 MR. FARRELL: I'm wondering whether -- not to 3 preclude something on the record, but I am wondering 4 whether this is something that might be done best off 5 line, Mr. Chair, so as not to take your time. 6 If this is quibbling over numerical sources, 7 maybe we can iron out the quibbles or not and at least 8 focus the issue for you, if we can't come to some 9 agreement on this, because it does -- I am going to ask 10 Mr. Stephens at some point to accept a lower number than 11 800, subject to check or otherwise, and maybe we will 12 have to argue the point just in order to see, based on a 13 lower number, what adjustment he would make to some of 14 the values he has on the ECG outsource affiliate column, 15 which is the right-hand column of Appendix 2. 16 THE PRESIDING MEMBER: Mr. Farrell, it appears 17 that it may be worthwhile to take a longer break today. 18 We will break now. We will return at 10 minutes to 19 11:00. 20 MR. FARRELL: Thank you, Mr. Chair. 21 --- Upon recessing at 1022 22 --- Upon resuming at 1054 23 THE PRESIDING MEMBER: Any preliminary 24 matters? 25 MR. FARRELL: No. 26 THE PRESIDING MEMBER: Mr. Thompson? 27 MR. THOMPSON: Yes. 28 MR. THOMPSON: I believe we have distributed a 2048 STEPHENS 1 document -- I hope it's on the dias. It's a fax -- 2 sorry, it's an e-mail. It's actually from Mr. Stephens, 3 to me, but it's a transmission of what the company sent 4 to Mr. Stephens to enable him to prepare what is 5 contained in Appendix 5 I believe it is. This was one 6 of the documents that Mr. Stephens referenced in his 7 response to Mr. Farrell about FTEs. 8 So could we have that marked, please. 9 MS DESAI: Exhibit K12.2 10 MR. THOMPSON: Thanks very much. 11 EXHIBIT NO. K12.2: Copy e-mail message 12 from Mr. Stephens to Mr. Thompson 13 THE PRESIDING MEMBER: Thank you, 14 Mr. Thompson. 15 Mr. Farrell? 16 MR. FARRELL: Thank you, Mr. Chair. 17 I think that rather than argue about what the 18 right number should be, I will just ask Mr. Stephens a 19 few questions, in terms of Appendix 2, and we will sort 20 out a way to resolve our differences of opinion, in 21 relation to the number of CIS system users. I think, 22 before the break, Mr. Stephens had agreed that there 23 were three tiers, in effect, of users. So I just want 24 to come back to that. 25 CONTINUED CROSS-EXAMINATION 26 MR. FARRELL: Mr. Stephens, would you agree 27 with me that in today's environment most office workers, 28 such as Mr. McGill or Mr. Kent, or the people that would 2049 STEPHENS, cr-ex (Farrell) 1 be in the billing support function, would have a PC of 2 their own, regardless of the CIS solution? 3 MR. STEPHENS: Yes. 4 MR. FARRELL: Would you also agree that the 5 people who need a PC in order to use the CIS solution 6 are the customer service reps? 7 If you need another service -- if you have 10 8 service reps and you need to add five more, you need to 9 buy five more PCs for them to do their job? 10 MR. STEPHENS: Yes. And the credit people 11 will need them and -- 12 MR. FARRELL: To the extent they don't already 13 have one. Which is what I thought you had agreed with 14 me a moment ago. 15 MR. STEPHENS: Fine. 16 MR. FARRELL: Now, if we go to the -- I will 17 just stop there and take a slight detour. 18 The outside demarcation costs that you show in 19 the Union Gas outsource and the ECG outsource, for the 20 five-, seven- and 10-year amortization period, those are 21 the fees that fall out of, so to speak, the two services 22 agreements? 23 In other words, that is what the affiliate 24 bills each of the two utilities, annually? 25 MR. STEPHENS: In the right column? 26 MR. FARRELL: In the right column -- in the 27 second-from-the-right column. 28 MR. STEPHENS: Yes. 2050 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: And just to make clear the -- 2 the contracts, with their various terms, could be relied 3 on for the five-year amortization period, but you have 4 assumed that the same fees would pertain to, presumably, 5 a hypothetical extension of those contracts for seven 6 years and for 10 years. Correct? 7 MR. STEPHENS: That's what I have shown. 8 MR. FARRELL: Okay. Now, coming back to the 9 inside demarcation costs, if you look at the fourth row 10 underneath the title "Inside Demarcation Costs", and 11 going out to the two right-hand columns, you show -- 12 well, first of all, it's "desktop solution and support 13 3,000 per user per year"? 14 MR. STEPHENS: Yes. 15 MR. FARRELL: And if you will accept this 16 assumption, for the purposes of my question, that the 17 persons to whom that line should apply are the ones who 18 wouldn't otherwise have a PC, namely, the customer 19 service representatives, and if you were to accept that 20 and if -- and I'm asking you to make this assumption for 21 the purposes of my question -- we were to use the 363 22 FTEs that appears in Exhibit J8.4 instead of your 800, 23 the $2,400,000 figure in the far right-hand column would 24 be reduced to -- and I ask you to accept this number, 25 subject to check -- $1,089,000. 26 MR. STEPHENS: Okay. 27 MR. FARRELL: And that would be -- again, 28 subject to check -- an amount, that one million and 2051 STEPHENS, cr-ex (Farrell) 1 change amount would be equivalent to 89 cents per 2 customer? 3 Assume my arithmetic is right. I have divided 4 the 1,089,000 by 1.47 million customers. 5 MR. STEPHENS: Can I, so I can explain why -- 6 MR. FARRELL: I'm told I misspoke myself. 7 Just a moment. 8 --- Pause 9 MR. FARRELL: I'm told that I jumped a step in 10 my assumption, Mr. Stephens. I apologize. 11 The 363 FTEs times 3,000 a year, for desktop 12 solution and support, is $1,089,000 and that if one 13 takes the difference between your 2.4 million and the 14 amount that I have referenced, that amount, divided by 15 the number of customers, works out to 89 cents -- a 16 reduction of 89 cents per customer. 17 MR. STEPHENS: Right. And if we did that, 18 right, you would also have to adjust the BC Gas, Union 19 Gas in-house option and my estimated ECG replace option, 20 just to support the numbers in terms of the estimated 21 number of CIS system users -- 22 MR. FARRELL: I take your point. 23 MR. THOMPSON: Let the witness finish, please. 24 MR. FARRELL: I'm sorry. 25 MR. STEPHENS: First, let me start with the BC 26 Gas one. It's pages 35 and 36 of their Program Mercury. 27 They do an "as is" cost analysis and they define 28 "customer care function", at BC Gas, as including meter 2052 STEPHENS, cr-ex (Farrell) 1 reading and meter data upload, consumption usage and 2 bill calculation, payment processing, handling of 3 customer enquiries and requests for service, and credit 4 and collection activities. And they go on to say that 5 there are 220 full-time equivalent staff in those 6 customer care processes and they say that the total 7 annual cost per customer is $36.70, and that they are 8 going to reduce that because they have basically 9 benchmark targets, on page 36, that would say they are 10 probably $3.00 or $4.00 per customer higher than the 11 industry best practice benchmarks indicate. 12 So I rounded the 220 to 200, and that $36.70, 13 which is the cost today, is the cost that compares to 14 the $53.90 that ECG expects to be at and it kind of is 15 a -- it flies in the face of Mr. Diamond's evidence and 16 is a good Canadian example of that. 17 Now, in terms of the Union Gas numbers, when I 18 talked to Bob Bell, I agreed with him that I would not 19 submit exact numbers until he had confirmed them to me, 20 and I had asked for that confirmation, and I have not 21 done that, but I have taken what was a much lower number 22 and rounded it up so I'm comfortable and it includes all 23 of the customer care process functions. 24 And for ECG, I got these numbers off Andy 25 Wingrove, and whether they are accurate of not I'm not 26 positive, but there are 400 CSRs -- in fact, that's on a 27 bulletin board in a customer service area -- there are 28 150 in collections, 150 in what is called "mass 2053 STEPHENS, cr-ex (Farrell) 1 marketing and billing" and 100 in customer attach, which 2 I understand could move to the distribution business 3 soon, and that that represents 796 as the customer 4 support services head count as it's to be on October 1, 5 1999, and he thought that would move down to 6 approximately 700 over the next year as 100 people were 7 transferred to ancillary programs. 8 Now, the information we just submitted as 9 evidence would also help collaborate that information, 10 although it does show 735 and not the 800 that I have 11 used. 12 So those are how I got the numbers. I think 13 they are for equivalent functions in what's called 14 "customer care" over at Enbridge Consumer Gas customer 15 support services and that's why I used the numbers and 16 not yours. But if you want to reduce that number, you 17 have to reduce them all. 18 MR. FARRELL: I understand your answer, 19 Mr. Stephens, and I think we are approaching the point 20 that maybe we are going to be arguing, so there's 21 nothing to be gained from it. 22 Let me ask you this -- and Mr. Kent has 23 contrary information for BC Gas and we will have to sort 24 out a way to resolve our differences, in terms of what 25 the 200 represents and what the 300 represents for 26 Union. But let me ask you this: You have assumed that 27 everyone who is shown as "user", given the numbers you 28 just put on the record from Mr. Wingrove, you have 2054 STEPHENS, cr-ex (Farrell) 1 assumed, I take it, in your analysis, that each of those 2 people needs to have a desktop solution and support 3 worth $3,000 per user per year? 4 MR. STEPHENS: Right. To access the primary 5 coded application for that business unit, which is the 6 CIS application. 7 MR. FARRELL: And it follows, I take it, from 8 what you are saying that if they already have a PC, they 9 get another one. 10 MR. STEPHENS: No, it doesn't. 11 MR. FARRELL: Does it mean that they need a 12 replacement? 13 MR. STEPHENS: What it says is that -- you 14 replace PCs about every four years, and you replace 15 about 25 per cent per year. That is normal in 16 organizations, because the technology changes very 17 quickly. 18 In terms of that $3,000, I included all of the 19 costs that normally would be associated with an 20 outsourcing service to support those PCs and their 21 technology replacement. 22 So it includes the technology replacement 23 costs inside there. That is supported by the Gartner 24 Group again, who estimate $6,000 to $7,000 a year, but 25 it includes things that I didn't think belonged in 26 there. 27 I think in your information you filed, it is 28 about $6,000 a year inside of Consumers Gas. 2055 STEPHENS, cr-ex (Farrell) 1 So I may have underestimated by a factor of 2 50 per cent. 3 MR. FARRELL: I understand your explanation, 4 and I think we are now at the point of quibbling 5 about -- maybe not quibbling; we are disagreeing about 6 the people who should be included in that row and the 7 basis on which they should be included. I think that is 8 about as far as we can take it at this point. 9 Going back, I have one last question here. 10 You have included in the 800 everyone in the three tiers 11 that we discussed earlier: the CRS, the billing support 12 people, and the occasional users. 13 MR. STEPHENS: Yes. By the way, I ran a check 14 just out of luck, while I was sitting here last week, 15 and when I take the ECG outsource and multiply that 16 $17.11 by the number of customers, it comes to 17 $25,152,419. 18 When you look at Appendix 5 -- which again are 19 your numbers -- that say what is the CIS cost, in the 20 2000 budget year it turns out to be $25,182,012. So 21 even though I estimated this information, I got lucky 22 and it came within about $30,000 of what you actually 23 project the cost will be for CIS in the budget year 24 2000. 25 MR. FARRELL: Coincidences do happen. 26 MR. STEPHENS: Yes. 27 MR. FARRELL: Could we move on, then, to the 28 first row under "Inside Demarcation Costs". 2056 STEPHENS, cr-ex (Farrell) 1 I take it that the $1.6 million that you show 2 for ECG is simply 320 per cent of the $500,000 you show 3 for Union. 4 MR. STEPHENS: That's how I got it. 5 MR. FARRELL: And your explanation is in 6 interrogatory no. 22 in Exhibit I, Tab 25, Schedule 46, 7 at page 11. 8 MR. STEPHENS: Yes, I have it. 9 MR. FARRELL: The reason there is that ECG has 10 several older systems, such as the work order system, 11 which you have probably updated, and require interface 12 development and maintenance. 13 MR. STEPHENS: Yes. 14 MR. FARRELL: On the basis of that sentence, 15 you came up with a nice precise 320 per cent. 16 MR. STEPHENS: That's what it worked out to 17 be. 18 MR. FARRELL: Could you just explain how you 19 translated the reason I read into the record into 320 20 per cent? 21 MR. STEPHENS: Am I wrong again? 22 MR. FARRELL: No. It is not an arithmetic 23 exercise. It is a value judgment, it would seem, that 24 you had Union at $500,000. And I have read you the 25 reason that you gave for the 320 per cent. I am just 26 wondering whether you had specific things in mind and 27 attributed certain percentages and built up to 320 per 28 cent, or whether you just said: Well, ballpark, 320 2057 STEPHENS, cr-ex (Farrell) 1 sounds fine. 2 MR. STEPHENS: Basically, I started with the 3 Union Gas number that is in their information. 4 MR. FARRELL: Yes. 5 MR. STEPHENS: They have a more modern one; 6 and I guess, as I talked about this morning, they are 7 adding new function inside the CIS function to support 8 their work order system. 9 So if they have a more modern one, and I know 10 yours is an older one based on what was given to me, 11 then I suspect you are going to have to redevelop that. 12 It will basically be replaced, and the interfaces will 13 have to be redeveloped. 14 The other thought that came into my mind as I 15 did this was that, for whatever reasons, your IT costs 16 also seem to be about double the industry. 17 MR. FARRELL: We will come to that. But go 18 ahead. 19 MR. STEPHENS: If those are kind of double -- 20 and I don't know what Union's are, but there is probably 21 something to that as well. 22 MR. FARRELL: So what you have said to me in 23 effect translates into $1.1 million, the difference 24 between ECG and Union. 25 MR. STEPHENS: Yes. 26 MR. FARRELL: And that is about as precise as 27 you can get, your explanation? 28 MR. STEPHENS: Yes. 2058 STEPHENS, cr-ex (Farrell) 1 MR. FARRELL: I don't see any line that 2 accounts for the $3,569,000 of hosting revenue. 3 MR. STEPHENS: Right. At the top of the page 4 this chart is titled "CIS Operating Costs". So if I 5 have costs and only costs for all the other cases, with 6 no benefits, why would I put a benefit in there? 7 The benefit basically is to the IT department. 8 It is not the cost of the service. 9 I guess Mr. Kent also explained that in some 10 other example the other day. When you are looking at 11 costs, you are looking at costs and you probably don't 12 want to mix them with benefits unless you do it for 13 everybody. 14 MR. FARRELL: I am not talking about a 15 cost-benefit analysis. I am talking about dollars that 16 the utility will receive as an offset. You have not 17 shown it as an offset to the outside demarcation costs, 18 so I just assumed that it had to be in the inside 19 demarcation costs. 20 MR. STEPHENS: It's a benefit. Like, it still 21 costs that. It will reduce the IT budget, but it will 22 not reduce the CIS operating costs. 23 MR. FARRELL: Would you go this far with me, 24 Mr. Stephens: that it may not reduce CIS operating 25 costs but it does have an effect on rates because it 26 reduces Enbridge's revenue requirement via the CIS 27 Z-factor? 28 MR. STEPHENS: Yes, I agree. 2059 STEPHENS, cr-ex (Farrell) 1 By the way, in Appendix 3, when I looked at IT 2 costs I did include that benefit in the year 2000. 3 So it has reduced the IT costs but not the 4 cost of delivering the CIS system. 5 MR. FARRELL: As I understand it, that is your 6 explanation for why you wouldn't show it here. You are 7 developing a cost per customer that is based on one 8 piece of the CIS puzzle, if I could put it to you that 9 way; that the hosting revenue is taken into account in 10 effect as an offset to the CIS fees for ratemaking 11 purposes. 12 MR. STEPHENS: Yes, I agree. 13 MR. FARRELL: And similarly the IS O&M 14 reduction, which is a staff reduction of $437,000 in the 15 test year. 16 That's in the Z-factor as well. Can you 17 confirm that? 18 MR. STEPHENS: It's within the Z-factor, 19 correct. 20 MR. FARRELL: I am advised that if one takes 21 into account the hosting revenue, our version of how one 22 calculates the desktop solution and support and the IS 23 staff reduction -- if those were shown as a credit in 24 the inside demarcation cost component of Appendix 2, 25 Enbridge's inside demarcation cost per customer would be 26 $2.87. 27 Would you accept that subject to check? 28 MR. STEPHENS: Yes. But I don't know how that 2060 STEPHENS, cr-ex (Farrell) 1 relates to this chart or to the other companies on the 2 chart. 3 MR. FARRELL: I understand your point. Now, 4 the third FMB test is this IT costs. I will go back to 5 page 24 of your written evidence. 6 MR. STEPHENS: I have it. 7 MR. FARRELL: Is this an indicator outside the 8 demarcation point or inside the demarcation point or 9 does it have anything to do with the demarcation point? 10 MR. STEPHENS: Well, it has something to do 11 with the demarcation point. It says: 12 "Compared to other utilities from these 13 G2R benchmarks, for four years you have 14 been double the industry average." 15 (As read) 16 In total IT spending, how that relates to this 17 fair market value, first of all, from a project cost 18 point of view, for some reason again you are double. 19 From an operating cost, you are nearly double. When I 20 look at the, you know, inside demarcation costs, again 21 you are high. 22 MR. FARRELL: So you regard this as something 23 that is an indicator. 24 MR. STEPHENS: It's an indicator. Right. 25 MR. FARRELL: You mentioned the G2R reports 26 and the benchmarks and you filed those as appendix 2 for 27 Canada and as appendix 3 for the U.S. in your response 28 to our interrogatories. 2061 STEPHENS, cr-ex (Farrell) 1 MR. STEPHENS: Yes. 2 MR. FARRELL: And can you agree with me if we 3 look at appendix 2 with the Canadian G2R report, and we 4 look at page 2 of that appendix, the heading is 5 "Interview targets". 6 MR. STEPHENS: Yes. 7 MR. FARRELL: The second sentence says: 8 "Most of the end users were electric 9 utilities in order to better reflect the 10 distribution of IT spending in the 11 utilities industry." 12 MR. STEPHENS: Yes. 13 MR. FARRELL: So you are taking electrics as a 14 proxy for gas. Is that how you have interpreted this 15 report? 16 MR. FARRELL: No. On page 7 of my evidence 17 under 4.3 -- 18 MR. FARRELL: Yes. 19 MR. STEPHENS: I wrote: 20 "The reports were based on surveys of 16 21 Canadian and 40 US gas and electric 22 utilities. The mix of the utilities was 23 about 1/3 gas and 2/3 electric in order 24 to reflect the IT spending in the 25 utilities industry." 26 So if you look at the actual companies in 27 those surveys, they turn out to be about one third gas 28 and two thirds electric. They focus it on the electric 2062 STEPHENS, cr-ex (Farrell) 1 because they represent a higher percentage of spending 2 within the utilities industry. 3 MR. FARRELL: And this is IT spending as a 4 percentage of their revenue. 5 MR. STEPHENS: As a percentage of revenue. 6 MR. FARRELL: Can you confirm for me that the 7 revenue of electric utilities includes commodity costs, 8 the electricity itself? 9 MR. STEPHENS: Yes. 10 MR. FARRELL: Are you aware that gas 11 distributors -- I will make it specific -- that Enbridge 12 provides what's known as T service, someone else 13 provides the commodity and Enbridge provides the 14 delivery system. 15 MR. STEPHENS: Yes. 16 MR. FARRELL: Do you have any idea of how much 17 commodity less throughput Enbridge has from a revenue 18 perspective? 19 MR. STEPHENS: Yes. Mr. Kent told me about 50 20 per cent. 21 MR. FARRELL: It's a little higher than that, 22 but I will take that. Did you take that into account, 23 that is to say the fact that, say, 50 per cent of the 24 throughput does not include revenue attributable to 25 commodity costs? 26 MR. STEPHENS: No, but there are some 27 transmission companies in the Canadian utilities 28 averages, so that probably, you know, accounts for some 2063 STEPHENS, cr-ex (Farrell) 1 of it, plus the other gas utilities in the Canadian 2 would be experiencing some T service as well. 3 MR. FARRELL: Okay. You just thought it was 4 just all placed into the mix. No Enbridge specific 5 adjustment was required in your view. 6 MR. STEPHENS: Yes, and I even thought about 7 the trucking industry. 8 MR. FARRELL: I see. Are you saying that the 9 IT profile, the IT spending profile, for a distributor 10 is the same as a transmission company such as 11 TransCanada Pipelines, which is one of the companies 12 included in the Canadian survey. 13 MR. STEPHENS: Could you give me that again? 14 MR. FARRELL: Yes. Are you saying that the IT 15 spending profile or the types of -- for the amounts that 16 a transmission company like TransCanada Pipelines or 17 Nova Gas Transmission might spend is similar to what the 18 distributors such as Consumers Gas would spend? 19 MR. STEPHENS: The mix of applications will be 20 quite different. You would expect their IT spending as 21 a percentage of revenue to probably be lower. 22 MR. FARRELL: Thank you. Now, at page 25 of 23 your written evidence you then compare Enbridge's IT 24 spending against the CSS total broken down into business 25 office costs and IT costs. You compare Enbridge to the 26 CIS World or TMG's breakdown. 27 MR. STEPHENS: Yes. 28 MR. FARRELL: Are you saying that TMG's split 2064 STEPHENS, cr-ex (Farrell) 1 between IT costs and business office costs, which I 2 take -- is that labour, business office costs? 3 MR. STEPHENS: Business office costs, well, 4 they take the whole customer support services area 5 equivalent. 6 MR. FARRELL: Right. 7 MR. STEPHENS: That's what they 8 call -- business office plus IT is the whole of that, so 9 I think that if we go to appendix 5 in 1999, that was 10 66.95 at ECG and 80.09 in 2000. 11 MR. FARRELL: Yes. I was focusing more on the 12 percentage splits. What you seem to be saying is that 13 it's a good thing to have a split of business office 14 costs approximating 87 per cent and 13 per cent for IT 15 and it's a bad thing to have approximately 66 per cent 16 or 75 per cent, depending on whether you look at 1999 or 17 2000 for Enbridge. 18 In other words, you are saying that the IT 19 percentage that Enbridge shows is bad because it's 20 higher than the CIS World per cent. 21 MR. STEPHENS: Well, first of all, let me 22 explain, and you probably know where I got the CIS World 23 numbers from. They are out of the evidence of Mr. 24 Diamond. 25 MR. FARRELL: Yes. 26 MR. STEPHENS: All it says again -- 27 MR. FARRELL: He explained what he used to Mr. 28 Thompson. 2065 STEPHENS, cr-ex (Farrell) 1 MR. THOMPSON: Let him finish, please. 2 MR. FARRELL: Yes, I'm sorry. 3 MR. STEPHENS: It's an indicator again. Like 4 these are all indicators. The only problem is they are 5 all out of whack. If just one was out of whack, maybe 6 it would be okay. 7 What it does show though on that table is that 8 if this proceeds at the, you know, the pricing that you 9 have got in it, you then rise to 34 per cent of your 10 customer support services total budget is IT. I know of 11 no industry that spends that much on computing in a 12 business function area like that. 13 Again, all the CIS World says is from their 14 experience and the companies that have provided 15 information to them, it's more like, you know, 13 per 16 cent. 17 MR. FARRELL: All right. Am I getting your 18 drift that you're saying that it's wrong -- well, let me 19 back up one step. Do you know of companies who have 20 leveraged technology in order to reduce labour costs? 21 MR. STEPHENS: Yes. 22 MR. FARRELL: Are you saying it's wrong to do 23 that? 24 MR. STEPHENS: No. 25 MR. FARRELL: Bear with this one, Mr. 26 Stephens. If you had a choice of flying on two 27 airlines, one of which spent 2 per cent on maintenance 28 and another that spent 4 per cent on maintenance, which 2066 STEPHENS, cr-ex (Farrell) 1 one would you choose? 2 MR. STEPHENS: Myself? 3 MR. FARRELL: Yes. 4 MR. STEPHENS: The most convenient one, but -- 5 MR. FARRELL: You don't have to answer that. 6 MR. STEPHENS: We will never know the answer 7 to that because I don't think they would publish those 8 numbers. 9 MR. FARRELL: Okay. I want to move to your 10 conclusions now. They appear on pages 27 and 28 of your 11 written evidence. We sort of covered off things you 12 have dealt with on page 27. I wanted to go to page 28 13 and deal with paragraph numbers 4 and 5. 14 You gave me an answer earlier when I asked you 15 what the fair market value of BC Gas and Union was, and 16 that was the $6 to $8 range. That appears in the second 17 line of paragraph 4. 18 MR. STEPHENS: That is because I believe that 19 to be true for, you know, any CIS solution. 20 MR. FARRELL: No, I understand. We are going 21 to go to how you derived it. I just wanted to make the 22 link. 23 This is outside the demarcation point, as you 24 say? 25 MR. STEPHENS: Right. 26 MR. FARRELL: Now, as I understand what you 27 did is -- in the response to Interrogatory No. 2 in 28 Exhibit I, Tab 25, Schedule 46, we asked you about the 2067 STEPHENS, cr-ex (Farrell) 1 $6 to $8 and you referred us to the TMG position paper 2 and you quoted from the bottom of page 51: 3 "Annual fees are typically based on a 4 customer `per click' charge every month. 5 This is the number of active customers 6 billed every month. The per click charge 7 ranges from $.50 to $2.50 depending on 8 the size of the utility and the number of 9 outsourced services." 10 In the $0.50 and $2.50 range. 11 You then say in the response to Interrogatory 12 No. 2 that you took that and you uplifted certain items, 13 as we discussed earlier, to derive a Canadian dollar 14 range of $6 to $8. 15 Have I fairly well summarized what you did? 16 MR. STEPHENS: Yes. 17 MR. FARRELL: Would you turn to page 51 of 18 Appendix 8 to your evidence, to the TMG position paper. 19 MR. STEPHENS: I have it. 20 MR. FARRELL: Okay. 21 Now, the part that I quoted -- that you quote 22 in your interrogatory response and that I repeated -- 23 starts at the second last line on page 51 -- 24 MR. STEPHENS: Yes. 25 MR. FARRELL: -- and it goes over to the next 26 page. 27 Now, it seemed to us that in talking about the 28 per click charge this report, or Mr. Galluzzi as its 2068 STEPHENS, cr-ex (Farrell) 1 author, was referring to the per click charge after he 2 describes the implementation of an outsourced solution. 3 Is that your understanding? 4 MR. STEPHENS: Yes. 5 MR. FARRELL: And, if you look near the top of 6 the page, said: 7 "The utility may spend 60% less to 8 implement an outsourced solution than it 9 would on an in-house solution." 10 (As read) 11 Then he gives cost categories "Outsourced 12 Low", "Outsourced High". 13 MR. STEPHENS: Yes. 14 MR. FARRELL: And it gives a range of vendor 15 costs of $12 to $30 U.S. Correct? 16 MR. STEPHENS: Yes. 17 MR. FARRELL: Then he adds something to 18 account for "Utility Costs/Salary", a range of $10 to 19 $30 U.S., so he has a total project of $22 -- excuse 20 me -- a total project cost range of $22 to $60. 21 MR. STEPHENS: Yes. 22 MR. FARRELL: Where have you accounted for 23 this $22 to $60 range? 24 MR. STEPHENS: In the $6 to $8? 25 MR. FARRELL: Yes. I understood your previous 26 evidence was you built the $6 to $8 on the $0.50 to 27 $2.50. 28 MR. STEPHENS: Well, as I explained in 2069 STEPHENS, cr-ex (Farrell) 1 response to your Interrogatory No. 2, since it was a 2 wide range I asked about requests for proposals that he 3 had been involved in. For the CIS application 4 outsourcing he had seen returns of less than U.S. $0.40 5 per customer and he thought that for a $1.5 million 6 gas-only utility it would be $0.50 per customer. 7 So if I uplift those by -- if I use 25 per 8 cent I get to $0.50; and the other one is 62.5, and I 9 said that is $6 to $8 Canadian based on RFPs. 10 MR. FARRELL: I'm not sure I'm following your 11 answer, Mr. Stephens. 12 Are you telling me that you have done 13 something with the $22 to $60 range of project costs? 14 MR. STEPHENS: No, I have not. 15 MR. FARRELL: Where does that money go? I 16 mean, presumably the utility has either spent or paid 17 someone a range of $22 to $60. 18 MR. STEPHENS: No. What they are saying is 19 that is the cost the vendor is going to have to build 20 into their outsourcing charge. Right? So if I go 21 through this outsourcing exercise, I have to pick up 22 those costs and allocate them out over time. 23 MR. FARRELL: What do you do with the $10 to 24 $30 range of utility costs? 25 MR. STEPHENS: You would probably add that 26 into the outsourcing cost or you could keep it inside 27 the company. It doesn't matter. 28 MR. FARRELL: Let me ask you this question. 2070 STEPHENS, cr-ex (Farrell) 1 Does the $6 to $8 Canadian range reflect the 2 $22 to $60 range, in U.S. dollars, and the $0.50 to 3 $2.50 range? 4 MR. STEPHENS: I really based it on this RFP 5 information because what are the arm's-length 6 relationship, you know, exercises that we can relate to. 7 So I based it on that, but it must include this other. 8 By the way, I should tell you that in talking 9 to the president of Enlogix, I bounced that number of $6 10 to $8 off him and he didn't think that was unreasonable 11 in terms of a CIS application. 12 MR. FARRELL: I'm still having some -- 13 MR. STEPHENS: Only, only. You know, it 14 didn't include the call centre or outsourcing metering 15 or whatever else you want to outsource. 16 MR. FARRELL: I am still having some 17 difficulty. Maybe I am just being thickheaded here. 18 Are you telling me that -- your building 19 block, I thought, or the first step, was the U.S. $0.50 20 to the U.S. $2.50 range of per click charges. 21 MR. STEPHENS: That is the only one I used. 22 MR. FARRELL: And that range, is that the 23 range that becomes the $6 to $8? 24 MR. STEPHENS: Yes. 25 MR. FARRELL: Okay. 26 So you didn't take into account the total 27 project $22 to $60 U.S. range or the subset of that, the 28 utility costs in the range of U.S. $10 to U.S. $30. 2071 STEPHENS, cr-ex (Farrell) 1 That is not factored into your fair market value 2 assessment. 3 MR. STEPHENS: It must be included in the 4 $0.40 to $0.50. Right? 5 MR. FARRELL: Well, I can only know -- I 6 didn't write this. 7 At the bottom of page 51 it says: 8 "While outsourcing installation costs are 9 less - the annual operating costs are 10 usually more." 11 Then he goes on: 12 "Annual fees are typically based on the 13 customer `per click' charge every month." 14 And he goes on to find that is $0.50 to $2.50. 15 I read this as saying after you take into 16 account the $22 to $60, then you go to the per click 17 charge. 18 You have obviously interpreted it differently. 19 MR. STEPHENS: Yes. 20 Those annual costs go up, as he has indicated 21 at the bottom of the previous page. So he is saying, in 22 general, those costs don't decrease, they increase with 23 the new application. 24 MR. FARRELL: I understand that. It is just 25 that you have not included in your fair market value 26 assessment, you have not taken into account, the total 27 project cost range and the subsets of it that are shown 28 in the top two-thirds of page 51. 2072 STEPHENS, cr-ex (Farrell) 1 MR. STEPHENS: I did not consider that, but I 2 believe they are included in the $0.40 to $0.50. 3 MR. FARRELL: Do you know that or do you think 4 that? I don't mean -- that is not to -- 5 MR. STEPHENS: No, I don't know that for sure. 6 MR. FARRELL: Could you undertake to find out? 7 MR. STEPHENS: Yes. 8 MS DESAI: J12.1. 9 UNDERTAKING NO. J12.1: Mr. Stephens to 10 determine and advise if the total project 11 cost range and the subsets of it that are 12 shown in the top two-thirds of page 51 of 13 Appendix 8, the TMG position paper dated 14 August 9, 1999, are included in the $0.40 15 to $0.50 16 MR. FARRELL: Thank you. 17 Now, if we could go back to the last page -- 18 second last page, rather, of your written evidence, 19 page 28, paragraph 5. You say: 20 "...a competitive CIS solution will allow 21 ECG to provide service inside the 22 demarcation point for $2.25 - $2.50..." 23 Canadian, I take it: 24 "...per customer during the year 2000." 25 MR. STEPHENS: Yes. 26 MR. FARRELL: Okay. 27 I don't mean to quibble here, but are you 28 talking about the test year which is not equivalent to a 2073 STEPHENS, cr-ex (Farrell) 1 calendar year? You are talking about a 12-month period? 2 MR. STEPHENS: Yes. 3 MR. FARRELL: Okay. 4 Where does that number come from -- or that 5 range, rather? 6 MR. STEPHENS: Okay. If you turn to 7 Appendix 2, I performed an estimated ECG replace 8 in-house cost per customer. I estimated the cost 9 inside. It came to $2.65. And I just thought, since 10 your IT costs seem to be high, there's room for 11 improvement and you can probably make it 2.25 to 2.50. 12 Now, the reason that the current ECG costs are 13 so high is you have this 4.3 million you are trying to 14 recover from rates and it has to go inside the 15 demarcation costs. So I basically said, you know, 16 that's all part of the application, that 4.3 million, 17 and the inside demarcation costs should be in that 18 range. 19 And by the way, you know, the $68.00 that you 20 supported with the BC Gas in-house, the Union Gas 21 in-house option, and that $2.00 that I think it will 22 eventually get to is supported by those two cases, as 23 well 24 MR. FARRELL: In giving me that answer -- 25 well, first of all, it doesn't answer the question, 26 though, what Mr. Galluzzi's methodology was, and you 27 have given an undertaking to find out. 28 In showing the Union Gas in-house option to BC 2074 STEPHENS, cr-ex (Farrell) 1 Gas in-house option here, you are referencing, I take 2 it, the 10-year amortization? 3 MR. STEPHENS: For inside demarcation costs? 4 Those are basically the annual operating 5 costs. 6 MR. FARRELL: I'm sorry. May I just have a 7 moment, please? 8 --- Pause 9 MR. FARRELL: No; I'm back outside the 10 demarcation point. 11 MR. STEPHENS: Okay. 12 MR. FARRELL: And I'm back in the $6.00 to 13 $8.00 range. 14 And so, I'm asking you to look on Appendix 2, 15 to the outside demarcation cost per customer per year. 16 You show three rows: the first is a five-year 17 amortization; the second is a seven-year amortization; 18 and the third is a 10-year amortization. 19 MR. STEPHENS: Right. And for sure, it's -- 20 at the 10-year you are inside the six-to-eight; with the 21 seven-year you are slightly above the six-to-eight; and 22 when you go to the five-year, they were way above it. 23 MR. FARRELL: They are all above it? 24 MR. STEPHENS: At 25 per cent above it. 25 MR. FARRELL: So, that's fine. We have had 26 our discussion about the validity, if you will, of a 27 10-year amortization rate for an outsourced solution 28 and -- 2075 STEPHENS, cr-ex (Farrell) 1 MR. STEPHENS: When did we have that? 2 MR. FARRELL: We had that when we were talking 3 about this appendix and I was asking you to recall the 4 discussion about a 10-year amortization, for rate base 5 purposes, being the economic equivalent of a 10-year 6 contract. 7 MR. STEPHENS: And I didn't quite agree. 8 Right? 9 MR. FARRELL: No; I know. But we are not 10 going to argue about it, so that's why I said we have 11 had our discussion and I don't need to ask -- 12 MR. STEPHENS: Well, can I just put on the 13 record why I think 10 years is reasonable? 14 MR. FARRELL: Well, if I don't let you, 15 Mr. Thompson will ask you, so why don't you go ahead 16 now. 17 --- Laughter 18 MR. STEPHENS: Basically, you are putting in a 19 piece of infrastructure for your company. And when 20 companies take major applications like their energy 21 resource planning applications, they buy it from a 22 reputable supplier -- that's the one thing you have to 23 make sure is you pick the right supplier -- and then 24 they pay this annual maintenance and, basically, 25 improvement cost of 15 per cent a year on the licence 26 cost. So this thing continually gets renewed. 27 Now, many companies choose to take that 28 infrastructure -- they call it kind of the guts of their 2076 STEPHENS, cr-ex (Farrell) 1 IT infrastructure for the business -- and they write it 2 off over a longer period, because it's continually 3 getting renewed and maintained. 4 MR. FARRELL: But in this case, Mr. Stephens, 5 BC Gas may be doing that because it retains the 6 application as part of its own assets and part of rate 7 base; whereas, both Union Gas outsourced and ECG 8 outsourced do not. They have contracts with an 9 affiliate supplier. Correct? 10 MR. STEPHENS: That's true. 11 MR. FARRELL: Those are my questions. Thank 12 you, Mr. Stephens. 13 Thank you, Mr. Chair. 14 THE PRESIDING MEMBER: Thank you, Mr. Farrell. 15 Mr. Stephens, just a question from the Board. 16 There was a lot of discussion, in the last 17 couple of days, about the subsecond response which you 18 have reported in the case of the Union system versus the 19 one to two seconds response in the case of the ECG 20 system. 21 In the demonstration that you attended at 22 Consumers Gas, for example, ECG, do you recall how long 23 it took for one of those two calls -- I believe you were 24 present while two calls were responded to. Do you 25 recall what would be the average time that the operator 26 was on line with the customer? 27 MR. STEPHENS: Well, the first one was very 28 short because she couldn't handle the call and 2077 STEPHENS 1 transferred to I think a rentals area; so a different 2 person in the call centre. 3 The second one, which I wouldn't think would 4 be very typical, probably took at least 10 minutes while 5 she got this woman calmed down over the phone about -- 6 they had moved from one location to another and they had 7 discontinued the rental of a furnace or something, so 8 she was really excited about that and the fact that her 9 husband was really going to be excited if this didn't 10 get back to so much a month rather than billed all at 11 once. So she handled all of that, and she did it really 12 well, but I don't think that would be too typical. 13 THE PRESIDING MEMBER: Can you give me an 14 idea -- well, did you have a discussion with ECG 15 personnel as to what would be the duration of a typical 16 call taken by an operator? 17 MR. STEPHENS: Less than three minutes is what 18 I recall. 19 THE PRESIDING MEMBER: Less than three 20 minutes. 21 So, in your view, should the regulator be 22 concerned about -- in light of the fact that if the 23 typical call would be three minutes whether the response 24 time to the screen would be a second or subsecond or two 25 seconds, from an economic point of view, from an 26 economic regulator's point of view, should we be 27 concerned about it? 28 MR. STEPHENS: Well, first of all, I didn't 2078 STEPHENS 1 think it was that big of an issue because you might be 2 able to fix this response time. But what happens is if 3 it's slow, it can -- and you have to go to several 4 screens, you just slow, --you know, the customer support 5 representative just takes a little bit more time on the 6 phone than if it's subsecond. 7 THE PRESIDING MEMBER: Again, in terms of 8 subseconds again? 9 MR. STEPHENS: Right. 10 THE PRESIDING MEMBER: Okay. Now -- 11 MR. STEPHENS: But in terms of that three 12 minutes, I don't think it's, you know, it's not an 13 enormous issue. It's frustrating if it's slower. And 14 it can probably get fixed. 15 THE PRESIDING MEMBER: It would be frustrating 16 for? 17 MR. STEPHENS: All the customer service 18 representatives, because they have to chat while this 19 thing is coming back displaying the information. 20 THE PRESIDING MEMBER: All right. Thank you. 21 Now, there was some discussion about the 22 ability to interface with the ECG system through the 23 Internet, and I believe that there was some discussion 24 about the added costs that may be required. 25 You did say -- I tried to make a note of 26 that -- that "Based on what I have seen, they can be 27 quite significant sometimes and those were the added 28 costs", and this was in response to Mr. Kent's evidence 2079 STEPHENS 1 that the added costs would not be significant. 2 So, "Based on what I have seen", can you just 3 elaborate on that? 4 MR. STEPHENS: Well, I'm saying, based on what 5 I have seen with the ECG, the information, they seem to 6 spend a lot of money on keeping their computing systems 7 operating and updating the applications. Like there 8 was -- 9 THE PRESIDING MEMBER: Maybe I wasn't clear in 10 my question. 11 One of the points that you made in your 12 evidence is that the system would not be able to 13 accommodate Internet interaction with the customer, such 14 as paying bills through the Internet, unless there's 15 some additional expenditures. 16 MR. STEPHENS: Yes. 17 THE PRESIDING MEMBER: Okay. 18 In that connection, you made reference to 19 Mr. Kent's evidence that this feature can be added to 20 the system at a cost that would not be significant. You 21 came back, in an answer to Mr. Farrell, saying that -- 22 and that is almost a quotation: Based on what I have 23 seen, they can be quite significant sometimes. 24 And those are the expenses, the additional 25 expenses. 26 Are you with me now? 27 MR. STEPHENS: Yes. 28 THE PRESIDING MEMBER: I am just asking you: 2080 STEPHENS 1 What have you seen? How can you assist the Board as to 2 what you have seen out there in terms of additional 3 expenditures to make the system able to operate in the 4 Internet mode? 5 MR. STEPHENS: Directly relating to what I 6 will call electronic commerce projects and building that 7 into an application, the costs vary from, let's say, 8 less than a million dollars to multiple millions of 9 dollars, depending on how far you take it and how much 10 you integrate it into the business processes. 11 My statement related to the fact that ECG in 12 the past, for things that are additional functions with 13 these applications, seems to spend more than one would 14 expect. 15 That is what I was referring to, not to that; 16 to my experience with e-commerce solutions. 17 THE PRESIDING MEMBER: Maybe I did not hear 18 you correctly at that time. 19 My third and final question is: In discussion 20 of release no. 2 scheduled for some time this fall, you 21 talked about a risk of delay. Do you recall that? 22 MR. STEPHENS: Yes. 23 THE PRESIDING MEMBER: Is it a risk of 24 unbundling the whole project? 25 MR. STEPHENS: In my opinion, I don't think 26 so, because they have been working on this for a long 27 time. 28 I guess Mr. Kent mentioned that if they missed 2081 1 the November date, they would have to move it to next 2 year because we are not going to try anything in the 3 year 2000 changeover. 4 So it will be a delay. 5 THE PRESIDING MEMBER: You mentioned that 6 release 2 is the critical one; that releases 3 and 4 are 7 not so critical. 8 MR. STEPHENS: Yes. And it is actually 9 referred to as 1B at ECG. 10 THE PRESIDING MEMBER: The risk is only one of 11 delay. It is only a matter of time before the system is 12 fully operational to do all of the functions that it is 13 meant to do. 14 MR. STEPHENS: Yes, I would believe that. 15 THE PRESIDING MEMBER: Can you assist the 16 Board as to what, in your view, is the probability of 17 the delay? 18 MR. STEPHENS: No. I never looked at anything 19 in that kind of detail. 20 THE PRESIDING MEMBER: Thank you very much. 21 Those are the Board's questions. 22 Mr. Thompson, do you have any re-examination? 23 MR. THOMPSON: Just a couple of points, if I 24 might, Mr. Chairman, and they are not major ones. 25 RE-EXAMINATION 26 MR. THOMPSON: Mr. Stephens, this morning you 27 were having a debate with Mr. Farrell about whether the 28 ECG system was operational or non-operational. 2082 STEPHENS, re-ex (Thompson) 1 Do you recall that? 2 MR. STEPHENS: Yes. 3 MR. THOMPSON: It just wasn't clear to me 4 whether, in your opinion, you regard it as operational 5 at this stage. Could you clarify that for us, please. 6 MR. STEPHENS: The most significant function 7 that will be added to this application and its highest 8 risk from a technology point of view is 1B, and that is 9 where you finally get to update customer records as well 10 as look at them, customer and premise records. 11 Until that happens, not much has happened. 12 MR. THOMPSON: Does that mean that until that 13 happens, it is not operational in your view? 14 MR. STEPHENS: Yes. 15 MR. THOMPSON: There was some discussion about 16 your Appendix no. 7 with Mr. Farrell, and this reflects 17 the numbers you derived from Mr. Galluzzi's appendix and 18 your discussions with him. 19 You were having a debate with Mr. Farrell 20 about whether the comparison should be to the in-house 21 low versus the in-house high. 22 Do you recall that? 23 MR. STEPHENS: Yes. 24 MR. THOMPSON: He was looking at your in-house 25 low column, where you show the total project cost per 26 customer at $33. This is after your adjustments for 27 making those items that you feel should be adjusted in 28 U.S. dollars to Canadian dollars. 2083 STEPHENS, re-ex (Thompson) 1 MR. STEPHENS: Yes. 2 MR. THOMPSON: Then you had said you had 3 uplifted Consumers from that. 4 Could you just explain what you meant when you 5 said that. 6 MR. STEPHENS: If you will note, I basically 7 said from an applications services point of view. Like, 8 you are going to have to have people help you make this 9 happen. I put this in the middle. 10 The program contingency and interest during 11 construction I put above the high, because that seems to 12 be the experience at ECG itself. 13 I said the utility costs and salaries would be 14 a little bit higher. Therefore, I uplifted from $33 to 15 $40. 16 MR. THOMPSON: So the uplift you were talking 17 about was from the $33 for the low to the $40 per 18 customer which you have used. 19 MR. STEPHENS: Yes. And that ties into what 20 we have seen at BC Gas and the Union Gas in-house 21 option. 22 MR. THOMPSON: Mr. Farrell put some questions 23 to you about some mathematical conclusions, and you said 24 you could live with that. 25 Did you mean you could live with his 26 mathematical calculations? 27 MR. STEPHENS: I can't remember what -- 28 THE PRESIDING MEMBER: That is always 2084 STEPHENS, re-ex (Thompson) 1 dangerous. 2 MR. STEPHENS: I can't remember what the 3 context was. 4 MR. THOMPSON: Do we know? 5 MR. FARRELL: Yes, I think if I look at my 6 notes. 7 This was at the end of our discussion of 8 Appendix 1, and Mr. Stephens and I had been discussing 9 the response to our interrogatory 26, on page 14 of 10 Exhibit I, Tab 25, Schedule 46. 11 We were talking about -- 12 MR. THOMPSON: The $61. Is that it? 13 MR. FARRELL: Yes. And I think the 14 proposition I put to him was that if ECG was in the 15 middle of TMG's range, using your approach, the total 16 project cost per customer would be approximately $60. I 17 think I said that, even with what I called his mixed bag 18 of currencies. 19 I think it is there that he said "I can live 20 with that". That is my recollection. 21 MR. STEPHENS: If I remember what I said -- if 22 I said I can live with that, it is because it is halfway 23 between $40 and $80. 24 MR. THOMPSON: But you could live with the 25 mathematics, not the -- 26 MR. STEPHENS: The mathematics, right. 27 MR. THOMPSON: Mr. Farrell was talking with 28 you about the TMG benchmark of IT costs to business 2085 STEPHENS, re-ex (Thompson) 1 costs. 2 MR. STEPHENS: Yes. 3 MR. THOMPSON: He was putting a suggestion to 4 you about leveraging IT costs to achieve labour savings. 5 Do you recall that? 6 MR. STEPHENS: Yes. 7 MR. THOMPSON: Is there any evidence that you 8 have seen that ECG is leveraging IT costs to reduce 9 labour costs in a major way? 10 MR. STEPHENS: Well, I have been through the 11 benefits of actually the BPR case and even though they 12 claim they have taken these 26 and 52 head counts out in 13 that series, a simple example, this head count just 14 keeps growing and growing, although there is some 15 productivity improvement in that they handle more 16 customers per year. 17 MR. THOMPSON: And their head count compared 18 to the information you obtained from others indicated 19 what in terms of comparative head count for this IT CIS 20 customer support services area? 21 MR. STEPHENS: Well, you can look at it in 22 several ways, but if I look at the customer care 23 function at BC Gas, as I understand it, and that at 24 Union Gas, as I understand it, there is something out of 25 whack again and it's out of whack about a factor of two. 26 There seems to be about twice as many people 27 in customer support services at ECG as there is, you 28 know, for the equivalent number at BC Gas and Union Gas. 2086 STEPHENS, re-ex (Thompson) 1 Those are certainly subject to us not agreeing since you 2 have raised that. 3 I did have a look at one other area. Whenever 4 we looked at a business that we were buying at SHL or 5 when we were looking at basically organizations, we 6 would look at the core versus non-core head count and 7 that core and non-core operations of maintenance dollars 8 or operating costs. 9 Again, at ECG relative to the petroleum 10 industry, they don't seem anywhere close. Like they are 11 about three to one, so core to non-core would be about 12 three to one, both operating and head count in the 13 petroleum business or in the IT consulting and systems 14 integration business. It's something like one and a 15 half to one at ECG. 16 There's a number of indicators that say "I 17 don't think this is effective as it should be". 18 MR. THOMPSON: You had a discussion with Mr. 19 Vlahos about the response time. 20 MR. STEPHENS: Yes. 21 MR. THOMPSON: He asked you whether the 22 regulator should be concerned about response time. Does 23 the response time relate to the quality of a CIS or IT 24 solution and its fair market value? 25 MR. STEPHENS: Yes, it does in two ways. You 26 can usually fix response time with money. If you spend 27 more money, you can usually fix response time in that 28 you put more hardware in and you tune the system better. 2087 STEPHENS, re-ex (Thompson) 1 That again relates to fair market value. If 2 it's inherent in the design of the application and its 3 technology, you can have a bigger issue. 4 MR. THOMPSON: Everything else being equal 5 with two CIS solutions, if one has a slow response time 6 and the other has a very rapid response time, is the one 7 with the rapid response time better than the slower from 8 a technological and value perspective? 9 MR. STEPHENS: Yes. 10 MR. THOMPSON: All right. Thank you. Those 11 are my questions. 12 THE PRESIDING MEMBER: Thank you, Mr. 13 Thompson. 14 Mr. Farrell, where do we stand now? 15 Mr. Thompson, I understand there is still a 16 part of the undertaking that has to be responded to. 17 MR. THOMPSON: Yes. We are going to have a 18 time. Mr. Stephens tried to reach the technology 19 director at Enlogix again at the break and we were 20 unsuccessful. We will try again. I am hoping to be 21 able to put that on the record today in some fashion. 22 The other one that's outstanding we have to 23 check with Mr. Galluzzi about what was in the 40 to 50 24 cents in the RFP, whether it included these costs. I'm 25 not so sure I will be able to do that today. 26 That's what's outstanding from me. I have 27 these comments I wanted to make about some of the 28 undertaking responses. Mr. Farrell may have something 2088 STEPHENS, re-ex (Thompson) 1 he wishes to add. 2 MR. FARRELL: Mr. Thompson, I might just speak 3 off the record for a moment. 4 --- Off the record 5 MR. THOMPSON: Subject to your directions, Mr. 6 Chair, Mr. Farrell and I -- I believe it might be 7 appropriate for me to put on the record the concerns 8 that I have with some of these undertaking responses and 9 then have a luncheon adjournment. We can try and clean 10 everything up and come back and deal with these 11 concerns, if they need to be addressed, on the record. 12 Mr. Farrell, I believe, still wants to 13 consider whether he is going to lead some reply 14 evidence. That will allow us time to try and clean up 15 our Enlogix and other outstanding undertakings. 16 THE PRESIDING MEMBER: Mr. Thompson, I was 17 just wondering. Why do we need to hear about those 18 concerns now until we have an opportunity to touch base 19 with Mr. Farrell over the next hour and a half. Perhaps 20 the concerns could be reduced. 21 MR. THOMPSON: I'm happy to do it that way as 22 well. 23 Thank you. 24 MR. FARRELL: Before we adjourn, Mr. Chair, I 25 have responses to two additional undertakings. J4.2 and 26 Exhibit J6.2. I will check on the status of the other 27 outstanding undertakings that we have. I believe there 28 are less than five now, but we can do that over the 2089 STEPHENS 1 break so I can advise the Board whether we will have 2 them today or whether we will have to file them after 3 the hearing is concluded. 4 THE PRESIDING MEMBER: Okay. Depending on the 5 outstanding concerns of Mr. Thompson then, we may or may 6 not conclude the oral hearing today. 7 MR. FARRELL: My sense is that we have a very 8 good chance of concluding it today because I think most, 9 if not all, of Mr. Thompson's concerns relate to 10 responses to undertakings given by either Mr. Kent or 11 Mr. McGill, who are both here. 12 If we were to decide to call any rebuttal or 13 reply witnesses, it would be Mr. Kent and Mr. McGill. 14 The issues are really narrow. I would not imagine, at 15 least not in chief, there would be any long stretch of 16 examination-in-chief. I'm hopeful that we can conclude 17 today. 18 THE PRESIDING MEMBER: The decision to call 19 rebuttal evidence is independent of Mr. Thompson's 20 concerns. 21 MR. FARRELL: No. It's dependent upon my 22 discussion with Mr. Kent and Mr. McGill over the 23 luncheon break. If necessary, if we can't resolve Mr. 24 Thompson's concerns off the record, if it could 25 facilitate the process to have Mr. Kent and Mr. McGill 26 re-impanelled, we will do that. 27 THE PRESIDING MEMBER: Okay. Why don't we 28 break for an hour and a half. We will return at 1:30. 2090 STEPHENS 1 Mr. Stephens, you are excused with our thanks. 2 --- Luncheon recess at 1205 3 --- Upon resuming at 1331 4 PREVIOUSLY SWORN: DUNCAN KENT 5 PREVIOUSLY SWORN: STEPHEN McGILL 6 THE PRESIDING MEMBER: Please be seated. 7 We are back. 8 Mr. Farrell. 9 MR. FARRELL: Yes, Mr. Chair. 10 Mr. Thompson has spoken to me. He wishes to 11 ask these witnesses some questions relating to two 12 undertaking responses, plus Exhibit K12.2 that 13 Mr. Thompson filed this morning. 14 I have some examination-in-chief that is in 15 the nature of reply evidence, very brief, and then 16 Mr. Thompson will -- 17 THE PRESIDING MEMBER: If someone can give us 18 the numbers of the "J" exhibits, please? 19 MR. FARRELL: Yes. I'm sorry. 20 It is J7.7 and J8.4, and Exhibit K12.2, which 21 was distributed this morning. 22 Mr. Brett has spoken to me about Exhibit J9.5. 23 The undertaking was Mr. Diamond's and he was going to 24 run the 10 largest U.S. pure gas utilities to arrive at 25 an industry average. 26 Neither Mr. Brett nor Mr. Diamond defined 27 "largest" in relation to what. In J9.5 Mr. Diamond 28 sorted them by operating revenue. Mr. Brett has asked 2091 KENT/McGILL 1 me if we could sort them by number of customers, and, 2 subject to getting a hold of Mr. Diamond and having him 3 do that, we are prepared to do another run. Although, 4 as I say, the transcript itself was silent. 5 Mr. Thompson has asked whether we can produce 6 the article that Mr. Diamond refers to in Exhibit J9.7, 7 and we have agreed to do that as well. 8 THE PRESIDING MEMBER: Do we need an exhibit 9 number for that, Ms Desai, the -- 10 MR. FARRELL: If I might? 11 I think that perhaps we could just maybe 12 refile the one page of Exhibit J9.7 that says "Update - 13 Article Attached", so we could maintain the same exhibit 14 number. 15 Similarly, for the resort according to number 16 of customers for Exhibit J9.7. It would just be a 17 question of adding a second page with an indication on 18 the first, if that is satisfactory. 19 THE PRESIDING MEMBER: That's fine. 20 MR. FARRELL: There are, at the moment, by our 21 count, five undertaking responses that are still 22 outstanding. If we can't get them by the time we are 23 finished today, then we will simply file them with the 24 Board and distribute them in the ordinary course. 25 FURTHER EXAMINATION-IN-CHIEF 26 MR. FARRELL: So, gentlemen, you were both 27 here this morning and yesterday during my 28 cross-examination of Mr. Stephens. 2092 KENT/McGILL, further in-ch (Farrell) 1 MR. KENT: Yes. 2 MR. McGILL: Yes. 3 MR. FARRELL: Do you recall the discussion 4 that we had about the amount of data on any particular 5 screen, or what I call the density of the screen, 6 because you told me to, Mr. Kent -- 7 MR. KENT: Yes, I recall that. 8 MR. FARRELL: -- and the response time? Then 9 Mr. Chair asked Mr. Stephens about the duration of the 10 calls that he listened in to. 11 Could you tell us what is the average call 12 handling time? 13 MR. KENT: Mr. Stephens' estimate actually 14 wasn't that far off. The call handling time was 15 approximately three minutes and 45 seconds in total. 16 MR. FARRELL: And that is the average call 17 handling time today? 18 MR. KENT: It is the average call handling 19 time both before and after implementation of our new 20 CIS. 21 Now, as you have heard quite a bit about, what 22 is currently implemented is only Phase 1A. I don't 23 disagree with Mr. Stephens' characterization of it as 24 not having the update capability. Things like that will 25 come later and will add productivity improvements and 26 help us reduce the average call handling time. 27 But when we implemented Phase 1A we were 28 naturally concerned that the response time of the system 2093 KENT/McGILL, further in-ch (Farrell) 1 is longer than it was with the old system. It is, as 2 Mr. Stephens suggests, in the order of one to two 3 seconds. So it varies with the type of screen that 4 people are calling up and the amount of information on 5 it. 6 The old system, as a mainframe one, did 7 respond faster, so we have been monitoring the average 8 call handling time with the old system and with the new 9 and it has not changed. That to us is very important, 10 that it should not increase. 11 The reason that it hasn't increased is that we 12 have been able to reduce the total number of screens 13 from almost 60 in the old system to 41 in the new 14 system. We have been able to pack more information on 15 each screen and make it more easily understandable by 16 the CSRs so they don't need to go to so many screens and 17 they can work more efficiently with it. 18 So the result of that is, though, that the 19 time required to pull up the screen is, on average, 20 longer. You get more out of it, basically, and you need 21 to go to fewer screens to respond to customer calls. 22 I hope that clarifies it, Mr. Farrell. 23 MR. FARRELL: Thank you, Mr. Kent. 24 Then I had a discussion with Mr. Stephens this 25 morning about the number of CIS users, his figure of 800 26 for Enbridge, 300 for Union Gas, and 200 for BC Gas. 27 Would you give us your understanding of what 28 you understand to be the appropriate numbers for BC Gas 2094 KENT/McGILL, further in-ch (Farrell) 1 and Union? 2 MR. KENT: Yes. I appreciate again that this 3 isn't sort of information from the source. 4 Mr. Stephens made inquiries and came up with 5 numbers. When we saw his evidence we wanted to follow 6 up and understand the numbers and try to make sure they 7 were comparable. 8 I contacted BC Gas and spoke to several people 9 there over the phone and got an estimate from a lady by 10 the name of Edna Katchachak(ph), whose last name 11 unfortunately I do not know how to spell, but she is 12 very much involved in the project, and I asked her how 13 many CSRs were going to be using the system when they 14 had all of their customers on that same single system 15 brought back from BC Hydro and the inland customers. 16 She told me that their current estimate of the 17 number for the two call centres that they will be 18 putting in is that there would be between 200 and 250 19 CSRs using the system. 20 Though I have no further information, my 21 understanding is that a CSR in their system is 22 essentially the same as ours. 23 So that, then, is a number that I believe to 24 be comparable to the 363 that appears at Exhibit J8.4. 25 The number of 300 from Union Gas was the one 26 that I followed up with Bob Bell. Both Mr. Stephens and 27 I, I think, have been trying to reach Mr. Bell over the 28 lunch break. But my understanding is that Mr. Stephens' 2095 KENT/McGILL, further in-ch (Farrell) 1 characterization is correct with one exception. 2 My understanding from Bob is that 300 people 3 is the number that are using Banner 1 as it is currently 4 in service to support the 280,000, approximately, 5 customers that were the old Centra Gas Ontario 6 customers. So that is a subset of their total number of 7 customer support services people and it is relative only 8 to those Centra Gas Ontario customers. 9 Now, I don't know how to manipulate that 10 number or whether it is relevant to the total number 11 carrying out that function at Union Gas for the entire 12 customer base, but the number of 300 that I understood 13 that Bob had given to Jim Stephens was, in the way that 14 I heard the story, relative only to the old Centra Gas 15 Ontario customers. 16 I, in fact, left messages with Bob asking if 17 he could possibly be here today to help us with this 18 matter, but he had other commitments I gather and was 19 unable to be here. 20 MR. FARRELL: Thank you, Mr. Kent. 21 Those are my questions, Mr. Chairman. 22 THE PRESIDING MEMBER: Thank you, Mr. Farrell. 23 Mr. Thompson. 24 MR. THOMPSON: Yes, thanks. 25 FURTHER CROSS-EXAMINATION 26 MR. THOMPSON: Just with respect to the 27 response time issue, Mr. Kent, you are agreeing, as I 28 understood you, that the response time at the moment for 2096 KENT/McGILL, further cr-ex (Thompson) 1 query is longer on the new system than it was under the 2 old? 3 MR. KENT: Yes, that is correct, because the 4 new system is a client/server system that 5 characteristically takes longer than an old mainframe 6 system. 7 The Enlogix SCT system is also a client/server 8 system and with any appreciable load on it would also 9 likely have a response time lower than a comparable 10 mainframe system. 11 MR. THOMPSON: I'm sorry? The response time 12 where? At Enlogix, you said? 13 MR. KENT: I'm saying it is characteristic of 14 client/server systems to have a somewhat slower response 15 time than mainframe dumb terminal systems. 16 MR. THOMPSON: But I'm just talking about your 17 system at the moment. 18 MR. KENT: Fine. 19 MR. THOMPSON: It is one to two seconds. You 20 would agree with that now? 21 MR. KENT: It varies. I don't think we ever 22 disagreed with it, Mr. Thompson, but it varies according 23 to the particular screen that is being called up and the 24 amount of data that is on that screen. 25 Some screens are that long. Others are 26 significantly faster because if they contain only a 27 small amount of data, the characteristic of our 28 infrastructure -- which is based on an IBM token ring 2097 KENT/McGILL, further cr-ex (Thompson) 1 technology -- is that the packet size on the network 2 limits the data transmission speed. And there's a 3 degree of latency in client/server systems, as well, 4 that tends to slow them, in relation to mainframe 5 systems. 6 MR. THOMPSON: I'm just trying to make sure I 7 understood what you were saying. 8 Do you agree that the response time is, as 9 estimated, one to two seconds? 10 MR. KENT: I would agree that in our 11 production environment, for our system, the average time 12 for our screens is probably on that order; though there 13 are variations around that average. 14 I would also say that it's characteristic of 15 client/server systems to be somewhat slower, in 16 response, than mainframe systems. 17 MR. THOMPSON: Do you agree that there's a 18 risk that the response time would be even longer when 19 Phase IB is introduced, as Mr. Stephens indicated was a 20 risk? 21 MR. KENT: I agree with Mr. Stephens that it 22 is a risk. It's one that we are aware of and that we 23 have been doing performance testing of to -- 24 stress-testing the system -- to ensure that when we do 25 put it in production, the response time is going to be 26 acceptable for CSRs. 27 MR. THOMPSON: Do you agree that the length of 28 the response time is a reflection on the quality of the 2098 KENT/McGILL, further cr-ex (Thompson) 1 CIS solution? 2 MR. KENT: I think there's a lot of factors 3 that need to be measured -- and I believe Mr. Stephens 4 has attempted to measure a number of factors -- to judge 5 the quality of the CIS system. 6 I think that, ultimately, for the operator of 7 the gas distribution utility and a call centre, what is 8 important is the total length of time that you have to 9 spend on the phone to reasonably satisfy a customer's 10 request or whatever they need; and that is: a factor of 11 response time for screens; the acceptability of data; 12 the ease with which CSRs can comprehend the data that's 13 presented to them. It's a factor -- it's a function of 14 a great many factors, of which response time is one. 15 MR. THOMPSON: Right. But in terms of the 16 value of the CIS or IT solution, do you agree or 17 disagree that response time is a factor? 18 MR. STEPHENS: I agree that it is a factor. 19 And if everything else was exactly the same between two 20 systems, if you had two systems that were precisely 21 identical in every respect and the only differentiator 22 was response time, I would agree that the one with the 23 slower response time would be less desirable than the 24 one with a faster response time. 25 MR. THOMPSON: And worth less? Like not 26 "worthless" but "worth less". 27 MR. STEPHENS: I hope the court reporter gets 28 that down accurately. It's going to be a challenge. 2099 KENT/McGILL, further cr-ex (Thompson) 1 I think we are talking about something that's 2 so hypothetical here, Mr. Thompson, that it's difficult 3 for me to give any real-world value to it, because there 4 are so many other things that would differentiate one 5 CIS from another. 6 MR. THOMPSON: Now, in your response to one of 7 my questions, you slipped into the Enlogix system, as I 8 understood you. My question is -- Mr. Stephens has 9 confirmed with an individual at Enlogix, today, as I 10 understood it, that the response time, in a production 11 environment, for Centra, and for Union Energy, is 12 subsecond. 13 Are you challenging that? 14 MR. KENT: Well, we haven't had the 15 opportunity of finding out exactly the parameters that 16 we asked Mr. Stephens about. I would be very interested 17 in that, particularly since, in a development 18 environment, you would appear, even in the situation at 19 Enlogix, to have fewer people using the system than we 20 do our in production system. In addition to that, 21 developers, when they are accessing a system, are doing 22 different things than someone is doing in production. 23 So, to have, simultaneously, 50 developers using a 24 system isn't necessarily the same as having 50 25 production users using the system. 26 MR. THOMPSON: I understand that. But 27 Mr. Stephens relayed, at your company's request, 28 information about the response time, in the production 2100 KENT/McGILL, further cr-ex (Thompson) 1 environment. He did that this morning. 2 Do you recall -- 3 MR. KENT: In that case, I misunderstood. I 4 didn't realize that Enlogix -- the developers at the 5 Enlogix site were using Union Gas production data. 6 Are you saying that's the case, Mr. Thompson? 7 MR. THOMPSON: I think what he said was -- and 8 correct me if I'm wrong -- that the individual at 9 Enlogix that he spoke to indicated that the Union Gas 10 use for the 280,000 Centra customers -- which is a 11 production environment -- 12 MR. KENT: Yes, I agree with that. 13 MR. THOMPSON: The response -- 14 MR. KENT: -- Banner 1 system or Phase 1 of 15 Banner. 16 MR. THOMPSON: Just let me get the question 17 out. 18 The response time, he was told, was subsecond. 19 MR. KENT: Yes, I do recall Mr. Stephens 20 recounting that he had been told that. I agree. 21 MR. THOMPSON: All right. Do you accept that? 22 Or are you questioning that? This is what I couldn't 23 understand. 24 MR. KENT: No; I do accept that Mr. Stephens 25 said that and that that was what was recounted to him. 26 I don't know enough about Phase 1 of Banner, which I 27 understand to be a different system than Phase 2 -- 28 which is what I believe Mr. Stephens was comparing to 2101 KENT/McGILL, further cr-ex (Thompson) 1 our solution -- I don't know enough about the 2 differences between those two systems to know whether 3 that's relevant. I don't know what the impact is of 4 scaling from 280,000 customers to 1.1 million customers 5 might be. But if the current system is recounted by 6 Mr. Stephens to have in its current application 7 subsecond response time, I do not have information to 8 contradict that. 9 MR. THOMPSON: All right. You don't have 10 information to contradict what I understood him to say, 11 which is that the response time for the Union Energy 12 use, which is for 900,000 customers, is subsecond? 13 MR. KENT: That's correct. Though I believe 14 that the Union Energy application is using a more 15 limited subset of the system than would be contemplated 16 for Union Gas. I'm not sure, but I believe that to be 17 the case. 18 MR. THOMPSON: I think Mr. Stephens said as 19 much. 20 Okay. Let's turn, then, to your information 21 you say you got from BC Gas. I think, probably, we are 22 going to have to mark -- and I will have to undertake to 23 do this, Mr. Chairman -- the pages in the BC Gas filing 24 to which Mr. Stephens referred in his evidence. These 25 are pages 35 and following. 26 Mr. Kent, have you reviewed this application? 27 MR. KENT: Yes, I have. 28 MR. THOMPSON: Okay. And as Mr. Stephens 2102 KENT/McGILL, further cr-ex (Thompson) 1 indicated, this morning, the section of this application 2 which describes the "as is" cost analysis indicated 220 3 full-time equivalent staff involving -- involved in 4 supporting direct customer care processes, including BC 5 Hydro staff (estimated). 6 MR. KENT: Yes, I read that at page 35. And 7 it was in order to get some confirmation of this number, 8 or to understand it better, that I called 9 Ms Katchachak(ph). 10 MR. THOMPSON: Are you suggesting that number 11 is wrong? 12 MR. KENT: I'm suggesting that she gave me 13 information that differs from this number -- and the way 14 that I recounted her description is, I believe, accurate 15 and correct. I saved her voice mail message and, over 16 the lunch break, I reviewed it -- and Mr. McGill had an 17 opportunity to hear her message, as well -- and I hope I 18 have characterized it correctly. 19 If that's not the case, perhaps Steve can -- 20 MR. McGILL: No; I heard it, and the figure 21 she quoted was 200 to 250 CSRs. 22 MR. THOMPSON: And you have assumed that those 23 are FTEs, are you? Or what is the assumption you have 24 made about CSRs and FTEs? 25 MR. KENT: My question to her was how many 26 simultaneous users there would be of the system, and she 27 responded with an estimate of 200 to 250 CSRs. So it 28 may be that the total is actually even higher, in terms 2103 KENT/McGILL, further cr-ex (Thompson) 1 of FTEs. 2 MR. McGILL: In terms of positions. 3 MR. THOMPSON: Did you ask her how many 4 full-time equivalent staff are involved in supporting 5 the direct customer care processes, including BC Hydro 6 staff estimates? 7 MR. KENT: No, I did not. Though, over lunch, 8 I left a voice mail message asking for that information, 9 as well, if they felt able to provide it to us. 10 MR. THOMPSON: Did you draw her attention to 11 the application that had been filed in your questions to 12 her? 13 MR. KENT: I did, originally, but in the 14 material -- in my voice message today I did not. She is 15 not in the office today, or tomorrow, so I was forced to 16 leave a voice mail. 17 MR. THOMPSON: But what Mr. Stephens has used 18 is as described in the BC Program Mercury application. 19 Do you accept that? 20 MR. KENT: There is a number, of 220 FTEs, 21 including an estimate of the BC Hydro staff. 22 MR. THOMPSON: With respect to Union Gas, I 23 think perhaps what we should do is leave it this way: 24 Perhaps jointly we could attempt to resolve this with 25 Mr. Bell and inform the Board as to what the facts are 26 in terms of the number of about -- well, Mr. Stephens 27 said he actually got less than 300 from Mr. Bell. 28 We can try and nail that down. Would that be 2104 KENT/McGILL, further cr-ex (Thompson) 1 satisfactory? 2 MR. FARRELL: Yes. 3 MR. THOMPSON: Maybe we should get a number 4 for that. 5 MS DESAI: Undertaking J12.2. 6 UNDERTAKING NO. J12.2: To confirm how 7 many full-time equivalent staff are 8 involved in supporting the direct 9 customer care processes, including BC 10 Hydro staff estimates 11 THE PRESIDING MEMBER: I hope, whatever the 12 answer is, that we don't need to resume, Mr. Thompson. 13 MR. THOMPSON: No. That's why I suggest we do 14 it jointly. 15 We will be done today, Mr. Chairman. 16 THE PRESIDING MEMBER: That's okay. It 17 doesn't have to be done today, as long as we can 18 complete today the oral part of the hearing. 19 MR. THOMPSON: Thank you. That concludes my 20 cross-examination on the reply material. 21 MR. FARRELL: I was inquiring through you, 22 Mr. Chair, whether Mr. Thompson wanted to get a "K" 23 exhibit for pages 35 to whatever, or whether he wanted 24 those pages added to K11.2, which contains some excerpts 25 from Program Mercury. 26 MR. THOMPSON: It would probably be convenient 27 if you could just undertake to add them to what has been 28 filed. I suggest we put the whole of the Financial 2105 KENT/McGILL, further cr-ex (Thompson) 1 Analysis section, which would be pages 35 to 42. 2 MR. FARRELL: That's fine by me. 3 THE PRESIDING MEMBER: If we could have those 4 now, we can just attach them to Exhibit 11.2. 5 Does somebody have them? 6 MR. THOMPSON: We haven't got them copied. 7 THE PRESIDING MEMBER: That's fine. We will 8 wait for them. I thought they were already produced. 9 MR. THOMPSON: I don't know if Mr. Farrell has 10 any re-examination on the reply evidence. Otherwise, I 11 will just go into these undertaking issues. 12 MR. FARRELL: Go ahead. 13 MR. THOMPSON: Thank you. 14 Panel, first of all, would you turn up Exhibit 15 K12.2, which is material that I believe Mr. Kent sent to 16 Mr. Stephens by e-mail in response to a telephone 17 message from him where he asked that the customer 18 support costs shown in IGUA 44 be broken down into 19 business office costs and IT costs. 20 Is that a reasonable paraphrase of the 21 request? 22 MR. KENT: It is. I think it is an example, 23 as Mr. Stephens was kind enough to point out, of our 24 being forthcoming in the provision of information. I 25 think another time I might be more careful to qualify 26 the information more carefully before providing 27 information of this nature. 28 MR. THOMPSON: Is there something wrong with 2106 KENT/McGILL, further cr-ex (Thompson) 1 it? 2 MR. KENT: No. The numbers are accurate. I 3 think the question is whether or not we were 4 sufficiently clear in explaining what the numbers meant 5 and where they came from. I am sure you will give us an 6 opportunity to go through that now. 7 It might have saved some aggravation if we had 8 done it as a formal interrogatory response and taken our 9 usual care in providing explanations of the data that go 10 on interrogatory responses. 11 MR. THOMPSON: Let me move on. I think it 12 would be helpful also if we just -- this information has 13 been displayed in Mr. Stephens' Appendix 5. But the 14 numbers at the bottom of page 2, the $66,965,265 and the 15 $80,091,903, were the calculations of total customer 16 support costs that Mr. Diamond used in his exhibit. 17 MR. KENT: They were, and they were prepared 18 for that purpose with the knowledge that Mr. Diamond was 19 going to be matching them with costs obtained from other 20 utilities. 21 MR. THOMPSON: If we could then jump quickly 22 to the last page, Mr. Diamond in his evidence indicated 23 that what he had done was attempted to select the 24 company's accounts that were comparable to the FERC 25 accounts that he was using. 26 MR. KENT: Yes. 27 MR. THOMPSON: In his evidence he had 28 indicated that there were numbered accounts that he had 2107 KENT/McGILL, further cr-ex (Thompson) 1 used from your system, and then he had a note to the 2 effect that information costs, including customer 3 information costs, were not captured in particular 4 account numbers, or words to that effect. 5 Do you recall that? 6 MR. KENT: Not segregated in that fashion. So 7 we had to do this to give him an allocation or an 8 estimate of our costs, yes. 9 MR. THOMPSON: So what we have on the last 10 page, as I understand it, running down the second column 11 we have the account numbers where specific information 12 was captured by Mr. Diamond from accounts, totalling 13 $54,347,736 in the 1999 revised estimate? 14 MR. KENT: Yes. I think we actually provided 15 Mr. Diamond with the data directly. 16 MR. THOMPSON: Okay. So this was your work. 17 Then the ones that were not segregated in any 18 particular accounts are shown at the bottom, for 1999, 19 totalling $17,746,547, and then in 2000 these are I 20 think just grossed up by the PBR factor, if I am not 21 mistaken. 22 MR. KENT: Those are -- 23 MR. FARRELL: Did you say 17? 24 MR. THOMPSON: I'm sorry, $15,746,547. 25 MR. KENT: Yes, I see that. 26 MR. THOMPSON: Okay. Then these numbers, 27 those totals, find their way to page 3 of this exhibit, 28 under Total IT Customer Care O&M Expenditures. 2108 KENT/McGILL, further cr-ex (Thompson) 1 MR. KENT: I believe that the transcription is 2 accurate, yes. 3 MR. THOMPSON: The totals being the 4 $15,746,547 for 1999 and then the $16,472,463 for 2000. 5 MR. KENT: Yes. 6 MR. THOMPSON: Then there is a footnote at the 7 bottom here. It is slightly smudged, but it reads: 8 "IS customer care costs include direct 9 application hosting support and 10 development costs, allocation of voice 11 network costs for the customer support 12 services, personnel based on FTEs, 13 allocation of desktop service costs for 14 customer support personnel based on 15 FTEs." (As read) 16 MR. KENT: Yes. 17 MR. THOMPSON: Then we go to the next page and 18 we see the customer support services IT costs. We also 19 have the allocation data that was used to do this 20 allocation that is described in the footnote previously. 21 Correct? 22 MR. KENT: Yes. 23 MR. THOMPSON: And we see under CSS, FTEs 743. 24 CSS means customer support services. Is that 25 correct? 26 MR. McGILL: That is correct. 27 MR. THOMPSON: So the total FTEs encompassed 28 by the customer support services costs are 743. 2109 KENT/McGILL, further cr-ex (Thompson) 1 MR. McGILL: Yes. There are 743 FTEs in the 2 customer support. What is supplied there is the cost 3 per desktop to that head count to come up with a total 4 of $4.4 million. 5 So that would include people like myself, in 6 addition to CSRs and others that perform customer 7 support services. 8 MR. THOMPSON: Then we have 416 under CSC. 9 That is call centre only? 10 MR. McGILL: That is correct. 11 MR. THOMPSON: Then we come to, if we could, 12 undertaking -- I probably should start with J8.4 13 undertaking response. 14 This arose at transcript 1432, if you could 15 turn that up. 16 Do you have that? 17 MR. McGILL: The transcript or the 18 undertaking? 19 MR. THOMPSON: Yes, the transcript. 20 MR. KENT: That was 14...? 21 MR. THOMPSON: Page 1432 is where the 22 discussion starts and the undertaking is actually 23 recorded on page 1433. 24 MR. KENT: Okay 25 MR. THOMPSON: If you look at 1432, what we 26 were trying to have confirmed, Mr. McGill, was the 27 number of full time equivalents that were in the 800 28 positions that we have been discussing that were covered 2110 KENT/McGILL, further cr-ex (Thompson) 1 by customer support services. 2 You made reference at page 1432 to our 3 interrogatory schedule No. 44 where we broke out the $80 4 million. Then I said: 5 "Yes, those are the costs, but I was 6 trying to find the people reflected in 7 the numbers." 8 Then you said: 9 "As we indicated, there are approximately 10 800 positions there; something less in 11 terms of FTEs." 12 The undertaking response over on the next 13 page, as I understood it, was for you to provide the 14 FTEs reflected in the 800 positions. 15 If we look at your undertaking response, 16 Exhibit J8.4, you really didn't answer the question 17 because you have provided us with call centre positions 18 only. Correct? 19 MR. McGILL: Well, the way the question was 20 recorded and the question that I answered was that I was 21 to provide the FTE number referenced in the previous 22 year's evidence. 23 The evidence that I recalled was what was 24 filed in 179 14/15, the unbundling application. That's 25 where we indicated that for customer support, and it's 26 in the table on the second page of the undertaking 27 response, and the customer support area basically refers 28 to the call centre. 2111 KENT/McGILL, further cr-ex (Thompson) 1 We were showing that in the 1999 budget we had 2 517 positions. What I did was I took the 252 part time 3 positions that make up that 517 total, multiplied that 4 by a factor of .6 to convert it to a full time position 5 number and the result is that you end up with the 416 6 positions which corresponds with what is shown in the 7 material that we provided to Mr. Stephens. 8 Now, in addition to that, and it was in 9 response to Board staff 57, we indicated that the number 10 of FTEs associated with the $1.9 million Z-factor 11 empirical reduction or component of the CS Z-factor due 12 to the incremental benefits of implementing CIS was that 13 there would be a 53 FTE reduction. 14 What I did was I took the 416 FTEs and reduced 15 it by 53 to come up with the 336. I believe that I was 16 answering the undertaking. Sorry, it should have been 17 363. 18 THE PRESIDING MEMBER: There are 743 FTE 19 positions within the costs described in Exhibit I-12, 20 schedule 44. 21 MR. McGILL: Yes. We agree on that. I think 22 both numbers are correct. They just represent different 23 things. 24 MR. THOMPSON: Have you got page 1432 in front 25 of you of the transcript? 26 MR. McGILL: Yes. 27 MR. THOMPSON: We talked about those costs in 28 that exhibit and then I said: 2112 KENT/McGILL, further cr-ex (Thompson) 1 "Yes, those are the costs, but I was 2 trying to find the people reflected in 3 the numbers." 4 You said: 5 "As we indicated, there are approximately 6 800 positions there; something less in 7 terms of FTEs." 8 I asked: 9 "Is the FTE numbered in the record 10 somewhere?" 11 You said: 12 "I don't believe it is. The details of 13 O&M aren't in issue in this case." 14 And so on. Then I say: 15 "Would it be possible --" 16 You said: 17 "It would presumably be in last year's 18 evidence --" 19 I say: 20 "Okay. Would it be possible for you to 21 give me the reference in last year's 22 evidence?" 23 You said: 24 "We will have to make inquiries?" 25 Then we gave an undertaking number. Now, how 26 did you construe that you were only to come back with 27 the call centre component of what was covered by those 28 costs? 2113 KENT/McGILL, further cr-ex (Thompson) 1 MR. McGILL: Again, I indicate that my reading 2 of the undertaking request was to give a reference to 3 the previous year's evidence. The reference that I 4 recalled was this reference that we have provided, 179 5 14/15, Exhibit D, section 5.5, page 2 of 11. That's 6 what we have come back with. 7 Now, in terms of the 800, I think what I said 8 on the transcript at 1432 is correct, that it's 9 approximately 800 positions overall, the actual number, 10 and the number that we provided to Mr. Stephens earlier 11 is the 743. 12 I think the issue here is what numbers are 13 comparable to the numbers that have been brought forward 14 to compare ECG to. 15 MR. THOMPSON: I thought you were trying to 16 discredit his use of 800 for the total customer support 17 services within Consumers Gas and it seems to me he's 18 very close there. It's 745 FTEs. 19 MR. McGILL: As long as we are using the same 20 definition across all the companies, then we have a 21 representative comparison, but if we are not, then we 22 don't have that. 23 MR. THOMPSON: Could you just tell me where 24 the other FTEs are in this Exhibit B, section 5.5, apart 25 from the call centre that go to make up the 745, what 26 line we would find those in? 27 MR. McGILL: Yes. They are on the third page 28 of the undertaking. At the bottom of the table there is 2114 KENT/McGILL, further cr-ex (Thompson) 1 an entry. It's called "Remainder of the organization". 2 The difference between the 743 and the 636 FTEs would be 3 in that figure of 616, or pardon me, I guess 2,036 if we 4 were to convert that to an FTE equivalent. 5 MR. THOMPSON: All right. Thank you. 6 Turning then, if I might, Mr. Kent to Exhibit 7 J7.7. This is where you provide, as I understand it, 8 the fully allocated costs of hosting. 9 MR. KENT: Hosting the CIS application. 10 That's correct. 11 MR. THOMPSON: And again, the number, and this 12 turns up as a credit to the calculation of the Z-factor. 13 MR. KENT: Yes, it does. 14 MR. THOMPSON: In the material that was 15 provided to Mr. Stephens, I noted the footnote that your 16 customer care costs included hosting costs. 17 Then if we go to page 4 of this document, and 18 we also see it on page 5 of the document, we see a line 19 "Application hosting and support $6.7 million", not $3.6 20 million. Can you explain the differences, please. 21 MR. KENT: Yes. I would be pleased to, Mr. 22 Thompson. I apologize for any confusion that may have 23 arisen through what would appear to be two discordant 24 pieces of information. 25 What's happened is that in an attempt to 26 compare our total costs with the total customer care 27 costs of other utilities, because you must remember we 28 put these numbers together for Mr. Diamond to then match 2115 KENT/McGILL, further cr-ex (Thompson) 1 to the stuff that he had already gotten from other 2 utilities. 3 What we wanted to do was to make sure that we 4 didn't in any way understate the costs associated with 5 our customer care function. 6 We took what were admittedly somewhat crude 7 estimates, but we thought very conservative estimates, 8 of all of the costs that could be associated with 9 customer care functions. I think I said on the record 10 when we first talked about this several days ago now, 11 Mr. Thompson, I said we threw everything, including the 12 kitchen sink, in here. 13 There are other applications being hosted 14 aside from CIS. There are things like an application 15 that provides on each CSR's desktop our customer's care 16 policies. That's not part of CIS. It's an application 17 that gives them immediate access online to the current 18 version of policies like "When do you disconnect 19 customers, under what circumstances", that sort of 20 thing. 21 We have to host that application as well. 22 It's part of our overall customer care function. So we 23 threw all of that stuff in as far as we could determine 24 it, made a very rough estimate, grossed it up, 25 essentially by a safety factor so we had everything in 26 there, and ended up with an estimate of $6.7 million. 27 It's not a precise number, Mr. Thompson. It's 28 a number that we thought could never be challenged as 2116 KENT/McGILL, further cr-ex (Thompson) 1 understating our customer care costs because we 2 anticipated that we would be questioned about our 3 comparison. 4 We wanted to make sure that if anyone thought 5 that we might have hidden some costs somewhere and not 6 included it in the numbers we gave to Mr. Diamond -- 7 MR. McGILL: It was our -- 8 MR. KENT: -- we would be able to defend it. 9 MR. McGILL: It was our intention to make the 10 figures we were quoting as comparable as possible to the 11 information that Mr. Diamond had acquired out of the 12 FERC surveys. 13 As Mr. Kent has indicated, there's a number of 14 applications that customer support utilizes outside of 15 CIS. 16 There are meter reading applications; there 17 are reporting applications; there is bank gas accounting 18 with respect to T-service customers; large volume 19 measurement systems that we use to correct meter 20 readings for pressure and temperature; systems that 21 monitor curtailment compliance and non-authorized 22 overrun for contract customers. 23 Those are examples of the kinds of things that 24 are included in the costs that we are quoting, apart 25 from the cost of hosting CIS. 26 MR. THOMPSON: Well, hosting, to me, means 27 providing -- it is the utility providing service to 28 someone other than the utility. 2117 KENT/McGILL, further cr-ex (Thompson) 1 Is that right? 2 MR. McGILL: In terms of what we are saying 3 here, there are a number of customer support 4 applications that the IS department hosts for customer 5 support. One of them is CIS, and we have removed the 6 cost of hosting it through the Z-factor. 7 There are other applications that the IS 8 department hosts for the customer support group, and 9 those are the things that I just mentioned. 10 MR. THOMPSON: Are the costs that you are 11 suggesting are the costs for hosting services for Newco 12 included in the $6.7 million? 13 MR. McGILL: Yes, they are, and then they are 14 removed by way of a Z-factor. 15 MR. THOMPSON: But they are in this number 16 now. 17 MR. McGILL: Yes. Well, in the $80 million 18 total, they are removed through the Z-factor. So they 19 go in through the allocation of IS cost, and then the 20 hosting costs, which are specific to the CIS application 21 that is being outsourced, come out through the Z-factor. 22 MR. THOMPSON: In the $6.7 million, or are 23 they out? 24 MR. KENT: They are in that number. 25 MR. THOMPSON: All right. 26 MR. McGILL: They are in that number but out 27 of the $80 million. 28 MR. THOMPSON: Are they in there as 2118 KENT/McGILL, further cr-ex (Thompson) 1 $3.6 million or some higher figure? 2 MR. McGILL: They would be less than that, 3 because the $3.6 million includes allocations of 4 overheads. 5 MR. THOMPSON: Who is Bruce Campbell? 6 MR. KENT: Bruce Campbell heads up the CIS 7 project management office, and he reports to me. 8 MR. THOMPSON: Could you provide us with a 9 breakdown of the $6.7 million, between all the things 10 that you say it supposedly covers? 11 MR. KENT: I don't know if it exists. I can 12 ask. But it wasn't ever intended to be a proper cost 13 allocation study. It was intended to be a reasonable 14 representation, on the conservative side, of every cost 15 that we could reasonably or should reasonably associate 16 with the customer care function. 17 MR. THOMPSON: What does it matter if it 18 doesn't exist? Can you not recreate it and tell us what 19 it is? 20 MR. FARRELL: Why is it necessary? 21 MR. THOMPSON: I am just trying, I guess, to 22 verify that what you have provided by way of a hosting 23 credit is reasonable. 24 It appears to me that it is not in the face of 25 this $6.7 million. But you are telling me that there 26 are other things in there. 27 So I am just asking to -- 28 MR. McGILL: We have given you the detail of 2119 KENT/McGILL, further cr-ex (Thompson) 1 how the hosting credit was calculated in 7.7. 2 MR. THOMPSON: So you can't provide the 3 breakdown. Is that what you are saying? 4 MR. McGILL: I think what we are saying is 5 that I don't think there is a breakdown of the 6 $16 million figure that was prepared for the work that 7 CSC did. It was an allocation of the company's IS 8 costs. 9 MR. KENT: But I think allocation may imply 10 more science than was actually used. 11 I think you are ascribing something to this 12 exercise that is more precise and more detailed than was 13 ever undertaken. 14 MR. THOMPSON: So you cannot provide the 15 breakdown requested. 16 MR. KENT: I have never seen one. I am not 17 aware if one exists. 18 MR. THOMPSON: If you can't provide it, fine; 19 I will move on. 20 In terms of the line item that is in this 21 customer support that is called Application Development, 22 this supposedly has costs allocated of $2,325,000 per 23 Bruce Campbell. 24 Again, my understanding -- and I may be 25 mistaken. I thought that any application development 26 that the utility does for Newco, that the utility should 27 get a credit for that. 28 Is that right? 2120 KENT/McGILL, further cr-ex (Thompson) 1 MR. KENT: Excuse me, Mr. Thompson, I am not 2 sure I am following you. 3 Application development that the utility does 4 for Newco. The corporate entity is finishing CIS and 5 will transfer it to Newco at net book value. So 6 anything that is being spent now on CIS will be assumed 7 by Newco. 8 These numbers were based on an allocation of 9 our fiscal 1999 budget but would not, I believe, have 10 included the CIS development cost. 11 MR. McGILL: Again, I think it is similar to 12 what was identified here as the hosting and support 13 cost. We have $3.3 million here. That effectively is 14 being reduced by $400,000-odd through the application of 15 the Z-factor. And then as I indicated again, there are 16 a number of applications that the customer support 17 business unit uses that still need to be supported and 18 continually developed. 19 Those costs stay behind, because those 20 applications are not moving to Newco. 21 MR. THOMPSON: Whether the utility is doing 22 some application development for the corporation that 23 still owns this product or for Newco when it owns it, I 24 am trying to find out what is in the $3.325 million for 25 that exercise. 26 MR. KENT: My understanding is that it was a 27 very rough split of the total budget within information 28 services to be spent on application development and 2121 KENT/McGILL, further cr-ex (Thompson) 1 support. 2 I don't know if Bruce broke it down to 3 specific projects that were being undertaken for 4 customer support or whether he just said arbitrarily 5 that it is X per cent on it. 6 It may have been 320 per cent of the number, 7 or something like that. 8 MR. THOMPSON: So there is something in this 9 number for application development being provided by the 10 utility either to the corporation or to Newco for the 11 ongoing development work for CIS? 12 MR. McGILL: Well, to the extent anything 13 would be provided for Newco, that would be removed 14 through the Z-factor. We are taking a number of FTEs 15 out of IS, and their dollar value is being removed in 16 the Z-factor. 17 MR. THOMPSON: That doesn't answer my 18 question. There is something in there, is there, 19 pertaining to application development work with respect 20 to CIS being provided by the utility either to the 21 corporation or Newco? 22 MR. KENT: I do not believe that there is, 23 Mr. Thompson, but I don't know. Frankly, these numbers 24 are, at the very best, rough percentage allocations -- I 25 wouldn't even use the word allocations. They are 26 guestimates of cost levels. 27 They are not rules of thumb; we haven't based 28 them on any kind of rule of thumb. But they are very 2122 KENT/McGILL, further cr-ex (Thompson) 1 rough numbers, and they are not intended to be a precise 2 representation of actual costs. 3 They are estimates intended to be on the 4 conservative side to be used for that specific purpose 5 of making sure that in the basket of costs that 6 Mr. Diamond was comparing with other utilities we did 7 not, in any way, shape or form, understand our actual 8 costs. 9 MR. THOMPSON: There is another view of them, 10 which is that there is about $10 million of costs for 11 hosting an application development. You can't tell us 12 how much of that relates to hosting with respect to CIS 13 or development of CIS. You are only crediting the 14 customers $3.6 million. 15 You are telling us that your $3.6 million is 16 very precise and the other we don't need to worry about. 17 MR. KENT: I am not saying you don't need to 18 worry about it. I am saying you need to understand how 19 much precision was put into the calculations and what it 20 represents. 21 The hosting fee is done as a fully allocated 22 cost, and we were very careful in determining the 23 volumes of different kinds of transactions, the amount 24 of data storage that was required for CIS, all of those 25 things, in developing the hosting fee. 26 We didn't do anything like the same level of 27 analysis to put together our estimate of $6.7 million 28 that was used for this purpose, again because what we 2123 KENT/McGILL, further cr-ex (Thompson) 1 were trying to do was an entirely different thing. 2 If I could, Mr. Thompson, I will give you 3 another number. 4 The desktop services cost -- I don't know if 5 you were going to inquire of us about that, but I think 6 the number that was used there was the Gartner Group 7 number that Mr. Stephens referred to before. I don't 8 think that number even comes out of our costs. 9 We wanted, again, to make sure that we had 10 everything in there. We used the Gartner Group number 11 that is twice the number that Mr. Stephens has used, 12 because we believed that we wanted to make sure that we 13 had everything in there, including the kitchen sink. 14 MR. THOMPSON: That number, just for the 15 record, you will find on page 4 of this exhibit, 16 opposite "desktop services" -- 17 MR. KENT: That's correct. 18 MR. THOMPSON: -- 5,976 per FTE -- 19 MR. KENT: That's correct. I believe that's 20 the Gartner Group study number that Mr. Stephens 21 referred to. 22 MR. THOMPSON: Just on the point of whether 23 this is fully-allocated costs or not, if you look at 24 page 3 of this document, you will see, at the bottom, 25 "fully-allocated customer care costs per customer", and 26 then the footnotes describe the costs that are included 27 in the "customer care costs" line. 28 So the phrase "fully-allocated costs" was used 2124 KENT/McGILL, further cr-ex (Thompson) 1 to describe what this document reflects? 2 MR. McGILL: I think what we were trying to 3 indicate there was that where we had direct costs out of 4 our customer support 1999 O&M budget that's what we gave 5 to Mr. Diamond. Where we didn't have absolute dollar 6 numbers in the budget that we could specifically tie to 7 the customer support activity, we went through this 8 estimating process -- as Mr. Kent has described -- to 9 ascribe IS costs to that activity, so that when we 10 bundled up the package in dollars, we had an equivalent 11 bundle to what was coming out of the FERC information. 12 That was the whole purpose of this. 13 So, we didn't -- we wanted to make certain 14 that we weren't underestimating anything, so we were 15 very generous in what we took from the IS accounts and 16 used as estimates to assign to the customer support 17 activities. 18 MR. THOMPSON: Thank you. 19 Let me move on. There's just one other item; 20 that is, with respect to Undertaking J9.2. Mr. McGill, 21 this was an undertaking response that you provided. And 22 there's another one coming from Mr. Grant: J10.2. And 23 this question related to what's left behind the programs 24 that are removed. 25 You tell us that the direct and marginal costs 26 of all programs removed from the company have been 27 eliminated from the company's cost structure. 28 MR. McGILL: Yes. 2125 KENT/McGILL, further cr-ex (Thompson) 1 MR. THOMPSON: And so, the difference between 2 direct and marginal and the fully-allocated costs of 3 what's been removed from the company are, in my 4 parlance, left behind. 5 And Mr. Grant, I believe, is going to give us 6 the number? 7 MR. McGILL: That's my understanding. He is 8 supposed to be trying to quantify that. 9 MR. THOMPSON: And then, you tell us 10 fully-allocated costs have been removed for those 11 non-utility activities remaining within Enbridge 12 Consumers Gas; and that's, for example, the ABC T -- 13 MR. McGILL: That's correct. 14 MR. THOMPSON: Thank you. Those are my 15 questions. 16 THE PRESIDING MEMBER: Thank you, 17 Mr. Thompson. 18 Any re-examination, Mr. Farrell? 19 MR. FARRELL: No, thank you, Mr. Chair. 20 THE PRESIDING MEMBER: The Board has no 21 questions. So this panel is excused, with our thanks. 22 MR. FARRELL: We will distribute, now, the 23 additional pages to be added to Exhibit K11.2; that's 24 pages 35 to 42 from the Program Mercury application. 25 --- Pause 26 THE PRESIDING MEMBER: Subject to receiving, 27 then, the answers to the remaining undertakings, we can 28 stand down for the oral part of this hearing. 2126 1 I want to thank all the parties for their 2 participation; Board staff, court reporters, for their 3 endurance. 4 If there is nothing else, we can conclude. 5 I want to remind parties that when they do 6 file their argument, please ensure that the references 7 are shown in the proper places. It has helped the Board 8 tremendously since we have followed that practice, and 9 we would like to be assisted in the same way this time. 10 It has been a tremendous help. 11 With that, then, I thank you very much. I am 12 looking forward to your arguments. 13 --- Whereupon the hearing adjourned at 1430 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2127 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Preliminary Matters 1997 5 6 PREVIOUSLY SWORN: JIM G. STEPHENS 1997 7 Continued Cross-Examination by Mr. Farrell 2006 8 Recess at 1022 2047 9 Resumed at 1054 2047 10 Continued Cross-Examination by Mr. Farrell 2048 11 Questions by the Board 2076 12 Re-Examination by Mr. Thompson 2081 13 Luncheon recess at 1205 2090 14 15 Upon resuming at 1331 2090 16 PREVIOUSLY SWORN: DUNCAN KENT 2090 17 PREVIOUSLY SWORN: STEPHEN McGILL 2090 18 Further Examination-in-Chief by Mr. Farrell 2091 19 Further Cross-Examination by Mr. Thompson 2095 20 Hearing adjourned at 1430 2126 21 22 23 24 25 26 27 28 2128 1 UNDERTAKINGS/OBJECTIONS 2 3 NO. DESCRIPTION PAGE 4 5 J12.1 Mr. Stephens to determine and 2072 6 advise if the total project 7 cost range and the subsets of 8 it that are shown in the top 9 two-thirds of page 51 of 10 Appendix 8, the TMG position 11 paper dated August 9, 1999, 12 are included in the $0.40 13 to $0.50 14 15 J12.2 To confirm how many full-time 2104 16 equivalent staff are involved 17 in supporting the direct 18 customer care processes, 19 including BC Hydro staff 20 estimates 21 22 23 24 25 26 27 28 2129 1 EXHIBITS 2 3 NO. DESCRIPTION PAGE 4 5 K12.1 E.R.O.'s template for the 1997 6 monitoring reports 7 8 K12.2 Copy e-mail message from 2048 9 Mr. Stephens to Mr. Thompson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2130 1 ERRATA/ADDENDA 2 3 REFERENCE DESCRIPTION 4 5 RP-1999-0001 - Volume 1 6 08/23/99 P. 119 L. 7 7 "brought towards" S/B "brought forward as" 8 9 Volume 8 - 09/01/99 10 P. 1355 L. 7 11 "1991" S/B "2001" 12 P. 1396 L. 23 13 "MR. McGILL:" S/B "MR. KENT:" 14 P. 1402 L. 22 15 "independently of" S/B "independently for" 16 P. 1409 L. 28 17 "MR. THOMPSON:" S/B deleted 18 P. 1444 L.14 19 "metro" S/B "natural 20 P. 1445 L. 13 21 "hardcoated" S/B "hard coded" 22 P. 1450 L. 2 23 "changed" S/B "change" 24 P. 1483 L. 5 25 "P" S/B "Peace" 26 P. 1487 L. 18 27 "mock" S/B "market" 28 2131 1 ERRATA/ADDENDA (Cont'd) 2 3 REFERENCE DESCRIPTION 4 5 Volume 9 - 09/02/99 6 P. 1534 L. 16 7 "ethicacy" S/B "efficacy" 8 P. 1561 L. 16 9 "IBR" S/B "IVR" 10 P. 1645 L. 18 11 "a specialist" S/B "specialists" 12 P. 1652 L. 16 13 "day" S/B "data" 14 P. 1655 L. 19 15 "fairly incremental cost" S/B 16 "fairly small incremental costs" 17 (see p. 1699, lines 7 -11) 18 P. 1656 L. 28 19 "applies to apples" S/B "apples to apples" 20 P. 1656 L. 28 21 "MR. KENT:" S/B "MR. McGILL:" 22 P. 1690 L. 27 23 "write-back" S/B "report back" 24 25 Volume 10 - 09/03/99 26 P. 1789 L. 11 27 "their" S/B "they" 28 2132 1 ERRATA/ADDENDA (Cont'd) 2 3 REFERENCE DESCRIPTION 4 5 Volume 10 - 09/03/99 (cont'd) 6 P. 1822 L. 8 7 "M exhibit" S/B "N exhibit" 8 P. 1836 L. 20 9 "not historically" S/B "and historically" 10 P. 1837 L. 4 11 "by" S/B "but at" 12 P. 1844 L. 25 13 "incurring" S/B "occurring" WPC# N[+am -^Hqڹ\'ꥦ; ڪUWPC# b;6Q0>Xӈ6=XIA/ybHdןufuFY͌D>\JJazhgRf;MKidKJ%<(WPCD MN"݃~))ڂ.~y^â)u5GɑDkLyG_6_.Z}~D,ջn}{B_Xn>*{[5%,x;(NGKCD XtiTlkU|/:aܘgLdx-o{ՂγG9x_MI  EsRQ|,B-dbPk^bWPC h.a3JpDg|QCk,NQ.K UDpYὝlʞ&ⴷ^eE,F97v*]̑OJ^3IqVJjEս촟!b-4(Q[6nbBG Ϭ׿a;_JGT#2d_|7Lx]9%2;'Jz""3~ܖeb+߉= k7­AY3-(LC,sE~u3a3H}A+%Kz`htОO)[ ÐJlASxߝFx}H)n<4/Ns.AWkHm-8J\0>"Yp*g`gqܵhNAǏzov2 ?C <`B7onFabg#!UN %3 0(9a^ iw@u4 mNe\\OEB\BOARD APQ0(9 Z6Times New Roman RegularX($ ѓ&c !"#$%U&'D()+&\Suite8\Prog3|x)UWPC Pzi1eCKF_]%@͝-P 9?8IMAt76}4הT1rL'} WPCA )= ĸ|0m|1R\%~=gmh)SfM-{}p97b' &@=^wO"mf8gE.x@mq{N@Xp5[lj{e{Mq_3>eےwoL+A3]}"pاTMGh_r_FP\AӉ;܋ QE"ztph s\Sъ=iu6}'J,ÑG'H +]~LLL {蝀)rM{e54ܘ1ObMblf(ΆO( KӞ@p].E=sS~hMcpWPC  O*Me&H1m%dZe\ e ,LRJC6lH?Em 17cK'{ͪA#ql PzG[̂"sX ,((d!_`Juj:t d0ĸ۱U?2BZ#!UN  %[ 0(afa^ w@4 m N' f) a+ f? aA fU aW fk am f a f a f a f a f a T 0DC T B  \\OEB\BOARD APQ0(9 Z6Times New Roman RegularX($TABLE A&c LMUNOPUQRUVaWbI&:i+003|xWU 1 1 RP-1999-0001 2 3 THE ONTARIO ENERGY BOARD 4 5 IN THE MATTER OF the Ontario Energy Board Act, 1998; 6 7 AND IN THE MATTER OF an Application by The Consumers 8 Gas Company Ltd., carrying on business as Enbridge 9 Consumers Gas, for an order or orders approving or 10 fixing rates for the sale, distribution, transmission 11 and storage of gas for its 2000 fiscal year. 12 13 14 15 16 B E F O R E : 17 P. VLAHOS Presiding Member 18 S.K. HALLADY Member 19 20 21 Hearing held at: 22 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 23 Toronto, Ontario on Monday, August 23, 1999, 24 commencing at 0900 25 26 VOLUME 1 27 28 2 1 APPEARANCES 2 JENNIFER LEA/ Counsel, Board Technical 3 HIMA DESAI/ Staff 4 JAMES WIGHTMAN 5 J.H. FARRELL/ Enbridge Consumers Gas 6 F. CASS/ 7 H. SOUDEK 8 ROBERT WARREN Consumers Association of 9 Canada. 10 TOM BRETT Ontario Association of 11 School Business Officials of 12 the Metropolitan Toronto 13 Separate School Board. 14 IAN MONDROW Heating, Ventilation and Air 15 Conditioning Contractors 16 Coalition Inc., HVAC 17 Coalition 18 GEORGE VEGH Coalition for Efficient 19 Energy Distribution 20 MARK MATTSON Energy Probe 21 MURRAY KLIPPENSTEIN Pollution Probe 22 DAVID POCH Green Energy Coalition, GEC 23 MICHAEL JANIGAN Vulnerable Energy Consumers 24 Coalition 25 STAN RUTWIND TransCanada PipeLines 26 Limited 27 28 3 1 APPEARANCES (Cont'd) 2 MICHAEL MORRISON Ontario Association of 3 Physical Plant 4 Administrators 5 JOEL SHEINFIELD Enbridge Services Inc. 6 MARK ANSHAN Canadian Association of 7 Energy Service Companies 8 MARK STAUFT TransCanada Gas Services 9 DAVID BROWN/ Coalition of Eastern Natural 10 RICHARD PERDUE Gas Aggregators and Seller 11 (CENGAS) 12 PETER THOMPSON Industrial Gas Users 13 Association (IGUA) 14 BETH SYMES Alliance of Manufacturers & 15 Exporters Canada 16 LYNDA ANDERSON Union Gas Limited 17 GLEN MacDONALD Ontario Hydro Services 18 Company 19 20 21 22 23 24 25 26 27 28 4 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Preliminary Matters 6 5 SWORN: TERRY PASHER 28 6 SWORN: DWIGHT WILLETT 28 7 SWORN: STEVE NOBLE 28 8 SWORN: DOUG LAPP 28 9 Examination-in-Chief by Ms Soudek 29 10 Cross-Examination by Mr. Warren 33 11 Cross-Examination by Mr. Brett 62 12 Short recess at 1045 75 13 Upon resuming at 1115 75 14 Cross-Examination by Mr. Mondrow 76 15 Cross-Examination by Mr. Mattson 84 16 Cross-Examination by Mr. Janigan 93 17 Cross-Examination by Mr. Thompson 111 18 Cross-Examination by Ms Lea 127 19 Lunch recess at 1245 134 20 Upon resuming at 1430 134 21 22 SWORN: MICHAEL MEES 135 23 SWORN: JOANNE GOULD 135 24 Examination-in-Chief by Mr. Cass 135 25 Cross-Examination by Mr. Warren 137 26 Cross-Examination by Mr. Brett 151 27 Cross-Examination by Mr. Thompson 169 28 Hearing adjourned at 1600 193 5 1 UNDERTAKINGS/OBJECTIONS 2 3 NO. GIVEN BY PAGE 4 5 J1.1 Mr. Noble 114 6 J1.2 Mr. Mees 140 7 J1.3 Mr. Mees 151 8 J1.4 Mr. Mees 167 9 J1.5 Mr. Mees 178 10 11 12 - - - 13 14 15 EXHIBITS 16 NO. PAGE 17 18 K1.1 Document entitled "Update to 14 19 E.B.R.O. 497, Undertaking 20 J6.2 using 1999 Bridge Year 21 estimates" 22 23 24 25 26 27 28 6 1 Toronto, Ontario 2 --- Upon commencing on Monday, August 23, 1999, 3 at 0900 4 THE PRESIDING MEMBER: Good morning 5 everyone. 6 The Board is sitting today to 7 commence the oral hearing of Enbridge's application for 8 test year 2000 rates. The Board file number for this 9 proceeding is RP-1999-0001. 10 My name is Paul Vlahos. With me is 11 Sheila Hallady. 12 Ms Lea, I assume that we are properly 13 constituted to commence this hearing? 14 MS LEA: Yes. As I understand it, 15 the affidavits of service have been received and the 16 Board Orders for publication and service have been 17 complied with. 18 THE PRESIDING MEMBER: Thank you, Ms 19 Lea. 20 Could I have appearances, please. 21 MR. FARRELL: Jerry Farrell. On 22 behalf of the Applicant, Enbridge Consumers Gas. 23 Appearing with me will be Fred Cass, 24 surname spelled C-A-S-S, and Helen Soudek, surname 25 spelled S-O-U-D-E-K. 26 THE PRESIDING MEMBER: Thank you, Mr. 27 Farrell. 28 MR. WARREN: Robert Warren. For the 7 1 Consumers Association of Canada. 2 MR. BRETT: Tom Brett. For the 3 Association of -- Ontario Association of School 4 Business Officials of the Metropolitan Toronto Separate 5 School Board. 6 MR. MONDROW: Good morning, sir. 7 Ian Mondrow. For HVAC Coalition; 8 that is, Heating, Ventilation and Air Conditioning 9 Contractors Coalition Inc. Thank you. 10 MS LEA: Jennifer Lea. For Board 11 Staff. 12 MR. VEGH: George Vegh. For the 13 Coalition for Efficient Energy Distribution. 14 MR. MATTSON: Mark Mattson. Good 15 morning, sir. For Energy Probe. 16 MR. KLIPPENSTEIN: Good morning, Mr. 17 Chair, Ms Hallady. 18 Murray Klippenstein. Appearing for 19 Pollution Probe. 20 MR. POCH: Good morning. 21 David Poch. For the Green Energy 22 Coalition; the GEC. 23 MR. JANIGAN: Good morning. 24 Michael Janigan. Appearing for the 25 Vulnerable Energy Consumers Coalition. 26 MR. RUTWIND: Good morning. 27 Stan Rutwind, R-U-T-W-I-N-D. 28 Appearing for TransCanada PipeLines Limited. 8 1 MR. MORRISON: Good morning, Mr. 2 Chair. 3 Michael Morrison. For the Ontario 4 Association of Physical Plant Administrators. 5 MR. SHEINFIELD: Good morning, Mr. 6 Chair. 7 Joel Sheinfield. For Enbridge 8 Services Inc. -- 9 THE PRESIDING MEMBER: Just speak to 10 the mike, Mr. Sheinfield. 11 MR. SHEINFIELD: Joel Sheinfield. 12 That is S-H-E-I-N-F-I-E-L-D. Representing Enbridge 13 Services Inc., formally Consumersfirst. 14 MR. ANSHAN: Good morning. 15 Mark Anshan. For Canadian 16 Association of Energy Service Companies. 17 MR. STAUFT: Good morning. 18 Mark Stauft. For TransCanada Gas 19 Services. 20 MR. BROWN: Good morning, Mr. Chair. 21 David Brown. For CENGAS, the 22 Coalition of Eastern Natural Gas Aggregators and 23 Sellers. Mr. Richard Perdue will joining me and, 24 indeed, he will be spending most of the time before 25 you, at the hearing. 26 MR. THOMPSON: Peter Thompson. For 27 the Industrial Gas Users Association. 28 MS SYMES: Beth Symes. For the 9 1 Alliance of Manufacturers & Exporters Canada. 2 MS ANDERSON: Lynda Anderson. For 3 Union Gas Limited. 4 MR. MacDONALD: Glen MacDonald. For 5 Ontario Hydro Services Company. 6 THE PRESIDING MEMBER: Anyone else? 7 There being none. 8 In the opening remarks, I intend to 9 deal with the following topics: the unbundling 10 issue -- 11 Mr. Farrell, we anticipate that we 12 are going to receive an update on the ADR. 13 MR. FARRELL: Yes. You should have 14 the settlement proposal on the dias -- and I will 15 explain the process when you wish me to. There are a 16 few what I will call anomalies in the settlement 17 proposal. I would like to point them out to you and 18 parties in the room. 19 THE PRESIDING MEMBER: Thank you. 20 The housekeeping matters, like 21 sitting days and hours, order of cross-examination and 22 the scoping of the issues to be heard, we are going to 23 deal with that this morning. 24 Before I do so, other than the HVAC 25 Coalition, which we will hear their motion at the end 26 of my opening remarks, are there any other preliminary 27 matters, Ms Lea? Are you aware of any matters we have 28 to deal with right now? 10 1 MS LEA: I am not aware of any, sir. 2 THE PRESIDING MEMBER: Mr. Farrell? 3 MR. FARRELL: Neither am I. 4 THE PRESIDING MEMBER: Anybody else? 5 There being none. 6 Turning to the topic of unbundling -- 7 Give me a second, please. 8 --- Pause 9 THE PRESIDING MEMBER: On behalf of a 10 number of parties to the settlement conference, 11 Enbridge provided, by way of a letter dated August 12 10th, a refined version of the unbundling issues 13 enumerated under Issue 7 in the Board's approved issues 14 list and sought direction as to the next steps. 15 In response, by letter to the Board 16 dated August the 12th, Union raised concerns that any 17 decision on the timing and process of unbundling issues 18 in the Enbridge proceeding may impact the timing and 19 scope of Union's proceeding, in respect of matters of 20 unbundling. 21 As it is Union's plan -- which was 22 further confirmed in its letter of August 19th -- to 23 enter into settlement negotiations with stakeholders 24 starting September 13th, Union proposes that the Board 25 create a second phase to Enbridge's current proceeding, 26 which would take place after Union's negotiations 27 regarding its unbundling proposals. 28 By a letter, August the 13th, to all 11 1 parties, the Board requested comments on the issues 2 raised. 3 Having reviewed the parties' 4 submissions, the Board finds as follows: 5 Issues relating to unbundling are 6 deferred to a separate phase. The Board does not see 7 any issue arising from Enbridge's stated condition if 8 the Board chose a phasing option. That the Board be 9 able to approve or fix rates for the test year without 10 waiting for the subsequent phase. 11 Also, Enbridge's stated condition 12 that Union's process would not pre-empt a complete 13 examination of the unbundling issues in the subsequent 14 phase of Enbridge's hearing, irrespective of the 15 outcome of Union's process, appears a reasonable 16 request. 17 There are, however, some 18 modifications. 19 The Board has been persuaded that it 20 would be assisted if intervenors have the opportunity 21 to file evidence for the second phase. However, 22 intervenors who have already filed evidence would be 23 given an opportunity to file reply evidence. 24 Also, parties are expected to 25 participate in a new settlement conference. 26 The scheduling of these matters, 27 including an interrogatory process, would be 28 co-ordinated by Board Staff and will be communicated to 12 1 parties through a procedural order. 2 The Board recognizes that the parties 3 would be assisted if they had Board guidance as to what 4 is contemplated in the so-called access code which the 5 Board may need to develop under its rule-making powers. 6 The Board is not able to, at this time, provide this 7 guidance. In fact, the Board expects to be assisted by 8 the parties' deliberations and negotiations going 9 forward, which issues may be appropriate for inclusion 10 in the subject code. 11 Now, at this stage, Mr. Farrell, I 12 would ask you to speak to the ADR, please. 13 MR. FARRELL: Thank you, Mr. Chair. 14 I apologize for the late filing of 15 the document. There was some conflict in schedules 16 such that we didn't have all intervenor comments until 17 mid-week last week and then there was another round of 18 drafts and comments. 19 The last draft -- that is to say, the 20 document in a form prior to what I have given you as 21 Exhibit N1, Tab 1, Schedule 1 -- was the subject of 22 comments by intervenors, in stages, and so, there are 23 some intervenors who have agreed to issues that other 24 intervenors now have either not agreed to, or 25 otherwise, and so this document will require some 26 revision and I thought I would just indicate on the 27 record the anomalies, as I called them, earlier, for 28 your benefit, Mr. Chair, and for the benefit of parties 13 1 in the room. 2 First of all, with the settlement 3 proposal I left with you a document called "Update to 4 E.B.R.O. 497, Undertaking J6.2 using 1999 Bridge Year 5 estimates". 6 This was a document that was prepared 7 for the purposes of the settlement conference during 8 the preparation of the settlement proposal. It was a 9 recommendation of IGUA, which the company and others 10 have accepted that this document be referred to in the 11 settlement proposal, and it is referred to on page 12 12 in the context of the capital expenditures issues, all 13 of which have been settled, with the exception of the 14 information systems capital budget. 15 You will see at the third bullet 16 point on page 12 there is a reference to this document. 17 I intended to put it into the record by just filing it 18 as a hearing day exhibit. 19 So perhaps if I could have an exhibit 20 number for it now. 21 MS LEA: K1.1, please. 22 EXHIBIT NO. K1.1: Document 23 entitled "Update to 24 E.B.R.O. 497, Undertaking J6.2 25 using 1999 Bridge Year 26 estimates" 27 MR. FARRELL: Thank you. 28 The next page I take you to, 14 1 Mr. Chair, is page 21. 2 This is the last part of the 3 agreement to settle Issue 3.3.2, fiscal 2000 accounts. 4 In the second bullet from the top of the page -- 5 THE PRESIDING MEMBER: I'm sorry, 6 Mr. Farrell, your page what? 7 MR. FARRELL: Page 21. 8 THE PRESIDING MEMBER: Page 21, okay. 9 I'm sorry, the title appears on 10 page 19. 11 MR. FARRELL: Yes, I'm sorry. 12 The issue begins midway through 13 page 19, but it is the last bullet point on page 21. 14 In the draft that went out this was 15 an issue to be examined in the hearing. We then had 16 comments from CAC and IGUA to the effect that they did 17 not wish to examine this particular topic in the 18 hearing. 19 There, therefore, was a partial 20 settlement, but I just leave it if other parties are of 21 like mind with CAC and IGUA then it may be a prospect 22 of having that particular issue completely settled. 23 Otherwise, there are parties listed that had accepted 24 the earlier version of the text and so they should 25 be -- they are shown as having disagreed with the 26 settlement. Hopefully that will change. 27 Similarly, if you turn to page 23, 28 Issues 4.1 and 4.2 have been combined, the cost of 15 1 short-term debt and the cost of long-term debt and 2 preferred shares. 3 Parties had agreed with this text 4 that when Mr. Thompson examined it he disagreed with 5 it, so if you turn to page 25 you will see that IGUA is 6 shown as having disagreed with the settlement. 7 Other parties may wish to confer with 8 Mr. Thompson. I'm not inviting them to join his camp, 9 but that was an anomaly, in our view. 10 The next, Mr. Chair, is page 26, 11 Issue 5.1. 12 When we left the settlement 13 conference it wasn't clear whether this issue had been 14 settled. I described it in the initial draft as an 15 unsettled issue. A number of parties took exception to 16 that, feeling that it had been settled, so we wrote it 17 up as if it was settled and that everyone agreed with 18 the settlement. 19 If my information is incorrect, I'm 20 sure parties will make their views known. 21 The last item is on page 33. It is 22 Issue 6.1.4, average use trend data. 23 This was an issue raised by Energy 24 Probe in last year's rates case and there were some 25 discussions on an off-the-record basis, so to speak, 26 during the settlement conference. 27 Ms Fraser for the company and 28 Mr. Rubin for Energy Probe had discussions. 16 1 Unfortunately, they both left on vacation before we 2 could get instructions. I am told they are going to 3 continue to speak, so hopefully the no agreement to 4 settle this issue will turn into an agreement to settle 5 and I will keep the Board apprised of progress in that 6 regard. 7 I should say that if intervenors are 8 interested in knowing the specific revisions or the 9 individual revisions between the last document that was 10 faxed out and the document that I have now filed, I 11 would be happy to sit down with them at the break or 12 another time off the record and indicate just exactly 13 what are the precise changes, if someone wants to get 14 into that much detail. 15 I should mention also that last week, 16 beginning with CAC and then IGUA, the Company had 17 discussions with those intervenors about the prospect 18 of making what I'm calling a scoping proposal wherein 19 the parties would indicate to the Board what the 20 disagreements were in relation to the unsettled issues 21 so the Board would have an idea of -- to use the 22 vernacular -- where everyone was coming from. 23 Mr. Thompson was good enough to take 24 a first crack at that and I have now circulated a 25 document called a "Scoping Proposal" in draft form. I 26 am requesting the parties to review it and then I would 27 meet with them during a break or at another time, so as 28 not to disrupt the Board's hearing schedule, with a 17 1 view to finalizing it for filing. 2 Most parties have seen it this 3 morning for the first time, so I wouldn't anticipate we 4 would reach the filing stage today, although I will 5 keep my fingers crossed. 6 THE PRESIDING MEMBER: Okay. It is 7 your hope that this will be done right after the break? 8 MR. FARRELL: Yes. I think if we can 9 meet at the break and at least -- perhaps the parties 10 would take the time at the break to read it. I realize 11 they have to get ready to speak to Mr. Mondrow's motion 12 and then also to cross-examine the first panel. But 13 hopefully throughout the day I would get some 14 indication of whether we were going in the right 15 direction as the scribe of this document. 16 I think there is a willingness among 17 intervenors to scope the issues for the Board's 18 convenience and for their own as well, so I am hopeful 19 that the process will lead to something that will prove 20 to be useful to the Board. 21 THE PRESIDING MEMBER: Thank you, 22 Mr. Farrell. 23 Perhaps at the same time, when you do 24 report back, we can look at the hearing schedule that 25 you provided us, or the company has provided us, and 26 any changes that may be required in that document. 27 The only other comment that I have 28 with respect to the issues, the scope issues, whether 18 1 there is any opportunity for any room for some of those 2 issues to be going to only submissions as opposed to 3 cross-examination. I'm not sure whether that was 4 contemplated or was discussed. 5 MR. FARRELL: Yes, Mr. Chairman, it 6 is. There is one and perhaps two, and perhaps more 7 once we have some discussions, that could be left for 8 argument only and we will discuss that as well. 9 I should mention that the hearing 10 schedule that was filed last week, we intend that to be 11 a work-in-progress. I don't intend to have it be an 12 exhibit number. 13 What we thought we do is, as 14 mistakes -- and there are some, I think, in terms of 15 what precise exhibits each panel will speak to, but we 16 thought we would keep that current on an ongoing basis, 17 so that at the end of the hearing the exhibits for 18 which each witness panel is responsible, including 19 responses to undertakings during the hearing, would 20 appear on that list so when people left for argument 21 purposes they would have a complete list of exhibits 22 that pertain to each of those issues. 23 THE PRESIDING MEMBER: That sounds 24 very helpful. 25 I guess it is important to decide 26 today, or early this morning, at some point this 27 morning, whether the volumes or average use is still an 28 issue to be for cross-examination so that you can 19 1 arrange your panel. 2 MR. FARRELL: The first panel that we 3 intend to call is the Y2K Panel. 4 THE PRESIDING MEMBER: Do you think 5 that would take the full day? 6 MR. FARRELL: I don't know. I didn't 7 have a chance to canvass intervenors to get some 8 indication of how long they might expect to be. 9 We have some difficulty if the panel 10 takes more than today with the witness availability. I 11 was going to ask the Board to consider standing down 12 Mr. Mondrow's motion to allow the Y2K panel to proceed. 13 Mr. Mondrow has indicated that he doesn't have any 14 objections to that. 15 An added benefit of the stand down, 16 if I might call it that, would be I have some 17 information now about the availability of the material 18 that Mr. Mondrow is seeking, were the Board to grant 19 his request, that I would like an opportunity to speak 20 with Mr. Mondrow about. It may affect the way he would 21 choose to argue his motion. I didn't get the material 22 until late yesterday. 23 THE PRESIDING MEMBER: Mr. Mondrow, 24 is that okay? 25 MR. MONDROW: That is satisfactory to 26 me, sir. I don't mind deferring that. Mr. Farrell and 27 I will have a chance to discuss it and I will be ready 28 to go whenever the Board wishes me to start. So that 20 1 is fine. 2 MR. FARRELL: That would shorten my 3 opening remarks quite a bit. 4 THE PRESIDING MEMBER: Just the 5 housekeeping items, then: the sitting dates and hours. 6 Should the hearing not finish by Friday, September 10, 7 we will have to stand down until September 28. Monday, 8 September 6, of course, is Labour Day. This will give 9 us 14 hearing dates. 10 We will start out this week with 11 sitting full days, except Friday, and we may look at 12 the schedule and see how it goes after the first week. 13 But I thought it important for parties to know the 14 period of time that the Board cannot sit. 15 With the unbundling issue off the 16 table, then, it seems to us that it is quite doable. 17 How long do you need, Mr. Farrell, on 18 the break in order to talk to the parties? I am sure 19 it will be beyond the usual 15 minutes. 20 MR. FARRELL: I will be guided, I 21 guess, by how much time they think they require to read 22 the scoping proposal and to react or to talk amongst 23 themselves about the anomalies that I mentioned in the 24 settlement proposal. 25 The break itself perhaps could be the 26 normal break for that purpose, and then I would be 27 prepared to meet with them after lunch. Maybe we could 28 delay the start of the hearing and have a slightly 21 1 longer luncheon adjournment so that we could then 2 discuss it. I don't know how fruitful it would be to 3 start discussions if they haven't had an opportunity to 4 read the document. 5 THE PRESIDING MEMBER: With that, 6 then, are there any other matters? It seems to me that 7 we can go to the hearing of the evidence. 8 MR. POCH: Mr. Chairman, if I might, 9 just briefly, I appreciate that apparently the Board 10 has just received the settlement agreement, so I don't 11 expect the Board is in a position yet to tell the 12 parties if it has any -- 13 THE PRESIDING MEMBER: We just 14 received it, Mr. Poch. 15 MR. POCH: Yes, I understand that. 16 I was attending today, should the 17 Board have any concerns, but also just to advise the 18 Board that GEC was active really only in the area of 19 the DSM portion of the document, section 6. We have 20 filed evidence. One of the concerns that has been 21 resolved in the agreement was the concern with respect 22 to the transparency of the material, of the numbers 23 basically. It shows up under issue 6.1.3, starting on 24 page 31 and carrying on on page -- it actually appears 25 as a settled item at the second bullet on page 32. 26 The mechanism by which this was 27 settled was that the GEC's expert, Mr. Neme, whose 28 evidence was pre-filed, sat down with the Company and 22 1 has worked for a number of days with them and they have 2 satisfied themselves. As a result of that, we 3 understand that there will be a filing forthcoming from 4 the Company just clarifying the numbers and a couple of 5 errors which were uncovered. 6 So that is the only caveat I wanted 7 to note on the record. I don't anticipate there will 8 be any problem. We will certainly advise the Board 9 should there be a problem, but I think the Board can 10 assume there is no problem, unless they hear otherwise. 11 I would just ask the Board, then, 12 whether -- GEC did play kind of a lead role in the DSM 13 part. I am not sure if the Board would prefer my 14 attendance here at the time the Board deals with the 15 agreement as a whole or not, and what the timing of 16 that might be. 17 THE PRESIDING MEMBER: Mr. Poch, I 18 guess you plan to head back. 19 MR. POCH: I can certainly be present 20 when the Board visits this document with the parties, 21 if the Board would appreciate that. I am readily 22 available. It is just that if I could understand the 23 timing, that would help me personally with my agenda. 24 THE PRESIDING MEMBER: My hope is to 25 be able to spend the evening tonight -- and I am making 26 the commitment here for both of us -- and perhaps 27 pronounce it tomorrow morning. 28 Does that help? 23 1 MR. POCH: Certainly, and I will 2 assume that the Board would prefer to have counsel on 3 hand should there be any questions, and I will make 4 plans to be here in the morning then. 5 THE PRESIDING MEMBER: Of course, we 6 will need Mr. Farrell to report on certain things that 7 he spoke of this morning regarding this document, the 8 settlement proposal. 9 MR. FARRELL: Yes. I was wondering, 10 Mr. Chair, if we could tentatively schedule that for 11 the mid-morning break tomorrow. I was the one of the 12 three counsel representing the Company -- I was counsel 13 in the preparation of this document, so I would like to 14 be here. I am not scheduled to be counsel for any of 15 the panels until we get to CIS, which is near the end, 16 and we have scheduled a meeting with one of our CIS 17 experts in order to review IGUA's filing last week on 18 behalf of CAC, IGUA and VECC. So I am requesting an 19 accommodation for my schedule in that regard. The 20 meeting is scheduled for 8:30, so it would be very 21 difficult for me to be here by 9:00. If we could defer 22 that until the mid-morning break, I will keep you 23 apprised through Ms Lea of our progress in discussing 24 the scoping proposal and any outstanding matters of the 25 settlement proposal with intervenors and perhaps you 26 could maybe deal with everything at once. 27 Is that satisfactory to you and your 28 colleagues? 24 1 THE PRESIDING MEMBER: Mr. Poch, is 2 that okay? 3 MR. POCH: I am in your hands, Mr. 4 Chairman. Of course, it being an ideal world, I would 5 have known that I wouldn't have to be here until 6 tomorrow, but I appreciate that the Company and some of 7 the parties have been working until the last hour. I 8 trust that Mr. Farrell will be accommodating when it 9 comes to costs. 10 THE PRESIDING MEMBER: Thank you, Mr. 11 Poch. 12 That is fine, Mr. Farrell. We will 13 defer it until after the morning break tomorrow. 14 MR. FARRELL: Thank you very much, 15 Mr. Chair. 16 THE PRESIDING MEMBER: At least that 17 is the plan. 18 MR. FARRELL: Thank you very much. I 19 appreciate it. 20 MR. RUTWIND: There is an additional 21 matter. Stan Rutwind from TransCanada. It deals with 22 the anomalies issues and, although it isn't, in effect, 23 an anomaly, TransCanada wishes to specify that the 24 turnback proposal, in relation to issue 3.1 of the 25 settlement document, that it does support the Enbridge 26 turnback proposal, but as it relates to Year 2000 only. 27 I think that is clear in any event, 28 but perhaps Mr. Farrell can assist us there. 25 1 MR. FARRELL: That is understood for 2 everything in the settlement proposal. They all 3 pertain to fiscal 2000, unless otherwise stated. 4 MR. RUTWIND: Thank you, sir. 5 MR. FARRELL: For example, there is a 6 statement of intention in the DSM issues as to the 7 future, but the other ones that have no such statement 8 would be confined to fiscal 2000. 9 THE PRESIDING MEMBER: Is there 10 anything before we proceed with the hearing of the 11 evidence on the first issue? 12 MR. KLIPPENSTEIN: Mr. Chairman, I am 13 Murray Klippenstein for Pollution Probe. 14 Pollution Probe's issues were 15 resolved in the ADR process, so, with the Board's 16 permission, I will excuse myself, for a brief re- 17 attendance when that is dealt with tomorrow. But we 18 have no other outstanding issues at the moment. 19 THE PRESIDING MEMBER: Thank you, Mr. 20 Klippenstein. 21 MR. MATTSON: Mr. Chairman, could I 22 just ask the Board to clear on the record if there is a 23 hot-line that intervenors may be able to use to update 24 the progress of the hearing? 25 THE PRESIDING MEMBER: Ms Lea? 26 MS LEA: Yes, I can help with that. 27 I am informed that the hot-line 28 number is 440-7608. 26 1 MR. MATTSON: Thank you. 2 THE PRESIDING MEMBER: Are there any 3 other opening remarks? 4 MR. JANIGAN: I take it, Mr. 5 Chairman, that we are going to deal with any problems 6 associated with the settlement proposal after the 7 break, in terms of any anomalies? I believe I heard 8 Mr. Farrell say that. 9 THE PRESIDING MEMBER: Mr. Farrell? 10 MR. FARRELL: What I was suggesting 11 was that during the break the intervenors discuss the 12 ones that I identified and any others that they might 13 choose to, and also look at the scoping proposal, and 14 then we would meet with them during an extended lunch 15 hour to see whether or not we had any problems that 16 needed to be reported to the Board and go from there. 17 That is my intention. 18 MR. JANIGAN: That's fine, Mr. 19 Chairman. 20 THE PRESIDING MEMBER: Okay, Mr. 21 Farrell. That is probably a record in terms of 22 finishing with preliminary matters before we go to the 23 hearing of evidence for a main rate case. 24 MR. FARRELL: Perhaps it can stay 25 that way if the settlement proposal is as 26 uncontroversial as I hope it will be. 27 THE PRESIDING MEMBER: Perhaps we can 28 bring forward the first panel? 27 1 MR. FARRELL: Yes. Ms Soudek will be 2 counsel for the first panel, so I will excuse myself 3 now, if I may, Mr. Chair. 4 SWORN: TERRY PASHER 5 SWORN: DWIGHT WILLETT 6 SWORN: STEVE NOBLE 7 SWORN: DOUG LAPP 8 THE PRESIDING MEMBER: Welcome, 9 Ms Soudek. 10 MS SOUDEK: Good morning, Mr. Vlahos, 11 Ms Hallady. 12 I had the pleasure this morning of 13 introducing the Enbridge witnesses who will speak to 14 the year 2000 issue. 15 Those issues include the disposition 16 of the balance of the fiscal year 2000 variance 17 account, which is issue 3.3.1 on the Board's list of 18 issues. 19 The second issue is the company's 20 request for a fiscal 2000 year 2K variance account, 21 which is issue 3.3.2 on the Board's list of issues. 22 Finally, the third issue being the 23 year 2000 costs, which is issue 3.5. 24 Sitting closest to you is 25 Mr. Terry Pasher, who is the Director of the Corporate 26 Year 2000 Program. Beside Mr. Pasher is Mr. Dwight 27 Willett, who is Vice-President, Information Services. 28 Next to Mr. Willett is Mr. Steve Noble, who is Manager 28 1 of Financial Reporting. Next to Mr. Noble is Mr. Doug 2 Lapp, Manager of Business Continuity Planning. 3 EXAMINATION-IN-CHIEF 4 MS SOUDEK: Mr. Pasher, I would like 5 to begin with you. 6 Is your curriculum vitae contained in 7 Exhibit A at Tab 17, Schedule A? 8 MR. PASHER: Yes, it is. 9 MS SOUDEK: Are you responsible for 10 the exhibits that are germane to the Y2K issues that 11 are listed opposite your name in Exhibit A, Tab 18, 12 Schedule 1? 13 MR. PASHER: Yes. 14 MS SOUDEK: Are you also responsible 15 for the interrogatory responses in Exhibit 1 that bear 16 your name and that are germane to the Y2K issue? 17 MR. PASHER: Yes, I am. 18 MS SOUDEK: Was this material 19 prepared by you or under your control and direction? 20 MR. PASHER: Yes, it was. 21 MS SOUDEK: Is this material accurate 22 to the best of your knowledge or belief? 23 MR. PASHER: Yes. 24 MS SOUDEK: Do you have any 25 corrections at all, Mr. Pasher? 26 MR. PASHER: I do have one 27 correction. 28 At Exhibit D1, Tab 9, Schedule 1 in 29 PASHER/WILLETT/NOBLE/LAPP, in-ch (Soudek) 1 my prefiled evidence, the answer in Question 8 at D-1, 2 Tab 9, Schedule 1, page 5 of 6, the answer to 3 Question 8 there -- 4 MS LEA: Can you please give us the 5 citation again? 6 MS SOUDEK: Yes, Ms Lea. That's 7 Exhibit D1, Tab 9, Schedule 1, page 5 of 6. 8 MS LEA: Thank you. 9 MR. PASHER: At the point A.8 where 10 it refers to Tab 5, that should read Tab 4. 11 MS SOUDEK: Thank you, Mr. Pasher. 12 Mr. Willett, is your curriculum vitae 13 contained in Exhibit A at Tab 17, Schedule 1? 14 MR. WILLETT: Yes, it is. 15 MS SOUDEK: Thank you. 16 Are you responsible for the exhibits 17 that are germane to the Y2K issues that are listed 18 opposite your name in Exhibit A, Tab 18, Schedule 1? 19 MR. WILLETT: Yes. 20 MS SOUDEK: Are you also responsible 21 for the interrogatory responses in Exhibit 1 that bear 22 your name and are germane to the Y2K issues? 23 MR. WILLETT: Yes. 24 MS SOUDEK: Was this material 25 prepared by you or under your direction and control? 26 MR. WILLETT: Yes, it was. 27 MS SOUDEK: Is this material accurate 28 to the best of your knowledge or belief? 30 PASHER/WILLETT/NOBLE/LAPP, in-ch (Soudek) 1 MR. WILLETT: Yes, with the 2 correction that Mr. Pasher described. 3 MS SOUDEK: Thank you. 4 Mr. Noble, is your curriculum vitae 5 contained in Exhibit A at Tab 17, Schedule 1? 6 MR. NOBLE: Yes, it is. 7 MS SOUDEK: Are you responsible for 8 the exhibits that are germane to the Y2K issues that 9 are listed opposite your name in that exhibit? 10 MR. NOBLE: Yes. 11 MS SOUDEK: Are you also responsible 12 for the interrogatory responses in Exhibit 1 that bear 13 your name and are germane to the Y2K issues? 14 MR. NOBLE: Yes, I am. 15 MS SOUDEK: Was this material 16 prepared by you or under your direction and control? 17 MR. NOBLE: Yes, it was. 18 MS SOUDEK: Is this material accurate 19 to the best of your knowledge or belief? 20 MR. NOBLE: Yes, with two minor 21 corrections. 22 At Exhibit D3, Tab 3, Schedule 1, 23 this exhibit describes the year 2000 variance account, 24 and the third paragraph of page 18 of 29 of that 25 exhibit, the reference to Exhibit D1, Tab 8, Schedule 1 26 should be changed to read D-1, Tab 9, Schedule 1. 27 Also, the reference to Exhibit D2, 28 Tab 5, Schedule 1 in the same paragraph should read 31 PASHER/WILLETT/NOBLE/LAPP, in-ch (Soudek) 1 D-2, Tab 4, Schedule 1. 2 MS SOUDEK: Thank you, Mr. Noble. 3 Mr. Lapp, is your curriculum vitae 4 contained at Exhibit A at Tab 17, Schedule 1? 5 MR. LAPP: Yes, it is. 6 MS SOUDEK: Are you responsible for 7 the exhibits that are germane to the Y2K issues that 8 are listed opposite your name in that exhibit? 9 MR. LAPP: Yes, I am. 10 MS SOUDEK: Are you also responsible 11 for the interrogatory responses in Exhibit I that bear 12 your name that are germane to the Y2K issues? 13 MR. LAPP: Yes, I am. 14 MS SOUDEK: Was this material 15 prepared by you or under your direction and control? 16 MR. LAPP: Yes, it was. 17 MS SOUDEK: Is this material accurate 18 to the best of your knowledge or belief? 19 MR. LAPP: Yes, it is. 20 MS SOUDEK: Thank you, Mr. Lapp. 21 Mr. Chairman, that completes my 22 examination-in-chief and the witnesses are available 23 for cross-examination. 24 THE PRESIDING MEMBER: Thank you, 25 Ms Soudek. 26 One thing we did not discuss is the 27 order of cross-examination. We tend to be flexible. I 28 will leave it to the parties as to who wishes to take 32 PASHER/WILLETT/NOBLE/LAPP, in-ch (Soudek) 1 the lead. There may be some discussion amongst the 2 parties. 3 Mr. Warren, you are the first one I 4 see there. Do you have any preference? Have you 5 discussed that at all? 6 MR. WARREN: We haven't discussed it, 7 Mr. Chair. Perhaps what we should do is just for this 8 one we will do it in the order of appearances and then 9 we can be flexible after that, if that's all right with 10 the Board. 11 THE PRESIDING MEMBER: Order of 12 appearances or order of sitting order? 13 MR. WARREN: Nothing turns on it from 14 my perspective. If somebody wishes to proceed me, I'm 15 happy to have them do it. 16 THE PRESIDING MEMBER: You can go 17 first, Mr. Warren. But I would ask the parties kindly 18 if they can turn their minds to the remaining issues as 19 to who would like to lead. As we are flexible on our 20 side staff will go last as generally they do. 21 CROSS-EXAMINATION 22 MR. WARREN: Good morning, panel. 23 I would like to begin, if I can, to 24 go through the three issues that are before us and just 25 get some clarification on the record in terms of the 26 relief that the company is asking for in relation to 27 those issues. The first issue that my friend, 28 Ms Soudek, mentioned was the disposition of the Y2K 33 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 variance account. What relief is the company asking 2 for in relation to the issue? 3 MR. NOBLE: That would be disposition 4 of the 1999 Y2K variance account. The total dollar 5 forecast for the fiscal year ended September 30, 1999 6 is $8,327,000. 7 The company has filed an exhibit at 8 G-3, Tab 8, Schedule 4, which highlights the forecast 9 balance of that account. 10 MR. WARREN: Mr. Noble, just on that 11 question and the relief being asked for, what is the 12 relationship between that forecast $8.3 million and the 13 amount which the Board approved in the last main rates 14 case? 15 MR. NOBLE: As you can see by that 16 schedule, the Board did not allow the clearing of the 17 1998 Y2K costs. However, they did allow the carryover 18 of those costs and they formed the opening balance for 19 the 1999 Y2K VA account. 20 MR. WARREN: And the carryover 21 opening balance is what amount? 22 MR. NOBLE: It's $4,467,000. 23 MR. WARREN: Is there, then, in the 24 $8.3 million an amount which is more than the company 25 anticipated it would spend for the Y2K account of 1999? 26 MR. NOBLE: No, I don't believe the 27 company has exceeded the forecast provided in 28 E.B.R.O. 497 in relation to fiscal 1999 expenditures. 34 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 The second part of that schedule that 2 I referenced shows the costs anticipated to be spent in 3 1999, in total $10,060,000. From that we have deducted 4 the $6.2 million allowed by the Board for recovering 5 sales rates in E.B.R.O. 497 to arrive at a net amount 6 for fiscal 1998 -- sorry, fiscal 1999 of $3,860,000. 7 It is when you add that balance to 8 the opening balance carried forward that you arrive at 9 the $8,327,000 that we are seeking relief for in this 10 proceeding. 11 MR. WARREN: And the $3.6 million, is 12 that in excess of what you anticipated that you would 13 spend in the last main rates case? 14 MR. NOBLE: No, that is not in excess 15 of what we thought we would spend. The amount applied 16 for in E.B.R.O. 497 was $11.7 million related to O&M 17 expenditures. 18 MR. WARREN: The second form of 19 relief you have asked for is the Y2K variance account. 20 What is the relief you have asked for in relation to 21 that? 22 MR. NOBLE: I am assuming you are 23 speaking about the year 2000, the fiscal 2000 Y2K 24 variance account. 25 MR. WARREN: Yes. 26 MR. NOBLE: We are looking to capture 27 in that account the difference between what the company 28 actually spends in fiscal 2000 on the Y2K issue as 35 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 compared to the $2.6 million said factor that we have 2 applied for. 3 If we spend more than the $2.6 4 million, we would capture that in the variance account. 5 If we spend less than the $2.6 million, we would also 6 capture that in the variance account. 7 MR. WARREN: The final item is issue 8 3.5, Y2K costs. What relief are you asking for in 9 relation to that? 10 MR. NOBLE: I am assuming you are 11 speaking to the $2.6 million said factor amount 12 included in the company's rate application? 13 MR. WARREN: Yes. 14 MR. NOBLE: That is the amount we are 15 seeking to include in sales rates in the year 2000. 16 MR. WARREN: Mr. Pasher, as I 17 recollect your testimony -- and you will correct me if 18 I am wrong -- when we were here last in the main rates 19 case, you were confident that you had the Y2K problem 20 under control and that your spending would be as you 21 would have predicted it. 22 I would like an update on your 23 confidence assertions in that case. 24 Have your expenditures been 25 approximately what you forecast; and if not, why not? 26 MR. PASHER: Yes, Mr. Warren. I am 27 still very confident about the program and having 28 almost a year behind us since the last hearing. We had 36 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 asked for $11.7 million in O&M last year, and we 2 subsequently reduced the O&M estimate. While the 3 individual line items had adjustments throughout the 4 year as we went in and started addressing remediation 5 in certain areas, we overspent for some of the line 6 items and underspent for others in the way that we 7 approached the program. 8 All of the milestone tasks that we 9 had identified were finished on schedule. We have 10 completed all of our critical systems and processes for 11 the June 30th date that we have scheduled. As of the 12 end of July and going to the end of this fiscal year, 13 we will finish within the $10 million O&M estimate that 14 I filed. 15 MR. WARREN: The amount that you 16 asked for last year was $11.7 million in O&M expenses. 17 It was the Board that reduced that amount to $6.2 18 million. 19 Is that right? 20 MR. PASHER: Yes, it was. 21 MR. WARREN: Have you spent more over 22 and above the $6.2 million? 23 MR. PASHER: Yes, we have. 24 MR. WARREN: By how much? 25 MR. PASHER: At the end of July our 26 actuals were $8.44 million. That is with two months 27 remaining. I am projecting that we will spend about 28 $10 million this fiscal year on O&M. 37 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 MR. WARREN: It is the relationship, 2 Mr. Pasher, between the $6.2 million and the $10 3 million that I wanted to explore. 4 Am I wrong in characterizing the 5 difference between those two numbers as an overspending 6 from the Board's $6.2 million? 7 MR. PASHER: From the Decision with 8 Reasons, yes, we used the $6.2 million. We reduced the 9 supervisory salaries by the $4 million from the 10 decision, and we took out the $1.5 million for CIS and 11 looked at the budget that would remain to determine 12 whether in fact we could do the program for that. We 13 determined we couldn't. 14 I think as we testified last year, we 15 were given more information as the weeks and the months 16 rolled on. We were in a better position to fine tune 17 the estimates as we moved forward. 18 We took the $6.2 million, complied 19 with that decision and then because we also have to 20 track the total cost of the program as part of due 21 diligence, as well as a good understanding for what we 22 pay to accomplish the program, we put together an 23 estimate for what it would take to do. That turned out 24 to be $10.06 million. 25 MR. WARREN: You are clearly much 26 more familiar with your evidence than I am, Mr. Pasher. 27 It isn't clear to me from the 28 evidence -- and again you will correct me if I am wrong 38 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 -- what the rationale is for the additional, I will 2 say, roughly $4 million in spending. Why was that 3 additional amount required? 4 MR. PASHER: In order to perform the 5 task that we had in front of us, it required that 6 amount of funding in order to complete the program, to 7 satisfy the four criteria that we were using to ensure 8 that we had covered all aspects of the program, being 9 operational sustainability, safety, financial and legal 10 responsibilities as well. 11 It was on that basis that we 12 determined how much it would cost to perform the 13 program in fiscal 1999. 14 MR. WARREN: Is it fair of me, 15 Mr. Pasher, to say that it costs more to do this than 16 you anticipated it would originally? 17 Is that a fair assumption? 18 MR. PASHER: No, it is not a fair 19 assumption. It cost less than we initially filed for 20 last year. We filed at $26.4 million, $22 million in 21 1998 and fiscal 1999. This program will finish for 22 less than the $26.4 million that we originally 23 anticipated. 24 MR. WARREN: Would it be fair of me, 25 Mr. Pasher, to say that the Board -- you asked for 26 $11.7 million. The Board reduced you to $6.2 million, 27 and what you want to do is recapture in effect the lost 28 ground. You want to recapture what it is the Board 39 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 disallowed in the last case. 2 Is that unfair? 3 MR. PASHER: We would like to recover 4 the costs that we legitimately spent in a prudent 5 fashion to perform the program. 6 MR. WARREN: Those were the costs 7 that the Board disallowed the last time. Is that not 8 fair? 9 MR. NOBLE: If I could jump in here, 10 the Board disallowed from inclusion in sales rates the 11 $5.5 million, reflecting the reduction from $11.7 12 million to $6.2 million, which they allowed in recovery 13 and sales rates. That was never intended as a 14 permanent disallowance. 15 The Board had concerns with respect 16 to the double counting of supervisory labour salaries, 17 and the Board also directed the company to remove from 18 the Y2K funding $1.5 million. That is the forecast 19 balance of that activity, but costs related to the 20 remediation of legacy customer systems, which were 21 identified as resulting from the delay in delivery of 22 CIS. 23 MR. WARREN: I understand the 24 categories, Mr. Noble. That is clear from the Board's 25 decision. 26 I am simply asking you to explain the 27 apparent -- and I underscore the word apparent -- 28 anomaly that the Board moved you back from $11.7 40 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 million to $6.2 million, and we are back up just a 2 shade under $11.7 million. 3 It strikes me intuitively, at the 4 crude level at which I operate, that what you are 5 seeking to do is to recapture what the Board 6 disallowed. I take it that you disagree with that. 7 MR. NOBLE: I do disagree with that. 8 I believe we are trying to recover the costs that the 9 company has prudently incurred to remediate this very 10 serious problem. 11 MR. WARREN: On the issue of the 12 amount, as I read the evidence, the largest single 13 category of expenditure is for contractors. Is that 14 right? 15 MR. PASHER: Yes, it is. 16 MR. WARREN: Can I take it that those 17 are outside contractors? 18 MR. PASHER: Yes, they are. 19 MR. WARREN: Were they retained 20 because they have a set of skills that the company 21 didn't have and/or because the company didn't have the 22 bodies to deal with the problem? Which one was it? 23 MR. PASHER: Yes to both of those, 24 partially because they had unique skills in some cases 25 that we required, and also to supplement the staff that 26 the company had onboard; that we required more of those 27 kinds of resources in order to do the year 2000 program 28 while still run the day to day business. 41 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 MR. WARREN: Could I ask you, panel, 2 if you could turn up your original pre-filed evidence, 3 which is at Exhibit D1, Tab 9, Schedule 1. I am 4 looking at page 3 of 6. 5 MR. PASHER: Yes, Mr. Warren. 6 MR. WARREN: Now, if I look at the 7 second-to-last full paragraph, beginning with the 8 words: 9 "Awareness in communication is 10 turning out to be a much more 11 time-consuming activity than 12 originally envisaged..." (As 13 read) 14 you go on to say: 15 "...customers, all levels of 16 governments, suppliers, media, 17 et cetera, are all aggressively 18 seeking detailed information 19 pertaining to all aspects of our 20 program and we are having to 21 take appropriate measures to 22 ensure that a proper balance is 23 achieved so as not to jeopardize 24 the forward motion of the 25 program." (As read) 26 I confess I don't understand what you 27 mean by striking a proper balance. What does that 28 mean? 42 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 MR. PASHER: What I am intending to 2 get across here is that we did not want to divert our 3 attention and our focus from doing the program and 4 completing the activities as scheduled, sacrifice those 5 parts of the program in having a number of the people 6 involved in a lot of the communication unawareness. So 7 we saw that there was going to be a lot of activities 8 required in this area and we ensured that there was 9 only a couple of people that were involved in the 10 communication and in responding to the various 11 suppliers, the levels of government, so that we were 12 delivering a consistent message while, at the same 13 time, keeping everybody else focused on the job they 14 were doing. That is all that that meant to convey. 15 MR. WARREN: Can I reduce this, Mr. 16 Pasher, to this: that you required an allocation of 17 resources in order to assure your various audiences 18 that you have listed here that Enbridge had a handle on 19 its Y2K problem. Is that a fair summary? 20 MR. PASHER: We did not hire anybody 21 or have anybody full time in this communication role. 22 So, if that was the front part of 23 your question -- 24 MR. WARREN: It wasn't the front part 25 of my question. 26 You needed resources to deal with 27 addressing the problems, the concerns of your various 28 audiences. Is that fair? 43 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 MR. PASHER: Part-time resources. 2 But we also used internal and external communications 3 within the company. 4 MR. WARREN: What I am trying to get 5 a handle -- sorry, Mr. Pasher. 6 What I am trying to get a handle on 7 is, if we look at the additional expenditure of some 8 $4.4 million dollars, how much of that was on fixing 9 problems within the company and how much of that was 10 spent to assure your various audiences, or 11 constituents, that you did fix the problem? 12 MR. PASHER: Virtually all of it was 13 spent on fixing the problem, testing the fixes and 14 redeploying them into the production environment. 15 The interaction that I am indicating 16 here that we are having externally was through 17 presentations and through forums and seminars that we 18 were invited to attend -- and, in fact, volunteered to 19 attend, in some cases -- to give the various parties a 20 level of assurance that we had the program in place, 21 that we were tracking as scheduled, and to convey that 22 level of confidence out there for the people we were 23 dealing with. 24 MR. WARREN: My last question in this 25 area, Mr. Pasher, is this -- and, again, it may be in 26 the evidence but I can't find it. 27 I am going to make a distinction, Mr. 28 Pasher, which you may not agree with -- and tell me if 44 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 you don't. The distinction is between testing your 2 existing systems to see if they are Y2K compliant, on 3 the one hand, and, on the other hand, fixing problems 4 within the system because they are not Y2K compliant. 5 Can you live with that distinction? 6 MR. PASHER: Yes, I can. 7 MR. WARREN: Okay;. Can you tell me, 8 of the money you spent on the Y2K problem, how much has 9 been spent in actually fixing problems? 10 MR. PASHER: I would say at least 75 11 to 90 per cent would have been spent on fixing and 12 testing and redeploying problems. 13 Now, I had better qualify your 14 initial comment there about testing versus testing and 15 remediation. 16 A lot of the testing we had to do -- 17 if I can use an example: the distribution technology, 18 for instance, that distributes our gas to our 19 customers, Early in 1998, the Gartner Group, who is an 20 industry watcher and publishes information for 21 technology-related issues, was predicting that 7 to 10 22 per cent of the imbedded chips within technology would 23 likely fail for year 2000. That was taken fairly 24 seriously by companies, and by ourselves as well, at 25 that time, and one of the issues that we had to deal 26 with was that, in order to determine whether in fact we 27 were going to have failures in that equipment, we had 28 to test the equipment. 45 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 There was vendor and manufacturers' 2 statements out there that some companies, in the 3 business that they do, could live quite comfortably 4 with those statements and say, "Well, ABC Company says 5 that this technology is going to work. They have 6 tested it in their labs. So I am pretty comfortable 7 and I don't have to do it." 8 In our case, we can't live with that. 9 In the distribution of natural gas. So what we had to 10 do was invest a lot of time and, yes, money into 11 testing technology, determining if in fact there was a 12 point of failure in it and then remediating it. So 13 even though we were determining that less than 1 per 14 cent of the imbedded chips --, not 7 to 10 per cent, 15 but less than 1 per cent of the imbedded chips -- had 16 problems, we still had to go through the exercise of 17 testing it. So there was no remediation involved in 18 the vast majority of it, but there was the assurance 19 that we had to reach in testing and certifying the 20 technology, so I am differentiating between testing -- 21 which was a lot of the remainder of the funding that I 22 just answered you on -- and the actual testing, fixing, 23 remediating and getting it back out into production. 24 So, those are the two kinds of 25 testing. 26 MR. WARREN: Among other things I 27 take from your answer is that we should be careful, 28 when you have to listen to the Gartner people again, 46 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 about whether the sky is falling. Is that fair? 2 MR. PASHER: Well, I think that the 3 Gartner people -- and anybody else out there, a couple 4 of years ago, that was talking about year 2000 -- 5 served us very well as a society and that they ensured 6 that companies and businesses alike were taking the 7 year 2000 problem seriously -- and that is what we did. 8 MR. WARREN: I want to get back to 9 this if I can, just briefly, Mr. Pasher. 10 The 75 to 90 per cent you indicated, 11 in response to my question, was actually fixing 12 problems. Now, would the balance of 25, between 10 and 13 25 per cent have been just testing to see whether there 14 are problems? 15 MR. PASHER: Other than some program 16 administration and due diligence activities that had to 17 be taken in place, yes, the remainder of that would 18 have been testing, not just the distribution system but 19 also the infrastructure, hardware and software that we 20 had, so that, as we got compliant documentation from 21 vendors and manufacturers and suppliers, there was a 22 certain amount of testing that we had to do for some 23 types of equipment and if it was a high-risk critical 24 process to us, we did full-blown testing against it to 25 ensure that it, in fact, was compliant. 26 MR. WARREN: Now, of the 75 per cent 27 to 90 per cent spent on fixing problems, how much, if 28 any, of that can be recovered from people who gave you 47 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 software/hardware that should have been Y2K compliant 2 to begin with? Any? 3 MR. PASHER: None of it is 4 recoverable. Basically, what happened in those 5 situations, with us, as well as with other 6 organizations, is, when we bought the software, we 7 either entered into a licence agreement -- in which 8 case, we could perform an upgrade of that software to a 9 year-2000-ready version or release. That was normally 10 taken care of, either under the licence or maintenance 11 agreement, or a lot of companies just provided the 12 software to you gratis. That didn't take away from the 13 fact that there was a significant amount of effort, in 14 lot of cases, in performing the testing on the new 15 release, if you had a lot of applications, your process 16 was tied to that software, you had to re-test it and 17 then re-implement it back in to the production 18 environment, but we have not recovered any of the 19 costs, and we have pursued that with manufacturers but 20 we cannot recover costs from them. 21 MR. WARREN: Is this a question, Mr. 22 Pasher, of your having received a legal opinion to the 23 effect that you cannot recover any of these costs? Or 24 is it just a practical matter than you can't-- 25 MR. PASHER: We have reviewed every 26 contract -- our legal department and the party that 27 they use have reviewed every contract, every service 28 agreement, maintenance agreement, that we have 48 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 regarding technology across the company and those 2 reviews were conducted in light of trying to determine 3 whether we had any recourse or what recourse we had and 4 what the responsibilities of the manufacturers and the 5 vendors and service providers were, in light of what we 6 were doing. 7 MR. WARREN: And the answer, as a 8 result of that, is that you do not have any basis for 9 recovering any of those costs? 10 MR. PASHER: Yes. 11 MR. WARREN: All right. The second 12 issue I want to turn to is the treatment panel of non- 13 utility eliminations -- and if you turn up the most 14 recent pre-filed evidence which arrived, I believe, 15 last Friday, and that is Exhibit G1, Tab 1, Schedule 5. 16 First of all, at a basic level I want 17 to understand the allocation to non-utility businesses. 18 If you look at page 2 of that 19 prefiled evidence, question and answer sequence 7, the 20 question was: 21 "Has the company attributed any 22 of the 1999 Y2K costs of the 23 ancillary programs or 24 non-utility activities?" (As 25 read) 26 The answer is: 27 "You allocated $1.5 million to 28 the ancillary programs and 49 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 $0.3 million to non-utility out 2 of the total forecast level of 3 the 1999 Y2K expenditures of 4 $11.7 million." (As read) 5 Now, the actual forecast expenditures 6 will be something in the neighbourhood of $10 million, 7 I think you have said, Mr. Pasher -- 8 MR. PASHER: Yes. 9 MR. WARREN: -- and change. 10 Now, is the figure of $1. -- I'm 11 sorry. 12 Sir, what is the total figure, then, 13 for allocation to non-utility activities? 14 MR. NOBLE: Are you looking for an 15 actual or the amount filed in 497? 16 MR. WARREN: I'm looking for an 17 actual. 18 MR. NOBLE: The actual amount to date 19 is approximately $100,000 of indirect costs. In 20 addition to that, there has been $1.3 million of direct 21 costs charged directly to the non-utility companies. 22 MR. WARREN: Mr. Noble, how was that 23 $1.3 million arrived at? 24 MR. PASHER: The affiliate companies 25 with which we have responsibility for reporting and 26 monitoring have their own programs in place. So they 27 put into place their own program management office, 28 following an accepted methodology for the year 2000 50 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 program, and they in fact fund those programs. 2 Our only role in the programs of the 3 affiliate companies is to take monthly reporting 4 information from them and consolidate it into an 5 overall report for our parent company, for 6 Enbridge Inc. 7 So any of the time that we, myself or 8 any of the staff on Y2K for Enbridge Consumers Gas, 9 spend on affiliate-related activities is charged 10 back -- tracked and charged back to the affiliate 11 company. 12 We do have one person on board the 13 program whose full-time responsibility it is to monitor 14 and gather this recording, this reporting on behalf of 15 the affiliate companies, and that person is charged 16 totally to the affiliate programs. 17 MR. WARREN: Based on that 18 methodology you have come up with the $1.3 million? 19 MR. WILLETT: No. 20 Just to respond quickly, the 21 $1.3 million of direct costs, those are charged 22 directly to the utility companies. In some cases those 23 are invoices that are received and sent to them for 24 payment. We do not even deal with those invoices. 25 MR. WARREN: Then what is the 26 relationship between that and the time recording which 27 Mr. Pasher just referred me to? Is it a combination of 28 direct invoices and the time records that come up with 51 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 the $1.3 million? 2 MR. PASHER: It is the time that my 3 staff spends on any activity. So if they have a two 4 hour meeting with one of the affiliate companies, they 5 track that time and we charge that out. 6 MR. WARREN: Is it -- 7 MR. PASHER: That is part of the 8 $1.3 million, or part of the -- yes, part of the 9 $100,000. 10 MR. WILLETT: The $1.3 million, 11 Mr. Warren, is all third party costs that are charged 12 directly. They pay those bills directly. If one of 13 them arrives on my desk by mistake, or Terry's desk by 14 mistake, then we forward them on to those companies for 15 direct payment. 16 But we are tracking them so we 17 thought you should see that they are paying their 18 direct costs so you could understand they are actually 19 incurring expense and paying for it. 20 MR. WARREN: Okay. So if that is the 21 case where there are expenses that are incurred 22 directly, in effect, by the affiliates, they simply pay 23 the amount for that expense. Is that right? 24 MR. PASHER: Yes. 25 MR. WARREN: Now, the traditional 26 non-utility elimination, if I can use that term, where 27 you have, for example, staff within Enbridge Consumers 28 Gas that are spending time on matters related to 52 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 affairs of the affiliate, that amount is $100,000. Is 2 that right? 3 MR. NOBLE: That is correct, yes. 4 MR. WARREN: Now, let me take you to 5 question and answer sequence 8. The question is -- on 6 the same page, or that Exhibit G1, Tab 1, Schedule 5: 7 "Does the company believe a 8 further allocation of 1999 costs 9 to the non-utility companies is 10 warranted?" (As read) 11 Answer: 12 "No. The non-utility companies 13 have borne an appropriate share 14 of the 1999 Y2K cost provided 15 the company does not exceed the 16 $0.3 million threshold in 17 indirect costs. If the actual 18 amount exceeds the threshold the 19 excess will be removed from the 20 1999 Y2K variance account." (As 21 read) 22 I don't understand that answer. 23 Could somebody explain it to me? 24 MR. NOBLE: Well, it's part of the 25 1999 cost allocation study that was filed in 26 E.B.R.O. 497. There was an allocation of $300,000 made 27 against the non-utility companies reflecting the 28 company's forecasts of costs to support that activity. 53 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 The actual number turns out to be 2 less than the $.3 million, in other words the actual to 3 date has been approximately $100,000, and given that 4 the $300,000 was eliminated from the company's cost of 5 service for rate-making purposes in 497 I don't believe 6 it is appropriate to allocate any additional amount to 7 the non-utility companies unless the actual effort on 8 non-utility exceeds $300,000. 9 MR. WARREN: All right. 10 Now, the final category of questions 11 I have is with respect to the $2.6 million forecast for 12 fiscal 2000. 13 Mr. Pasher, is that a forecast with 14 an additional $2.6 million which you feel will be 15 required to finally close the book on the Y2K problem? 16 MR. PASHER: That is part of it, yes. 17 That is from October 1st to March 31st, which is the 18 termination of the program. 19 The last three months of this 20 calendar year we have some remediation tasks that we 21 are completing, more lower priority activities. 22 We have a fair amount of integration 23 testing that we are doing among all of the applications 24 that prior to that point we were doing a lot of 25 individual application remediation so we have some more 26 extensive integration testing to do between 27 applications. 28 As well, we have the planning that we 54 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 are doing for the transition centre, command centre if 2 you will, that is going to take us into the next 3 century. 4 We also have some continuing, ongoing 5 due diligence activities that we are doing as we 6 complete the year. 7 With respect to the first three 8 months of next year, we have the support of the 9 year 2000 transition that we are handling during that 10 time period. 11 The staffing on the program is 12 ramping down as I speak and will continue to ramp down 13 through to the end of January and then we will have a 14 minimal number of staff on board for February and March 15 in order to complete all of the due diligence and 16 basically close the program down. 17 So that is what those costs relate to 18 for fiscal 2000. 19 MR. WARREN: Is there anything in 20 that for non-utility businesses? 21 MR. PASHER: No, there isn't. 22 MR. WARREN: Is it anticipated that 23 there will be no more expenditures for non-utility 24 businesses? 25 MR. PASHER: There will just be the 26 co-ordination activities involved. For instance, we 27 will want to know how they are doing during the 28 transition so we will have reports coming into us, 55 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 verbal reports coming into us through communications so 2 that we can convey the results to the people that we 3 have to report to. 4 MR. WARREN: There would be no costs 5 associated with that? 6 MR. PASHER: Maybe a few hours. We 7 are not doing any other of their transition centre 8 planning. They are independent companies and have 9 their own programs and they will do all of their own 10 planning. 11 MR. NOBLE: If I could just jump in 12 here. For ratemaking purposes it is my understanding 13 that there is still an allocation to the non-utility 14 companies embedded in the non-utility elimination for 15 fiscal 2000 included as part of the rate-setting 16 process. 17 MR. WARREN: I am not sure that I 18 understand that answer, Mr. Noble, or that observation. 19 What do you mean by that? 20 MR. NOBLE: What I am saying is that 21 $300,000 was eliminated from the cost of service in 22 1999 for ratemaking purposes related to the Y2K 23 activities of the non-utility companies. By its nature 24 and by determination of how the PBR formula works and 25 the calculation of the non-utility adjustment for 26 fiscal 2000, embedded in that calculation is an ongoing 27 allocation to the non-utility companies related to Y2K. 28 MR. WARREN: And are you saying that 56 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 you haven't spent all of that? 2 MR. NOBLE: We are saying that for 3 fiscal 1999 we certainly have not spent all of the 4 $300,000, yes. 5 MR. WARREN: Mr. Pasher, just 6 returning to the point, after I began my questions of 7 you, asking whether or not you were confident that you 8 had dealt with the problem, and I took your answer to 9 be "yes", in light of that, I am puzzled as to why you 10 believe that another $2.6 million is required to deal 11 with a problem which I thought had been dealt with. 12 MR. PASHER: The problem continues to 13 be dealt with. This was a three-year program -- three 14 fiscal years -- 1998, 1999 and the first half of 2000. 15 There are still activities under way. While we 16 completed the critical systems for June 30, we are 17 still doing the mediation on less critical activities, 18 and we are still interacting and joint testing is going 19 on with some of our key and critical suppliers. 20 So there is still a lot of work to be 21 done between now and the transition, and this company 22 is not alone in the amount of work that it has to do 23 between now and the end of the year and immediately 24 following, into the new century. So we can't do that 25 for no cost, and it wasn't indicated last year that we 26 wouldn't have any costs in 2000. 27 MR. WARREN: Mr. Pasher, the all-in 28 bill at the end of the day to deal with the Y2K problem 57 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 will be what? 2 MR. PASHER: We are projecting in the 3 evidence that was filed on Friday, at G-1, Tab 1, 4 Schedule 5, page 3 of 3, about $23.8 million. 5 MR. WARREN: And the proposal of the 6 Company is that all of that will be recovered from the 7 ratepayers, right? 8 MR. PASHER: Yes, it is. 9 MR. WARREN: Mr. Pasher, looking at 10 this issue as dispassionately as one can, would it not 11 be reasonable for me to suggest, Mr. Pasher, that some 12 portion of this should be borne by the Company's 13 shareholders in the category of a problem that should 14 have been anticipated and wasn't? 15 MR. WILLETT: If I can, Mr. Warren, I 16 would like to speak to that one. 17 I guess there is a part of me that is 18 the individual who likes to believe that we can foresee 19 as managers those major problems that are going to 20 arise on the horizon and be well prepared for them. 21 But if you look at this particular issue, while its 22 existence has been known since the late eighties -- and 23 you would find people who would argue today that they 24 knew about it even before that. No one would listen to 25 them. Who knows, they may be correct, because we 26 weren't listening to them. But today we would all, I 27 think, in the position of senior managers and 28 executives in corporate Canada, look around and say 58 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 "None of us recognized this problem", including the 2 banks, which will tell you that they have been working 3 on it for five to eight years. 4 Most organizations have the 5 opportunity, through setting up finances for their 6 products and services, to recover expenses that they 7 incur, and if you look at Y2K costs as those kinds of 8 expenses and you look around the non-regulated world, 9 you will see that in fact most corporate profits have 10 gone up over the time that they have been dealing with 11 the Y2K issue. 12 We do not have that free market 13 capability to set our prices, without coming here to 14 the OEB and getting those rates set appropriately, and 15 we are simply attempting to accomplish what the 16 marketplace does through setting its prices in the way 17 that is allowed us, coming before the Board to ask for 18 the necessary adjustment so that we can recover those 19 costs. 20 If you go to a retailer who has had 21 to deal with Y2K costs, they have established within 22 their prices the necessary margin for them to make the 23 money they need to make, and that would include what 24 they have spent on Y2K, and we are asking to do the 25 same. 26 MR. WARREN: Mr. Willett, you don't 27 want this Board to believe that every single 28 manufacturer and retailer out there is able to recover 59 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 100 per cent of his or her Y2K costs from customers? 2 Is it not reasonable to assume that some companies, 3 simply to remain competitive in the marketplace, are 4 going to have to absorb some of those Y2K costs 5 internally? Is that not fair? 6 MR. WILLETT: It is fair to assume 7 that some have not been able to recover all of their 8 costs. I guess I look at my bank service charges and 9 assume that they are recovering their costs. If I look 10 at what I am paying for other goods and see the 11 companies that I am paying making more profits than 12 they made five years ago, I would have to assume that 13 they have recovered the costs that are associated with 14 all of their work, including Y2K, in their prices. 15 MR. WARREN: I am clear, though, Mr. 16 Willett, that in the final analysis every single cent 17 of expenditure by Enbridge Consumers Gas to make itself 18 Y2K compliant will be recovered, under your proposal, 19 from your ratepayers. 20 MR. WILLETT: I will let Mr. Noble 21 address that. 22 MR. NOBLE: I don't agree that the 23 Company has been able to recover 100 per cent of their 24 costs. You will see in the evidence at G-1, Tab 1, 25 Schedule 5 -- and I am looking now at page 3 of 3 -- in 26 discussing the allocation made to the ancillary 27 programs for fiscal 1999, again as part of the non- 28 utility study completed for E.B.R.O. 497, that the 60 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 Company had allocated $1.5 million against the 2 ancillary programs. 3 Further to that, the Board imputed 4 revenues in 497 of $8.4 million to the ancillary 5 programs. And to the extent that the $1.5 million of 6 Y2K costs contributed to the imputation of revenue, I 7 believe that the shareholder, or the Company in this 8 case, has absorbed $1.5 million of costs related to 9 Y2K. 10 MR. WARREN: Costs which may be 11 recovered, presumably, by the ancillary businesses. 12 Is that right, Mr. Noble? 13 MR. NOBLE: I am not sure that I can 14 comment on the recovery side from the ancillary 15 programs. I don't believe that to be the case. I 16 believe the Board imputed revenue in 497 based on a 17 pricing structure that was put before the Board and 18 those funds, for ratemaking purposes, have been paid 19 for by the Company. 20 MR. WARREN: The final question, Mr. 21 Willett, is -- and I just want to make this clear on 22 the record -- it is your view that the shareholders -- 23 the managers and shareholders of the Company -- acting 24 prudently, could not have anticipated any of these 25 expenditures and, therefore, it would be unfair for the 26 shareholders to absorb any of these Y2K costs. Have I 27 understood that correctly? 28 MR. WILLETT: It is my position that 61 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Warren) 1 we, like the rest of corporate Canada, dealt with this 2 issue as soon as we understood its magnitude. We have 3 dealt with it in a prudent fashion. We have dealt with 4 it as responsible managers in an industry where we 5 cannot afford to make trade-offs on the public safety; 6 the delivery of gas to homes and businesses that might 7 be interrupted in the middle of a cold winter. 8 We don't have the ability to trade 9 off. We don't have the risk profile of a company that 10 can decide whether it might spend a bit less in order 11 to maintain its profits. 12 I believe we have done what a prudent 13 manager should do and that the ratepayer is going to 14 provide the relief that we need. 15 MR. WARREN: Those are my questions. 16 Thank you, Mr. Chairman. 17 THE PRESIDING MEMBER: Thank you, Mr. 18 Warren. 19 Mr. Brett, would you like to go next? 20 MR. BRETT: Yes, thank you, Mr. 21 Chairman. 22 CROSS-EXAMINATION 23 MR. BRETT: Good morning, panel. 24 Just before I get into my questions generally, I want 25 to clarify -- and this may be for you, Mr. Noble. 26 With respect to the Y2K fiscal 2000 27 variance account, are you seeking in this proceeding 28 the Board's approval for the disposition of that 62 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 account to ratepayers, or just the creation of the 2 account? I wasn't clear on that. 3 MR. NOBLE: Just the creation of the 4 account for fiscal 2000. 5 MR. BRETT: Okay. 6 For purposes of my question you will 7 want I think to have in front of you the interrogatory 8 of my client, which is Exhibit I, Tab 19, Schedule 26. 9 This is a blue sheet that was filed on the 21st of 10 July. I think this represents the most recent 11 statement of your costs relative to your budget 12 approval in 497. So if you would have that in front of 13 you. 14 Also, I want to refer to the Board 15 Decision in 497, and in particular page 43 of that 16 decision. 17 --- Pause 18 MR. BRETT: Do you have that handy, 19 gentlemen? 20 MR. PASHER: Yes, Mr. Brett. 21 MR. BRETT: Okay. 22 I want to refer you to 23 paragraph 3.3.12 first of all on page 43. This 24 pertains to the fact that in E.B.R.O. 497 you had asked 25 for $11.7 million in O&M costs and you had received 26 6.2. The Board, in turning down the remainder, in 27 paragraph 3.3.12, first of all talked about work with 28 respect to CIS and they said that they would not 63 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 include the cost of a CIS delay in rates, so they 2 disallowed the $1.5 million. 3 Leaving that aside and going on to 4 the next part of that paragraph the Board says: 5 "In addition, in light of the 6 `double counting' for staff, and 7 the fact that the Company could 8 have acted earlier, given the 9 state of its knowledge in the 10 summer of last year, and might 11 therefore have required a lower 12 level of expenditure, the Board 13 further reduces the O&M portion 14 of the program expenditures by 15 $4 million. The Board therefore 16 accepts O&M expenditures of 17 $6.2 million relating to Y2K for 18 the purposes of the test year." 19 As I read that paragraph, there are 20 two reasons the Board is giving for the disallowance of 21 the further $4 million. One is the double counting 22 issue. The second is the fact that the Board felt that 23 you might have acted earlier and therefore not have had 24 to spend as much money as you were proposing to spend. 25 The inference being here that because you didn't act as 26 early as you might have you paid more money for some of 27 the services. 28 First of all, the Board doesn't break 64 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 down the $4 million into those two reasons. But with 2 respect to the second reason, what I will call the late 3 action, relatively late action, is it a fair inference 4 on my part that that is what the Board appears to be 5 saying there? 6 MR. PASHER: It appears that that is 7 what the Board is saying. 8 We reduced the supervisory salaries 9 by the $4 million. 10 I would like to make a comment with 11 respect to the suggestion or the belief that the 12 overall program would have cost less if we had started 13 earlier. I would propose that it would have cost more 14 had we started earlier. 15 The last two years we have been able 16 to take advantage of the automation that was developed 17 in support of year 2000 programs. We have been able to 18 get fairly earlier in with the vendors with respect to 19 their delivery of year 2000 products. Starting a lot 20 earlier in this process would have left us spinning our 21 wheels like a lot of other companies had to do in 22 waiting for year 2000 solutions to come across from 23 their various vendors and suppliers and manufacturers. 24 However, that's just my comment about 25 that, your assumption that we may have done it less 26 expensively. 27 MR. BRETT: So you are disagreeing 28 with what the Board said there, essentially? 65 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 MR. PASHER: Well, if I may be so 2 bold, I'm just saying from experience, that's what my 3 experience is telling me, that if we had started 4 earlier the net result of this program would cost 5 significantly more than what it's costing us. 6 I'm not being disrespectful here. 7 You asked me a question. I'm just -- 8 MR. BRETT: No, I understand. You 9 are re-arguing the case, in a sense. 10 MR. WILLETT: Might I add, if you 11 don't mind? 12 I think that, again, to speak with 13 the voice of experience, not just from my current job 14 but from my past experiences, you will note from my 15 resume that I was a partner with a large consulting 16 company and as part of that role had, for one of their 17 larger clients, responsibility of establishing that 18 company's Y2K initiative which was done a bit earlier 19 than what we have done. They find themselves in the 20 same position as we have found ourselves for the past 21 year, waiting for our vendors and suppliers to complete 22 work that, in our opinion, they should have started 23 earlier on. 24 We have not been able, for example, 25 to get certain software patches, as they are called, in 26 the industry that were promised us at a certain time 27 until sometimes as much as six to nine months later. 28 In a few cases we have had to -- I will call it -- go 66 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 to the max with our vendors and threaten to pull the 2 contracts and find alternative suppliers if they do not 3 hasten their efforts; and we have been successful in 4 most of those cases. 5 So I think what Terry is alluding to 6 is the fact that if we had started earlier -- and this 7 is hindsight as opposed to where the Board was dealing 8 with trying to look at things from what they knew at 9 that time -- we would not have been able to do some of 10 the things we have been able to do less expensively. 11 We would have had to spend more money to do them. 12 I think that is a common finding 13 amongst companies that are dealing with this issue, is 14 there are certain things you can't do until your 15 vendors and suppliers are done with their efforts, and 16 they have been not as fast. There are several 17 newspaper articles about how Microsoft has not been 18 able to provide some its patches as to timeliness. 19 They are a pretty big, well-recognized company. 20 MR. BRETT: Are you comfortable, 21 then, Mr. Pasher, Mr. Willett, that in your evidence 22 here you have addressed thoroughly the reasons that the 23 Board decided to not approve the $4 million of the 24 $11.7 million that you had asked for? You are 25 satisfied that you, in your evidence, either your 26 prepared evidence or your IR responses, that you have 27 addressed the issues the Board raises here? 28 MR. PASHER: Well, it was certainly 67 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 our intention, Mr. Brett, based on the decision of the 2 Board, to comply, in that: we removed the $1.5 million 3 from appropriate line items for CIS; we took the 4 $4 million to be our interpretation on supervisory 5 salaries and the discomfort around the potential for 6 double counting, double dipping, whatever one may refer 7 to it as, and removed that $4 million from supervisory 8 salaries. 9 MR. BRETT: Maybe I haven't been 10 clear, Mr. Pasher. I'm sorry. I don't mean to suggest 11 you haven't done that. You covered that with 12 Mr. Warren. 13 I think what you have done, 14 essentially, is substituted consultants for salaries, 15 to a very large extent. Your final total bill here 16 that you estimate for 1999 for O&M is $10.060 million 17 versus a Board-approved $6.2 million, and a sought 18 after, a requested $11.7 million. This is just O&M. 19 We are not talking capital here. 20 So it's not that so much. It's just 21 the bottom line is that you have effectively put back 22 in here and are seeking the Board's approval to charge 23 ratepayers for most of what the Board declined to put 24 in last time round. You have put back in most of that. 25 I think as you have said yourself to 26 Mr. Warren, the broad prospects or outlines of the 27 programs are the same. I mean they are similar. It's 28 the same basic program that you are carrying out. So I 68 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 view this as simply a restitution of the funds, albeit 2 in a somewhat different form. 3 My question really to you was: Given 4 that, that that is what you are doing, are you 5 satisfied that you have met, in your evidence, each of 6 the Board's reasons here for declining to approve the 7 $4 million at that time? 8 MR. PASHER: Based on the information 9 that was filed in E.B.R.O. 497 and the testimony that 10 the panel gave at that time, and the decision that was 11 made by the Board based on that information, we took 12 that and applied what we felt was the appropriate 13 interpretation to the reasons for that decision. 14 While our overall methodology or 15 framework for the program has remained constant 16 throughout the life cycle of the program, what has been 17 highly variable -- and we indicated on the stand last 18 year that this would be the case; that a lot of the 19 issues and the tasks that we were tackling as part of 20 remediating for year 2000 was not knowing the total 21 amount of effort you would have to spend on any one 22 thing until you got there. 23 The one thing that we knew for sure 24 was that the date was not changing. We knew that we 25 had to accomplish a lot of parallel activities -- not 26 serial activities, but a lot of parallel activities -- 27 in order to get the job done. 28 What actually happened was that as we 69 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 got into more of the remediation, while some of the 2 tasks were less than anticipated, some of the tasks 3 were much more than anticipated. When we put together 4 the E.B.R.O. 500 evidence, we took all of that into 5 consideration for moving forward in 1999. 6 MR. BRETT: Thank you, Mr. Pasher. 7 The last area I wanted to ask you 8 about is the issue identified by Mr. Warren with 9 respect to the responsibility for these costs as 10 between the ratepayer and the shareholder. 11 I would like again to refer you to 12 page 43 of the E.B.R.O. 487 decision. 13 In paragraph 3.3.11 -- I will just 14 read you a part of that to focus our minds here: 15 "The Company has argued that it 16 is 'dedicated and determined to 17 prevent Y2K issues from 18 impacting its customers'. The 19 Board applauds this approach, 20 but believes that there is an 21 issue as to whether some of the 22 costs might reasonably be borne 23 by shareholders, a circumstance 24 that will no doubt prevail in 25 unregulated companies, and act 26 to reduce expected rates of 27 return for those companies. The 28 Board does not agree with the 70 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 Company's implication that in a 2 regulated company the 3 shareholder should necessarily 4 be insulated from all risks of 5 this unusual problem." 6 In that connection, Mr. Willett, you 7 talked a bit about the fact that profits were up in the 8 last several years widely across industry, and this was 9 evidence to you that none of the companies in the 10 unregulated business sector had to absorb any of the 11 Y2K costs because they were able to pass them on to 12 their customers because their profits were up. 13 Would you not agree with me, though, 14 that profits would be up over the last couple of years 15 for many companies for a variety of reasons, one of 16 which would be that the economy has been booming by 17 most accounts, and profit levels are high across a wide 18 variety of industries. Y2K costs may not have been a 19 large cost overall in large companies' cost structure. 20 So it doesn't follow, does it, from 21 the fact that some of these companies may very well 22 have absorbed some Y2K costs themselves as shareholder 23 and still been able to show substantial profits. 24 There is not a direct link between 25 those two things, surely. 26 MR. WILLETT: I guess the argument 27 that I was trying to make is that these companies have 28 not allowed the Y2K costs to reduce their profits. 71 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 They have made either the tradeoffs which they can make 2 because they are not an essential service as we are, or 3 they have found ways to incorporate those costs in the 4 prices. I would agree with you that it would be very 5 difficult for me to make a direct link with the fact 6 that their profits are up, that the Y2K costs have not 7 had any impact. It would be speculation on all our 8 parts to say whether if Y2K costs had not been there, 9 their profits would have been even higher or whether 10 the market would have acted to keep profits at about 11 the same level. 12 MR. BRETT: I wondered whether some 13 of these companies might have absorbed some of those 14 costs themselves. 15 MR. WILLETT: Again, I will go back 16 and state once more that I believe we face a situation 17 that is different than the unregulated market, because 18 we don't have those options. We do not have the option 19 of incorporating at our prices. We do not have the 20 option of making tradeoffs and saying well, it's okay 21 if 50 per cent of our systems don't work for a couple 22 of days on January 1st until we get them fixed. 23 We have made very sure that our 24 systems that control the flow of gas will operate. We 25 have done everything possible to ensure that that will 26 happen. If we did not do that, I am sure the Board 27 would be very unhappy with us if we made that tradeoff. 28 We have never proposed to do that, nor do we do that 72 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 now. 2 MR. BRETT: No, nor am I suggesting 3 that you do that. I think my suggestion was -- and I 4 think the Board's suggestion here in 3.3.11 might be 5 that you might accept a slightly lower rate of return 6 as a result of not charging all of the Y2K costs 7 through to the ratepayer. 8 I don't think they are suggesting 9 that you not do it and have the distribution system 10 stop the function, Mr. Willett. 11 MR. WILLETT: And I would argue that 12 our shareholders would then look to companies whose 13 rates of return are not impacted by Y2K costs operating 14 in the unregulated world and would depart. Our share 15 price would drop, and that would not be something that 16 would allow us to continue to make the kinds of 17 investments that would be appropriate for the company. 18 I just view this as circumstantial. 19 We are trying to do the same things as others, and we 20 capture our costs through the price-setting mechanism 21 that is allowed us. 22 MR. BRETT: All right. Do you have 23 any precedents at all with respect to how this has been 24 treated, these Y2K costs have been treated? Do you 25 have any precedents to offer, other U.S. utilities or 26 other Canadian utilities? 27 MR. WILLETT: Not directly in terms 28 of how they are being treated by the regulators. We 73 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 are fairly early on in this. 2 MR. BRETT: All right; thank you very 3 much. 4 One last question; I'm sorry. 5 Turning briefly to a question of 6 clarification on your capital expenditures -- and these 7 are set out on the last page, page 12 of D-2, Tab 4, 8 Schedule 1, which is your Y2K budget. It is part of 9 your year 2000, Y2K program report. 10 I take it you have that in front of 11 you. 12 You started off 1999 with an approved 13 capital budget of $2.3 million, and you are now 14 estimating an increase of $1.5 million, as I read this, 15 to $3.8 million. This is for 1999. 16 There is a further $500,000 in 17 capital for 2000. 18 What regulatory treatment are your 19 proposing for that additional capital? That is simply 20 treated as a capital overage which will flow into rate 21 base at some point? 22 MR. NOBLE: Yes, that is my 23 understanding of how this would work. 24 MR. BRETT: That $1.5 million 25 increase, is that all the costs of the back-up power 26 generators for the various gate stations and other 27 sensitive spots on the distribution network? Are there 28 capitalized O&M costs in that $1.5 million, for 74 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 example? 2 MR. LAPP: No. Those costs refer to 3 primarily the back-up generators that were referred to 4 in the evidence earlier. There are some other minor 5 capital expenditures for the business continuity 6 planning project. 7 MR. BRETT: So those would be 8 expenditures of individuals doing that planning which 9 are capitalized. Is that right? 10 MR. LAPP: No. That is for capital 11 acquisitions for the purpose of business continuity. 12 MR. BRETT: Thank you. Those are my 13 questions. 14 THE PRESIDING MEMBER: Thank you, 15 Mr. Brett. 16 Perhaps this is an opportune time to 17 take a break. The clock on the wall says quarter to 18 eleven. We will return at five minutes after eleven. 19 --- Upon recessing at 1045 20 --- Upon resuming at 1115 21 THE PRESIDING MEMBER: Mr. Mondrow, 22 would you like to go next? 23 MR. MONDROW: Thank you, Mr. Chair, I 24 will, and I hope to be very brief with this panel. 25 Before I start, I will just note for 26 the Board and the parties, I will discuss with Mr. 27 Farrell, again, the timing of return of HVAC 28 Coalition's motion, subject of course to the 75 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Brett) 1 information available connected with the request. 2 I understand however that tomorrow 3 morning, when the Board commences at 9:30, there is a 4 motion in a parallel proceeding, the electricity 5 proceeding. There may be parties in attendance here 6 today who would have an interest in the motion of HVAC 7 Coalition who might also have an interest in the other 8 proceeding, so I will attempt to talk about it and 9 invite anyone who has a position to advise Mr. Farrell 10 and I regarding scheduling and we will get back to you 11 on that. 12 Mr. Farrell is not available after 13 one today but he will be available tomorrow morning and 14 I will find out if his availability extends beyond that 15 and try to work it out. 16 THE PRESIDING MEMBER: That is fine, 17 Mr. Mondrow. 18 MR. MONDROW: Thank you. 19 CROSS-EXAMINATION 20 MR. MONDROW: Good morning, panel. 21 Mr. Noble, I just have a few 22 questions and I expect they are for. I just want to 23 clarify this issue of non-utility and utility program 24 allocations with respect to Y2K costs. Just to clarify 25 something you discussed with Mr. Warren, as I 26 understand it -- and I am just going to talk about the 27 1999 budget, the approved budget. 28 As I understand it, there was a 76 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 direct allocation out of moneys expected to be spent on 2 expenditures incurred on behalf of affiliates, $1.3 3 million. Those expenditures would have been paid by 4 Enbridge Consumers Gas, eliminated from cost-of-service 5 and then recovered by Enbridge. Is that correct? 6 MR. NOBLE: That was not the plan in 7 the beginning. We would never -- in filing E.B.R.O. 8 497, none of the affiliates' costs were included in any 9 of those unless they were at that time outside of our 10 program and continue to be so. None of those costs are 11 included in the estimates in E.B.R.O. 497. 12 MR. MONDROW: Fair enough. We spoke 13 this morning about costs that aren't included in the 14 variance account that had been excluded off the top, as 15 it were. Those costs you were referring to were the 16 direct allocations. Fair? 17 MR. NOBLE: This is going back to the 18 question you asked previously and I am confused as to 19 exactly what you are asking, with respect to the non- 20 utilities and -- 21 MR. MONDROW: Really, I am trying to 22 clarify the mechanism. 23 My understanding is that the one -- 24 you mentioned the number, I think it was you, Mr. 25 Noble, of $1.3 million, which were costs incurred on 26 behalf of affiliates and not included in the variance 27 account dollars. 28 MR. NOBLE: Those are actual costs 77 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 incurred in 1999 related to the affiliates and excluded 2 from the forecast balance of the various account, yes. 3 MR. MONDROW: Great. And the 4 mechanism of those expenditures, as I understand it, is 5 they are actually incurred by Enbridge Consumers Gas, 6 not put in the variance account and recovered from the 7 affiliates on whose behalf they were incurred. Is that 8 right? 9 MR. NOBLE: I believe that is the 10 case, yes. The affiliates are actually paying those 11 dollars related to the Y2K remediation efforts. 12 MR. MONDROW: I am just trying to 13 clarify whether the affiliates are paying that directly 14 or whether Enbridge pays and recovers it. If the 15 affiliates pay it directly, I am not sure what you are 16 excluding. I just don't understand that. 17 MR. WILLETT: I think I will attempt 18 to clarify our -- I think we have gotten -- there are 19 two numbers. One is the 1.5 million that was 20 eliminated on the basis of the cost allocation study in 21 1999. That is a different number than the 1.3. 22 MR. MONDROW: Okay. 23 MR. WILLETT: The 1.3 million are 24 costs being incurred directly by the affiliates and, in 25 a couple of cases, they are, call it, subcontracts to 26 master agreements that we the utility -- so these are 27 similar. But they would receive those bills directly. 28 These are all third-party costs. We included it to 78 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 show that they are paying for their own programs and 2 that we are not paying for their programs and then 3 incurring costs and allocating them. So, as a example, 4 we have a contract with a major consulting firm that we 5 use for hardware and software provision; as a 6 subschedule, we contracted with them to provide project 7 management office services for one of our affiliates. 8 But they now bill that affiliate directly, and that 9 would be incorporated within that 1.3 million -- 10 MR. MONDROW: Okay. So as I 11 understand it now, this isn't a question of dollars 12 paid by the utility but excluded from your actual 13 expenditures. They were never paid by the utility? 14 MR. WILLETT: That 1.3 million -- 15 MR. PASHER: No, they weren't paid by 16 the utility. 17 MR. WILLETT: -- all them were not. 18 I just wanted to make sure of that. 19 MR. MONDROW: Okay. Thank you. 20 And then, in addition to the direct 21 allocations you have described, I think with reference 22 to the 1.5, on a budget basis at least, the indirect 23 allocations, which are the cost allocation exercise 24 numbers that are excluded from costs incurred by the 25 utility and allocated out to the ancillary programs for 26 non-utility businesses and, therefore, removed from 27 both the budget number and as you go forward, on a 28 natural basis, you have removed $100,000 on account of 79 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 those types of allocations. Is that accurate? 2 MR. NOBLE: For rate-making purposes, 3 yes, there was 1.5 allocated against the ancillary 4 programs and .3 million allocated against the non- 5 utilities. The .3 million was used to reduce the cost- 6 of-service in 1999. The 1.5 million related to the 7 ancillaries led to the imputation -- or at least part 8 of it related to the imputation of revenue. 9 MR. MONDROW: Okay. Now, in -- you 10 have already covered with other counsel -- in the 497 11 case, you asked for 11.7 million recovery, in 1999, for 12 Y2K costs, and the Board reduced your requested amount 13 to the allowed amount of 6.2 million. The 11.7 million 14 that you initially requested was the cost remaining 15 following the allocations performed and eliminated for 16 ancillary and non-utility businesses. Is that correct, 17 Mr. Noble? 18 MR. NOBLE: I would suggest that that 19 was prior to allocation. There is a direct link -- the 20 11.7 million was allocated to the various programs, of 21 which 1.5 million was ancillary and .3 million non- 22 utilities. 23 MR. MONDROW: The total amount you 24 were actually requesting, or actually included in 497, 25 in Y2K costs, was 14 million, and then there was an 26 exclusion for ancillary and non-utility, which brought 27 it down to the requested amount of 11.7? 28 MR. NOBLE: No, that is not my 80 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 understanding. The requested amount was 11.7, of which 2 1.5 was attributed to ancillary and .3 million to non- 3 utility. 4 In addition to that, there was $2.3 5 million of capital costs to bring the total applied for 6 amount in 497 to the 14 million that you referred. 7 MR. MONDROW: I am sorry; I am 8 confusing you. 9 And the reason you asked for the 10 whole 11.7 million in 497 is that you were not planning 11 to allocate costs on a fully allocated basis to the 12 ancillary and non -- well, to the ancillary programs, 13 at that time. 14 MR. NOBLE: I am sorry. I am not 15 sure I understand your question. 16 MR. MONDROW: Give me a second. 17 --- Pause 18 MR. NOBLE: If it would help you, Mr. 19 Mondrow, at Exhibit I, Tab 12, Schedule 70, in 20 E.B.R.O. 497, it shows how the costs were allocated, 21 the 11.7 million of costs, were allocated between the 22 various programs. 23 MR. MONDROW: I will follow up on 24 that but I am just after the concept here, and I am 25 obviously getting mired in the numbers. But the 11.7 26 million that you initially requested, then, was prior 27 to eliminations on account of ancillary and non-utility 28 activities. And then, out of the 11.7, as you are 81 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 explaining it to me, there was, at one point, $5 2 million elimination on account of ancillary activities. 3 Correct? And an additional elimination on account of 4 non-utility activities? 5 MR. NOBLE: That is correct. 6 MR. MONDROW: It is the company's 7 position in this proceeding, and with respect to the 8 amount in the variance account, that up to $11.7 9 million in Y2K expenditures, for 1999, the ancillary 10 and non-utility allocations out of that amount are 11 already -- out of those expenditures -- are already 12 covered off by virtue of the Board's decision in 497. 13 MR. NOBLE: I think that is a fair 14 characterization. I was focusing primarily on the non- 15 utility activities and the .3 million that was 16 allocated through 497, and we have tracked actuals 17 against that number. But I guess it would be fair, 18 also, to use the 11.7 as a bench mark for determining 19 whether an appropriate allocation has been made to 20 ancillary non-utility activities. 21 MR. MONDROW: So, in the company's 22 position, only if you exceed total expenditures before 23 allocation of $11.7 million does the issue of an 24 additional allocation out of your expenditures to the 25 ancillary or non-utility activities arise, in your 26 view. Is that fair? 27 MR. NOBLE: That is fair. And I 28 don't think it would be appropriate if we don't exceed 82 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 those two thresholds that I have mentioned. 2 MR. MONDROW: And that position 3 assumes, doesn't it, Mr. Noble, that when the Board 4 adjusted the O&M expenditures associated with Y2K and 5 497 and, indeed, other O&M expenditures, it did not 6 make a parallel adjustment for the ancillary and non- 7 utility allocations. That is your assumption. 8 MR. NOBLE: That is our assumption. 9 There was nothing in the 497 decision to suggest 10 otherwise. In fact, in the decision, the Board 11 increased the level of the non-utility elimination from 12 10.8 to $12 million. And we have taken the position, 13 and our interpretation is, that, again, provided we do 14 not exceed the $11.7 million or the 0.3 million non- 15 utility amount that the company has -- or that those 16 programs have absorbed an appropriate share of the Y2K 17 costs. 18 MR. MONDROW: If the Board, in coming 19 to its decision and its final numbers in the 497 case, 20 had made an adjustment to the Y2K -- or had made an 21 implied adjustment to the Y2K elimination due to its 22 reduction of O&M expenditures, then would you agree 23 with me that any expenditure above $6.2 million in Y2K 24 would in fact require a revisiting of allocation of 25 those costs to ancillary and non-utility? 26 MR. NOBLE: Taking your hypothetical 27 that the Board outlined that as part of the decision, I 28 believe it would have changed the threshold upon which 83 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mondrow) 1 we are determining that the appropriate costs have been 2 allocated today. Again, that is taking your 3 hypothetical there. 4 MR. MONDROW: Thank you very much, 5 sir. 6 Thank you, Mr. Chairman. 7 THE PRESIDING MEMBER: Thank you, 8 Mr. Mondrow. 9 Mr. Mattson, would you like to go 10 next? 11 MR. MATTSON: Thank you, 12 Mr. Chairman. 13 CROSS-EXAMINATION 14 MR. MATTSON: Just a few questions, 15 Panel. 16 Staying with Mr. Willett, I believe 17 it was your evidence where, in your words, you said 18 that the company has done everything possible to ensure 19 that gas will flow. 20 Oh, I'm sorry. Mr. Willett, I 21 believe it was your evidence today, or your words, 22 where you indicated that the company has done 23 everything possible to ensure that gas will flow. I 24 take it that is on January 1st, 2000. Is that fair? 25 MR. WILLETT: Well, I would like to 26 assume that we are doing everything -- I do assume that 27 we are doing everything possible to keep the gas 28 flowing all the time. 84 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 But as it relates to the Y2K problem 2 specifically, yes. Over the transition from 3 December 31st, 1999 to January 1st, 2000 we are doing 4 everything we can, as reasonable management and prudent 5 management, to making sure the gas will flow. 6 MR. MATTSON: That begs the question, 7 then, of how sure is the company now that there will be 8 no problems on January 1st, 2000? 9 MR. WILLETT: I would respond by -- 10 first of all, as with everyone who is dealing with 11 these issues in a public company, I have to be 12 cognizant of disclosure requirements that have been -- 13 and constraints that have been placed on us both in the 14 Canadian context and the U.S. context. 15 Given that no one can ensure that on 16 January 1st there will not be some unforeseen events of 17 any nature, including Y2K, that there would be 18 something that would interrupt the flow of gas, we have 19 done everything we can, given prudent management 20 decisions and looking at all of the facts that we have 21 in our possession, to ensure that we will be ready as 22 it relates to the Y2K problem and that gas will flow on 23 January 1st. 24 I would hope I haven't caveated that 25 too much, but I want to make sure that people 26 understand that there are things outside the control of 27 anyone that could happen that would prevent that from 28 occurring. 85 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 But as far as it relates to the Y2K 2 problem, we have done everything we can. 3 MR. MATTSON: So if, for example. 4 ratepayers did pick up the entire Y2K bill, it wouldn't 5 be like an insurance policy or anything where 6 ratepayers would be free from all future liability if 7 anything occurred. The shareholder would still be 8 seeking any liability that might occur as a result of 9 failures on January 1st, 2000 from the ratepayers as 10 well, or is this sort of an indemnity for ratepayers? 11 MR. WILLETT: Well, again I will use 12 the phrase taking your hypothetical that if something 13 did indeed occur. I think we would have to understand 14 why it occurred and if we had made the correct 15 decisions as management and it was outside the control 16 of prudent management decisions and such a thing 17 occurred, then we would be looking for, at the very 18 least, some sharing with the ratepayer. 19 MR. MATTSON: Wouldn't you agree, 20 Mr. Willett, then, in terms of the money that has been 21 spent to date with respect to the Y2K problem, some of 22 it certainly has been spent in order to help protect 23 shareholders from liability in case of unforeseen 24 problems as well? Would you agree? 25 MR. WILLETT: It has been done to 26 protect all stakeholders from liability, including the 27 ratepayer, the shareholder, the Board, and all of those 28 people who have a stake in making decisions that will 86 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 let us be Y2K-ready. So I would argue that we have 2 made those decisions to protect all stakeholders, and 3 the shareholder being one of those stakeholders, yes. 4 MR. MATTSON: Why should the 5 ratepayer pay all of the costs of Y2K if really the 6 money is being spent to protect both shareholders and 7 ratepayers from future liability? 8 MR. WILLETT: I would have to return 9 to the argument that I made earlier, that we are simply 10 doing what any other company does, look to its 11 price-setting mechanisms and ensures that its rates of 12 return are adequate to attract capital. In order to do 13 that in a regulated company we are doing that here. 14 It is our view that if we weren't in 15 a regulated company we would have other avenues to do 16 that and, therefore, the shareholder would make those 17 decisions. Here we cannot make those decisions without 18 the Board's approval, so that is why we are here. 19 MR. MATTSON: After spending the 20 $20 million or so on trying to find and correct the Y2K 21 problems, does the company recognize that there are 22 greater risks for some customers in your -- there are 23 greater risks for some customers on January 1st, 2000 24 than others, or is that something that -- for example, 25 are there people who may be more susceptible to 26 problems on that date than other customers of Consumers 27 Gas? 28 MR. WILLETT: If I could, just for a 87 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 moment confer with Mr. Lapp. 2 --- Pause 3 MR. WILLETT: If I could just get a 4 clarification? 5 The reason we were conferring is we 6 were trying to understand if you are looking at it from 7 a business continuity perspective or a Y2K issue, and 8 they are interrelated. 9 So if I could just get a 10 clarification. Are you trying to discriminate with 11 some classes of customers, if we had an issue, not 12 receive gas and others receive gas or all customers -- 13 is that what you are asking? 14 MR. MATTSON: In your search and in 15 your investigations over the past two or three years 16 have you identified where certain equipment may be more 17 susceptible to Y2K problems and that equipment is 18 directly going to affect certain customers as opposed 19 to other customers? For example, have you found areas 20 in your business operations that may be more 21 susceptible than others and, if so, where are they and 22 who may they affect? 23 MR. PASHER: If I could respond to 24 that. 25 MR. MATTSON: Yes. 26 MR. PASHER: We looked at every 27 aspect of the business, particularly in the area of 28 operational sustainability. I talked earlier about 88 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 ensuring that all of the equipment was ready and was 2 tested out. So a lot of the technology does have 3 embedded systems in it. 4 So we ensured that all of the 5 technology across the distribution system, if we are 6 just talking distribution for now, was in fact ready 7 through testing, through remediation. 8 We didn't uncover any significant 9 area of concern across the distribution system other 10 than ensuring that we could continue to operate in the 11 event of loss of electricity, for instance, with backup 12 generators, and we also operate under contracts as well 13 to our customers. We didn't find any segment of our 14 customer base that was more exposed or at higher risk 15 due to potential failures than others. 16 MR. WILLETT: I guess I would just 17 add that in common with the rest of the industry we 18 have been dealing with the issue of what happens if 19 somewhere in the network, so to speak, we have an issue 20 and we do not receive the commodity in the quantities 21 that we are expecting and we get into emergency 22 curtailment kinds of situations. What would the order 23 of curtailment become. 24 Mr. Lapp, as well as Mr. Pasher and 25 I, sit on an industry-wide subcommittee of the CGA to 26 discuss those kinds of issues and we are working on 27 that approach. 28 As far as it relates to our system -- 89 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 that was why my discussion with Mr. Lapp. 2 As it relates to our system, we do 3 not see anything that would lead us to believe that any 4 one part of the system is more vulnerable than any 5 other part. Therefore, the customers would not see any 6 difference from a normal cold weather day. 7 MR. LAPP: I guess another way of 8 looking at it is, there is no item that specifically 9 impacts one group of customers versus another group of 10 customers. 11 MR. MATTSON: In terms of that 12 emergency preparedness plan, has that -- 13 THE PRESIDING MEMBER: Mr. Mattson, 14 we can hardly hear you. 15 MR. MATTSON: I'm sorry. 16 In terms of that emergency 17 preparedness plan, has that been finalized as to who 18 would be curtailed and when? 19 MR. LAPP: No. We have a practice of 20 curtailing interruptible customers that they have used 21 previously. 22 One issue we are looking at is what 23 the shortfall -- if there was a shortfall in supply, 24 how would we respond to that. We have been looking at 25 various scenarios of shortages on how we would deal 26 with that. 27 One issue that we have a problem with 28 is, once you get into the firm market, apparently there 90 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 is no legislation that allows us the power to manage 2 supplies during emergencies. We have been lobbying 3 through ONGA with the ministry to change this 4 legislation, but there is nothing as yet. 5 MR. MATTSON: Finally, Mr. Willett, 6 if the ratepayers are indeed -- or they have been asked 7 to, and if the Board finds that they should pick up the 8 Y2K costs, is there anyone at the Company who can now 9 give the Board and ratepayers and idea as to what the 10 chances are that the system will work, with no 11 problems, on January 1, 2000? Or, is that something 12 you are not prepared to give; a clear indication as to 13 what the risks are at this time? 14 MR. WILLETT: I will have to 15 reiterate that we have done everything we can, and we 16 believe we are ready. As it is defined in sort of the 17 public domain, readiness implies that we have 18 undertaken all of those reasonable steps that would be 19 expected, that we have done the kinds of work that 20 Terry's group has been working on, in terms of testing 21 the systems, remediating. All of our mission critical 22 systems have been through that process as of June 30. 23 We are now working on what would be called high- 24 priority systems that need to be working but are not 25 going to put either the public safety or the Company's 26 integrity at risk. 27 So we have those kinds of assurances 28 we can give you that we have done a very good job. I 91 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 guess, as a person who has been around the program, 2 other than the one that I currently have executive 3 responsibility for at Enbridge Consumers Gas, I can 4 assure you that we are doing most things that are 5 industry standards or, if possible, if we are not ahead 6 of the curve, which we are on a few things, we are 7 taking best practices that have been learned by others 8 and applying those. There is no pride of ownership on 9 our part. We are attempting to do everything we can to 10 meet industry standards and best practices, and I think 11 we have done a good job of doing that. 12 MR. MATTSON: I am sorry, but there 13 is still the $20 million question: How confident are 14 you? 15 MR. WILLETT: I am very confident 16 that, if it relates to what we have, under our control, 17 we have done everything we can and, therefore, there 18 will be as few issues as one would expect under that 19 circumstance. 20 But I just cannot provide absolute 21 assurance. Even if I weren't under constraint from the 22 legal ramifications of providing that, I could not 23 provide absolute assurance that there will not be some 24 issues that arise, regardless of how much money you 25 spend. I think we have spent the appropriate amounts 26 to provide as much assurance as we can. 27 MR. PASHER: If I could add to that, 28 we have worked very closely the last two years with the 92 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Mattson) 1 Canadian Gas Association. We are members of the task 2 forces that the Canadian Gas Association has 3 established. We are not internal-looking in what we 4 are doing. We are sharing experiences across local 5 distribution companies and transportation companies 6 across Canada. We are learning from one another's 7 experience. So that brings some additional confidence 8 to bear in the overall program that we are doing the 9 best that we possibly can, under the circumstances, to 10 ensure that we are ready. 11 MR. MATTSON: Those are all of my 12 questions, Mr. Chairman. 13 THE PRESIDING MEMBER: Thank you, Mr. 14 Mattson. 15 Mr. Thompson, would you like to go 16 next? Or Mr. Janigan? 17 CROSS-EXAMINATION 18 MR. JANIGAN: Thank you, Mr. Chair. 19 First of all, panel, I would like to 20 reconcile something that Mr. Willett indicated, I 21 believe, in his examination by Mr. Brett with something 22 Mr. Pasher indicated in the examination by Mr. Warren. 23 I believe, Mr. Willett, you indicated 24 that the software suppliers had been delinquent in 25 their delivery of product which was Year 2000 26 compliant, that they had been rather unresponsive to 27 requests and, in fact, that there had been a fair 28 amount of activity directed in an attempt to get them 93 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 to comply with their contract, including threatening 2 the dismissal or the recision of the contract. I am 3 attempting to reconcile what you have indicated, Mr. 4 Willett, with Mr. Pasher's earlier comments that the 5 company has no recourse against software suppliers for 6 their failure to deliver Year 2000 product in an 7 appropriate fashion. 8 Could somebody help me with that? 9 MR. WILLETT: I will take a stab at 10 it. 11 The difference between what I was 12 relating and what Mr. Pasher was relating is that we 13 always have the recourse of choosing an alternate 14 supplier, but Mr. Pasher was referring to the recourse 15 of going to those suppliers and taking legal action if, 16 indeed, something that they provided to us does not 17 meet our needs in terms of Y2K readiness. 18 I think that we all are aware that in 19 the media we are hearing a lot about how the legal 20 profession is going to experience a great boon from law 21 suits post-Y2K for those that fail, and while we don't 22 intend to do more than is necessary to contribute to 23 that, if, indeed, we see something that leads us to 24 believe we were given assurances that were not met by a 25 software supplier, I am certain that we would look at 26 recourse if it caused us and the ratepayers economic 27 harm. 28 Of course, if that arises, then we 94 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 would put that into the appropriate means of dealing 2 with it. 3 It is not our belief that we would 4 have much hope, but that might be something we would 5 attempt to do if we received significant harm from 6 something failing. 7 That is the difference. What I was 8 talking about, wrestling with our suppliers -- what we 9 are saying to them is, "If you can't meet these needs, 10 there are other people we would switch to." That is 11 the kind of recourse that I was speaking of. 12 MR. JANIGAN: Presumably, the reason 13 that you are requesting new product or re-designed 14 product is that their initial product is not meeting 15 Year 2000 compliance. 16 MR. PASHER: In some cases that is 17 true, Mr. Janigan. I think the earlier discussion that 18 Mr. Willett and I were responding to, at least part of 19 that discussion, was around, if we had started earlier, 20 could we have reduced the costs. That was one aspect 21 of it. And a lot of the manufacturers and vendors just 22 weren't ready early in the game to deliver Year 2000 23 ready product. 24 I will say this on behalf of our 25 suppliers and manufacturers and service providers that 26 we have been working with. None of them have let us 27 down to date. They may not fit within our time 28 schedule, but we are one of many, many customers they 95 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 have. Most of our critical suppliers, if not all, 2 treat us as a very significant customer, because of the 3 product that we supply and the essential service that 4 we deliver. However, the availability of Year 2000 5 ready releases that we require to do the job is based 6 largely on whether a vendor or a manufacturer could 7 deliver according to our schedule, and in some cases we 8 had to revamp schedules. 9 This is important for everybody to 10 understand. Until you have an operating environment, 11 with all of your hardware and software, until all of 12 that environment is Year 2000 ready, you can't really 13 have the degree of assurance that you need with your 14 application systems until they are actually running in 15 a Year 2000 ready operating environment. Then you can 16 do your forward testing and you will know that come 17 January 1, 2000 you can respond appropriately to all of 18 the dates that are coming up. 19 It was very important to have the 20 supplier chain, the people supplying us the hardware 21 and software, on board as soon as possible and 22 delivering product as soon as they could. But 23 delivering something premature wouldn't have satisfied 24 us, in that we probably would have found problems with 25 it and would have been going back there. 26 We have been getting quality product 27 from our vendors and suppliers. 28 MR. JANIGAN: Mr. Pasher, that seems 96 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 to indicate that the sooner you started on the process, 2 the quicker and the least expensive solution for the 3 Y2K problem would have been met. 4 MR. PASHER: No, I don't believe that 5 at all. I think that the understanding is that 6 remediating your applications -- that we have total 7 control over our applications that we develop in-house. 8 The applications that we have bought externally, 9 purchased from third parties, and all of the 10 infrastructure -- hardware, software and network 11 components -- upon which we operate, it wouldn't have 12 done us any good to remediate applications and sit 13 there waiting on compliant releases of software and 14 hardware to come along. 15 It's only this past year or less that 16 a lot of the major manufacturers have been able to 17 deliver ready releases of hardware and software. It's 18 not that they were behind. They just had so many 19 releases and versions that they had to get out to 20 people. 21 MR. JANIGAN: But, Mr. Pasher, I 22 think you have indicated that you have to get your 23 internal applications in order before these external 24 applications would have been affected. I'm suggesting 25 to you that if you had been aware of the year 2K 26 problem sooner you would have had your internal 27 applications in order sooner. 28 MR. PASHER: And we would have lost 97 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 focus on the year 2000 program at that time. 2 I also indicated earlier that a lot 3 of what we are doing and what other companies are 4 having to do is a lot of parallel activities. So at 5 the same time that you are remediating your 6 applications with one team, you have another team 7 focussed on various types of infrastructure and another 8 team focussed on other pieces of the year 2000 program. 9 So elongating this into a series of serial projects 10 wouldn't have served the company or the customer as 11 well as taking it over a relatively short term and 12 focussing on it and remaining focussed until we got the 13 job done. 14 MR. JANIGAN: Now, the conduct of 15 your software suppliers that Mr. Willett described 16 seemed to amount to delinquency on their part. 17 MR. WILLETT: If I could respond to 18 that? I will just go back and perhaps clarify. 19 The types of things I was referring 20 to are places where we have had a very small percentage 21 of our suppliers suggesting that perhaps they would not 22 have products that would meet our needs until 23 post-June 30th, 1999. That was unacceptable to us and 24 it meant that we would either have to develop a 25 contingency plan to deal with that or find an 26 alternative supplier. That is the way we presented it 27 to those particular vendors. That is a small number, 28 but those examples do exist. 98 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 If you are wanting to suggest that 2 they are delinquent, I suppose in my opinion in a 3 couple of those cases I felt that they should have been 4 earlier in the process than they were given who they 5 are and the kind of product that they sell. 6 We, in a couple of those instances, 7 know that we were not the only people having this same 8 discussion with them. So there was pressure coming to 9 bear in those particular instances. They were on a 10 schedule that suited their purposes which, for most 11 cases, the people that have not chosen the June 30th 12 date have chosen the September 30th date. We were not 13 prepared to live with the September 30th date, which 14 was the date that those vendors had chosen in the 15 specific examples that I was thinking of. 16 So while in my opinion they should 17 have been ready for June 30th, in the opinion of their 18 management September 30th was good enough and therefore 19 we had a conflict. We have been able to work through 20 that conflict by suggesting to them that we needed 21 product at an earlier date or we have developed a 22 contingency plan that removed the need for that 23 product. 24 MR. PASHER: If I could add? 25 In fact, both of those vendors that 26 we were dealing with delivered for the June 30th date, 27 in time for us to do the testing and the assurance we 28 needed, and those products were implemented for 99 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 June 30th. 2 MR. JANIGAN: Has there been any 3 delay in delivery of product by software suppliers that 4 has caused the company to incur additional costs? 5 MR. PASHER: I would say not. 6 MR. JANIGAN: I want to turn once 7 again to the passage that my friend Mr. Brett referred 8 to you in the decision of E.B.R.O. 497 at 3.3.12. I 9 want to deal once again with the reasons the Board gave 10 for the reduction and what evidence you have put 11 forward today to meet those particular points. 12 First, with respect to the double 13 counting of staff, and I will deal with that point 14 later, you have filed in, I believe, Board Staff 15 Interrogatory 87 your guidelines for backfilling staff. 16 Is that correct? 17 MR. PASHER: Yes, it is. 18 MR. JANIGAN: Okay. I will come to 19 that later. 20 The Board also found that the fact -- 21 and the fact that the company could have acted earlier, 22 given the state of its knowledge in the summer of last 23 year and, therefore, have required a lower level of 24 expenditure, the Board further reduces this O&M portion 25 of the program expenditures by $4 million. 26 First, as I recall your evidence from 27 last year, Mr. Pasher, I believe it was to the effect 28 that the state of readiness of Enbridge Consumers Gas 100 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 parallelled that of most industries that were engaged 2 in customer-intensive programs and that there was no 3 lack of prudency shown by the date that you started. 4 Would that be a fair summary of your evidence? 5 MR. PASHER: Yes. That was our 6 belief and it's our belief to this day. 7 MR. JANIGAN: Yes. 8 Today both yourself and Mr. Willett 9 had indicated that, I suppose, in the event that you 10 were imprudent and you started too late it wouldn't 11 have mattered any way. Is that a fair summary? 12 MR. PASHER: I don't believe that 13 it's a fair summary. I think the point was made and I 14 attempted to make it that just by saying that starting 15 earlier would have meant for a reduced cost overall 16 doesn't necessarily mean that that would have been the 17 case, because there is a lot of things that just could 18 not be done until this past year or year and a half in 19 order to get to the point of being able to say that we 20 were even close to having a ready environment. 21 Until such time as you can take 22 remediated applications and run them in a clean year 23 2000 forward environment, which means that you have 24 that environment running as it was January 1st, 2000 25 and beyond, then you can't prove any of your year 2000 26 remediation testing out until that point. I'm saying 27 that that was not possible for ourselves or for any of 28 the other major corporations until this past year. 101 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 MR. JANIGAN: Forgive me if I once 2 again try to paraphrase it, but the point is, even if 3 you should have started earlier, your submission is it 4 would have cost the same. 5 MR. WILLETT: I guess what I would 6 say is given the knowledge that people had at the time 7 of the E.B.R.O. 497 hearing it would not have been an 8 unreasonable assumption to look and say: Couldn't you 9 have started earlier and wouldn't that make it cheaper? 10 I guess what we are saying is, given 11 hindsight, given what we know today, if we had started 12 earlier we would not have been able to take advantage 13 of some of the technologies we have taken advantage of 14 around software remediation factories, we would not 15 have been able to take advantage of some of the -- what 16 I will call -- reduced pricing that third parties have 17 started to give in the last year or so as they have 18 realized that the much heralded boom in cost was not 19 going to occur as it relates to paying for those 20 services. 21 So given hindsight, we know that if 22 we had started a year earlier we probably would have 23 spent more, not less. 24 I think the way that you have 25 characterized leaves not the correct perception, that 26 in the time period when the Board ruled on this it 27 might have looked like starting earlier would have 28 saved money. We now know, looking backwards, that 102 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 starting any earlier would not have saved this money, 2 in our opinion. 3 MR. JANIGAN: Okay. I'm just 4 following up on one of your points. 5 We have gone now from the point that 6 if you started earlier you would not have saved money. 7 I believe I heard you say, Mr. Willett, if you had 8 started earlier it would have cost more money. 9 MR. WILLETT: Might have, yes. 10 MR. JANIGAN: Might have cost more 11 money. 12 MR. WILLETT: Yes. 13 MR. JANIGAN: Now, have you done any 14 study as a result of this decision comparing what the 15 cost might have been at an earlier start date? 16 MR. PASHER: No, there hasn't been a 17 formal study around that. 18 We know from the maturity of the 19 products that are available to us as part of the 20 program. We also know the steps that you have to go 21 through from identifying that you have to make changes 22 right through until the time you redeploy. For 23 instance, there are multiple test steps that you have 24 to go through when you remediate product in order to 25 put it into -- get it ready to redeploy. 26 If we had done a lot of that some 27 time ago, like, other than the past year and a half or 28 so, we would have been able to take things to a certain 103 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 degree, but we would also had to have gone back and 2 retest that whole environment again when we were at the 3 point of being able to have a year-2000-ready 4 environment, because one of the issues that we face, 5 like other companies, is you can't freeze the whole 6 company like an iceberg for a year and a half or two 7 years and just do Y2K, leave every application as it 8 was when you made the changes and then have January 1st 9 roll around. 10 By compressing it into a time frame 11 that we just freeze up the application, do the Y2K 12 remediation, test it into a forward environment and 13 then release that application back into a production 14 environment, and at the same time have a rigorous 15 change and clean management process in place, which we 16 do have, we would only address this whole process once, 17 from start to finish. 18 We would remediate it, we would test 19 it, we would redeploy it, and then we would have 20 effective clean management processes in place, and we 21 would not be revisiting testing. 22 MR. JANIGAN: When you received the 23 E.B.R.O. 497 decision, were you aware of the facts you 24 have indicated today? 25 MR. PASHER: I didn't sit down and 26 think about the facts in the same way that I am 27 responding to the questions today. What the company 28 did when it received the decision was to act on that 104 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 decision, interpreting it the way we felt that it was 2 laid out here. 3 What I did in a step beyond that was 4 given the number of months that had lapsed from putting 5 the first evidence together, testifying, until it was 6 time to do a revised 1999 estimate, we knew a great 7 deal more than we did at the time that we had set the 8 original 497 evidence together. 9 What we tried to depict here was the 10 true cost and effort involved in continuing with the 11 program in 1999. 12 MR. JANIGAN: I wonder if I could 13 have you turn up interrogatory of the Schools, Exhibit 14 I, Tab 19, Schedule 25. 15 MR. PASHER: Yes, Mr. Janigan. 16 MR. JANIGAN: I believe you set out 17 in the answer to this interrogatory the Y2K staffing 18 figures, which I believe are 78 staff members. 19 MR. PASHER: Yes, at that point in 20 time that was true. 21 MR. JANIGAN: That may consist of 20 22 backfills. 23 MR. PASHER: Yes. 24 MR. JANIGAN: Thirty-six incremental 25 staff. 26 MR. PASHER: Yes. 27 MR. JANIGAN: And 22 that are not 28 paid for by the Y2K program. They are on loan, I 105 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 assume. 2 MR. PASHER: That is correct. They 3 were being paid for by the business unit. 4 MR. JANIGAN: What is the cost of the 5 22 staff that are not included in the Y2K variance 6 account, approximately? 7 MR. PASHER: The total program costs 8 would be their monthly salaries, taken at $6,000 per 9 month per employee, which would be an average number. 10 MR. JANIGAN: This cost is not 11 included in the O&M costs that appear on D-2, Tab 4, 12 Schedule 1, at page 12. 13 MR. PASHER: In the revised estimate? 14 MR. JANIGAN: Yes. 15 MR. PASHER: Yes, it is included. 16 Let me turn that up. 17 The ones that the business unit are 18 paying for are not included. The ones that are being 19 backfilled, we are paying the backfill costs in Y2K and 20 the business continues to pay the salaries of the 21 people who -- 22 MR. JANIGAN: I am just dealing with 23 those 22. 24 MR. PASHER: The 22 that were -- 25 MR. JANIGAN: On loan. 26 MR. PASHER: They were not in the Y2K 27 cost. 28 MR. JANIGAN: If we included them in 106 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 the Y2K costs, the cost of staff that have been 2 reassigned to Y2K but not backfilled, that budget would 3 have been much higher, I assume. 4 MR. PASHER: Yes, if we were going to 5 have to pay for them. 6 MR. JANIGAN: In Board staff 7 interrogatory Exhibit I, Tab 1, Schedule 87, you set 8 out the guidelines for Y2K variance account inclusions. 9 MR. PASHER: Yes. 10 MR. JANIGAN: Under several items, 11 that include supervisory and other salaries, business 12 unit conversion and testing, it makes it clear to your 13 managers that if a person from his or her department is 14 working on Y2K and not backfilled, salary costs are 15 borne by the department, since the costs are already 16 budgeted. 17 Is that correct? 18 MR. PASHER: Yes. 19 MR. JANIGAN: And if the position is 20 backfilled, the cost of the backfill labour is charged 21 to the Y2K variance account. 22 MR. NOBLE: That is correct, yes. 23 MR. JANIGAN: On page 6 of this 24 document, it appears that the business unit makes the 25 decision as to whether to backfill or permanently 26 replace or leave a position vacant, looking at the 27 first bullet on page 6. 28 MR. NOBLE: That is correct, yes. 107 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 MR. JANIGAN: Would you agree that 2 the implication is that if a manager has a person 3 assigned to Y2K, the position can be backfilled without 4 the cost being charged to the departmental budget? 5 MR. WILLETT: The original salary 6 costs would still be charged to their departmental 7 budget. Y2K would pick up the backfill costs. 8 MR. JANIGAN: Isn't this a strong 9 incentive for business unit managers to backfill all 10 positions? 11 MR. WILLETT: There is an incentive 12 for the business unit managers to ensure that the work 13 for which they have budgeted is completed. Therefore, 14 they are going to look at it and see whether it is 15 possible to do without that person. 16 Of course, I would assume that they 17 are going to have a bias to say "I have budgeted for 18 this work and I need to have some way to get it 19 completed". 20 That is one of the reasons we 21 required executive management team member sign-off. 22 These are the people who report directly to our 23 president, have an obligation to him and the rest of us 24 to ensure that any work that is being done is work that 25 is required. Before we would accept any of the costs 26 into the Y2K variance account, that signature had to be 27 obtained, Terry's signature had to be obtained, and I 28 was advised of it, as the executive sponsor, if it was 108 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 not in my business unit that the person came from. 2 A number of these people did come 3 from within the IS area, and we did, wherever possible, 4 attempt to not backfill them. 5 MR. JANIGAN: But what incentive is 6 there for the executive management not to backfill? 7 MR. WILLETT: We do feel a 8 responsibility to the shareholder, and to the ratepayer 9 as well as to the shareholder, to ensure that all costs 10 are prudent and should be incurred in order to keep the 11 business running. 12 It is our job, and I think all of us 13 take it seriously. We did have cases where it was not 14 backfilled because the executive management team 15 members said we can do without this for the period of 16 time that the person will be working in Y2K. 17 MR. JANIGAN: In an ordinary company 18 situation, where there is competition for resources, 19 ordinarily a business unit manager would want to have 20 those additional resources on staff, would he not? 21 MR. WILLETT: Once again, I can only 22 say that we have established, as an executive 23 management team, a budget for fiscal 1999 that included 24 an amount of work that should be done. The Board 25 approved that budget, which makes the assumption that 26 the Board felt that that work should be done as well. 27 Therefore, if we couldn't get the 28 work done, we would not be fulfilling the mandate as 109 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 managers that we have been given. 2 So yes, there is inherently a look at 3 this to say: "How do I get the work done? If I can't 4 get it done, I will backfill it". 5 I don't know how else to answer your 6 question, Mr. Janigan. 7 MR. JANIGAN: I have just a couple of 8 clean-up questions. 9 Could you confirm that the reason 10 that there are Y2K costs in the year 2000 is because 11 you are keeping the Y2K office in operation until 12 March 31, 2000. 13 Am I correct on that? 14 MR. PASHER: That is the three months 15 following January the 1st, yes. So that is where part 16 of the cost factors in. 17 MR. JANIGAN: As well, the 18 remediation of customer Legacy systems which was 19 referred to in the paragraph of the decision that I 20 just cited, of remediation costs of $1.465 million -- 21 and I take that from Board staff interrogatory 89(a) -- 22 this amount has been transferred to CIS work in 23 progress, has it? 24 Can you confirm that? 25 MR. NOBLE: Yes, it has. 26 MR. JANIGAN: Am I correct in saying 27 that you intend to recover all of the costs of this 28 account from ratepayers? 110 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Janigan) 1 MR. NOBLE: I see that more as a CIS 2 issue. I am not sure we are the best panel to help you 3 with how that amount would be recovered. 4 MR. JANIGAN: Okay. Thank you, 5 Mr. Chair, those are all of my questions for this 6 panel. 7 THE PRESIDING MEMBER: Thank you, 8 Mr. Janigan. 9 Mr. Thompson, before we get to you, 10 do any other counsel have any questions of this panel? 11 Ms Lea, you will have some. 12 Mr. Morrison...? 13 MR. MORRISON: No. 14 THE PRESIDING MEMBER: No other 15 counsel; that's fine. 16 Mr. Thompson, how long will you take? 17 MR. THOMPSON: Probably 20 minutes. 18 THE PRESIDING MEMBER: Do you want to 19 continue now? 20 MR. THOMPSON: Thank you. 21 CROSS-EXAMINATION 22 MR. THOMPSON: Panel, could you turn 23 up Exhibit G3, Tab 8, Schedule 4, page 1. 24 This, as I understand it, gives us 25 the breakdown of the 1999-year-2000 variance account. 26 MR. NOBLE: Yes, that is the forecast 27 balance of the 1999 Y2K variance account. 28 MR. THOMPSON: The amount in the 111 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 opening balance 1998 is $4,467,000. Is that correct? 2 MR. NOBLE: Yes, it is. 3 MR. THOMPSON: What was the amount 4 forecast in E.B.R.O. 497 for that component? 5 MR. NOBLE: I believe it was 6 $5,370,000 forecast in E.B.R.O. 497. 7 MR. THOMPSON: What is the reason for 8 the difference? 9 MR. PASHER: The $1 million underage 10 was caused by not starting some of the activities in 11 the time frame within the 1998 budget, but it was also 12 attributable to some reduced costs that we had in 13 running the program, as well as the negotiations that 14 we had for the on-sight factory. 15 MR. THOMPSON: Am I correct to assume 16 that there is interest accumulated in this number of 17 $4,467,000? 18 MR. NOBLE: No, the interest amounts 19 are not included in any of these numbers. 20 MR. THOMPSON: Where do they appear? 21 MR. NOBLE: They appear as part of 22 the regular clearing of the deferral account. 23 MR. THOMPSON: All right. In terms 24 of the scope of the Y2K program, Mr. Pasher, it is 25 described as a "corporate program". Is that right? 26 MR. PASHER: Yes. 27 MR. THOMPSON: All right. And what 28 company are we talking about? 112 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 MR. PASHER: We are talking about 2 Enbridge Consumers Gas. 3 MR. THOMPSON: All right. And the 4 business activities that this program encompasses 5 includes distribution? 6 MR. PASHER: Yes. 7 MR. THOMPSON: Rental programs? 8 MR. PASHER: Indirectly, through the 9 customers, there is some. 10 MR. THOMPSON: Merchandise sales? 11 MR. PASHER: Yes. 12 MR. THOMPSON: MGV? 13 MR. PASHER: Yes, if there were any 14 applications there. 15 MR. THOMPSON: Merchandise finance? 16 MR. PASHER: Yes. 17 MR. THOMPSON: ABCT? 18 MR. PASHER: Yes. 19 MR. THOMPSON: And the systems that 20 are being made compliant are systems that are being 21 used to serve all of these business activities? 22 MR. PASHER: Yes, that is true. 23 MR. THOMPSON: All right. Now, do I 24 understand correctly that in the 4,467,000 recorded in 25 the 1998 opening balance there has been no adjustment 26 to that amount for ancillary programs or non-utility 27 business activities carried on by the Consumers Gas 28 Company? 113 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 MR. PASHER: Other -- go ahead, 2 Steve. 3 MR. NOBLE: No, that is correct, 4 there has not been any removal of costs related to 5 those activities from the opening balance. 6 MR. THOMPSON: All right. Can you 7 tell me approximately, in 1998, the value, the book 8 value, of assets in the company, for the purposes of 9 these ancillary and non-utility business activities, 10 compared to the total company assets. 11 My calculations indicated about 20 12 per cent but I just want to get that confirmed. 13 MR. NOBLE: I don't think any of us 14 here on the panel would have those numbers with us. 15 MR. THOMPSON: Could we have an 16 undertaking to just give us that proportion, based on 17 the 1998 financial statements? 18 MR. NOBLE: Yes. 19 Undertaking J1.1 20 MS SOUDEK: Mr. Thompson, can you 21 just repeat the undertaking that you -- 22 MR. THOMPSON: Yes. We are looking 23 for the total value, book value, of the company's 24 assets pertaining to the ancillary/non-utility business 25 activities carried on by the company in fiscal 1998 26 expressed as a proportion of the total 27 MS SOUDEK: Fiscal 1998? 28 MR. THOMPSON: That is right. And I 114 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 will also be asking for fiscal 1999, as well. 2 MS SOUDEK: Expressed as a total of 3 the total company assets, Mr. Thompson? 4 MR. THOMPSON: Yes. 5 THE PRESIDING MEMBER: Just to be 6 abundantly clear, Mr. Thompson, you want a net book 7 value, do you? 8 MR. THOMPSON: Yes. 9 MS SOUDEK: You are making a 10 distinction -- 11 THE PRESIDING MEMBER: Because 12 depreciation may play some weird games here. I don't 13 know. I don't know if anything turns on it, but do you 14 have a preference? 15 MR. THOMPSON: I will take it both 16 ways: gross and net. 17 THE PRESIDING MEMBER: All right. 18 MS SOUDEK: One further 19 clarification, Mr. Thompson. 20 Are you asking for company assets or 21 utility assets? The total company assets or the -- 22 MR. THOMPSON: I am asking -- the 23 corporate Y2K program encompasses the corporation, as I 24 understand it. So, I am asking for the proportion that 25 the non -- in effect, the non-distribution related 26 activities of the asset proportion of the total 27 company. 28 MR. PASHER: In the corporate part of 115 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 the program, it involved Enbridge Consumers Gas, the 2 utility. That was the scope of the program that we 3 were doing. Other than having reporting in from the 4 affiliates. 5 MR. THOMPSON: All right. So that is 6 the whole. What I want is the proportion of the whole 7 that is non-distribution related. 8 Are we clear? 9 MR. WILLETT: I believe so. But if I 10 might ask a clarifying question as to the intent behind 11 your request. Is it because you believe that there is 12 some relationship to the value of the assets versus the 13 amount of time that was spent working on those assets? 14 Because I have no idea whether there is some 15 correlation or not. I actually suspect there is not, 16 given the nature of the system. So, I just would 17 caution that if that is the intent, I do not believe 18 that that is the best way to look at the level of 19 effort spent on the various systems. 20 MR. THOMPSON: Well, I want the 21 undertaking, first of all, on the record. 22 Could we have a number for it? 23 MS LEA: Okay. Thank you. 24 J-1.1, as described, relating to the 25 Y2K assets. 26 MR. THOMPSON: Related to the company 27 assets. 28 MS LEA: Company assets. 116 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 MR. THOMPSON: In the utility. 2 Well, it is obvious, I think, Mr. 3 Willett, that what I am suggesting is: there needs to 4 be an adjustment made to the opening balance, in 1998, 5 on some reasonable basis, for ancillary/non-utility 6 business activities. 7 MR. NOBLE: And I am not disagreeing 8 with you, Mr. Thompson. 9 If you look at E.B.R.O. 497, Exhibit 10 J12.5, the company filed an undertaking to allocate the 11 forecast balance of the 1998 Y2K variance account. 12 That may get you to the number which you are looking 13 for. 14 MR. THOMPSON: And what is that 15 number? 16 MR. NOBLE: Based on a forecast 17 balance of 5,370,000, the forecast -- the allocation 18 was .9 million. 19 MR. THOMPSON: What does that 20 translate into in percentage terms, approximately? 21 MR. NOBLE: Approximately 17. 22 MR. THOMPSON: Seventeen per cent? 23 MR. NOBLE: Per cent. 24 MR. THOMPSON: All right. Thank you. 25 Now, moving forward, if I could, to 26 the 1999 estimated costs, which we have in this Exhibit 27 G3, Tab 8, Schedule 4, they are shown there as 28 10,060,000. 117 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 That is the actual and estimated, as 2 I understand it, for fiscal 1999? 3 MR. NOBLE: That is the forecast 4 balance of fiscal 1999, yes. 5 MR. THOMPSON: But does it include 6 actuals to a certain point and then estimates beyond 7 that point? 8 MR. NOBLE: Yes, it would. 9 MR. THOMPSON: And what is the point? 10 MR. PASHER: At the end of July, we 11 had actuals of $8.4 million. 12 MR. THOMPSON: All right. So about 13 80 per cent of it is actual? 14 MR. PASHER: Yes. 15 MR. THOMPSON: And about 20 per cent 16 forecast? Big picture? 17 MR. WILLETT: Yes. Big picture. 18 MR. THOMPSON: And, again, those 19 expenditures encompass systems being made compliant 20 which serve the rental business, the sales business, 21 the merchant -- sorry -- the financing business, 22 natural gas vehicles, ABCT and other non-distribution 23 business activities? 24 MR. PASHER: Yes. The systems are 25 only part of the program but, yes, in direct answer 26 your question. 27 MR. THOMPSON: And there has been no 28 adjustment made to any portion of the $3,860,000 that 118 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 you are seeking ratepayers to pay for a non- 2 utility/ancillary business activities elimination? 3 MR. NOBLE: No, I don't agree with 4 that, Mr. Thompson. 5 As part of the cost of allocation 6 study filed in E.B.R.O. 497, there was an allocation of 7 the forecast balance of $11.7 million and, as mentioned 8 earlier, that allocation was 1.5 million against the 9 ancillary programs and .3 million for non-utility. 10 MR. THOMPSON: Let me come at it this 11 way: you started out, last year, budgeting $11.7 12 million for 1999 Y2K. Right? 13 MR. NOBLE: Correct. 14 MR. THOMPSON: And that included 15 making the systems compliant for the distribution 16 business activity and the other ancillary business 17 activities? 18 MR. NOBLE: That is correct, yes. 19 For which an appropriate allocation was made. 20 MR. THOMPSON: Fine. You now are -- 21 and the Board allowed recovering rates of $6.2 million 22 of that budget, $11.7 million? 23 MR. NOBLE: That is correct, yes. 24 And they disallowed certain portions. As I mentioned 25 earlier, $4 million related to supervisory salaries and 26 1.5 million related to the remediation of Legacy 27 customer systems. The company, as directed by the 28 Board in its 497 decision, have come back and have 119 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 presented the financial information related to Y2K that 2 you see in this schedule, in accordance with that 3 decision. I am looking specifically at page 82 of the 4 Board's decision, at paragraph 5.23. The decision 5 basically said: 6 "The balance in the 1998 account 7 shall be brought towards the 8 opening balance in the 1999 9 account. Any amount in the 1999 10 account to be brought forward 11 for disposition, in the future, 12 shall be the sum of the amount 13 carried forward from 1998 and an 14 amount recorded during 1999 over 15 the 6.2 million amount allowed 16 by the Board rates for fiscal 17 1999." (As read) 18 MR. THOMPSON: I know you are trying 19 to get it all, as Mr. Warren illustrated in his cross- 20 examination. I just want to make sure we all 21 understand that you started out at a budget of $11.7 22 million, in the last case. The Board allowed recovery 23 based at $6.2 million. 24 We agree on that? 25 MR. NOBLE: Yes. 26 MR. THOMPSON: All right. Now, the 27 1999 estimate is 10,060,000. Right? 28 MR. NOBLE: That is correct, yes. 120 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 MR. THOMPSON: That is less than what 2 you budgeted in E.B.R.O. 497 of $11.7 million. 3 MR. NOBLE: It is less because in 4 that $11.7 million was forecast the $1.5 million 5 related to the remediation of the Legacy systems. The 6 $10,060,000 forecast for 1999 excludes the 7 $1.5 million. 8 MR. THOMPSON: Just the big picture. 9 The estimated amount is actually below the budgeted, 10 and yet through your interpretation of the Board 11 decision you are going to be permitted to recover 12 $10,060,000. 13 MR. NOBLE: Less the $6.2 million 14 that has already been recovered in sales rates. 15 MR. THOMPSON: Right. The 16 $6.2 million and the $3,860,000 adds up to $10,060,000, 17 right? 18 MR. NOBLE: Yes, it does. 19 MR. THOMPSON: Right. And your 20 budget last year was $11,700,000, of which the Board 21 said you could recover in rates $6.2 million. Through 22 the machinations of the interpretation of the decision 23 it seems to me you have somehow enhanced your position 24 by $3.860 million, even though the estimate is below 25 the budget. 26 MR. WILLETT: Is that a question? 27 MR. THOMPSON: Yes, it is a question. 28 Do you agree? 121 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 MR. WILLETT: No. 2 I guess once again I would say that 3 we have taken the view -- and I believe it is 4 substantiated by the words that Mr. Noble read from the 5 decision -- that the Board at that time felt that the 6 forecasts could not be made accurate. They made some 7 requests that we disallow certain things with which we 8 have complied and then said come back with what you 9 actually spend and it will be disposed of. We have 10 done exactly that. 11 I do not view that as machinations, I 12 view that as responding to what the Board requested us 13 to do. 14 MR. THOMPSON: In terms of the 15 legality in the total of $10,060,000 estimated to be 16 spent, which you seek to recover on the basis of the 17 $6.2 million and your view of the deferral account 18 treatment, within that total there is in fact money 19 being used to make systems compliant where those 20 systems are being used to serve ancillary businesses. 21 Those are the facts. 22 MR. WILLETT: Yes, and an appropriate 23 allocation has been made against that number based on 24 the $1.5 million that we talked about earlier 25 MR. THOMPSON: Well, we will argue 26 that later. 27 Just moving to the 2000, the test 28 year, essentially what -- let me come at it this way: 122 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 We agree, I assume, that costs associated with the Y2K 2 program are outside the O&M PBR envelope. They are 3 classified as a "Z" factor I believe. 4 MR. NOBLE: That is correct, 5 Mr. Thompson. 6 MR. THOMPSON: Okay. So that for the 7 purposes of the test year what you are suggesting is 8 that an amount of $2.6 million be recovered in rates 9 and that a variance account be established to capture 10 over and unders around that fulcrum? 11 MR. NOBLE: That is correct, yes. 12 MR. THOMPSON: I'm sure you have 13 sensed from the questioners that there is concern about 14 that from intervenors. 15 The suggestion that intervenors, at 16 least my client, puts forward is this: Simply 17 establish a deferral account, don't have the advance 18 recovery of $2.6 million -- because you folks will 19 invariably spend it and probably more -- but just have 20 a deferral account related to year 2000 costs in the 21 test year. Now, what is the problem with that 22 approach? 23 MR. NOBLE: Well, the problem I'm 24 having with that is that in the E.B.R.O. 497-01 hearing 25 the company sought "Z" factors of which the Board 26 approved in that proceeding. 27 In my mind, the Y2K application, in 28 this instance for the $2.6 million, fits very well with 123 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 the "Z" factors outlined in 497-01. In fact, the 2 company discussed the use of the "Z" factor for Y2K in 3 fiscal 2000, and it is our interpretation of the 4 Board's decision in 497-01 that they had accepted the 5 list of "Z" factor categories. 6 Specifically the Board said in that 7 decision that they will expect to consider the amounts 8 proposed for such unusual expenditures as Y2K costs and 9 CIS expenditures. 10 MR. THOMPSON: But under your 11 proposition, you are not prepared to live with a 12 forecast "Z" factor of $2.6 million. Under your 13 proposal, you want variance account protection over the 14 forecast. What we are suggesting is that you first 15 have a deferral account and bring forward any amounts 16 recorded for disposition at the next case. I really 17 have difficulty as to why the company is troubled with 18 that proposition. 19 MR. WILLETT: I guess we could live 20 with the $2.6 million as an absolute and, in the spirit 21 of PBR, keep any that we are able to do under. 22 MR. THOMPSON: Well, are you 23 saying -- 24 MR. WILLETT: I'm saying -- 25 MR. THOMPSON: Would you just repeat 26 that? 27 MR. WILLETT: I guess I said what -- 28 I guess we are prepared to accept the $2.6 million as 124 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 an absolute for fiscal 2000, an absolute "Z" factor if 2 you will, and live within that in the spirit of PBR. 3 As long as we are understood to keep the underages, I'm 4 sure we will do everything we can to keep it under 5 $2.6 million and we will live with the overages. 6 MR. THOMPSON: Are you prepared to 7 accept what the Board determines is reasonable for the 8 year 2000 without the variance account protection? 9 MR. WILLETT: I am prepared to accept 10 $2.6 million because I believe I can make that budget. 11 MR. THOMPSON: Let's assume you 12 can't. Let's assume the Board sets it at something 13 lower. Are you prepared to live with that? 14 MR. WILLETT: Then I would have to 15 suggest that we would need to have the variance account 16 because that is a number that we have developed based 17 on some experience and we are pretty comfortable with 18 $2.6 million. If we are asked to do it for something 19 less than that, then I think we would still request the 20 variance account. 21 MR. THOMPSON: Whether it is our way 22 or your way or something in between, what happens if 23 the company is wrong, that Y2K costs in the test year, 24 we have another disaster scenario, does the company 25 accept shareholder responsibility for any of these 26 costs, that there ought to be shareholder 27 responsibility for any of these costs? 28 MR. WILLETT: What kind of disaster, 125 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 if I might ask? Are you contemplating something where 2 we find we have to expend money well beyond in order to 3 ensure that we fix something we missed? 4 MR. THOMPSON: Yes. Sort of the CIS 5 thing all over again in Y2K? 6 MR. WILLETT: I think as it relates 7 to those kinds of costs we would want to be able to 8 demonstrate it was something outside our control. If 9 it was outside our control then we should have the 10 ability to get relief for that from the ratepayers. 11 I think, as always, we would have to 12 demonstrate that it is prudent and that we did not make 13 a mistake that we should have caught, and provided we 14 can demonstrate that we should be allowed to get 15 relief. 16 Management has always been willing to 17 accept the responsibility for those things for which it 18 is found to be negligent, but I can't think that in 19 this particular case we have done anything to date that 20 we would view that way. 21 MR. THOMPSON: We never know what the 22 future holds, as CIS has demonstrated. 23 Thank you. 24 Those are my questions. 25 THE PRESIDING MEMBER: Thank you, 26 Mr. Thompson. 27 We have lost Ms Lea. 28 --- Pause 126 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Thompson) 1 MS LEA: Thank you, Mr. Chairman. 2 I'm sorry, but I was speaking to 3 Mr. Janigan at the time. 4 CROSS-EXAMINATION 5 MS LEA: I have one question of 6 clarification that relates to what Mr. Thompson was 7 just discussing with you and that is the variance 8 accounts for the year 2000. 9 Pardon me if this is obvious in the 10 evidence, perhaps it isn't obvious to me. 11 At Exhibit D3, Tab 3, Schedule 1, at 12 page 25 of that exhibit -- that is D3, Tab 3, 13 Schedule 1, page 25 -- you talk about the generic "Z" 14 factor deferral account. Are any of the Y2K items 15 going to be included in that "Z" factor account? 16 MR. NOBLE: No. In fact -- I'm 17 sorry. 18 That "Z" factor deferral account, the 19 Board did not allow the creation of that account in 20 E.B.R.O. 497-01. The company withdrew its application 21 for that account and in the updated evidence filed on, 22 I believe, May 31st, that account is no longer there. 23 MS LEA: Okay. That has been removed 24 as of the updated evidence? 25 MR. NOBLE: Yes. 26 MS LEA: Okay. 27 Now, so the issue about the $750,000 28 threshold is not an issue with respect to the deferral 127 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 account that you are proposing now? 2 MR. NOBLE: That $750,000 threshold 3 was in specific reference to in period requests for 4 deferral accounts and was included as part of the 5 proposal for the generic "Z" factor deferral account. 6 MS LEA: Okay. Thanks very much. 7 That is helpful. 8 THE PRESIDING MEMBER: Thank you, Ms 9 Lea. 10 Mr. Willett, I have one question. 11 You talked about the 22 employees who were not 12 backfilled, and that was a decision by the senior 13 management group. I just wonder as to what numbers 14 went up to the management group, the senior management 15 group. 16 MR. WILLETT: What numbers -- 17 THE PRESIDING MEMBER: There were 22 18 positions for employees that were not backfilled. 19 MR. WILLETT: That's correct. 20 THE PRESIDING MEMBER: I am just 21 wondering if those were the numbers that went up to the 22 senior management group as a proposal. 23 MR. WILLETT: Actually, it was on an 24 individual basis that we identified what the numbers 25 were that Terry needed in order to complete the work. 26 THE PRESIDING MEMBER: Terry being 27 Mr. Pasher? 28 MR. WILLETT: That's right. Excuse 128 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 me, that Mr. Pasher needed to do the work. We spent a 2 lot of time together this year. I am very familiar 3 with him. My apologies. 4 We would look at what particular work 5 needed to be done for a specific project and identify 6 the skill set. Those skill sets Terry would then 7 use -- Mr. Pasher would then use through our resourcing 8 process internally to identify candidates. We would 9 approach their direct manager and then their executive 10 management team member for them to be assigned to the 11 project. So it was not done on a total of 22; it was 12 done -- although Terry did provide those kinds of 13 estimates. They are very similar to the estimates he 14 provided in total, the 78 staff that we had on at the 15 date that the evidence was filed. 16 So that number fits within that total 17 number, but 22 would not be backfilled, it was part of 18 the total number of 78. 19 MR. PASHER: If I could just add to 20 that. I think, generally speaking, we were seeking to 21 bring people from the business units for shorter 22 periods of time, and that was necessary in a lot of 23 cases to test out their applications and have them work 24 with us. Business units were living quite comfortably 25 within that kind of a timeframe, where we were taking 26 people out for one, two or three months. 27 We had a number of people from the 28 business units for the full duration of the program, 129 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 and those are the cases where, I think, they made the 2 case, quite legitimately, for backfilling. I think 3 that is kind of a rule of thumb. Generally, we didn't 4 see backfilling occurring for short periods of time. 5 It was generally where we had somebody for the duration 6 of the year. 7 THE PRESIDING MEMBER: And when you 8 refer to the senior executive group, that would be 9 yourself, Mr. Pasher -- 10 MR. PASHER: No. 11 THE PRESIDING MEMBER: Or that would 12 be -- 13 MR. PASHER: Mr. Willett. 14 MR. WILLETT: Myself and the 15 other -- I guess today's number is 8 -- the vice- 16 president and Mr. Riedl. 17 THE PRESIDING MEMBER: Thank you. 18 Those are the Board's questions. 19 Ms Soudek, do you have any re-direct? 20 MS SOUDEK: No re-examination, thank 21 you, sir. 22 THE PRESIDING MEMBER: Thank you. 23 Ms Lea, do you have something before 24 we excuse the panel? 25 MS LEA: Just one administrative 26 matter. I wonder if the Company could just briefly 27 help us at the beginning of the lunch break with 28 respect to the evidence I asked you about. 130 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 I don't know whether we are missing 2 something, but we just need to talk to you about it. 3 But that can be done off the record and we can inform 4 the panel, if there is any problem. Thanks. 5 THE PRESIDING MEMBER: All right. 6 The panel is excused, with our thanks. 7 We were just looking at the clock and 8 we were wondering whether a two o'clock resumption 9 would give adequate time for the parties to look at the 10 two documents they have to look at. 11 Does anybody want to offer a time? 12 MR. MATTSON: Two-thirty? 13 MS LEA: Let's compromise at 2:15. 14 MR. MATTSON: As I understand it, Mr. 15 Chairman, from speaking to Mr. Farrell earlier, in the 16 context of the HVAC motion, Mr. Farrell is planning to 17 come back about now, I guess, to meet with intervenors 18 after the intervenors have a chance to speak 19 internally, and then to speak with intervenors about 20 adjustments, if any, to the scoping documents, so 21 perhaps a little extra time beyond two o'clock would be 22 appropriate. 23 THE PRESIDING MEMBER: All right. 24 Let's make it 2:30 then. Then, I guess, Mr. Cass will 25 be on board, Ms Soudek? 26 MS SOUDEK: That's correct. 27 THE PRESIDING MEMBER: I just wasn't 28 sure -- and I know that Mr. Farrell is not here, so it 131 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 may not be totally fair, but maybe some other counsel 2 can help me. 3 Was there any question about the 4 volumes not being an issue? Average use? Maybe I 5 misheard. I misheard, Mr. Thompson? 6 MR. THOMPSON: Yes. I think he was 7 only referring to that section of the settlement 8 proposal dealing with DSM. 9 THE PRESIDING MEMBER: DSM, okay. 10 MR. THOMPSON: It has nothing to do 11 with the ratemaking volumes. 12 THE PRESIDING MEMBER: All right. 13 That would explain it, yes. 14 MR. WARREN: Mr. Chairman, may I ask 15 a question on an unrelated matter? 16 As the Board may be aware, there is a 17 motion which is returnable before the Board tomorrow 18 morning dealing with the scheduling of the PBR 19 Handbook. 20 THE PRESIDING MEMBER: Yes. Ms 21 Mondrow just pointed out that I guess there are some 22 counsel who would be there for that motion? 23 MR. WARREN: I certainly will be 24 there and I believe others will be as well. 25 THE PRESIDING MEMBER: What time is 26 that scheduled for? 27 MR. WARREN: I believe 9:30, sir. 28 THE PRESIDING MEMBER: Nine-thirty? 132 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 MS LEA: It is 9:00 or 9:30. I'm 2 sorry, I don't know which of the two. 3 THE PRESIDING MEMBER: Can I get an 4 indication as to how many counsel plan to be there for 5 that motion? 6 All right. We will put our attention 7 to it over lunch. I will want to speak to my 8 colleagues as well. 9 So it is Mr. Warren, Mr. Janigan, Mr. 10 Mattson and Ms Lea. All right. 11 Yes, Mr. Mattson? 12 MR. MATTSON: My understanding is 13 that this afternoon when we return we will be cross- 14 examining on the average uses, and I will not be here 15 for that. So I will just return tomorrow morning, with 16 your permission. I don't believe there will be 17 anything covered after that this afternoon. 18 THE PRESIDING MEMBER: Our position 19 is that we won't, Mr. Mattson, although if by any good 20 fortune we reach 332, that is the deferral account, the 21 so-called -- the late payment charges, in a sense. I 22 don't anticipate that to be a long issue. In fact, 23 that is one of the issues I had in mind when I invited 24 parties to turn their attention to whether some of 25 those things could be dealt with in argument. 26 Actually, it will be your call, Mr. 27 Mattson. Thank you. 28 Mr. Mattson, you may not want to 133 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 leave right away, though, until Mr. Farrell comes back 2 into the room. 3 MR. MATTSON: That's fine, Mr. 4 Chairman. I will stay. I just won't be back, that's 5 all. 6 THE PRESIDING MEMBER: All right. We 7 will be back at 2:30. 8 --- Lunch recess at 1245 9 --- Upon resuming at 1430 10 THE PRESIDING MEMBER: Mr. Cass, 11 welcome. 12 MR. CASS: Good afternoon, 13 Mr. Chairman. 14 We have the next panel sitting here. 15 The witnesses I believe need to be sworn. 16 They are Mr. Michael Mees and 17 Ms Joanne Gould. 18 THE PRESIDING MEMBER: While they are 19 being sworn, Mr. Cass, about tomorrow, any discussion 20 amongst parties? We will ask Ms Lea to -- 21 MR. CASS: You mean apropos the 22 motion tomorrow morning, sir? 23 THE PRESIDING MEMBER: Yes. I 24 understand that -- I guess, Ms Desai, in the absence of 25 Ms Lea, can you just advise us as to what is going to 26 happen tomorrow morning? Was there any discussion 27 amongst parties? What is your understanding. 28 MS DESAI: My understanding is there 134 PASHER/WILLETT/NOBLE/LAPP, cr-ex (Lea) 1 is an agreement amongst all the parties and the company 2 that we would start at one o'clock to allow parties to 3 attend the motion next door as well as finalize the 4 scoping document and that. 5 MR. MONDROW: It is my understanding, 6 sir, that Mr. Farrell will be available at one o'clock 7 and his understanding as well, I believe, is that we 8 would proceed with the HVAC motion, subject to the 9 Board's directions at that time. So he is available 10 for that at one o'clock tomorrow. 11 THE PRESIDING MEMBER: Okay. So 12 everybody agrees to -- we can step down tomorrow, we 13 can stand down for half a day and resume at one 14 o'clock. 15 Whether we proceed with the motion 16 right away or we finish today's panel -- just in case 17 they are not finished today, I guess we can talk about 18 that later at the end of the day today. 19 Okay. We will do that. 20 Also, by way of preliminary matters? 21 There being none, Mr. Cass. 22 SWORN: MICHAEL MEES 23 SWORN: JOANNE GOULD 24 EXAMINATION-IN-CHIEF 25 MR. CASS: Thank you, Mr. Chairman. 26 As the Board is aware, this panel 27 will be addressing the outstanding item from issue 1.1, 28 which is average uses. 135 MEES/GOULD, in-ch (Cass) 1 Ms Gould, if I may start with you. 2 You are the company's Director of 3 Budgets and Forecasts. Is that correct? 4 MS GOULD: Yes, that's correct. 5 MR. CASS: Mr. Mees, you are the 6 Manager of Volume and O&M Budgets. Is that correct? 7 MR. MEES: Yes, it is. 8 MR. CASS: Mr. Mees, together with 9 Ms Gould, were you responsible for the company's 10 evidence on volumes and in particular for today's 11 purposes on average uses? 12 MR. MEES: Yes, we were. 13 MR. CASS: That would be including 14 answers to interrogatories? 15 MR. MEES: Yes. 16 MR. CASS: Thank you. 17 Was that evidence prepared by the two 18 of you or under your direction or control? 19 MR. MEES: Yes, it was. 20 MR. CASS: Are there any corrections 21 that should be made to the evidence? 22 MR. MEES: None at this time. 23 MR. CASS: Is the evidence accurate 24 to the best of your knowledge or belief? 25 MR. MEES: Yes, it is. 26 MR. CASS: Thank you, Mr. Chairman. 27 Those are my questions. 28 THE PRESIDING MEMBER: Thank you, 136 MEES/GOULD, in-ch (Cass) 1 Mr. Cass. 2 Mr. Warren. 3 MR. WARREN: Thank you, Mr. Chairman. 4 CROSS-EXAMINATION 5 MR. WARREN: I wonder, panel, if you 6 could turn up Exhibit C3, Tab 3, Schedule 7. 7 --- Pause 8 MR. MEES: Yes, we have that. 9 MR. WARREN: This is an update of an 10 exhibit which was delivered approximately two weeks 11 ago, just after the conclusion of the ADR process. I 12 wonder, Mr. Mees, if you could tell me first why this 13 document was prepared -- why it was prepared and when 14 it was prepared? 15 MR. MEES: This was updated to 16 reflect -- there were two areas that were in the 17 calculation of gas sales revenue at that time. It has 18 been corrected for the -- an update to or correction to 19 Rate 200 and a correction to the interruptible rates. 20 It didn't include the capacity repurchase credits. So 21 that's what this -- that was done at that time. 22 MR. WARREN: You will agree with me, 23 Mr. Mees, that neither of those errors are pointed out 24 on the face of the document? 25 MR. MEES: Yes, I would agree, 26 although it was in Impact Statement No. 1. An 27 explanation was given at that time. 28 MR. WARREN: Okay. 137 MEES/GOULD, cr-ex (Warren) 1 While we have the document in front 2 of us, can we turn to -- I think you said in Rate 200 3 there is a change. Is that what you said? 4 MR. MEES: Yes, I did. 5 MR. WARREN: Can you tell me what the 6 nature of the change is? 7 MR. MEES: It was reduced from 8 $20.7 million to $20.5 million, as listed at 9 Exhibit C3, Tab 3, Schedule 1. 10 MR. WARREN: And the other change, 11 I'm sorry, was? 12 MR. MEES: Was for an update to the 13 capacity repurchase credit, which was not included in 14 the original calculation by error. 15 THE PRESIDING MEMBER: I'm sorry? 16 MR. MEES: Capacity repurchase 17 credit. 18 THE PRESIDING MEMBER: Thank you. 19 MR. WARREN: While you have that 20 document in your hand, can you turn up an interrogatory 21 delivered on behalf of my client, which is Exhibit I, 22 Tab 4, Schedule 1? Do you have that? 23 MR. MEES: It was Exhibit I, Tab 4, 24 Schedule 1? 25 MR. WARREN: Yes. 26 MR. MEES: Yes, we have that. 27 MR. WARREN: On the third page you 28 have a normalized average use per customer. Can you 138 MEES/GOULD, cr-ex (Warren) 1 tell me if Exhibit C3, Tab 3, Schedule 7 has an impact 2 on the numbers which appear on Exhibit I, Tab 4, 3 Schedule 1? 4 MR. MEES: The adjustments that we 5 made for gas sales revenue was just for rates only. 6 Volumes did not change at that time. 7 MR. WARREN: Okay. Thanks. 8 Now, panel, if you look at the CAC 9 interrogatory which you just turned up, Exhibit I, 10 Tab 4, Schedule 1, these are, as I understand it, and 11 please correct me if I'm wrong -- although this 12 interrogatory response was delivered in the early part 13 of June, these are numbers that were prepared sometime 14 earlier. Is that correct? 15 MR. MEES: These numbers in this 16 interrogatory reflect the update to the gas sales 17 volumes that was made just before ADR, which is around 18 June 2nd. 19 MR. WARREN: Okay. 20 What I want to know is whether or not 21 there have been any changes to that. In particular, if 22 you look at the 1999 figures, you have a bridge year 23 estimate included. Has there been any changes in any 24 of these numbers which appear on this exhibit? 25 MR. MEES: The numbers that are 26 included in there are the bridge year estimate numbers 27 as filed in the evidence. Given the fact that we have 28 10 months of actuals that have happened since then, we 139 MEES/GOULD, cr-ex (Warren) 1 do have a pretty good indication of where we are going 2 to be at year end for 1999, but we have not reflected 3 that in -- 4 MR. WARREN: Do you have those with 5 you? 6 MR. MEES: I do not have the -- 7 MR. WARREN: Can I get an 8 undertaking, please, to deliver the most current 9 information to update Exhibit I, Tab 4, Schedule 1? 10 MR. MEES: Certainly. Yes, we can do 11 that. 12 MS DESAI: That would be undertaking 13 J1.2. 14 Undertaking No. J1.2 15 MR. WARREN: Either, Ms Gould or 16 Mr. Mees, could you tell me, at a sort of general 17 level, how the average use numbers are produced? In 18 particular, is there any level of subjectivity that has 19 gone into the production of the forecast? 20 MR. MEES: The process that is 21 involved in preparing the general -- average use is a 22 very comprehensive and detailed approach. We take a 23 look at all customer groupings, we call them -- there 24 are 78 different customer groupings within the 25 company -- and we look at a detailed level at the 26 volumetric drivers that are impacting each of those 78 27 customer groups. 28 So once we -- I call it a building 140 MEES/GOULD, cr-ex (Warren) 1 block approach -- we take a look at all these 2 individual drivers and come up with a total change in 3 average use, we do look at the overall average use at 4 that time to make sure that it is reasonable. So from 5 a reasonable check I guess I would look at that as some 6 subjectivity. 7 MR. WARREN: When you say that you 8 subject it to a -- I guess reasonability is not a word 9 -- reasonableness test, what is involved in that check? 10 MR. MEES: We look at the overall 11 impacts of each of the individual volumetric drivers, 12 such as DSM, furnace turnovers, the turnover of 13 furnaces in our franchise area, we look at vacancy 14 rates for the commercial and industrial sectors. We 15 look at all those individual components and make sure 16 that we are comfortable with the overall trend that it 17 provides us to make sure that it is consistent with 18 historical trends that we are seeing. 19 MS GOULD: If I could add to that, in 20 looking at the 2000 budget in particular, we begin with 21 our 1998 actual volumetric levels, and from that we 22 look at what changes are we anticipating going into 23 both 1999 and the 2000 budget year, reflecting, as 24 Mr. Mees mentioned, the various factors that will 25 generate reduced volume consumption from LARDSM 26 initiatives, but also areas where we are seeing growth 27 in the marketplace with some of our natural gas 28 appliances. 141 MEES/GOULD, cr-ex (Warren) 1 So it really is focusing in on things 2 that we know, looking at our projections for the 3 future, and looking at that over time as to: Is that 4 reasonable, given what we have observed? 5 MR. WARREN: Using that test, 6 Ms Gould, can you turn up again my client's 7 interrogatory Exhibit I, Tab 4, Schedule 1. 8 MR. MEES: Yes, we have that. 9 MR. WARREN: Can I just take a look 10 from 1994 forward, in particular with respect to Rate 11 6. Can we not agree that your estimates of the 12 normalized average use per customer have been off? 13 I won't add a modifier to it yet, but 14 they have been off. 15 MR. MEES: I would agree that if you 16 looked at 1994 through 1998, there has been a variance 17 in the Rate 6 area, but I do believe that it is 18 important to look at just half the picture, I would 19 call it. In particular for Rate 6, we see a lot of 20 transfer between large volume and general service. 21 You can understand that one large 22 volume customer or a couple of large volume customers 23 that switch from general service -- I would call them 24 borderline large volume -- switch and it has an impact 25 on the actual average use because they switch from 26 large volume to general service. 27 MR. WARREN: If you see that year 28 after year, Mr. Mees, would you not conclude that the 142 MEES/GOULD, cr-ex (Warren) 1 prospect of switching is something that should go into 2 your forecast? 3 MR. MEES: And we do. We do, as I 4 mentioned, a comprehensive look at and make sure that 5 the overall variances, we do adjust our general service 6 volumes to reflect changing for large volumes. In some 7 cases it can be greater than we anticipated, but I 8 think it is important to know that you are looking at 9 these variances, the company's overall budget accuracy. 10 From 1991, if I incorporate the latest numbers that we 11 have in 1999, on a normalized basis, we are within a 12 quarter of a per cent. So we do a very good job at 13 budgeting. 14 MR. WARREN: Thank you for that, 15 Mr. Mees. I didn't ask about that. I was asking about 16 Rate 6. 17 You and I can agree that there is a 18 consistent pattern from 1994 on of the company 19 overestimating average use, which is reflected in the 20 variances annually. Isn't that correct? 21 MR. MEES: I would agree that there is 22 a variance in that area. But as I indicated to you, we 23 make sure that we are capturing the total volume. So 24 if there is an overage in Rate 6, there would be a 25 corresponding underage in -- 26 MR. WARREN: This year -- sorry to 27 interrupt, Mr. Mees. 28 This year, do I understand it that 143 MEES/GOULD, cr-ex (Warren) 1 you are forecasting a drop in the normalized average 2 use per customer for Rate 6? 3 MR. MEES: Can I understand where you 4 are getting that from? 5 MR. WARREN: Are you forecasting a 6 drop? 7 MR. MEES: If you look at Exhibit C3, 8 Tab 3, Schedule 4, page 2 of 2 -- 9 MR. WARREN: I will have to turn that 10 up, Mr. Mees. 11 Can you give it to me again, please. 12 MR. MEES: Exhibit C3, Tab 3, 13 Schedule 4. 14 MR. WARREN: Yes. 15 MR. MEES: If you look at column 4 16 for rates -- 17 MR. WARREN: On which page? 18 MR. MEES: On page 2 of 2. 19 MR. WARREN: I have it. 20 MR. MEES: Line item 1.2. If you 21 look at column 4, the total change in average use, it 22 is positive. We are anticipating an increase in the 23 average use in 2000, on a normalized basis. 24 MR. WARREN: What is the basis for 25 that forecast increase? 26 MR. MEES: As I mentioned, it is 27 based on a detailed analysis of DSM programs, taking a 28 look at the commercial vacancy rates. We also take a 144 MEES/GOULD, cr-ex (Warren) 1 look at switching some large volumes. So it is a very 2 detailed comprehensive calculation. 3 MR. WARREN: Could you turn up Board 4 staff interrogatory No. 6, which is Exhibit I, Tab 1, 5 Schedule 6. 6 MR. MEES: Yes, we have that. 7 MR. WARREN: In that interrogatory 8 response, you indicate that there are a number of 9 factors that are affecting the forecast usage. I would 10 like to go through those seriatim, if I could. 11 First of all, you talk about a 12 decrease in the forecast degree day. 13 Is there a new methodology being used 14 to forecast degree days? 15 MR. MEES: No, there is not. We 16 still use the Board approved methodology that has been 17 since Year 4-64, I believe. 18 MR. WARREN: What is the relative 19 significance of that factor to your forecast? 20 MR. MEES: As you can see, on line 21 item no. 2, there is a significant reduction of 172.8 22 10(6)s in the general service market. 23 MR. WARREN: You refer then to 24 customer conservation. First of all, is customer 25 conservation different from a DSM program? 26 MR. MEES: As shown here, yes, it is. 27 We separate the DSM. 28 MR. WARREN: Why is that? 145 MEES/GOULD, cr-ex (Warren) 1 MR. MEES: By far, DSM is the largest 2 component of our conservation. In the total general 3 service market, it represents 22 10(6)s of the 22.8 4 listed on line item no. 3. 5 MS GOULD: And I think the 6 distinction recognizes the fact that some conservation 7 will be customer driven. To the extent that a customer 8 takes it upon themselves to upgrade their furnace, for 9 instance, from a mid efficiency to a high efficiency, 10 that would deliver conservation that is not necessarily 11 attributable to a specific program undertaken by the 12 company. 13 MR. WARREN: What is the impact -- is 14 DSM, as you suggest, the largest single factor? 15 MR. MEES: Of reduction and average 16 use, yes, it is. 17 MR. WARREN: How would you decide 18 among which rate classes -- how would you allocate, if 19 you wish, the reduction attributable to DSM among the 20 rate classes? 21 MR. MEES: We work with the DSM group 22 very closely, and they provide a detailed forecast at 23 the level that we require for a volumetric budget. 24 MR. WARREN: Do you forecast DSM 25 being a significantly greater factor this year than it 26 has been in the last several years? 27 MR. MEES: Yes, we do. 28 MR. WARREN: Why is that? 146 MEES/GOULD, cr-ex (Warren) 1 MR. MEES: I guess in the latest ADR 2 agreement, for example, there is an increase to the 3 point, to 42 10(6)s, I believe. So we are seeing an 4 increase from 1998 through to 1999 to that 2000 number. 5 MR. WARREN: DSM has been in place 6 for a number of years now. Can we agree with that? 7 MR. MEES: It has been a constant 8 factor in your forecasting for usages for the last 9 several years; correct? 10 MR. MEES: I am not sure if I would 11 agree with the "constant". It is increasing over time, 12 I believe. 13 MR. WARREN: As a factor, it has been 14 a constant, whether the percentage has been the same. 15 But it has been a factor; correct? 16 MR. MEES: Yes, I would agree with 17 that. 18 MR. WARREN: It has been a factor 19 certainly since 1994? 20 MR. MEES: I am not sure if it is 21 1994. It might be 1995 when it first began. 22 MR. WARREN: Notwithstanding the 23 presence of DSM as a constant factor, indeed can we 24 agree that customer conservation has been a constant 25 factor at least since 1994? 26 MR. MEES: One of the things that we 27 are seeing over time is what I would call a reduction 28 in the amount of customer generated conservation. By 147 MEES/GOULD, cr-ex (Warren) 1 that, I mean the amount where people are going out of 2 their way to try to conserve energy. 3 We are seeing a change to a turnover 4 in furnaces, things that they are doing without even 5 really trying, a DSM program. It is changing as a 6 factor. 7 Does that answer your question? 8 MS GOULD: And I think our delivery 9 on our budget around DSM, as well, has changed 10 significantly over the years. 11 In the early years, I think we were 12 very much in a learning curve. I think as noted in the 13 DSM evidence, particularly in the commercial and 14 industrial sectors, that realizing savings took a lot 15 longer than was anticipated at the outset and that 16 there was some lag time and to the extent that we may 17 have anticipated receiving that earlier rather than 18 later, we did see a greater degree of volatility, in 19 those early years, than we either saw in 1998 or 20 anticipate to see in 2000 either. 21 MR. WARREN: What puzzles me about 22 your answer, Ms Gould, is that the one constant in all 23 of these factors, again from 1994 on, is that, with 24 respect to Rate 6, you are mis-estimating every year; 25 and that is the puzzlement to me about why you 26 consistently get that wrong every year when you know 27 the factors, you know that they are increasing, you say 28 you know that individual customer conservation is 148 MEES/GOULD, cr-ex (Warren) 1 increasing, you know that the effect of DSM is 2 increasing. Why do you always get it wrong? 3 MR. MEES: As I indicated earlier, I 4 don't think we do get it wrong. As I mentioned, if you 5 look at over time, 1991 through 1999, we were within 6 .26 per cent of Board-approved amount on a normalized 7 basis. 8 MR. WARREN: But not Rate 6. 9 MR. MEES: As we have already 10 indicated, there are transfers between large volumes 11 and Rate 6 and we try to accommodate that from -- 1998 12 were some excellent examples where we saw, particularly 13 in the apartment sector, a big transfer from large 14 volume to general service. 15 And perhaps I can take you to Exhibit 16 C, Tab 3, Schedule 10, to show you that. 17 MR. WARREN: Exhibit C3 or C? 18 MR. MEES: Sorry. Did I say -- C5, 19 Tab 3, Schedule 10. I am sorry. 20 MR. WARREN: Sorry, Mr. Mees, C3, Tab 21 10? 22 MR. MEES: Tab 3, Schedule 10. 23 C3, Tab -- C5, Tab 3, Schedule 10. 24 MR. WARREN: C5. Yes. Go ahead. 25 MR. MEES: If you take a look at the 26 apartment sector, for example, you can see that it is a 27 very volatile sector. There is consistent transfer 28 between large volume and general service. And, in 149 MEES/GOULD, cr-ex (Warren) 1 particular, in 1998, under Column 8, you can see that 2 there is an increase of 3.24 per cent. So, it is 3 substantial. And when we are putting together our 4 apartment sector budget, for example, we make sure that 5 we have captured the overall trends. 6 Yes, there may be some ups, there may 7 be some downs, but I think we did, as I have indicated, 8 a pretty good job of budgeting. 9 MR. WARREN: My last question, with 10 respect to the Board Staff interrogatory, Exhibit I, 11 Tab 1, Schedule 6, is you have reference to continued 12 turnovers of low-efficiency furnaces and, again, what 13 is the distinction between that, on the one hand, and, 14 on the other hand, continued conservation and demand 15 side management? 16 MR. MEES: The turnover of furnaces 17 that we are capturing here is the turnover from what I 18 might call convention, or low-efficiency, furnaces to 19 mid-efficiency furnaces. So, really, there we are 20 seeing an elimination of the pilot light and we are 21 seeing a great deduction due to that. 22 When you look at DSM, for example, we 23 try to ensure that we are not duplicating the 24 conservation and so that the DSM is capturing the 25 impact from medium to high. 26 MR. WARREN: Now, if I look at -- 27 going back to my client's interrogatory, Exhibit I, Tab 28 4, Schedule 1. If I were simply to take the data from 150 MEES/GOULD, cr-ex (Warren) 1 1994 on, for the Rate 6 data, what would be the impact, 2 panel, on the revenue requirement if you were to 3 increase the forecast for your average -- your 4 normalized average use per customer by 400 cubic 5 metres? 6 If you don't have the answer, can you 7 give me an undertaking to answer that? 8 MR. MEES: Yes, we can do that. 9 Undertaking J1.3 10 MR. WARREN: Those are my questions. 11 Thank you. 12 MS LEA: That is undertaking J1.3. 13 THE PRESIDING MEMBER: That last 14 undertaking is clear, Mr. Mees? 15 MR. MEES: It is. 16 THE PRESIDING MEMBER: It is clear? 17 MS GOULD: Yes, that is fine. 18 THE PRESIDING MEMBER: Thank you, Mr. 19 Warren. 20 Mr. Brett, do you want to go next? 21 MR. BRETT: Yes, thanks, Mr. 22 Chairman. 23 CROSS-EXAMINATION 24 MR. BRETT: Just a preliminary 25 question. I noticed on that interrogatory Board Staff 26 No. 6, panel, that Mr. Warren was asking you about, you 27 have an item for conservation there: -22.8. 28 Now, you may have given this answer 151 MEES/GOULD, cr-ex (Brett) 1 but I didn't hear it clearly. Is demand side 2 management within that? 3 MR. MEES: Yes, it is. 4 MR. BRETT: It is a part of that? 5 MR. MEES: Yes, it is. It is the 6 most -- it makes up a majority of that. 7 MR. BRETT: Okay. How big a part of 8 it is it? 9 MR. MEES: DSM would be approximately 10 22 10(6)s of the 22.8. There are other -- 11 MR. BRETT: Okay. So it is 95 per 12 cent, give or take? 13 MR. MEES: Yes. But there are other 14 things going up and down: general conservation; 15 increased economic activity. But, generally, DSM is a 16 big factor. 17 MR. BRETT: I understand that. But 18 what you are calling "conservation" is really mainly 19 the DSM program with a little bit of other activity 20 going on, which you say is customer-driven activity? 21 I just want -- I am not arguing with 22 you. I just want a quick sense of that. That is what 23 I hear you say. 24 MR. MEES: Yes, that generally is 25 that. 26 MR. BRETT: Okay. If I can ask you 27 to look over, again, at the CAC interrogatory No. 1. 28 That is Exhibit I, Tab 4, Schedule 1. You were just 152 MEES/GOULD, cr-ex (Brett) 1 looking at that. 2 In looking at Rate 1, for a moment, 3 on page 3 -- if you would turn to page 3 of that 4 exhibit, with the tables -- in 1999, you show -- these 5 are normalized numbers, I take it? All of the numbers 6 on this table. 7 MR. MEES: They are normalized to 8 the -- 9 MR. BRETT: To the year in question. 10 MR. MEES: Yes, that is correct. 11 MR. BRETT: So, in 1999, for example, 12 you have normalized consumption of 3310, for Rate 1. 13 Three thousand three hundred and ten cubic metres. 14 Right? 15 MR. MEES: Yes. That is for the 16 bridge -- 17 MR. BRETT: Right. For 1999. 18 MR. MEES: As I indicated, the bridge 19 -- the current estimate of -- we are going to provide 20 that in an undertaking, but it will be significantly 21 below that what we are seeing -- 22 MR. BRETT: It will -- I see. But 23 based on that 3310, you are proposing a reduction down 24 to 3218. Now I hear what you are saying about there 25 being a difference on your latest information. But if 26 I look at these numbers, that is a difference of about 27 3 per cent, or so. Right? Very roughly. 28 MR. MEES: Roughly, it is 3 per cent, 153 MEES/GOULD, cr-ex (Brett) 1 and we are seeing a reduction in number of degree days 2 of about 3.2 per cent. 3 MR. BRETT: Yes, I was going to -- 4 that was going to be my next question, Mr. Mees. You 5 are ahead of me. 6 If we go over to page 1 of that 7 response to CAC, you show -- and these, again, are 8 normalized to the degree day assumptions approved by 9 the Board. So, in 1999, you show degree days of 4060. 10 And then, for 2000, you predict degree days of 3929. 11 Right? 12 MR. MEES: That is based on the 13 Board-approved methodology. 14 MR. BRETT: Yes, no, that difference 15 I make to be somewhere in the area of -- is that about 16 -- what is that, in percentage terms? That is about 5 17 per cent? 18 MR. MEES: No; as I indicated, I 19 believe it is about 3 per cent of --. 20 MR. BRETT: All right. Well, it is 21 between -- yes, maybe a little over 3 per cent. 22 MR. MEES: Three point two, I 23 believe. 24 MR. BRETT: You say it is according 25 to -- you calculate that based on Board-approved 26 method, but can you tell me, if I look at that table of 27 degree days, and I see, on a normalized basis, the 28 degree days over 4000 for four years and then dropping 154 MEES/GOULD, cr-ex (Brett) 1 to 3929 -- forecast to drop to 3929, in year 2000. 2 Can you just tell me, at a basic 3 level, how you get there? How do you get to that 4 reduction after four years of significantly higher 5 degree days? 6 MR. MEES: You have to appreciate I 7 am not the expert in this area. But what we are 8 reflecting in the forecasts for 2000 budget is the 9 latest information, so it takes into account weather 10 from -- up to 1998 in calculating the number. 11 MS GOULD: And the numbers that are 12 presented in that particular interrogatory were the 13 Board-approved degree days not the actual degree days, 14 and it would be the actual degree days that would go 15 into the formula to determine budgeted degree days for 16 fiscal 2000. 17 MR. BRETT: All right. So you base 18 your forecast budgeted degree days on recent actual 19 days. 20 Would you mind, just for purposes of 21 clarification -- I have read the evidence that Mr. 22 Taylors files every year on the methods, and so on and 23 so forth, but it would be helpful if you took that -- 24 gave an undertaking to simply apply those principles to 25 this situation and show how you get to the 3929. Could 26 you do that, please? 27 MS GOULD: We can provide the 28 calculation, but I think, if we can use -- the way the 155 MEES/GOULD, cr-ex (Brett) 1 methodology works is that there would be the most 2 heaviest weighting to the most recent two years of 3 actuals. So if you looked at 1998, for example, we had 4 a budgeted or a Board-approved number of 4,079 degree 5 days. We experienced actual degree days of 3,382. So 6 it would be that number that is having a significant 7 influence in looking at what is the projection for 8 fiscal 2000. 9 MR. BRETT: That is fair enough, but 10 if you could just take -- whatever numbers you used, if 11 you wouldn't mind just taking those and applying the 12 formula to the relevant numbers to show how you get to 13 the 3929. That I don't think is in the evidence 14 anywhere. 15 MS GOULD: If I could just draw your 16 attention -- and this is Mr. Taylor's evidence, and we 17 will do our best to walk through it -- to Exhibit D2, 18 Tab 2, Schedule 1. 19 MR. BRETT: Exhibit D2, Tab 2, 20 Schedule 1? 21 MS GOULD: That's correct. 22 MR. MEES: Do you have the evidence? 23 MR. BRETT: No, I don't. 24 Exhibit D2, Tab 2, Schedule 1. 25 All right, I have it here. 26 MR. MEES: If you turn to page 3 -- 27 which is what has been listed there as 3929. 28 MR. BRETT: Right. I don't see a 156 MEES/GOULD, cr-ex (Brett) 1 3929 on this page 3. 2 MR. MEES: I will do my best to show 3 you how we get there. 4 MR. BRETT: All right. 5 MR. MEES: If you look at note No. 2, 6 it explains how the 2,000 number was taken on a 7 weighted average of the last five, based on the 8 regression equation shown on note No. 3, and we come 9 out with a number of 3997. 10 MR. BRETT: What are the weighting 11 years for those years? 12 MR. MEES: For example, 1998 would 13 have a weighting of five, and 1997 would be four. 14 MR. BRETT: And so on, back for three 15 more years? 16 MR. MEES: Back through to the 17 corresponding year. As indicated in Mr. Taylor's 18 evidence, this 3997 is then converted to what we call 19 gas supply degree days, which is how we take our 20 readings, on an average of 24 hourly readings, and it 21 is converted, on page 9 I believe, to the 3929, based 22 on the regression equation of the environmental degree 23 days. 24 MR. BRETT: That is how you get from 25 3997 down to 3929? 26 MR. MEES: That's correct. 27 MR. BRETT: All right. So you have 28 used the last five years of actuals weighted. Starting 157 MEES/GOULD, cr-ex (Brett) 1 in 1998 you use it with a three-year lag and you go 2 back five years and you weight them 5, 4, 3, 2, 1. Is 3 that it, in essence? 4 MR. MEES: Yes, that is my 5 understanding. 6 MR. BRETT: And then you make the 7 conversion into the gas degree days. 8 MR. MEES: Gas supply degree days, 9 that's correct. 10 MR. BRETT: All right. Now, if I 11 look again back at the same interrogatory, CAC's, and I 12 look at the Rate 1 experience, you had it looks like 13 something of a history of under-forecasting Rate 1. Is 14 that fair? 15 MR. MEES: No. I would agree that 16 there are some ups and some downs and, in particular, 17 if you look at fiscal 1996 and 1997, we did 18 overestimate the amount of reduction in average use. 19 As we indicated at the time, that was primarily due to 20 the learning curve that we had with DSM. DSM savings 21 were not to the extent we had hoped during those two 22 years, and that did cause a lot of the variance. 23 MR. BRETT: If you go back in these 24 numbers, it looks like 1991, 1994, 1995, 1996, 1997, 25 1998 -- all of those years you had under-forecast Rate 26 1. You are saying, basically, that the main reason was 27 you were getting some learning experience with the 28 impacts of DSM? 158 MEES/GOULD, cr-ex (Brett) 1 MR. MEES: If we look at 1996 and 2 1997, in particular. 3 We also did overestimate the amount 4 of, as I indicated before, customer-generated 5 conservation. That has declined and we have reflected 6 that in our 2000 budget. 7 MS GOULD: I think in looking at the 8 trend, as well, in the variances, and in particular 9 looking at 1996 and 1997, as we identify those 10 variances -- and that is largely as we receive actual 11 results and get a better sense of what is 12 happening -- we analyze those variances and do take 13 them into consideration and reflect them in our 14 budgets, and I think that is why you are seeing 15 declines as we get into 1998 and into 1999 of the size 16 of that variance. 17 MR. BRETT: All right. Now, you also 18 have shown -- as I understand it, on a normalized 19 basis, if you normalize all of your years to the same 20 degree day base -- and this, I think, you show in C-5, 21 Tab 3, Schedule 10, which was the exhibit you were 22 looking at with Mr. Warren a moment ago -- you are 23 looking for a further decrease of about 24 10-cubed. 24 Is that fair? 25 MR. MEES: Yes, that's correct. 26 MR. BRETT: That is the large chart 27 that we were looking at a few minutes ago, and that 28 normalizes every year to the same number of degree 159 MEES/GOULD, cr-ex (Brett) 1 days. That is the balanced point methodology? 2 MR. MEES: Yes, it does. 3 MR. BRETT: And on that basis, kind 4 of a neutral basis, you are looking at a further 5 reduction -- you are projecting a further normalized 6 reduction of 24 cubic metres. 7 MR. MEES: Yes. If you take a look 8 at that exhibit, the average reduction in average use 9 in Rate 1 or residential from 1991 through to 1998 was 10 22 M3. Even though DSM is picking up a little bit over 11 that timeframe, we are only at 24 for the 2000 budget. 12 MR. BRETT: I have a bit of a 13 conundrum here. Effectively, you have had this history 14 of over-forecasting -- or under-forecasting 15 rather -- but you still are recommending or proposing 16 or budgeting a further 24 cubic metre reduction in Year 17 2000. I take it, again, that the main reason for that 18 is that you see the DSM program continuing to bite 19 somewhat -- beginning to take hold? 20 MR. MEES: Yes. For example, if you 21 look at the 2000 budget for residential, of the 24 over 22 13 of it is due to the DSM program, and an additional 23 11 would be due to the turnover of premises in that 24 area. 25 So we are seeing 3 per cent of our 26 furnace stock turn over each year and that has been 27 reflected in there. 28 MS GOULD: I should explain that the 160 MEES/GOULD, cr-ex (Brett) 1 numbers as presented here are our actual performance. 2 So, regardless of our budget variances, we have 3 historically seen conservation and will continue to see 4 conservation as the Company undertakes DSM initiatives 5 and as customers do. But I think in looking at 2000 it 6 is important to note that this is nowhere near the 7 extent of declines in average uses that we are actually 8 experiencing in 1999. So it certainly isn't, from our 9 perspective, unrealistic as to what we should expect to 10 see in 2000. 11 MR. BRETT: What I did was a small 12 exercise, taking your -- and you will need two pieces 13 of paper for this, just to understand what I have done. 14 I did it both for Rate 1 and Rate 6, and I will go 15 through it briefly with you. 16 If you take Exhibit C3, Tab 3, 17 Schedule 1, first of all, that is your number of 18 customers in the test year. That is a blue sheet, C-3, 19 Tab 3, Schedule 1. That gives us the number of 20 customers in each rate class, more or less, in the test 21 year. 22 All right? 23 MR. MEES: Yes. 24 MR. BRETT: Then, if you take, 25 secondly -- now, you are going to have to pull up 26 Exhibit D2, Tab 3, Schedule 1. That is your DSM 27 evidence: "Program Plans and Targets", Table No. 4-1. 28 Exhibit D2, Tab 3, Schedule 1. That gives you your 161 MEES/GOULD, cr-ex (Brett) 1 target savings by type of customer; your targeted 2 savings from DSM activities. 3 MR. MEES: Where is the reference? 4 MR. BRETT: It is D, as in "dairy", 5 Tab 3, Schedule 1, and then it is page (iv)-1 of 53. 6 It's a blue sheet. It is your most recent -- I think 7 it is your most recent estimate of DSM savings. 8 What I am trying to get at here, of 9 course, is the projected DSM savings per existing 10 house. 11 This will be a little rough, but let 12 me take a run at this with you and you can tell me if 13 we are in the same ballpark. I don't think we are very 14 far apart here, but let's just -- 15 If you look at the Year 2000 -- 16 Do you have that? 17 MR. MEES: I just want to get it in 18 front of me. Exhibit D2, Tab 3, Schedule 1? 19 MR. BRETT: Yes. Right. Page IV-1 20 of 53. It is entitled "Program Plans and Targets". 21 This is a corrected exhibit. It is corrected as of 22 1999/03/05. I hope it hasn't been corrected again. 23 THE PRESIDING MEMBER: We tried to 24 locate that ourselves. Is it the part of the evidence 25 that has some green tabs? 26 MR. BRETT: I have taken it out of my 27 basic volume, so -- 28 THE PRESIDING MEMBER: Okay. Let's 162 MEES/GOULD, cr-ex (Brett) 1 try it a different way. 2 This is the DSM evidence? 3 MR. BRETT: Yes, sir. 4 THE PRESIDING MEMBER: Okay. All 5 right. So we have D2, Tab 3, Schedule 1. 6 MR. BRETT: Right. 7 THE PRESIDING MEMBER: Then we are 8 starting at page Roman (i)-1 of 4. 9 MR. BRETT: Right. 10 THE PRESIDING MEMBER: That is the 11 starting point. Now, what page would you like us to go 12 to? 13 MR. BRETT: I'm up one page, Roman 14 (iv)-1. 15 THE PRESIDING MEMBER: Okay. Right. 16 MR. BRETT: What the page consists of 17 is some projected -- 18 THE PRESIDING MEMBER: Mr. Brett, 19 just give the witness a chance to turn it up. 20 MR. BRETT: Yes. I was just going to 21 try and help them by describing what was on the page. 22 THE PRESIDING MEMBER: You are 23 welcome to ours. 24 MS GOULD: Unfortunately, we don't 25 have any updates in ours. 26 THE PRESIDING MEMBER: Just ignore 27 the notes. 28 --- Pause 163 MEES/GOULD, cr-ex (Brett) 1 MR. MEES: Page 1, Mr. Brett? 2 MR. BRETT: Yes, right. Roman 3 numeral (iv)-1. Do you have it there now? 4 MR. MEES: Yes, we do. 5 MR. BRETT: Okay. 6 Do you see opposite the item, I guess 7 it is number 3, "Existing Homes", item number 3? I 8 guess item number 4, along the left-hand column, "Net 9 Savings", under column 3, move over to column 3, "2000 10 Budget Year", and there is a number 14,699,000 cubic 11 metres. Do you have that number? 12 MR. MEES: Yes, we do. 13 MR. BRETT: Okay. 14 Now, if you turn to the other sheet I 15 gave you, which is the number of customers, the Rate 1 16 customers -- 17 MR. MEES: Yes. 18 MR. BRETT: -- and I said this would 19 be rough. But if you look at on that sheet C3, Tab 3, 20 Schedule 1, under "Total Rate 1" you see customers of 21 1,328,659. 22 MR. MEES: Yes. 23 MR. BRETT: If I divide one by the 24 other, the first by the second, I get roughly 11 cubic 25 metres, which is to say I think that what they are 26 predicting here is that the DSM program for the year 27 2000 will result in savings of about 11 cubic metres on 28 average for the average home. Does that sound 164 MEES/GOULD, cr-ex (Brett) 1 reasonable to you? Is that a reasonably correct 2 exercise? 3 MR. MEES: I can understand how you 4 get there, but I think there is something that you have 5 to understand. 6 In looking at DSM there is the impact 7 -- I will use 2000, for example. 1999 programs are 8 fully effective into 2000 and then we have the impact 9 of the 2000 program in 2000. So what I believe is 10 being shown here is just the impact of what the 2000 11 programs are and then you would have to take into 12 account the effectiveness, the full effectiveness of 13 the 1999 programs in the year 2000. 14 MR. BRETT: If that is what is being 15 shown here it is not very clear. I would have thought 16 what is being shown here is the savings that they 17 expect to get in the year 2000 from whatever programs 18 happen to be in place in that year. 19 If you have an undertaking that you 20 can make or take that demonstrates to us that that 21 isn't the case, then I would be delighted to have it, 22 but -- 23 MR. MEES: Perhaps I had better make 24 sure it is clear. 25 MR. BRETT: -- I see that as 26 something different. 27 MR. MEES: Yes. This again is the 28 full year impact of 2000, and that is not the real 165 MEES/GOULD, cr-ex (Brett) 1 impact -- 2 MR. BRETT: Yes. I see this number 3 of fourteen-six-ninety-nine as the impact in the year 4 2000 of whatever programs you have addressing the 5 single family residential sector. You are saying it's 6 something different than that or it is leaving 7 something out? 8 MR. MEES: I do believe it is not 9 entirely clear. 10 MR. BRETT: All right. 11 In the event my interpretation is 12 right, though, you would agree that you roughly get a 13 saving of about 11 cubic metres per house, which is 14 about half -- and my point really I want to get at here 15 is it's about a little under half of what you are 16 projecting per Rate 1 customer as a reduction. It's 17 about 45 per cent or so. 18 MR. MEES: As I indicated, the impact 19 that we have for Rate 1 is 13. 20 MR. BRETT: Oh, you have 13; I have 21 11 here. So we are not that -- 22 MR. MEES: Because you also have to 23 take into account the amount on the new homes too, 24 which is accounted for. 25 MR. BRETT: All right. 26 THE PRESIDING MEMBER: Do you still 27 need the undertaking, Mr. Brett? 28 MR. BRETT: Yes, please. Yes. 166 MEES/GOULD, cr-ex (Brett) 1 MS DESAI: J1.4. 2 Undertaking No. J1.4 3 MR. BRETT: To clarify what that 4 number represents. 5 MR. MEES: And the exact number that 6 you are looking for is the line item number 4? 7 MR. BRETT: Yes. That's right. 8 That's right. 9 Okay. Now, I did the same exercise 10 without going through all of the bells and whistles. I 11 did the same exercise for Rate 6, taking out the number 12 of Rate 6 customers, the 138,574 from your C3, Tab 3, 13 Schedule, 1, okay -- Rate 6 sales, Rate 6 T-service, 14 total Rate 6, 138,574. 15 MR. MEES: Yes. 16 MR. BRETT: Then I looked at the 17 volumes, and I think I was generous here. I took 18 basically a combination of the commercial and the 19 multifamily residential volumes that are set out in 20 lines 8 and 10 of those -- in other words, I added up 21 roughly the 209,300 from line 8, which is the net 22 savings projected for commercial for year 2000, okay? 23 MR. MEES: Okay. 24 MR. BRETT: And I added to that the 25 net savings projected for multifamily residential also 26 for the year 2000, all right, the 2,538,000 cubic 27 metres? I put those two together and I'm not sure all 28 of those volumes in fact are in Rate 6. Some might be 167 MEES/GOULD, cr-ex (Brett) 1 in the Rate 100. 2 But for the sake of the argument 3 let's keep it simple. I assume those represent the 4 Rate 6 volumes. If I divide that sum by the 138,574, I 5 get about 33 cubic metres and I make that to be only 6 about 5 per cent of what you are proposing as a 7 decrease in Rate 6 consumption. You are going down in 8 Rate 6, as I understand your conversations with 9 Mr. Warren, from -- go back to the CAC interrogatory at 10 CAC Schedule 1. Do you have that again? 11 MR. MEES: Yes, we have that. 12 MR. BRETT: You show normalized in 13 1999 a Rate 6 consumption of 23,523 metres and you are 14 proposing to reduce that in 2000 to 22,844. So my 15 calculation of the impact of DSM on that is about -- 16 and I may be a little bit off here, but it's relatively 17 small. I take it to be around 5 per cent. Does that 18 seem fair? Does that seem a reasonably accurate number 19 doing what I have done, doing the -- 20 MR. MEES: It does appear to be a 21 little low, although I would acknowledge that the 22 impact of DSM in rates is smaller than in Rate -- 23 MR. BRETT: Say in the 5 to 10 per 24 cent level? 25 MR. MEES: I think that is a little 26 low. The total impact of DSM for Rate 6 would be in 27 the neighbourhood of about 4.5 10(6)s on the 2000 28 budget. 168 MEES/GOULD, cr-ex (Brett) 1 MR. BRETT: The calculation I have 2 given you leads to a result that is not too far off 3 what in fact is happening here as far as you can tell? 4 MR. MEES: Yes, it's not too far off. 5 MR. BRETT: All right. 6 Thanks very much, Mr. Chairman, 7 panel. Those are my questions. 8 THE PRESIDING MEMBER: Thank you, 9 Mr. Brett. 10 Mr. Mondrow, do you have any 11 questions? 12 MR. MONDROW: No. Thank you, 13 Mr. Chairman. 14 THE PRESIDING MEMBER: Mr. Thompson? 15 MR. THOMPSON: Yes, please. 16 CROSS-EXAMINATION 17 MR. THOMPSON: Panel, could I just 18 get confirmed for the record -- I'm looking at the CAC 19 Exhibit I, Tab 4, Schedule I, page 3. At the bottom of 20 the page under "Rate 1" the Board was seeking approval 21 of a normalized average use for Rate 1 of 3,218 metres 22 cubed? 23 MR. MEES: Based on the Board 24 approved methodology, yes, that is correct. 25 MR. THOMPSON: That is what you are 26 asking this Board to approve. 27 MR. MEES: Yes. 28 MR. THOMPSON: That number is down 169 MEES/GOULD, cr-ex (Thompson) 1 from the 1999 Rate 1 shown in this exhibit, the next 2 line up under actual normalized average uses. It is 3 down from 3310; correct? 4 MR. MEES: Although they are on two 5 different sets of degree days, yes, that is correct. 6 MR. THOMPSON: The average use you 7 are seeking -- we know it's a product of degree days, 8 but it is 3218 down from 3310; right? 9 MR. MEES: Yes, that is correct. 10 MR. THOMPSON: And that is a decline 11 of 92 metres that you are forecasting; correct? 12 MR. MEES: Subject to check, yes, 13 that is correct. 14 MR. THOMPSON: 3218 subtracted from 15 3310, I make to be 92 metres. Would you take that 16 subject to check? 17 MR. MEES: Yes. 18 MR. THOMPSON: All right. If you 19 look at the CAC Exhibit I, Tab 4, Schedule 1, page 3, 20 and ask yourself what has been the rate of change, the 21 average rate of change in normalized average uses for 22 Rate 1, you can see that from 1991 to 1992 it went from 23 3530 down to 3508; correct? 24 MR. MEES: Yes, I can see that. 25 MR. THOMPSON: And that is a 22 26 metered cubed rate of change? Would you take that 27 subject to check? 28 MR. MEES: Subject to check, yes. 170 MEES/GOULD, cr-ex (Thompson) 1 MS GOULD: Could I just make one 2 clarification on the use of "rate of change". I think 3 it is important to note that the information that is 4 presented on the CAC IR is the comparison of the 5 Board-approved average use to the actual results that 6 the company saw in average use. 7 I think to get a clearer picture of 8 rate of change, we need to look at the average use 9 trends that we presented at Exhibit C5, Tab 3, Schedule 10 10. That really highlights the rate of change between 11 one year and the next and specifically from the 12 company's 1998 actuals to its estimate to its proposed 13 budget. 14 MR. THOMPSON: Would you just stick 15 with me on this exhibit. 16 What this shows is from 1991 to 1992, 17 a decline in average uses in Rate 1 of 22; 1992 to 18 1993, an increase in average uses of Rate 1 of 79. 19 Would you take that subject to check? 20 Sorry, it's a decrease of 79. 21 MR. MEES: Can I ask how you are 22 getting that? 23 MR. THOMPSON: 3429 subtracted from 24 3508. 25 MR. MEES: So you are looking at the 26 actual -- 27 MR. THOMPSON: Normalized average use 28 per customer. 171 MEES/GOULD, cr-ex (Thompson) 1 MR. MEES: Based on the degree days 2 in 1992 and 1993 -- 3 MR. THOMPSON: Based on the 4 methodology that the company uses to forecast revenues. 5 MR. MEES: Yes. 6 MR. THOMPSON: I can go from line to 7 line in each case and, if you would agree with me 8 subject to check, from 1993 to 1994 it goes up nine; 9 from 1994 to 1995, down 97; from 1995 to 1996, up 64; 10 from 1996 to 1997, down 85; from 1997 to 1998, up 16; 11 from 1998 to 1999, down 25. 12 If I add all of those up to get an 13 average rate of change in actual normalized average 14 uses, would you take subject to check that the total is 15 397 divided by eight, which works out to about 49.6 or 16 50 M3? 17 Would you take that subject to check? 18 MR. MEES: Subject to check. 19 MR. THOMPSON: So what you are 20 forecasting for 2000, being a 92-metre decline from 21 1999 to 2000, exceeds the average rate of change, using 22 this exhibit, by 42 cubic metres. 23 Would you take that subject to check? 24 MR. MEES: Yes, although as Ms Gould 25 has already indicated, it is not based on the degree 26 days in the 2000 budget. It is based on the degree 27 days it has in each of the Board-approved volumes for 28 each of the years. 172 MEES/GOULD, cr-ex (Thompson) 1 MR. THOMPSON: Based on the 2 methodology that you are using -- which has its degree 3 day component; there is no doubt about it -- I put it 4 to you that that change where you are seeking a 5 92-meter cubed decline in average uses compared to the 6 average rate of change from year to year appears 7 excessive. That is why intervenors are challenging 8 your forecast. 9 MS GOULD: Again, I think we do need 10 to clarify. 11 If I could draw your attention back 12 to C5, Tab 3, Schedule 10, we -- 13 MR. THOMPSON: What exhibit is this, 14 then? 15 MS GOULD: It would be the average 16 use put on a comparable degree day basis, because we 17 have taken the degree day methodology. We have divided 18 the method 1 fallout with the second average uses. 19 But I think if you look at the trend that we have seen 20 year over year, after allowing for those changes and 21 average uses, you can see declines year over year that 22 range from a decline of 56, or 1.64 per cent, down to 23 it being somewhat neutral. 24 I think we need to compare that to 25 what we are looking or predicting for fiscal 2000, 26 which is a decline of 24, or .74 per cent. That is 27 consistent with what we have seen over the 1991 to 1998 28 time frame. 173 MEES/GOULD, cr-ex (Thompson) 1 MR. THOMPSON: I will argue that with 2 you. 3 The reality is that your forecasts 4 are not based on a constant degree day methodology. 5 They are based on a change in degree day. 6 So the reality for actual normalized 7 average uses is presented in CAC No. 1; correct? 8 MR. MEES: We don't agree. I think 9 you are trying to combine two factors there when we are 10 looking at one consistent set of degree days as shown 11 in C5, Tab 3, Schedule 10 and the degree day 12 methodology as already indicated. 13 MR. THOMPSON: In terms of the impact 14 of an increase in the average uses from what you 15 forecast, if the Board subscribes to our position that 16 it should be no more than 50 reduction, then that would 17 result in an increase of 42 cubic metres in the average 18 use for Rate 1. 19 Is the undertaking that you gave 20 before going to tell us what impact an increase of 10 21 cubic metres in the average use of Rate 1 will have on 22 the revenue requirement? 23 MR. MEES: It was just Rate 6, but we 24 can include Rate 1 if you want it. 25 MR. THOMPSON: Would you do that. 26 Provide the revenue requirement impact of an increase 27 in average use on Rate 1 of 10 cubic metres? 28 THE PRESIDING MEMBER: Mr. Thompson, 174 MEES/GOULD, cr-ex (Thompson) 1 just so that I can follow it, I have here the answer to 2 your interrogatory 23. 3 --- Pause 4 THE PRESIDING MEMBER: That is 5 I12-23. You have an answer there. You want something 6 in addition to that as far as the residential sector is 7 concerned? 8 MR. THOMPSON: I think that is 9 slightly different. What I was trying to do was just 10 to get it on a -- what this I believe tells me is that 11 if the average use was 310, which would be 92 -- 12 Well, I am not sure what it tells me. 13 MR. MEES: Perhaps I can clarify. 14 This response assumes that there is no reduction in 15 average use in 2000. The 2000 budget would not have 16 the reduction of 24. 17 THE PRESIDING MEMBER: I see. Okay. 18 Could you live with the proportionality issue? 19 MR. MEES: It will be based on most 20 of that. 21 MR. THOMPSON: This number has been 22 provided to us in another process, so it shouldn't be 23 difficult for the company to produce it. 24 MR. MEES: We can provide it. As 25 Mr. Thompson already indicated, we do have the 26 information available. 27 THE PRESIDING MEMBER: Could you 28 repeat that, Mr. Thompson, please? 175 MEES/GOULD, cr-ex (Thompson) 1 MR. THOMPSON: Yes. It is providing 2 the impact on revenue requirement of an increase in the 3 average use for Rate 1 customers of 10 cubic metres of 4 the forecast of 3,218. 5 THE PRESIDING MEMBER: Mr. Mees, 6 could I add something to Mr. Thompson. Mr. Thompson 7 will be assisted by having the bottom number for 8 argument, but if the Board were inclined to make a 9 change what we need is a change to the revenue line and 10 a change to the cost-of-gas line. The rest I don't 11 need to see because the model will do it for us. Do 12 you understand? 13 MR. MEES: Yes, I do. 14 THE PRESIDING MEMBER: Okay. So 15 maybe you could just send an addendum to it, 16 whatever -- 17 MR. MEES: We will provide that 18 breakdown. 19 THE PRESIDING MEMBER: All right. 20 MS LEA: In Undertaking J1.3, did you 21 also wish, Mr. Vlahos, to have those figures for the 22 Rate 6 customers? It sounds to me like that would be 23 of assistance also to the Board. 24 MR. THOMPSON: I was going to get to 25 that in a minute. 26 MS LEA: Oh, I beg your pardon, 27 Mr. Thompson; I'm leaping ahead. 28 So is all that under J1.3? Is that 176 MEES/GOULD, cr-ex (Thompson) 1 what I understand, it is all in the one undertaking? 2 MR. THOMPSON: Just Rate 1 was under 3 J1.3. 4 MS GOULD: That would be the simplest 5 to respond to, but I will -- 6 MR. THOMPSON: There is an earlier 7 undertaking dealing with Rate 6. 8 MS LEA: All right. Thanks. Thank 9 you. 10 MR. THOMPSON: Just before I turn to 11 Rate 6, is there anywhere in the evidence where we have 12 the actual average use for 1998 Rate 1? Not actual 13 normalized, but just actual. 14 --- Pause 15 MR. MEES: No, I don't believe we do 16 have that explicitly in our evidence. We do have the 17 1998 actual volumes and the 1998 actual customers, but 18 we never divided it out. 19 MR. THOMPSON: Is it just a case of 20 dividing one into the other? 21 MR. MEES: We do it on a monthly 22 basis, but it would be a pretty close approximation by 23 doing it -- 24 MR. THOMPSON: Could I ask, by way of 25 undertaking, that you give us the actuals unnormalized 26 for Rates 1 and 6 for 1998? 27 MS LEA: J1.5 28 Undertaking No. J1.5 177 MEES/GOULD, cr-ex (Thompson) 1 MR. THOMPSON: Because 1998, we are 2 told somewhere, was the warmest year on record ever. 3 Is that right? 4 MR. MEES: I'm not sure if it was 5 ever, but it was pretty hot. The warmest in recent 6 memory, that's for sure. Although 1999 is coming very 7 close. 8 MR. THOMPSON: On the 1999 situation, 9 the company's evidence and the ADR process all 10 proceeded on the basis of the forecasted average use 11 for Rate 1 being 3,310. Do I understand you to be 12 saying you are going to update that? 13 MS GOULD: No, I don't think that 14 was -- I think what we are saying is we continued to 15 monitor average use trends. That is part of what we 16 did as our major review process. To the extent that we 17 saw anything that would question our budget for 2000, 18 we would have done so at that point, but it is not our 19 intention. 20 MR. THOMPSON: All right. 21 So the point of departure, then, 22 remains the 3,310 for the purposes of measuring the 23 reasonableness of your 3,218. Have I got that 24 straight? 25 MR. MEES: It is the point of 26 departure from 2000, although we do use the 1998 27 actuals as our ultimate starting point. 28 MR. THOMPSON: But you seem to be 178 MEES/GOULD, cr-ex (Thompson) 1 implying or suggesting to Mr. Warren that you have done 2 a last minute check of your 1999 average uses and they 3 are coming in much lower, and you implied that we would 4 be getting some sort of update, which suggested to me 5 you are now changing this 3,310. 6 MR. WARREN: Gentlemen, I wonder if 7 we could just check the record on the undertaking 8 because I thought I asked for an undertaking for 9 exactly that number. 10 MR. MEES: Yes. We will be providing 11 that, but we will not be updating our evidence to 12 reflect the revised 1999 estimate. 13 MR. THOMPSON: Just so I'm clear. 14 Thanks very much for that. 15 MS GOULD: I will just clarify. As 16 Mr. Mees noted we are experiencing trends in average 17 use that are coming below our 1999 estimate and our 18 1999 Board approved. 19 We have undertaken significant study 20 and we plan on -- we are actually about to embark on a 21 study with the Gas Research Institute so that we get a 22 better understanding of what is driving that decline, 23 but at this point don't have sufficient empirical 24 evidence for us to come forward with an update at this 25 point in time. 26 MR. THOMPSON: Thank you. 27 Could I turn, then, now to Rate 6 and 28 again back to CAC No. 1, page 3. You were discussing 179 MEES/GOULD, cr-ex (Thompson) 1 this with others. This is the over-forecasting of 2 Rate 6. But just to get the average uses for Rate 6 3 from the bridge year to the test year, this exhibit -- 4 and I'm looking at the bottom of the page in the second 5 column -- shows Rate 6 for 1999 average use of 23,523. 6 Correct? 7 MR. MEES: Yes, that's correct. 8 MR. THOMPSON: And the forecast for 9 2000 is 22,844 for Rate 6. Correct? 10 MR. MEES: That's correct, based on 11 the 2000 budget -- 12 MR. THOMPSON: And that is a decline. 13 Correct? 14 MR. MEES: Yes, it is. 15 MR. THOMPSON: And you told 16 Mr. Warren you were forecasting an increase for Rate 6 17 and that just didn't reconcile with these numbers. 18 MR. MEES: As we previously 19 indicated, on a normalized basis we are forecasting an 20 increase. 21 MR. THOMPSON: All right. 22 MR. MEES: Holding degree days 23 constant, reflecting the 2000 budget degree days, we 24 are showing an increase. 25 MR. THOMPSON: But you don't hold 26 degree days constant. On the basis that you are 27 forecasting the revenue requirement, we are going from 28 23,523 to 22,824. Right? That's what appears -- 180 MEES/GOULD, cr-ex (Thompson) 1 MR. MEES: We are showing a drop 2 based on the degree days -- 3 MR. THOMPSON: Now, in terms of the 4 extent to which you have over-forecast this Rate 6 5 since 1994 -- we can see that if we take 1994. The 6 Board-approved number was 23,148. I'm sorry, you are 7 under-forecasting this average use. The actual was 8 23,343, a variance of 195. We see that over in the 9 right-hand column. Right? 10 MR. MEES: Yes, I do, for 1994. 11 MR. THOMPSON: And then 1995, the 12 under-forecast was 471 M(3). Right? 13 MR. MEES: Yes. As I have already 14 indicated, this can be a little misleading because it 15 does not take into account any transfers from large 16 volume. 17 MR. THOMPSON: I will come to that in 18 a minute. I just want to get the numbers straight. 19 195 was the extent to which you 20 under-forecast in 1994; 471 was the extent to which 21 under-forecast in 1995; 421 was the extent to which you 22 under-forecast in 1996; 623 was the extent to which you 23 under-forecast in 1997; 309, the extent to which you 24 under-forecast in 1998; and, 428, the extent to which 25 you under-forecast in 1999. Correct? 26 MR. MEES: We are over in the Rate 6 27 category on average use, but, as I indicated, you need 28 to look at the bigger picture. The total gas sales 181 MEES/GOULD, cr-ex (Thompson) 1 volumes on a normalized basis which includes the 2 customer gross, which includes the large volume, we are 3 within, between 1991 to 1999 up to date, we are within 4 .26 per cent. 5 MR. THOMPSON: Take it one step at a 6 time. 7 On Rate 6 the under forecast, in 8 those last six years I make to be a total 2,447 cubic 9 metres or about 407.8 cubic metres on average. Would 10 you take that subject to check? 11 MR. MEES: Subject to check, yes. 12 MR. THOMPSON: All right. 13 And the undertaking that you gave 14 about revenue requirement, gross margin revenues and 15 gas costs with respect to Rate 6, will it tell us the 16 -- what I call -- revenue requirement impact of an 17 increase of 100 cubic metres on Rate 6? If it 18 wouldn't, would you please add that to that earlier 19 undertaking you gave about Rate 6? 20 MR. MEES: I believe the other 21 undertaking was 400, was it not? 22 MR. THOMPSON: Okay. Well, then, I 23 just need to divide it by four. That's fine. 24 Then that undertaking doesn't need 25 any change. 26 Now, you have given us a lot of 27 evidence about transfers. The margins on Rate 6, I 28 assume, are higher than the margins on the industrial 182 MEES/GOULD, cr-ex (Thompson) 1 rates. 2 MR. MEES: I believe they are 3 slightly higher, yes. 4 MR. THOMPSON: It is fairly glib, I 5 suggest, to say, "Well, we underestimated on Rate 6, 6 but we overestimated somewhere else." Is that what you 7 are, in effect, telling us? 8 MR. MEES: Although we do go back to 9 try to ensure that we put things in the right 10 categories, we are dealing with 1.5 million customers 11 and there are switches back and forth. In particular, 12 the large volume rates are very volatile. 13 For example, in 1997 we added a 14 tremendous amount of large volume actual customers in 15 the apartment sector, and in 1998 we had a bit of a 16 shakeout. They didn't have the volumes necessary and 17 they moved into our general service rate. We saw that 18 impact in 1998 and we are reflecting that in 1999. 19 MS GOULD: As part of our process, as 20 Mr. Mees mentioned, we have met with our account 21 executives and we do look at those customers that are 22 on the border line to try to get an idea of what 23 initiatives they have under way that may impact their 24 consumption. A lot of the switches we saw and 25 reflected in the 1999 estimate were in health and 26 education, where a lot of our customers undertook 27 specific conservation efforts that actually moved them 28 from a large volume to a Rate 6 classification. 183 MEES/GOULD, cr-ex (Thompson) 1 So I don't think we are saying, 2 "Don't worry, it goes from one class to another." We 3 attempt, to every degree possible, to measure that at 4 the outset. 5 MR. THOMPSON: The evidence suggests 6 that you are 400 metres, on average, light in your 7 forecasts on Rate 6. Now, as I understood your 8 responses to others, you took us to Exhibit C5, Tab 3, 9 Schedule 10 and somehow had us conclude that this 10 evidenced transfers. Did I understand you correctly? 11 MR. MEES: It is one place where I 12 can show you that it is fairly evident that there are 13 large increases and decreases over time, particularly 14 in the apartment sector. 15 MR. THOMPSON: But it doesn't say 16 anything about transfers. 17 MR. MEES: We have talked about that 18 in the evidence. In this exhibit we do talk about the 19 factors that are driving the average use, and we 20 mention, in particular, that large volume transfers 21 have a large impact on the apartment sector and, 22 therefore, the overall Rate 6. 23 MR. THOMPSON: What this exhibit 24 shows me is -- first of all, it talks about apartments, 25 and that is not just Rate 6, right? Because the Rate 6 26 average use, we have been told, is 24 -- I'm sorry. 27 You are forecasting it at 22,844, and here under 28 apartment we are talking about average uses almost four 184 MEES/GOULD, cr-ex (Thompson) 1 times that amount. 2 So this is not Rate 6 only under the 3 category "apartment". 4 MR. MEES: What is shown here is the 5 general service rate, which is Rate 6. So the Rate 6 6 number of the year we are referring to includes both 7 apartment commercial and industrial for the general 8 service market. 9 MS GOULD: That's right. There would 10 be no large volume customers reflected in this 11 particular C5, Tab 3, Schedule 10 exhibit, or the 12 associated variance discussion. 13 MR. THOMPSON: There is no evidence 14 here, then, of transfers to large volume? Is that what 15 you are saying? 16 MR. MEES: No, I did not say that. 17 If I could take you to that same exhibit, but at page 18 5 -- 19 MR. THOMPSON: I am talking about C5, 20 Tab 3, Schedule 10. 21 MR. MEES: Yes, and I am saying, if 22 you could turn to that exhibit, at page 5, under the 23 heading "Apartment Sector Trend", indicated in the top 24 paragraph there it shows you that large volume rates 25 have a big impact -- a significant impact on average 26 uses as they move back and forth between general 27 service rates and large volume rates. 28 MR. THOMPSON: No, but there is 185 MEES/GOULD, cr-ex (Thompson) 1 nothing in the numbers that shows the transfers that 2 you are talking about to an industrial rate. Because I 3 thought you just told me this C5, Tab 3, Schedule 10 is 4 limited, I thought you said, to general service and 5 Rate 6 combined and does not include industrial rates. 6 Is that correct? 7 MR. MEES: This does not include any 8 large volume rate. 9 MR. THOMPSON: Does this exhibit, C5, 10 Tab 3, Schedule 10, show any transfers about which you 11 were speaking? I can't find them. 12 MR. MEES: It doesn't specifically 13 show the amount that is transferring between each year, 14 but it does, in general, show you the trend that is 15 happening -- the ups and downs we have just 16 discussed -- that this has a large impact. 17 MR. THOMPSON: So it shows a trend 18 in -- let's just take the apartment line. What is the 19 change line telling us there? Is that some evidence of 20 under-forecasting? Because that trend line isn't the 21 same as what we saw in the CAC exhibit, where we had 22 consistent under-forecasting in the years 1994 on. 23 MS GOULD: That's right. This isn't 24 a reflection of a comparison against forecast; it is a 25 comparison against actual average use in one year to 26 actual average use in another year. 27 So if we were to compare 1995 to 28 1996, for instance, we actually experienced and 186 MEES/GOULD, cr-ex (Thompson) 1 measured an increase in average use in the apartment 2 sector of 1.91 per cent. That reversed in the next 3 year and we saw a decline in that particular sector in 4 average use of 1.24 per cent. So that illustrates, 5 within this particular class, the shifting between Rate 6 6 and large volume, as average use is very susceptible 7 and volatile as these large customers move in and out 8 of this particular rate class. 9 THE PRESIDING MEMBER: Ms Gould, 10 those are normalized. You said "actual", but they 11 are -- 12 MS GOULD: I'm sorry. Actual 13 normalized, that's right. 14 MR. THOMPSON: Is there anywhere that 15 we see how many move in and out? I can't find it. 16 You tell us that, but the evidence 17 strikes me as being equally consistent with forecasting 18 errors in two categories of account, the industrial and 19 the apartment. And you tell us, "That's because there 20 were transfers", but there isn't any evidence that I 21 can see of who moved in and who moved out. 22 MR. MEES: No, we don't have the 23 specific number of customers there moving in or the 24 amount of volume that is moving in, although in 1998, 25 for example, in the apartment sector, there was in the 26 neighbourhood of 20 10(6)s. 27 MR. THOMPSON: Thank you. Those are 28 my questions. 187 MEES/GOULD, cr-ex (Thompson) 1 THE PRESIDING MEMBER: Thank you, Mr. 2 Thompson. 3 Ms Lea? 4 MS LEA: No questions. Thank you. 5 THE PRESIDING MEMBER: The Board has 6 no questions. 7 Mr. Cass, do you have any re-direct? 8 MR. CASS: No, Mr. Chairman. Thank 9 you. 10 MS LEA: I have one announcement, in 11 the nature of a public service announcement, whenever 12 that is appropriate. 13 THE PRESIDING MEMBER: All right. 14 MS LEA: Thank you. There are two 15 matters. 16 Mr. Cass, is Mr. Farrell going to let 17 us know whether the scoping document and the ADR 18 document -- 19 I am just wondering what we do now, I 20 guess. I gather that the next panel, deferral 21 accounts -- it is still under discussion as to whether 22 that is going to be necessary to hear evidence upon. 23 MR. CASS: Yes, I think that's 24 correct, Ms Lea. Mr. Ladanyi has indicated to me that 25 Mr. Farrell will be able to deal with the scoping 26 document tomorrow. 27 MS LEA: All right. Thank you. 28 The public service-type announcement 188 MEES/GOULD, cr-ex (Thompson) 1 that I have is that, for those counsel who are 2 interested in the motion in the electricity proceeding 3 tomorrow, when I spoke on the record earlier I didn't 4 know whether it was at 9:00 or at 9:30. It is actually 5 at 9:00 that that motion begins tomorrow. I thought I 6 would put that on the record. 7 THE PRESIDING MEMBER: All right. We 8 are going to stand down until one o'clock tomorrow, but 9 I was hoping that Mr. Cass and Mr. Farrell would give 10 us some assistance today as to the ADR document, so 11 that we don't spend a lot of time on it -- the 12 Board -- to find out, "Oh, disregard it. There is a 13 brand new document coming in", and we have to read from 14 page 1. 15 Do you have any guidance? 16 MR. CASS: I am sorry, Mr. Chairman. 17 I am told that Mr. Farrell has had to go out of town, 18 and I am afraid that I can't offer any more than that 19 at this point. I apologize for that. 20 THE PRESIDING MEMBER: Mr. Thompson 21 was conversing with him and -- 22 MR. THOMPSON: Yes, thank you, Mr. 23 Chairman. 24 The intervenors met and developed 25 their responses to very few points in the settlement 26 proposal, which have been communicated to Mr. Farrell. 27 So I would be optimistic that we will have those items 28 solved. 189 MEES/GOULD, cr-ex (Thompson) 1 The same thing with the scoping 2 document. The intervenors met and we provided Mr. 3 Farrell with our comments, which he is considering. 4 I am hopeful that that is also a 5 document that will be finalized tomorrow. 6 THE PRESIDING MEMBER: Okay. Thank 7 you, Mr. Thompson. 8 So apart from the motion, then, 9 Mr. Mondrow's motion tomorrow at one o'clock, can we 10 venture to say what issues may be coming forward? 11 I know, Mr. Cass, it is not one of 12 your issues, other than the KASZDA, it's Ms Soudek's 13 issue, but can anybody give us some guidance as to what 14 not to read? 15 MR. WARREN: Yes, Mr. Chairman. I 16 think you should be aware that with respect to KASZDA I 17 think that it is an argument-only matter. So there 18 won't be any evidence on that at all. 19 THE PRESIDING MEMBER: All right. 20 That helps. 21 MR. CASS: I think, Mr. Chairman, we 22 would be moving to the NGV program. That is the next 23 panel. 24 THE PRESIDING MEMBER: So NGV will be 25 on, then. 26 I'm sorry. I didn't hear you, 27 Mr. Cass. 28 MR. CASS: Yes. The next panel after 190 MEES/GOULD, cr-ex (Thompson) 1 the conclusion of the motion, I believe, Mr. Chairman, 2 would be the NGV program. 3 THE PRESIDING MEMBER: Okay. And the 4 retention is still an issue there, Mr. Mondrow? 5 MR. MONDROW: We don't take any issue 6 with the NGV program at all, Mr. Chairman. Our issue 7 is with respect to the HGAI program, the issue 8 following that. 9 THE PRESIDING MEMBER: Okay. 10 Mr. Thompson or Mr. Warren? 11 MR. BRETT: We have some 12 cross-examination on the NGV program, but I don't 13 expect it will be more than 10 or 15 minutes maximum, 14 sir. 15 THE PRESIDING MEMBER: I'm sorry? 16 MR. BRETT: I have a brief one, but 17 it will be no more than 10 minutes. 18 THE PRESIDING MEMBER: Mr. Thompson? 19 MR. THOMPSON: I just wanted to know 20 whether the issue is on the rate of return or it is 21 retention within the company. Is that what "retention" 22 means? 23 MR. MONDROW: Yes. 24 THE PRESIDING MEMBER: That's what it 25 means. All right. 26 MR. MONDROW: I think what it 27 means -- on the issues list it is a classification 28 under the undertakings, the 1998 undertakings, as 191 MEES/GOULD, cr-ex (Thompson) 1 another business for which prior approval is required 2 for retention. 3 THE PRESIDING MEMBER: All right. I 4 guess that will be enough for half a day tomorrow. 5 Thank you very much. 6 MR. CASS: Mr. Chairman, I do have an 7 updated version of the hearing schedule now that could 8 be passed around. I think Mr. Farrell indicated this 9 morning that it would be a work-in-progress and I think 10 this is the second version now. 11 THE PRESIDING MEMBER: All right. 12 That would reflect the discussion this afternoon, 13 Mr. Cass, as to what issues may be going to argument? 14 MR. CASS: I don't think it does. 15 THE PRESIDING MEMBER: You don't. 16 All right. 17 MR. CASS: I don't think it is that 18 fully up to date, Mr. Chairman. I'm sorry. 19 THE PRESIDING MEMBER: Maybe we 20 should just -- 21 MR. CASS: Not bother? 22 THE PRESIDING MEMBER: Maybe just 23 wait, then, for tomorrow. 24 MR. CASS: Okay. Thank you. 25 MS LEA: Thank you. 26 MR. THOMPSON: Mr. Chairman, on the 27 NGV program, because it is not a contentious part of 28 the scoping document, it might be helpful if I just 192 MEES/GOULD, cr-ex (Thompson) 1 read into the record what part you see the issue as 2 being here. 3 THE PRESIDING MEMBER: Well, that 4 would definitely help the Board, Mr. Thompson. 5 Mr. Cass, do you have a problem with 6 that? 7 MR. CASS: No, not at all, 8 Mr. Chairman. 9 MR. THOMPSON: Under the topic 10 headings "Natural Gas Vehicle Program", "Rate of 11 Return" and "Retention" the scoping document reads as 12 follows: 13 "The following parties 14 participated in the discussion 15 of this issue: the Company, 16 CAC, Energy Probe, HVAC, IGUA, 17 OAPPA, Schools, and VECC. 18 There is no agreement to 19 settle these issues. The 20 Company and the other parties 21 cannot agree on the imputation 22 of revenue to the NGV Program if 23 the marketing component is 24 retained and, if it is not, on 25 the basis for removing the 26 marketing component. 27 The Company proposes to 28 retain the NGV Program, as an 193 MEES/GOULD, cr-ex (Thompson) 1 ancillary activity, but not 2 impute revenue. The other 3 parties propose to impute 4 revenue. 5 On the other hand, if the 6 marketing component of the NGV 7 Program were transferred to a 8 non-subsidiary affiliate, the 9 Company would propose to remove 10 the marketing component on the 11 basis of direct and marginal 12 costs. The other parties would 13 propose to remove the marketing 14 component on the basis of fully 15 allocated costs." 16 So that is the issue with respect to 17 NGV. 18 THE PRESIDING MEMBER: Thank you, 19 Mr. Thompson. 20 Any other matters before we adjourn 21 for the day? 22 Thank you very much, then, and we 23 will see you tomorrow at one o'clock. 24 --- Whereupon the hearing adjourned at 1600, to resume 25 on Tuesday, August 24, 1999 at 1300 974 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Monday, July 19, 1999, 26 commencing at 9:00 a.m. 27 28 VOLUME 5 975 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Producers' 18 Society of Ontario, IPPSO 19 ELIZABETH DEMARCO Various interested parties 20 BRIAN McKERLIE Municipality of Chatham-Kent 21 ROBERT WARREN Consumers Association of 22 Canada. 23 DICK PERDUE Direct Energy and Enershare 24 Technology 25 DAVID POCH Green Energy Coalition, GEC 26 ZIYAAD MIA Coalition of Distribution 27 Utilities et al 28 976 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 Incorporated, ECMI 11 RICK GROULX 12 MARK RONAYNE Competition Bureau 13 KEITH RAWSON TransCanada Power 14 ANDREW BARRETT/ Ontario Power Generation 15 SHANE FREITIG Inc. 16 RICHARD BATTISTA Union Gas Limited 17 BARBARA BODNER Enbridge Inc. 18 AMIR SHALABY Ontario IMO 19 DAN PASTORIC Energy Advantage 20 JIM RICHARDSON/ Upper Canada Energy Alliance 21 PAUL FERGUSON 22 MICHAEL JANIGAN Vulnerable Energy Consumers 23 Coalition 24 GRAHAM HENDERSON Ontario Hydro Services 25 Company 26 27 28 977 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 978 4 Presentation by Mr. John Brooks 978 5 Presentation by Ms Paula Casciato 981 6 Questions of Mr. Brooks and Ms Casciato 990 7 Presentation by Mr. Jack Gibbons 1001 8 Questions of Mr. Gibbons 1008 9 Presentation by Mr. Keith Rawson 1011 10 Questions of Mr. Rawson 1013 11 Presentation by Mr. Al Barnstaple 1029 12 Presentation by Mr. Barry Chuddy 1036 13 Questions of Mr. Barnstaple and Mr. Chuddy 1037 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 978 1 Toronto, Ontario 2 --- Upon resuming on Monday, July 19, 1999 3 at 9:00 a.m. 4 MS O'RILEY: Welcome to the fifth day 5 on the Technical Conference on the Standard Supply 6 Service Code. The presenters this morning are Toronto 7 Hydro. 8 I wondered if there were any 9 procedural matters to be dealt with before we start 10 with them. 11 Second, if people haven't signed the 12 timesheets to indicate if they have questions for the 13 people in the lineup today, I would appreciate if they 14 could do that. 15 Mr. Rodger. 16 MR. RODGER: Thank you, Ms O'Riley. 17 Toronto Hydro has three presenters. 18 I will leave the introductions for Mr. Brooks. 19 I have just advised my friends here 20 that the prefiled alternative that Toronto Hydro 21 already submitted to the Board was dated July 5, 1999. 22 I believe everyone has copies of that. 23 With that, I will turn it over to 24 Mr. Brooks to make the introductions. 25 PRESENTATION 26 MR. BROOKS: Thank you, Mark. 27 I have with me Bruce MacOdrum, our 28 legal counsel. I am sure everybody knows who Bruce is. 979 BROOKS/CASCIATO, presentations 1 Also with me is Paula Casciato, one 2 of our energy procurement specialists at Toronto Hydro. 3 She has been a member of the MDC Retail Technical Panel 4 and a member of the Default Supply Subpanel and the 5 Licensing and Code Subpanel. 6 She is our expert up here. 7 I am here this morning to make a few 8 general remarks. I will turn over later the podium to 9 my colleagues to get into some more details on the 10 technical side of this question. 11 I did come here this morning because 12 I recognize the critical importance of the Standard 13 Supply Service Code to the future retail market on both 14 the supplier's side and the customer's side. 15 It is my belief that imposition of a 16 spot price pass-through for standard supply service 17 will ultimately jeopardize the credibility of the 18 entire effort to introduce competition to the 19 electricity market. 20 The Ministry intends to launch an 21 information campaign some time in the fall in an effort 22 to educate, to some extent, the electricity customer 23 about the coming competitive market. The main theme of 24 this campaign will be customer choice. Customers will 25 have lots of choices, which they have never had before, 26 and the freedom to choose their supplier will motivate 27 those suppliers to provide better prices and innovative 28 and improved services. This has been the rationale for 980 BROOKS/CASCIATO, presentations 1 the retail market since the MacDonald Committee Report. 2 Toronto Hydro, for one, has always 3 supported this concept. 4 I believe, as do most of us, that the 5 majority of customers will not want to be bothered 6 switching suppliers, and they will be assured in this 7 upcoming media campaign that they don't have to. 8 I also believe that most of those 9 customers will not be very happy that if they choose to 10 do nothing, they will be forced to accept a pricing 11 regime that could expose them to the volatility of the 12 spot market. 13 The City of Toronto has a great 14 number of low income and senior citizen residents whose 15 incomes do not have the flexibility to weather the 16 swings in electricity prices such as would have been 17 experienced in this province over the past six weeks if 18 there was already a retail market here. 19 I cannot imagine how I would explain 20 to these customers why their bills had jumped so 21 dramatically. How do you explain to the average 22 customer that they shouldn't worry; that the spot price 23 is ultimately the lowest price they could get, and that 24 it will average out over the long run, whatever the 25 long run might be. 26 People not associated with the 27 electricity industry aren't very clear as to why we are 28 doing this competition thing in electricity. I believe 981 BROOKS/CASCIATO, presentations 1 that it is critical for the industry's success that the 2 majority of electricity customers see retail 3 competition in a positive light, and they will only do 4 so if they are offered something as good as or better 5 than they have now. I don't believe that spot price 6 pass-through fits the bill. 7 Most of us electricity consumers -- I 8 presume all of us are, actually -- and I would 9 certainly urge everyone to remember that perspective 10 when it comes to determining what the ultimate outcome 11 of these hearings will be. All of the economic theory 12 and organizational theory aside, it ultimately comes 13 down to the customer. 14 I think those are the most important 15 people to hear from and ultimately will be the ones who 16 judge whether this is a success or not. 17 Those are my opening remarks. I will 18 now turn it over to Bruce MacOdrum to get into a 19 more -- or is Paula going to go first? 20 MS CASCIATO: Yes, I am. 21 MR. BROOKS: Paula is going to go 22 first. 23 PRESENTATION 24 MS CASCIATO: This presentation will 25 strengthen and support our written submission and will 26 examine the proposed SSS Code by addressing four 27 themes: one, risk management; two, facilitation of 28 competition; three, level playing field; four, what 982 BROOKS/CASCIATO, presentations 1 customers want. 2 I will begin with risk management. 3 Who should bear the price volatility 4 risk? Risk should be borne by those best able to 5 manage them. The proposed SSS Code, with a spot price 6 pass-through, provides no price certainty for SSS 7 customers. All customers are, by definition, SSS 8 customers until they select an alternative pricing 9 option. 10 In order for our customers to select 11 among alternatives, we want to help them gather 12 information and be able to make informed decisions. In 13 other words, we plan to work with our customers to help 14 them manage their risk by selling them power and by 15 educating and empowering them to understand their 16 options. 17 By imposing a spot price on a 18 customer in a new market with which they have no 19 familiarity or experience and likely little 20 understanding of even the components of the price of 21 electricity, we risk hurting support for introducing 22 competition to this industry in the first place. 23 Public support for competition itself will be at risk. 24 While rate changes annoy customers, 25 not being able to tell customers their rates can be 26 expected to annoy them more. We know this from our 27 recent experience in Toronto with our current rate 28 harmonization for residential customers. We have six 983 BROOKS/CASCIATO, presentations 1 rates for the former six municipal utilities, which are 2 being harmonized into uniform rates. Our customers 3 tell us, daily in fact, that they don't understand the 4 reasons for the changes. Our costs and our activity 5 level and, of course, the costs associated with 6 responding to this level of customer concerns imposes 7 real costs on our utility. 8 Now let's imagine that we have 9 implemented the SSS spot price methodology. We would 10 see different rates on every billing period. These 11 will likely be highest in summer and winter and lowest 12 and spring and autumn seasons. 13 Another complication is that we, like 14 all other utilities, send out bills daily. So, this 15 might mean that two neighbours living across the street 16 from one another might have the same energy consumption 17 in a billing period, but end up paying different rates 18 and total bills, depending on their billing cycles. 19 The wholesale spot market will clear 20 on an hourly basis according to bids and offers by 21 wholesale generators and purchasers. Generators' bids 22 assuming competition in the spot market will reflect 23 generating even at short-run marginal costs. This, of 24 course, assumes competition and generation, something 25 that we may only achieve in Ontario over the next 10 26 years. 27 The prices at which the spot market 28 clears will more likely be representative of OPGI, 984 BROOKS/CASCIATO, presentations 1 Ontario Power Generation Inc.'s, bidding strategy and 2 not competitive market prices. This strategy should be 3 based around recovering a maximum of revenue under the 4 revenue cap provisions of the MPMA or Market Power 5 Mitigation Agreement. At the same time, it may work to 6 deter new entry. The actual PGI's bidding strategies 7 that may result from these circumstances are impossible 8 to predict. 9 SSS customers, all customers 10 initially, will be subject to rates and price 11 fluctuations most directly influenced by OPGI. Small 12 customers have the least ability to understand the 13 market structure, the prices they will face in the spot 14 market and will not be able to measure whether 15 retailers' offers are likely higher, lower or 16 equivalent to the future average spot market price 17 corrected by an even more complicated MPMA and rebate 18 formula. This lack of understanding will lead to 19 numerous calls and complaints and, we believe, little 20 customer migration. 21 Under the proposed SSS Code, LDCs and 22 providers of the SSS are relieved of any risk if they 23 simply take power from the spot market and sell it to 24 customers at spot prices plus administration charges. 25 This proposed Code accomplishes the goal of risk 26 mitigation for the SSS provider. However, the question 27 remains: Is it appropriate to transfer this risk 28 entirely onto small customers? Our position is that it 985 BROOKS/CASCIATO, presentations 1 is clearly not appropriate. 2 I have already presented some of 3 Toronto Hydro's customers' reactions to our rate 4 changes due to amalgamation in the city of Toronto. We 5 cannot support a system that will add significant 6 uncertainty on the consumers' bills. 7 The price risks for participating in 8 a market should be borne by those who are best able to 9 manage them. Because of the extent of the industry 10 knowledge required and the costs and complexity of 11 hedging these risks, customers not able to should not 12 be expected to bear this burden. Customers will have 13 to learn about the new competitive electricity market, 14 compare effectively retailer offers, choose one and 15 sign a service contract. Experience in other 16 industries has shown that many customers are reluctant 17 to switch. This is compounded when the standard offer 18 with which to compare offers is based on a spot price. 19 Spot price standard supply service 20 does not allow for an apples-to-apples comparison of 21 retail price offers. The MPMA does not protect small 22 customers. There could be considerable monthly or 23 seasonal price volatility. Yet OPGI may still have an 24 overage price less than 3.8 cents. 25 Additionally, once the MPMA is no 26 longer in effect, which could be on market opening if 27 OPGI moves quickly to reach decontrol targets, there 28 will be no protection in place for small customers. It 986 BROOKS/CASCIATO, presentations 1 may well be that the Board will be in the position of 2 developing a new SSS methodology in the absence of the 3 MPMA to afford some level of customer protection and 4 price certainty. 5 Now on to facilitation of 6 competition. It is Toronto Hydro's position that a 7 spot price pass-through option will not facilitate the 8 creation of competitive retail markets. I will 9 reiterate some of the points raised by Mr. Adamson in 10 his paper entitled "Preliminary Critique of the Draft 11 Standard Supply Service Code", dated February 9th, 12 1999. 13 The weighted average spot price model 14 on which the SSS price is based will impose significant 15 and unnecessary risks on Ontario consumers, especially 16 smaller consumers. 17 We would like to point out again that 18 competition itself may be at risk. There exists a 19 danger that the public will have a bad taste in their 20 mouth for competition if they do not understand how 21 they are being billed if there is a very great 22 difference between what they are currently paying and 23 what they will be paying in a competitive market. 24 Further confusion will result with 25 billing-period-to-billing-period price variation. All 26 of this may cause a great deal of customer 27 uncertainties with respect to the new market. 28 There is potential for negative 987 BROOKS/CASCIATO, presentations 1 public reaction. SSS price will impede the development 2 of liquid financial intermediate markets. Without a 3 fixed price, new entrant generators will face a higher 4 cost of capital, if they can secure financing at all. 5 The fixed alternative is therefore 6 imperative for efficient risk sharing amongst 7 customers, retailers and generators. 8 Additionally, the spot price 9 pass-through pricing method proposed by the Ontario 10 Energy Board will impede the competitive position of 11 new entrants in the generation and retail markets. 12 I will now turn over the presentation 13 to Bruce MacOdrum. 14 MR. MacODRUM: Thank you, Paula. 15 Both the Market Design Committee and 16 Board staff have stated that its goal is to create a 17 level playing field, but we believe the effect of their 18 proposal is to place unfair burdens on local 19 distribution companies like Toronto Hydro. 20 The shareholder value of the business 21 corporations that were recently incorporated by the 22 City of Toronto on June 23rd will be based on an 23 assessment of the value of the businesses in which 24 Toronto Hydro is engaged today and those it will be 25 engaged in in the future. 26 Toronto Hydro's relationship with its 27 customers is an important ingredient in any 28 determination of shareholder value. 988 BROOKS/CASCIATO, presentations 1 Granted, this historic and valued 2 relationship that Toronto Hydro shares with its 3 customers is an advantage. Nonetheless, in our view it 4 is not an unfair advantage. 5 Of major consequence is the fact that 6 by the time competitive electricity markets begin in 7 the year 2000, Ontario's natural gas distributors will 8 already be at a significant advantage, having had 9 15 years to develop and realize separated monopoly and 10 competitive businesses from their former structured 11 integrated monopolies. 12 In summary, it is Toronto Hydro's 13 position that in order to establish a truly level 14 playing field it is necessary to allow municipal 15 electric utilities the opportunity to maintain its 16 relationship with its customers and a period of time to 17 complete the organizational and system changes 18 necessary to compete fairly in the unfolding Ontario 19 electricity market. 20 Finally, I would like to end on the 21 topic of what our customers want. Mr. Brooks has 22 already addressed this issue in some detail, but the 23 Board's solution is to place all the responsibility -- 24 or the Board's staff solution, I should say, Brian, is 25 to place our responsibility to accommodate price 26 volatility on the customer. 27 Toronto Hydro believes that its 28 customers and the taxpayers of Toronto expect Toronto 989 BROOKS/CASCIATO, presentations 1 Hydro to offer price offerings that mitigate risk and 2 that take into account their circumstances and their 3 requirements. Toronto Hydro's view is that the purpose 4 of the legislation is to provide customers with low 5 cost electricity, a choice of supplier, and to create a 6 competitive market while not exposing consumers to 7 excessive risk. 8 Accordingly, a standard supply 9 obligation should be met through an offering at a fixed 10 price in order to mitigate customer risks due to spot 11 market volatility. 12 The basic price for all standard 13 supply service customers could be set at fixed rates to 14 mitigate customer price risk due to spot market 15 volatility. 16 Our position is that the standard 17 supply customers should receive a fixed price offering 18 that is established locally by each local distribution 19 company. The fixed price should establish price 20 stability for end-use customers in a volatile commodity 21 market and should promote new entry and the offering of 22 new competitive products and services to standard 23 supply service customers. 24 The weighted average spot price model 25 on which the standard supply service price is based 26 will impose significant and unnecessary risks on 27 Ontario consumers, particularly smaller consumers. 28 The Government of Ontario promised 990 BROOKS/CASCIATO, presentations 1 customers competition in the electricity market, and by 2 promoting a fixed price option it is our view the 3 competitive market will develop more quickly than under 4 a spot price pass-through option. 5 All of these issues are, as 6 Mr. Rodger said, addressed in our submission of 7 July 5, 1999. 8 Thank you very much. 9 MS O'RILEY: Mr. Gibbons, do you have 10 any questions? 11 MR. GIBBONS: Yes. 12 John, I believe Toronto Hydro has 13 announced its plans to purchase cleaner electricity 14 from the Lakeview Generation Project and from the 15 Boralex Cogeneration Project? 16 MR. BROOKS: That's right. 17 MR. GIBBONS: How much electricity 18 would you be purchasing from those projects? 19 MR. BROOKS: The Lakeview Project 20 would be somewhere in the order of 250 megawatts; and 21 Boralex, that's similar, about a similar amount. 22 MR. GIBBONS: You have also announced 23 proposals to build two wind turbines on the lake front? 24 MR. BROOKS: Yes. 25 MR. GIBBONS: Those three or four 26 projects, what percentage of your power would come from 27 them? 28 MR. BROOKS: In total, no more than 991 BROOKS/CASCIATO 1 20 per cent. 2 MR. GIBBONS: Has your shareholder 3 expressed support for your endeavours to purchase 4 cleaner power? 5 MR. BROOKS: Oh, absolutely. They 6 are 100 per cent behind us, yes. That is certainly one 7 of the mandates we have been given by our shareholder. 8 MR. GIBBONS: Thank you. Those are 9 my questions. 10 MS O'RILEY: Mr. Power, do you have 11 questions for this presenter? 12 MR. POWER: I have just one, please; 13 open to the panel, I guess. 14 What affect will the Affiliate 15 Relationships Code 2.5.7 have on your intended business 16 operations? 17 MR. MacODRUM: Mr. Power, I'm not so 18 sure, under the issues list, how much the Affiliate 19 Code gets into this. We have obviously taken a close 20 look at the Affiliate Code. It is attached to our 21 distribution licence which we are operating under. We 22 certainly, in the time period afforded, are going to 23 want to have discussions with the Board exactly as to 24 how we deal with that. 25 I think some of our concerns are more 26 the timing of some of the provisions of the Code, but 27 we will be addressing that in another forum. 28 MR. POWER: Okay. Thank you. 992 BROOKS/CASCIATO 1 MS O'RILEY: Mr. Mark? 2 MR. MARK: No. 3 MS O'RILEY: Mr. Brett? 4 MR. BRETT: No. Thank you. 5 MS O'RILEY: Mr. Mia? 6 MR. MIA: No. Thank you. 7 MS O'RILEY: Is Mr. White or 8 Mr. Rawson -- 9 MR. RAWSON: I have no questions. 10 MS O'RILEY: I take it there are no 11 questions out there that I am not seeing? 12 I have a question, then. 13 On page 7 of the submissions from 14 Toronto Hydro, you talk about the need to establish a 15 transition period to a competitive market and compare 16 it to the sort of transition that was afforded natural 17 gas distributers. I wondered if you would elaborate on 18 what you would see in this transition? 19 MR. MacODRUM: I think the first 20 thing I would say is Toronto Hydro supports the 21 introduction of retail competition in 2000. We are 22 not, by suggesting that there should be a transition 23 period, in any way backing off from that support. 24 I think we do feel however that 25 certain of the elements -- and Mr. Power touched upon 26 this, certain of the requirements of the Affiliate 27 Code, perhaps even the initial form of the standard 28 supply obligation, some of the PBR requirements -- and 993 BROOKS/CASCIATO 1 I understand that, for example, the PBR requirements, 2 that there is intended to be a sort of three-year 3 initial PBR program and then look at it again and a 4 more complex -- so we are looking at phased 5 implementation of some of the regulatory requirements, 6 and we think that this is necessary both so that 7 consumers are brought along in understanding the 8 changes in our company but also so that the industry 9 can adapt. 10 Our analysis, for example, is that 11 there are a multiplicity of system changes that have to 12 be made. We are already in the process of integrating 13 many of our systems as a result of the amalgamation and 14 ensuring that they are Y2K compliant. There are 15 further system changes needed to facilitate the retail 16 market. These are going to take time and we feel, for 17 example, that their implementation to meet 18 requirements, such as some of the provisions of the 19 Affiliate Code, should be dealt with in a phased-in 20 period. 21 MS O'RILEY: There is I guess a sort 22 of recommendation on page 9 of your report, the "Basis 23 of the Plan", and it's recommendation number 4 that 24 suggests that a standard supply offer would be 25 submitted to the OEB for approval under section 78(3) 26 of the OEB Act, 1998, based on Toronto Hydro's proposed 27 Year 2000 rates. 28 I wondered if you could explain that 994 BROOKS/CASCIATO 1 in a little bit more detail, what that rate actually 2 is. 3 MR. MacODRUM: We are going to have 4 to be before the Board some time between, I believe it 5 is, November and May with our proposal for distribution 6 rates, in accordance with the timetable set out in the 7 proposed draft PBR handbook. 8 Resulting from that process will come 9 a rate order establishing the distribution rates. We 10 believe that the Board, when it exercises its 11 rate-making jurisdiction to do that, could also 12 exercise its rate-making jurisdiction to fix either a 13 standard supply rate or a standard supply methodology 14 for Toronto Hydro. 15 For example, it could put a price cap 16 on what the standard supply offering is. 17 We envisage it being done as part of 18 the rate-making process which the Board must already 19 undertake as part of their new rate-making 20 responsibilities, which we understand they intend to 21 do, in Toronto Hydro's case at least, in a PBR 22 framework. 23 I am advised that the PBR rate 24 handbook does envisage that information on the cost of 25 power has to be filed as part of the PBR application. 26 Therefore, it seems to us not to be an extensive 27 additional regulatory burden, to use a phrase that is 28 often referred to in this room in this proceeding. It 995 BROOKS/CASCIATO 1 is not a significant additional regulatory burden to 2 also include the consideration of a standard supply 3 price. 4 In our case, and I think in most 5 utilities' cases, there will be a series of prices 6 because of different customer classes -- commercial, 7 residential, general service -- or a standard supply 8 price methodology, again referring to something like a 9 price cap or something like that. 10 So that's about as far as our 11 thinking has gone at this stage, to the extent I am 12 aware of it. 13 MS O'RILEY: Just to clarify: Would 14 you see the price of power being in some way or another 15 indexed to the spot market? 16 The reason that I am asking this is 17 because although -- and I understand the argument for a 18 contract market, but there is really only at this 19 stage, given Mr. Jenkins' testimony or presentation on 20 Friday that it would take two years to build even the 21 plant at Lakeview, there is really just one contract, 22 one major retailer, and then a small amount of 23 independent power. 24 Do you see that as in some way 25 indexed to what the spot market would be doing, or just 26 a level that is established based on existing costs of 27 generation? 28 MR. MacODRUM: I would certainly not 996 BROOKS/CASCIATO 1 think it would be indexed to the spot level. I don't 2 think we would go to all the trouble we have been going 3 to in the past several days before this forum and then 4 come in with a standard supply price indexed to the 5 spot price. 6 We are looking at a fixed price. We 7 are looking for something that is a smooth transition 8 from our present rate levels and our present rate 9 structures, something that the customer can understand 10 and not only understands but understands it is 11 responsive to their needs and will generate support for 12 the changes that are taking place in electricity 13 markets in Ontario. 14 MS O'RILEY: I see Mr. Perdue has 15 joined us. 16 Do you have questions for these 17 presenters? 18 MR. PERDUE: No, that's fine; thank 19 you. I apologize for being late. 20 MR. HEWSON: I have just one quick 21 question. I am not sure how it falls into the issues 22 list. 23 You have a provision in your code 24 that you have presented, the alternative code, 2.7.2, 25 on page 20. I wasn't quite clear exactly what was 26 intended by that provision. 27 MR. MacODRUM: I'm sorry, what page? 28 MR. HEWSON: It's on page 20 of your 997 BROOKS/CASCIATO 1 submission, Bruce, and it is provision 2.7.2 that you 2 have inserted into the code. 3 I am curious as to what the intention 4 is behind that particular addition to the code. 5 MR. MacODRUM: We are having trouble 6 finding the author of this recommendation. I am 7 advised that it is not one of the three people on the 8 panel. 9 I think what -- and certainly, we can 10 get back to you with more details on the basic 11 understanding behind this. 12 When we saw the White Paper and when 13 we saw the legislation, what we understood was that we 14 had to separate our business into two separate 15 businesses. We had to separate it into a wires company 16 and a retail company. 17 In fact, the restructuring that the 18 City of Toronto has undertaking has established two 19 separate affiliates for the monopoly and the 20 competitive businesses. We view that the energy 21 commodity business would all be conducted by the retail 22 affiliate, including the standard supply business. 23 That affiliate would be able to buy 24 electricity, a portfolio of electricity which they 25 would make available to its customers, including the 26 standard supply customer, and the cost of that 27 portfolio to supply the standard supply customers would 28 be subject to scrutiny by the Ontario Energy Board, 998 BROOKS/CASCIATO 1 addressed in answer to an earlier question, as part of 2 our annual rate filing. 3 If that is the case, I think we 4 envisage that any communications to the customer and 5 the primary point of customer contact is going to be 6 the electricity retailer, our competitive business. 7 So it is appropriate that the 8 distributor should be able to arrange that the person 9 who is the primary customer contact could include in 10 the information that they share with the customer 11 information about the services that the distributor is 12 offering. 13 MS O'RILEY: I have one more question 14 for you, which is from Mr. Poch, on behalf of Green 15 Energy Coalition. 16 It is whether you think that section 17 2.7.3 of the draft code would interfere with DSM in 18 Toronto Hydro's opinion; i.e., while DSM has agreed to 19 be a distribution activity on the gas side, it might be 20 that the distributor is not obliged to send any 21 particular DSM-related bill stuffer. 22 The question is: Would Toronto Hydro 23 agree that DSM should be an option available to MEUs 24 and 2.7.3 should not restrict it? 25 --- Pause 26 MR. MacODRUM: I don't believe we 27 include 2.7.3 in our proposed code. 28 We propose the dropping of that 999 BROOKS/CASCIATO 1 provision from the Code. 2 I should say, though, about demand 3 side or energy conservation information, that we 4 believe that there are customers who are very 5 interested in demand side management option, and we 6 certainly intend to communicate to them about what 7 opportunities there are there and provide them with 8 services to do that, as we are at the present time. 9 MS O'RILEY: Mr. Brett. 10 MR. BRETT: I just have one question 11 for the panel. 12 I represent the Independent Power 13 Producers Society of Ontario. In our comments set out, 14 we make the point that we see the need for some sort of 15 restriction -- this is with respect to default supply 16 now -- on the degree to which a municipal distributor 17 would be able to purchase generation or power for 18 default supply from generation facilities which it owns 19 or in which it holds a beneficial interest. 20 We weren't thinking in terms of an 21 absolute prohibition, but we were thinking in terms of 22 some sort of limit placed on the amount of power, of 23 your own power effectively that you could purchase for 24 use in fulfilling your default supply obligation. 25 Do you have any comment on that or 26 reaction to that? 27 MR. MacODRUM: I think one of the 28 things, as we get into this new world, we constantly 1000 BROOKS/CASCIATO 1 remind ourselves that we have shareholders. We have a 2 single shareholder, and that shareholder will be making 3 the investment in our generating projects and 4 cogeneration projects that Mr. Brooks alluded to. 5 Certainly, we want to afford the 6 benefits of all of our customers who, in the case of a 7 municipally owned utility like Toronto Hydro are also 8 indirectly our shareholders, the benefits of those 9 investments. 10 We are not proposing any restriction 11 that would deny our customers the benefits of locally 12 produced power, green power, or other options. 13 Mr. Brooks may want to add to that. 14 MR. BROOKS: I will just add to that. 15 The whole purpose of our owning 16 generation is, to a large extent, is to hedge our 17 position and to mitigate risk. We need to be able to 18 move in and out of the market with our own generation 19 when things happen, such as have happened in the last 20 few months. 21 So it would seem to be kind of going 22 against that if we are prevented from using our own 23 generation. 24 MR. BRETT: Thank you. That is my 25 question. 26 MS O'RILEY: Is there anyone else 27 here now who has questions for these presenters? 28 Then, thank you very much. 1001 BROOKS/CASCIATO 1 Mr. Brett, is your panel here yet? 2 MR. BRETT: No, actually. I had them 3 coming for 10:30. I thought this would go somewhat 4 longer than it did. This is always the way with these 5 sessions. 6 It may be that you want to have 7 someone like Mr. Gibbons, who I know is anxious to get 8 on and off today, to step in at this point. 9 We will be ready to go at 10:30, but 10 probably not much before that. 11 MS O'RILEY: Thank you. 12 Mr. Gibbons, would you be willing to 13 present at this time? 14 MR. GIBBONS: Sure. 15 MS O'RILEY: Thank you. 16 --- Pause 17 PRESENTATION 18 MR. GIBBONS: Good morning. I am 19 Jack Gibbons, and I am here on behalf of Pollution 20 Probe. 21 The Ontario Medical Association has 22 issued a warning that air pollution is a public health 23 crisis in Ontario. According to the Government of 24 Ontario, 1800 people a year die as a result of air 25 pollution in this province. Hundreds of more suffer 26 asthma attacks which are triggered by air pollutants in 27 the air. 28 In fact, in Hamilton one out of every 1002 GIBBONS, presentation 1 five children suffers from asthma. The Ontario Power 2 Generation Company is a major source of Ontario's air 3 pollution and our public health crisis. To be 4 specific, OPG is the largest corporate source of 5 smog-causing nitrogen oxide emissions in Ontario. It 6 is also the largest corporate source of mercury 7 emissions and carbon dioxide emissions. OPG is the 8 second largest corporate source of our sulphur dioxide 9 emissions. 10 In its White Paper, the government of 11 Ontario promised that it would implement competition in 12 a way which would ensure that the province's 13 environmental protection record is maintained and 14 improved. To improve our environmental protection 15 record, we must reduce the emissions or 16 electricity-related emissions. 17 The Market Design Committee, in its 18 report, has made two recommendations which are of 19 special importance to this proceeding. First, the 20 Market Design Committee recommended the government of 21 Ontario should establish caps for all of Ontario's 22 electricity-related air pollutants. Second, the Market 23 Design Committee recommended that a smoothed spot price 24 pass-through should be the standard supply service 25 option. 26 Clearly, if the government of Ontario 27 does establish strict emissions caps for all 28 electricity-related pollutants before the market opens 1003 GIBBONS, presentation 1 in the year 2000, a smoothed spot price pass-through 2 will not jeopardize public health and the environment. 3 However, in the absence of such an environmental 4 regime, which is caps for all electricity-related air 5 pollutants, the Board staff's proposal to use a spot 6 price as the standard supply service option, will 7 exacerbate our air pollution crisis by increasing our 8 dependence on coal-fired electricity. 9 That will be mean more air pollution 10 for Ontario over time. Unfortunately, at this time, 11 there is no indication that the government of Ontario 12 is planning to establish strict emissions caps or even 13 emissions caps for all of Ontario's electricity-related 14 emissions. 15 So what should the Ontario Energy 16 Board do? The Board staff has proposed that the 17 standard supply service option should be the spot price 18 pass-through and, quite frankly, there are two very 19 powerful arguments in favour of this proposal. First, 20 for large industrial customers which have interval 21 meters, a spot price pass-through could play a very 22 powerful role in helping us to balance the supply and 23 demand for electricity on a daily basis. That could 24 help reduce peak demands, it could improve the load 25 factor of the electricity system, and reduce costs. So 26 that's one very powerful argument in favour of the 27 Board staff's proposal. 28 The other strong argument in favour 1004 GIBBONS, presentation 1 of their proposal is it will minimize regulatory costs. 2 The OEB's regulatory costs of ensuring that the 3 electricity commodity price is correct will be 4 essentially trivial. Nevertheless, I believe that a 5 fixed price option is the best option in the public 6 interest for the MEUs and Ontario Hydro Services 7 Company's residential and small commercial customers 8 for four reasons. 9 The first one is quite simply it's 10 what the customers want. We have seen significant 11 volatilities in the gasoline market and that creates 12 all kinds of public outrage, even though there is 13 absolutely no evidence the gasoline retailers are 14 making excess profits. We know an electricity spot 15 market will be volatile. Nobody knows how volatile it 16 will be, but we do know that a volatile electricity 17 spot market will create very significant public outrage 18 and it will reduce public support for the move to a 19 competitive electricity market. 20 The government of Ontario and the 21 Ontario Energy Board want to manage a smooth transition 22 to a competitive electricity market and volatile spot 23 prices which undermine political support for the move 24 to a competitive electricity market I do not believe 25 are in the public interest. 26 Now, a fixed price option, in 27 addition to solving the volatility problem, also 28 provides two very important additional benefits. The 1005 GIBBONS, presentation 1 fixed price option allows municipal electric utilities 2 to contract with other electricity suppliers for 3 supply. As we have seen, Toronto Hydro and Hydro 4 Mississauga have already announced proposals to 5 contract with new suppliers to bring new supply into 6 the electricity market and those new supplies are 7 absolutely essential to help reduce Ontario Power 8 Generation Company's market power. 9 We all know that if we were to have 10 the benefits of a truly competitive market, we would 11 have to reduce its market power and this is a very good 12 way to do that; by allowing the municipal electric 13 utilities to use their countervailing power to bringing 14 new supply and to challenge Ontario Power Generation 15 Company's dominant market position. So the fixed price 16 option allows us to help reduce market power and that 17 will reduce prices over time. 18 The fixed price option, by allowing 19 the municipal electric utilities to contract with new 20 suppliers for power, also can provide very large 21 benefits in terms of cleaner air. In this context, 22 it's very important to remember that the total power 23 consumption of the residential and small commercial 24 customers is more than two times the total output of 25 OPG's coal-fired power plants. So if the MEUs contract 26 with new cleaner supplies for only 50 per cent of their 27 power demand, we will be able to reduce the use of coal 28 in Ontario to zero. So there is potentially very 1006 GIBBONS, presentation 1 significant benefits from the MEUs contracting with 2 cleaner suppliers. 3 Allowing the MEUs to contract with 4 cleaner suppliers such as the Lakeview Project and the 5 Boralex Project are very much consistent with the White 6 Paper's objective of ensuring that competition is 7 brought in in a manner that leads to cleaner 8 electricity and it's also consistent with the purpose 9 section of the Ontario Energy Board Act. 10 The final reason why I believe that 11 the fixed price option is the best option for 12 residential and small commercial customers is that the 13 regulatory costs of this option need not be high, and 14 there are three reasons for that. The original fear 15 that the regulatory costs will be high, I think, was 16 provoked by the bogeyman of over 200 municipal electric 17 utilities, all with their own stand-alone supply 18 portfolios. If the OEB had to regulate over 200 supply 19 portfolios, obviously the regulatory costs would be 20 exorbitant. 21 But I don't think there is any 22 indication that that is likely to be the case. At the 23 maximum, it appears that Toronto Hydro is the only 24 municipal electric utility which would consider 25 purchasing their power on a stand-alone basis. Hydro 26 Mississauga, which is the second largest municipal 27 electric utility have already entered into a 28 consortium, the G6 consortium, to purchase power. 1007 GIBBONS, presentation 1 So I think if there is a fixed price 2 option, there will be a relatively smaller number of 3 consortiums that will do the power purchasing and, 4 therefore, there will be a relatively small number of 5 supply portfolios that the OEB will have to regulate. 6 So that's the first reason why I don't think the 7 regulatory costs will be high. 8 The second reason is that the logical 9 way for the Board to regulate these different supply 10 portfolios is to go to a PBR type of incentive 11 regulation, such as was outlined by Mr. Adamson. That 12 again, I think, can be implemented at a relatively low 13 cost. What you are doing is harnessing market forces, 14 you are harnessing the self-interest of the MEU's 15 shareholders to ensure that we get a price that is just 16 and reasonable. That is basically the beauty of PBR 17 incentive regulation is it reduces regulatory cost by 18 achieving a greater alignment between shareholder 19 interests and customer interests. 20 I think the third way that the Board 21 could ensure that the regulatory costs of regulating 22 the standard supply option are low is by simply, at the 23 end of the year, issuing a press release to all the 24 newspapers, all the daily papers in Ontario, and to 25 every mayor and city council in Ontario which ranks 26 each of the municipal electric utilities according to 27 their prices for their standard supply service option. 28 That kind of transparency and that kind of knowledge 1008 GIBBONS, presentation 1 will ensure that all the MEUs strive very hard to get 2 very just and reasonable rates. 3 In conclusion, I believe that the 4 Board should establish a fixed price SSS option for 5 residential and small commercial customers for four 6 reasons. First, it's what they want; second, it will 7 help the MEUs reduce the market power of OPG; third, it 8 will help the MEUs bring cleaner power to Ontario and 9 fulfil the objectives of the White Paper and the 10 Ontario Energy Board Act; and, fourth, there is no 11 reason why the regulatory costs of this option should 12 be high. 13 Thank you. 14 MS O'RILEY: Thank you, Mr. Gibbons. 15 Mr. Adams? 16 MR. ADAMS: No questions. 17 MS O'RILEY: Mr. Power? 18 MR. POWER: No questions, thanks. 19 MS O'RILEY: Mr. Rodger? 20 MR. RODGER: No questions. 21 MS O'RILEY: Mr. Mark? 22 MR. MARK: No questions. 23 MS O'RILEY: Mr. Mia? 24 MR. MIA: No questions. 25 MS O'RILEY: Mr. White? 26 MR. WHITE: No questions. 27 MS O'RILEY: Is there anybody I am 28 not seeing who has a question? 1009 GIBBONS 1 Mr. Poch has a question that he has 2 asked me to ask you, Mr. Gibbons. 3 If we have NOx and SOx limits 4 affecting OPG and we don't have carbon caps and 5 controls over mercury and toxics at market opening, 6 might OPG respond with capital investment and 7 scrubbers, et cetera, to run its coal plants harder, 8 thus increasing other emissions? 9 MR. GIBBONS: Yes, I think that's a 10 real possibility. If the government just regulates SO2 11 and NOx emissions, the least cost option for OPG to 12 respond may be to simply put on end-of-pipe scrubbers 13 to meet those emissions reductions and then run its 14 coal-fired power plants even harder to recover its 15 costs. So that's the real danger of not taking an 16 integrated approach to air pollution and just focusing 17 on two pollutants. You may choose an option which 18 doesn't solve all the air pollution problems and is not 19 the least cost. 20 If the government was to pursue that 21 option, then in a year or two it would have to deal 22 with the mercury issue, it would to deal with the 23 greenhouse gas issue, and then if it brought in caps 24 for mercury and greenhouse gas later, those caps would 25 presumably force a conversion to cleaner fuels like 26 natural gas and renewable energy and then you would 27 have stranded your investment on the SO2 and the NOx 28 scrubbers. 1010 GIBBONS 1 MS O'RILEY: I will ask a question 2 from Board staff. 3 One of the, I guess, arguments in 4 your paper is that if MEUs and OHSC are permitted to 5 have a fixed price and are permitted to contract for 6 power, they will contract with cleaner gas-fired plants 7 or cleaner water, those kinds of things. I was just 8 wondering if those aren't necessarily the cheapest 9 options about, if they could get cheaper dirty power, 10 would you think it's necessary for the Board to 11 establish a percentage of contracts that MEUs and OHSC 12 would have to enter into that would be clean contracts 13 or do you think it's more of a natural evolution? 14 MR. GIBBONS: I think certainly from 15 a public health and environmental point of view, if the 16 Ontario Energy Board also, in addition to establishing 17 a fixed price regime for the standard supply service 18 option, if it said that they had to buy a certain 19 percentage of their supplies from clear natural 20 gas-fired plants, that would certainly provide 21 additional public health and environmental benefits. 22 MS O'RILEY: I don't see any other 23 questions for this presenter. Thank you, Mr. Gibbons. 24 MR. GIBBONS: Thank you. 25 MS O'RILEY: I also don't see the 26 IPPSO presenters in the room. 27 Mr. Rawson, would you be willing to 28 make your presentation now? Then I think we would 1011 GIBBONS 1 probably have a break after that. 2 PRESENTATION 3 MR. RAWSON: One more time for the 4 record, my name is Keith Rawson, R-a-w-s-o-n, and I am 5 here on behalf of TransCanada Energy. We put a 6 submission in dated July 5th, so the details are in 7 that. I think it is four pages submitted on that date. 8 I am just going to touch on three 9 elements -- highlight three elements of that submission 10 this morning. The first is related to neutrality. 11 It's our position that the standard service supply 12 should neither unduly advantage nor disadvantage 13 default customers. The proposed spot price 14 pass-through will meet the neutrality test, but only 15 when there is sufficient competition so that the spot 16 price reflects a truly open market. 17 In the interim, until that market is 18 open, a fixed price of 3.8 cents per kilowatt hour is a 19 better neutral price signal. That would be a standard 20 offer-type fixed price. It would be backstopped by 21 Ontario Power again. 22 The second item I want to touch on is 23 uniformity. 24 It is our position that it is not 25 absolutely necessary that the standard supply price be 26 uniform across the province. However, in the absence 27 of compelling evidence that the neutrality objective is 28 best met by varying prices throughout the province, we 1012 RAWSON, presentation 1 must acknowledge that uniformity has inherent 2 advantages. 3 Since such compelling evidence of the 4 advantages by varying prices has not been presented, we 5 must believe, then, that uniformity is a desirable way 6 to set the spot price. 7 The third point I want to touch on is 8 assisting competition. Our view is that there are 9 numerous structural factors that will inhibit the 10 arrival of new entrants in Ontario, not least of these 11 is the price cap mechanism which sets a benchmark at 12 3.8 cents per kilowatt hour. 13 This price is below the all-in costs 14 of most new generation supply, and hence this 15 marketplace will be relatively unattractive to new 16 entrants, at least in the early days. 17 However, having said that, it is 18 possible that the standard service supply could be set 19 up in such a way as to assist competition. In 20 particular, we believe that setting a fixed price at 21 3.8 cents per kilowatt hour would limit the flexibility 22 of Ontario Power Gen and hence help competitors. 23 It would also ensure that small 24 customers would not pay more than 3.8 cents per 25 kilowatt hour, and this is something the price cap does 26 not do because it is quite possible that some customers 27 would do better than 3.8 cents per kilowatt hour. Some 28 customer classes in particular could do better than 1013 RAWSON, presentation 1 3.8 cents per kilowatt hour, at the expense of small 2 customers. 3 So we see that as being a significant 4 advantage in terms of small customers, and also an 5 advantage in terms of competition. 6 Those are the points I wanted to 7 touch on. 8 MS O'RILEY: Thank you, Mr. Rawson. 9 Mr. Gibbons? 10 MR. GIBBONS: No questions. 11 MS O'RILEY: Mr. Adams? 12 MR. ADAMS: I just have a couple of 13 questions. 14 You have proposed a uniform price? 15 MR. RAWSON: Three-point-eight cents, 16 uniform across the province, yes. 17 MR. ADAMS: I understand. 18 So would there be any need for a spot 19 market at all? Should there be an IMO spot market in 20 your proposal? 21 MR. RAWSON: I don't see the need for 22 a spot market being directly linked to standard supply. 23 The spot market would exist for a number of reasons 24 besides just standard supply. 25 So, yes, I see advantages in having a 26 spot market unrelated to standard supply. 27 MR. ADAMS: Do you see any advantage 28 in customers responding to price signals? 1014 RAWSON 1 MR. RAWSON: Yes, I do see an 2 advantage in terms of having customers respond to price 3 signals. 4 I see a major disadvantage in that 5 regard with regard to the price cap mechanism, which 6 inherently takes away those incentives by essentially 7 making the price something like 3.8 cents after the 8 fact, and so the responsiveness of customers is 9 somewhat moot. 10 MR. ADAMS: Let's take a hypothetical 11 situation where Ontario faces a capacity constraint for 12 some extended period of time. What would you expect 13 would happen to the price in the spot market? 14 MR. RAWSON: I think it has been 15 demonstrated in other jurisdictions that the spot price 16 tends to rise when the capacity is tight. I would see 17 that happening as well in Ontario. 18 MR. ADAMS: In this scenario we have 19 a high spot price and we have customers who have an 20 entitlement to power at 3.8 cents, right, under your 21 proposal? 22 MR. RAWSON: Under my proposal, and I 23 think under the market power mitigation price cap 24 mechanism pretty much the same thing, yes. 25 MR. ADAMS: Do you have a mechanism 26 in mind that could prevent customers from taking their 27 entitlement at 3.8 cents and reselling it at spot? 28 If I have an entitlement to something 1015 RAWSON 1 at 3.8 cents and it is selling for 15 cents, I might 2 take all I can get and resell it. What is preventing 3 me, under your proposal? 4 MR. RAWSON: That is not something 5 that I addressed in my submission. 6 I would believe that it would be 7 quite readily done to make that price only apply to 8 ultimate consumption, not for purposes of resale. I 9 think that would be a relatively easy addendum to the 10 proposal. 11 MR. ADAMS: How would you police it? 12 MR. RAWSON: I haven't, as I said, 13 addressed that particular item in the proposal. I'm 14 not sure how you would do that. It isn't certainly 15 something that I have covered off. 16 MR. ADAMS: Let's try another aspect 17 of this issue of the uniform price. 18 If the price were to jump up in a 19 situation of supply constraint another possible reason 20 for price to rise would be exercise of market power by 21 Genco -- or by OPG. Would you agree? 22 MR. RAWSON: It's not clear to me 23 that that kind of price increase that might result from 24 market power of Genco is the same kind of price 25 increase we were discussing when we were talking about 26 market forces. In fact, it is a totally different kind 27 of price increase consideration. 28 But yes, Ontario Power Gen, 1016 RAWSON 1 uncontrolled, could set prices wherever it wanted to. 2 MR. ADAMS: I apologize. That was a 3 messy question, but I think you understood what I was 4 asking. 5 Okay. So we have a situation where 6 OPG could exercise market power and increase price. If 7 customers could respond to that higher price, would 8 that demand response be some mitigation of OPG's market 9 power? 10 MR. RAWSON: To the extent that there 11 is a demand response. I'm not sure that there is going 12 to be a significant demand response evidence, because 13 to date there is very little demand that actually does 14 go off-line when the price is high. 15 But yes, there would be a minor, 16 minor response. Very minor, in my opinion. 17 MR. ADAMS: I can leave it for later 18 to examine the degree, but the direction of the 19 response would be to mitigate market power. Are we in 20 agreement on that point? 21 MR. RAWSON: Direction would be okay. 22 I'm not sure how much of a 23 counterbalance it really would be. 24 MR. ADAMS: Understood. 25 Okay. So we have looked at a 26 scenario where market price might prove to be above 27 your proposed uniform price. 28 I want to walk you through the 1017 RAWSON 1 implications of market price being below. 2 Let's imagine the scenario where we, 3 for some reason, do get new entrants and market price 4 for sustained periods of time is below 3.8 cents. You 5 have locked customers in at 3.8 cents under your 6 proposal. How are you going to explain it to 7 customers? 8 MR. RAWSON: One thing I didn't 9 mention this morning is that the proposal as outlined 10 in the submission is that the spot price go to -- I'm 11 sorry, that the standard price go to spot, in my 12 submission, at the end of the Market Power Mitigation 13 Agreement. However, the end of the Market Power 14 Mitigation Agreement was really no more than a stand-in 15 for forces of competition. 16 I would certainly have no difficulty 17 with the standard price reverting to spot should there 18 be, by some measure, sufficient competition that the 19 spot price is an open and competitive spot price. 20 MR. ADAMS: Thank you. 21 Those are my questions. 22 MS O'RILEY: Thank you, Mr. Adams. 23 Mr. Power? 24 MR. POWER: No questions. 25 Thank you. 26 MS O'RILEY: Mr. Rodger? 27 MR. RODGER: No questions. 28 MS O'RILEY: Mr. Freitig? 1018 RAWSON 1 MR. FREITIG: Good morning. My name 2 is Shane Freitig. I am appearing on behalf of Ontario 3 Power Generation. I am counsel to Ontario Power 4 Generation. 5 Mr. Rawson, I have a few clarifying 6 questions on the Market Power Mitigation Agreement. 7 I would refer you to your submission, 8 in particular the Executive Summary, clause 1.0. Also, 9 on page 3, the third bullet. Do you have those 10 references? 11 MR. RAWSON: I have them. 12 MR. FREITIG: Thank you. 13 There is a reference to a 42-month 14 period after the market opening in which a flat price 15 of 3.8 cents would apply. Do you have that reference? 16 MR. RAWSON: Yes. 17 MR. FREITIG: Just to be clear, are 18 you aware that the 3.8 cents price cap applies for a 19 period of 48 months, not 42 months? 20 MR. RAWSON: That's the first I have 21 heard. All the references I have seen it said 22 42 months, but if that is the case -- the 42 month is a 23 reflection of the Market Power Mitigation Agreement, in 24 particular the price cap. So the intention is to cover 25 that period. 26 If it's 48 months, fine. 27 MR. FREITIG: Would it be fair to say 28 that perhaps the 42 months more properly refers to the 1019 RAWSON 1 requirement to decontrol? 2 MR. RAWSON: The decontrol has two 3 aspects, one of which is the mandated reductions in 4 share of generation. The other, the price cap, and 5 I am particularly highlighting the price cap of 6 those two. 7 MR. FREITIG: Okay. 8 But in particular, the 42 months 9 really speaks to the requirement to get down to 35 per 10 cent. Is that correct? 11 MR. RAWSON: That wasn't what was 12 driving the material in the submission. 13 If the generation reduction decontrol 14 aspect were quicker than 42 or 48 months, whatever the 15 time period is, then along the lines of my response to 16 Mr. Adams, and subject to some test as to whether the 17 market is open and competitive, then perhaps you could 18 revert to the spot price sooner than later. 19 MR. FREITIG: Mr. Rawson, I'm not 20 arguing or even referring to your submission. I'm just 21 trying to clarify for the record. 22 Forty-eight months deals with the 23 price cap; 42 months deals with a requirement to 24 decontrol? 25 MR. RAWSON: Now perhaps I am 26 confused. 27 The particular item I was referring 28 to when I put that point in the submission was the 1020 RAWSON 1 price cap regime. That was what the 42 months was 2 referring to. 3 MR. FREITIG: If you were to refer to 4 the Market Power Mitigation Agreement and it indicated 5 that it was 48 months, would you agree that you would 6 have to modify your submission to indicate that the 7 price cap ends at 48 months? 8 MR. RAWSON: If it is in fact 9 48 months, yes, I would modify the submission to make 10 it 48 months. 11 MR. FREITIG: Thank you. 12 Now, on page 4 you have some further 13 discussion of the working of the Market Power 14 Agreement. I have a few questions on the points you 15 have raised there. 16 Are you aware that the Market Power 17 Mitigation Agreement imposes a 3.8 cent cap and rebate 18 only on OPG and not on any other supplier? 19 MR. RAWSON: Yes. 20 MR. FREITIG: Are you also aware that 21 the price cap of 3.8 cents applies to a predetermined 22 quantity of power equivalent to 90 per cent of OPG's 23 expected market share in Ontario? 24 MR. RAWSON: Yes. 25 MR. FREITIG: Would you agree that an 26 individual customer, because of its unique load shape, 27 could experience an average price above 3.8 cents, even 28 if the average price in the spot market was below 1021 RAWSON 1 3.8 cents? 2 MR. RAWSON: On that point, I am a 3 little less clear. I believe that possibility exists, 4 but I would have to understand the detailed mechanisms 5 of the price cap a little better than I do to be 6 absolutely certain about that point. 7 MR. FREITIG: Would you agree that 8 there is nothing in the market power deal that really 9 says that residential customer have to pay more than 10 3.8 cents and that industrial customers will pay less 11 than 3.8 cents? 12 MR. RAWSON: There is no explicit 13 reference that I am aware of in the price cap regime 14 that says what any individual customer will pay. 15 However, it is also quite clear to me 16 that the price cap regime would permit differences 17 between what customers pay for reasons other than load 18 shape. 19 MR. FREITIG: What would those 20 reasons be? 21 MR. RAWSON: Whatever actions Ontario 22 Power Generation decides to take with regards to its 23 customers. 24 MR. FREITIG: Would that be 25 unilateral actions on behalf of Ontario Power 26 Generation? 27 Would it not be fair to say that it 28 would be subject to discussions with customers and 1022 RAWSON 1 agreements with customers? 2 MR. RAWSON: I would very much doubt 3 that there would be many agreements between Ontario 4 Power Generation and individual small customers. There 5 might very well be discussions and negotiations between 6 Ontario Power Generation and large customers. 7 MR. FREITIG: Okay. 8 But doesn't it then follow that -- I 9 mean, the 3.8 cents, there is nothing that says for any 10 particular customer they have to pay either more or 11 less than 3.8 cents? 12 MR. RAWSON: As I said, I don't 13 recall any explicit reference to what any individual 14 customer would pay under the Market Power Mitigation 15 Agreement. 16 MR. FREITIG: Okay. 17 But there is nothing expressed in 18 there that says that they do in fact have to pay 19 3.8 cents? 20 MR. RAWSON: No, I agree. There is 21 nothing in there that says that the price would be, for 22 any customer, 3.8 cents or any other number. 23 MR. FREITIG: Thank you. 24 One last question. You have a 25 reference in the first bullet of the fifth paragraph of 26 page 4, the one that starts, "Developers of potential 27 new generation". 28 Would you agree with me that 1023 RAWSON 1 predatory pricing is an offence under the Competition 2 Act? 3 MR. RAWSON: I believe that to be the 4 case. However, it is not clear to me, with the Market 5 Power Mitigation Agreement, as it is presently put 6 forward, what role the Competition Bureau would play 7 with regard to Ontario Power Gen pricing. 8 MR. FREITIG: Is there anything 9 within the Market Power Mitigation Agreement that would 10 condone predatory pricing? 11 MR. RAWSON: I don't believe that 12 there is anything in there that would condone predatory 13 pricing, however, it's not clear to me that it prevents 14 it. 15 MR. FREITIG: Would it be fair to say 16 that the Competition Act is under the jurisdiction of 17 the federal government? 18 MR. RAWSON: Yes. 19 MR. FREITIG: Would it also be fair 20 to say that this Market Power Mitigation Agreement is 21 done within the ambit of the provincial jurisdiction? 22 MR. RAWSON: Yes. 23 MR. FREITIG: Would it be fair to say 24 that predatory pricing, because it is under federal 25 act, would take precedence over a provincial piece of 26 legislation? 27 MR. RAWSON: I don't know. 28 MR. FREITIG: Those are my questions. 1024 RAWSON 1 Thank you. 2 MS O'RILEY: Thank you. 3 Are there any other questions? 4 Mr. White? 5 MR. WHITE: If I can go back to some 6 of the early questions. 7 One of the comments made was the 8 concept of entitlement. Is there anything in your 9 proposal that gives the customer an entitlement to 10 energy, an amount of energy that could in fact be 11 resold? 12 MR. RAWSON: Nothing that would 13 specifically give them an entitlement for energy to be 14 resold, no. 15 MR. WHITE: Based on your 16 understanding of the Ontario Energy Board's powers 17 under Bill 35, would any resale of power require any 18 approval of the Board or a licence to do so? 19 MR. RAWSON: I don't know that 20 approval would be required, but certainly a licence 21 would likely be required. 22 MR. WHITE: Thank you very much in 23 that area. 24 In terms of the default supply or the 25 standard supply conditions, one of the specific things 26 contemplated is the advent of customers who may no 27 longer choose to opt for third party supply, who have 28 gone out to a third party and then may choose to return 1025 RAWSON 1 to the standard supply situation. Does your proposal 2 in any way require that those customers in that 3 situation face the same 3.8 cents as customers who are 4 initially in the standard supply situation? 5 MR. RAWSON: On that point 6 specifically, item 5 on page 5 suggests that going to 7 the fixed price standard offered spot would be a 8 one-time choice and they could only revert to standard 9 in the case of retailer failure. But should they 10 revert to standard, they would get the same standard 11 supply price as any other standard supply customer 12 would get at that time -- and depending on time, it 13 might be the 3.8 or ultimately the spot price. 14 MR. WHITE: Based on your knowledge 15 of market conditions, what kind of -- 16 --- Pause 17 MR. WHITE: I'm sorry. Let me 18 rephrase that. 19 What would be the result of 20 significant suppliers of energy defaulting in terms of 21 their ability to supply bilateral or other similar 22 contractual arrangements on the overall price? 23 MR. RAWSON: I'm not sure that if the 24 failure were of retailers, for example, who were 25 procuring their power from providers in the 26 marketplace, I'm not sure there would be any 27 significant impact. I would see more likely 28 significant impacts of failures of generators than of 1026 RAWSON 1 retailers, per se. 2 MR. WHITE: If we were to talk for a 3 minute about a hypothetical situation where we had some 4 large industrial customers who are in fact purchasing 5 from one or more generators who, for particular 6 reasons, end up in default, what influence would that 7 have on the price in the marketplace? 8 MR. RAWSON: These are large 9 industrial customers who contracted with alternative 10 generators, for example? 11 MR. WHITE: Yes. 12 MR. RAWSON: And those generators 13 fail to supply? 14 MR. WHITE: Yes. 15 MR. RAWSON: The impact would be, 16 directionally, less supply and demand showing up on the 17 remaining supply. There would be some tendency for 18 prices to increase. Again, how much of an impact would 19 be questionable. If it were a relatively small failure 20 compared to the size of the marketplace, it might not 21 be much of a change, but there would be a tendency for 22 prices to rise. 23 MR. WHITE: Is there anything within 24 your proposal that suggest how it might be possible for 25 an adjustment in the 3.8 cents in response to that kind 26 of condition? 27 MR. RAWSON: No. There is no 28 proposal for any change to the price for that reason, 1027 RAWSON 1 or, for that matter, for other market forces. 2 MR. WHITE: Thank you. 3 No further questions. 4 MS O'RILEY: Any other questions from 5 parties? 6 Mr. Hewson. 7 MR. HEWSON: Hi, Mr. Rawson. I just 8 had one question on your submission. 9 On page 5 where you are in your 10 conclusions, under 3.0, could you explain what you 11 intend by the suggestion that potential new suppliers 12 could bid to have the right to customers and the 13 proceeds from bidding would go to paying down stranded 14 debt? I don't quite understand that. 15 MR. RAWSON: The inherent supplier 16 for the standard at 3.8 would be Ontario Power Gen. 17 However, to the extent that other participants in the 18 marketplace wanted to have a standard supply assigned 19 to them so that they would take on the obligation of 20 supplying at 3.8, they would be entitled to do so 21 subject to a bidding mechanism where, in effect, they 22 would bid some amount of money for the right to have 23 standard customers priced at 3.8 cents a kilowatt hour. 24 MR. HEWSON: Then the amount they bid 25 in order to get the ability to charge only 3.8 cents 26 per kilowatt hour would go towards paying down the 27 stranded debt? 28 MR. RAWSON: Yes. There would be no 1028 RAWSON 1 other party who would get the benefit of that. It 2 would be essentially put to the stranded debt account. 3 MR. HEWSON: Who would this bid be 4 made to? 5 MR. RAWSON: I hadn't got to the 6 point of thinking through the mechanisms as to how that 7 would be conducted. It could be conducted perhaps 8 under the Ontario Energy Board auspices or perhaps even 9 some third party suitably charged to do it as well. 10 MR. HEWSON: Thank you. 11 MS O'RILEY: Thank you, Mr. Rawson. 12 I suggest that we take our break now 13 for 15 minutes and come back at 25 to 11:00. 14 --- Upon recessing at 10:20 a.m. 15 --- Upon resuming at 10:35 a.m. 16 MS O'RILEY: Could we resume now, 17 please. 18 Mr. Brett, do you have your panel 19 ready? 20 MR. BRETT: Yes, I do; thank you very 21 much. 22 With me today are Al Barnstaple, who 23 is President of IPPSO; and to his right as you are 24 looking forward, is Barry Chuddy, who is a Director of 25 IPPSO. 26 I will let them take it from there. 27 We have a brief statement to make, and then they will 28 be available for questions. 1029 RAWSON 1 PRESENTATION 2 MR. BARNSTAPLE: Thanks, Tom. 3 As Tom mentioned, I am Al Barnstaple, 4 President of IPPSO. For those of you who don't know, 5 IPPSO is the society that represents the interests of 6 the private power industry in Ontario. We have close 7 to 500 members at the current time. 8 We have been very active in the 9 restructuring activities in the province and have dealt 10 with the Board on a number of issues, including 11 generator licensing. 12 We appear here this morning to talk 13 about standard supply service. We feel this particular 14 aspect of the new market is going to be a critical area 15 for our members. We see it also interlinked with a 16 number of other areas in the new market. 17 Essentially, we are coming from the 18 standpoint that our members need to have as much access 19 through various market vehicles to the whole market, 20 including the default market, as possible. 21 We are starting out in Ontario next 22 year with a market that is largely lopsided, with the 23 presence of a dominant generator. It is very difficult 24 to attract new investment that will be necessary to 25 bring about supply change in the province and 26 eventually lower prices to customers, including the 27 default supply customer. 28 We are here today to give you our 1030 BARNSTAPLE/CHUDDY, presentations 1 views on default supply. We are putting forward in our 2 written submission, and we are prepared to talk today 3 about our written submission, several principles about 4 how the default supply should be structured. In 5 particular, we are coming at this from the viewpoint of 6 our members solely, so we haven't tried to address all 7 issues of standard supply service. 8 I would like to point out some 9 background that we see to this particular deliberation. 10 First of all, it seems to be that the 11 standard supply service customer is often portrayed as 12 a victim that is going to be on the horns of a price 13 dilemma. There are very different points of view as to 14 how the best interests of this poor victim should be 15 represented. 16 I think that is the wrong way to look 17 at the default supply. It is another group of 18 customers that, if the market unfolds properly, should 19 benefit as well as any other customer to a new and open 20 market that has a reasonable level of competition. The 21 need here is to ensure that competition comes into this 22 market early so that these customers are not victims of 23 predictions and rules that really may not turn out to 24 be in their best interest. 25 The principles that we have put 26 forward in our submission really talk about how our 27 members need to see the default market so they can 28 serve the interests of them, to increase competition in 1031 BARNSTAPLE/CHUDDY, presentations 1 the province and to make investment. Our members are 2 not of any particular entity or size. They are diverse 3 by nature. 4 Some of our members are companies 5 that would build small green projects, that generally 6 find it very difficult to compete in a marketplace, 7 particularly where there is a dominant generator that 8 is capped on price. At the other end of the spectrum, 9 our members are large companies that are capable of 10 investing in large facilities and even entering into 11 the merchant market in Ontario when that market appears 12 that it is justifiable to support that type of 13 investment. 14 We are here today to talk about how 15 the default supply needs to be structured so that all 16 of our members are capable of contributing to that 17 default supply and through their investments delivering 18 the benefits to all customers, including default supply 19 customers. 20 The first principle we have put 21 forward is that our members need to have a contract 22 access to default supply. That essentially means that 23 we don't want to depend solely on accessing that market 24 through the spot market, particularly in initial market 25 years when the spot market is going to be, we think, 26 very lopsided because of the presence of OPGI and the 27 provisions of the Market Power Mitigation Agreement. 28 So there is a need, we think, for a 1032 BARNSTAPLE/CHUDDY, presentations 1 contract path from our members through to the default 2 supply. Our paper talks a little bit about how that 3 default supply might work. 4 You have had some submissions, I 5 think, from others who talked about that type of a 6 contract path. 7 The second principle we have put 8 forward is that if we are going to have a contract 9 path, it is essential that there me an intermediates 10 market for mitigating risk for contracted entities, 11 both buyers and suppliers, and that that market 12 functions in as open a way as possible. 13 We have read some submissions that 14 lay out how that intermediates market would work, and 15 we generally are in support of those types of things. 16 Basically, you must have an 17 intermediate market so that the default customer is not 18 burdened solely with the risk of price on the market. 19 If you have an intermediate market, then price risk can 20 be offloaded to suppliers and retailers, to some 21 degree, and not have the customer exposed to that risk. 22 The other thing we see that is very 23 important is that because the default market will be 24 quite large in this province, it is important that that 25 market be accessible to provide price signals that 26 indicate the need for new supply in the province. If 27 you rely on the spot market to indicate when supply is 28 made through increased prices, you might be very light 1033 BARNSTAPLE/CHUDDY, presentations 1 in the cycle. 2 Generally, you don't get priced-up 3 spot market until you are very short on supply or 4 supply is getting very tight. Whereas in a contracted 5 market, because there are forward contracts in that 6 market, the parties to those contracts tend to worry 7 more about supply over a longer term than the spot 8 market outlook is. 9 So it is going to be very good for 10 this market if there is a contract path through to the 11 market, because that will provide early price signals 12 for investment. 13 The other area that is critical, as I 14 mentioned, a lot of our members are investors in small 15 facilities and operate small facilities, particularly 16 those based on renewable and high efficiency 17 cogeneration projects that range in size from a 18 megawatt up to, say, 100 megawatts, maybe 200 19 megawatts. They would be deemed small, I would think, 20 in the future market. 21 For those types of projects to be 22 financed efficiently, there needs to be some degree of 23 contracting for their output. And the default market, 24 because it is a large part of the initial market, will 25 require contract access to that market, as I have 26 pointed out. 27 The other thing that is very 28 critical, I think, before the Board here at this time 1034 BARNSTAPLE/CHUDDY, presentations 1 is that we are dealing with standard service supply 2 issue at the current time and the code for that. There 3 will be subsequently an OEB deliberation on 4 transmission tariffs, and it could be as a result of 5 the transmission tariff deliberations that we have a 6 transmission tariff structure and application for those 7 tariffs in the province that do give some pricing 8 advantage to small greener projects that are 9 distributor or imbedded out in loads. 10 These types of facilities, if they 11 have what we think will be fair transmission rates, 12 will be able to offer contracted power or surplus power 13 to the default market at prices that are less than the 14 spot market. In fact, I think you will see members 15 offering to contract for sales of power for such 16 facilities at a discount to the spot market. 17 It is important that the default 18 customer be able to access this type of low cost power, 19 which is really contingent on the outcome of the 20 transmission rate hearings. 21 What I am saying here is that that 22 hearing on transmission issues, the outcome of that is 23 tied in many ways to the deliberations here on standard 24 service supply. 25 The final point we make in our 26 principles is that there are already quite a number of 27 distributors in the province, and these companies are 28 capable, we believe, of being a party to the contract 1035 BARNSTAPLE/CHUDDY, presentations 1 pass-through to the default market and should be given 2 the flexibility to do that. 3 There are ways that have been 4 prescribed for providing for that. 5 So we fully support that the 6 distributors be capable of being a contract entity 7 between the generator and the default market. 8 Having said that, however, we have a 9 very critical point that we want to raise with the 10 Board. If distributors are part of the contract path 11 to the default market, we feel very strongly that they 12 need to be limited from self-dealing. 13 What that really means is if a 14 distributor is allowed to contract other than through 15 the spot market for supply to the default customer, 16 essentially being prohibited from supplying a large 17 portion of that supply from generating facilities that 18 he might have a beneficial interest in. 19 We haven't prescribed what the limit 20 might be. It might be zero; it might be 10 per cent; 21 it might be 15 per cent. That is up to the Board to 22 give consideration to. 23 But self-dealing of distributors who 24 are capable of contracting for default supply, it is 25 essential that they not be able to self-deal with 26 generation that they have an interest in. That would 27 be an anti-competitive activity that kind of flies 28 against everything else we are saying in the subject 1036 BARNSTAPLE/CHUDDY, presentations 1 area. 2 I will stop talking at this point and 3 ask Barry if he would like to add anything. 4 PRESENTATION 5 MR. CHUDDY: Sure. I would just like 6 to add one or two points based on an issue that Al 7 brought up. 8 Again, my name is Barry Chuddy, and I 9 have been a Director with IPPSO since the latter part 10 of last year. 11 On the point of why would generators 12 sell at anything less than spot, I guess the point I 13 would like to raise is that a number of our members do 14 have their own forecasts of what they believe the spot 15 market prices will be. When you layer on top of that 16 the likelihood of deemed profiling for residential 17 customers and the fact that it is fair to say that 18 because of that and the fact that there is expected to 19 be some volatility in pricing, based on different times 20 of day, times of the month, and times of the year, it 21 is unlikely that an average residential customer, for 22 example, would pay the annual average spot price. 23 There are those of our membership 24 that are looking at selling long and would like the 25 opportunity to sell long or sell into a longer term 26 agreement with customers that are purchasing for 27 default supply. We believe that we will be selling 28 those at a discount against the prices that customers 1037 BARNSTAPLE/CHUDDY, presentations 1 will be paying in that pricing regime, and also in some 2 cases against the prices that we believe will be 3 representative of the annual average spot price. 4 That point comes from the expectation 5 of fair degree of volatility over time in terms of what 6 that pricing will be. 7 It is fair to say -- again, just on 8 the heels of Al's point -- that our members believe 9 that there is a need to mitigate merchant risk in a 10 market, particularly in a market that has no history. 11 The only way to do that is to sell contracts forward 12 that would provide the opportunity to delivering power 13 that is cost effective to those customers that might 14 otherwise be paying spot prices. 15 That's the only point I would like to 16 make in support of Al's comments. I think we are 17 willing and ready to answer questions from the floor, 18 if that is the forum. 19 MS O'RILEY: Thank you. 20 Mr. Gibbons, do you have any 21 questions? 22 MR. GIBBONS: No. questions. 23 MS O'RILEY: Mr. Power? 24 MR. POWER: No questions; thanks. 25 MS O'RILEY: Mr. Rodger? 26 MR. RODGER: No questions. 27 MS O'RILEY: Mr. Mark? 28 MR. MARK: No questions. 1038 BARNSTAPLE/CHUDDY 1 MS O'RILEY: Mr. White? 2 MR. WHITE: No questions. 3 MR. POWER: A very intimidating 4 panel! 5 MS O'RILEY: Is there anyone I have 6 missed out there who has a question for this panel? 7 Well, just so someone asks you a 8 question -- 9 MR. CHUDDY: Don't feel you have to. 10 MS O'RILEY: You mentioned that your 11 members see a need for long-term contracts or some kind 12 of contracts in order to be able to enter the market in 13 at leat the near term. 14 Could you give us an estimate of how 15 long those contracts would have to be? 16 MR. CHUDDY: Let me start and then I 17 will defer to my esteemed colleague. 18 It is our view that the range of 19 terms of contracts will vary anywhere between a year or 20 two and twenty years, depending on the nature of the 21 contract and customer. 22 As Al very accurately mentioned, some 23 of the deliberations here are linked in many ways to 24 discussions that are expected to be coming up in the 25 latter part of the year concerning transmission tariffs 26 and how those will be structured. 27 I would endeavour to suggest that for 28 the contracts behind the fence, those will be longer 1039 BARNSTAPLE/CHUDDY 1 term; and the ones that will be done strictly on the 2 basis of market discussions will be shorter term. 3 Again, I see contracts from months to 4 a year to probably as long as five years. 5 MS O'RILEY: In terms of your comment 6 that municipal utilities shouldn't be self-dealing, 7 could you comment on some of the utilities that 8 currently own generation, specifically utilities such 9 as Orillia Hydro and whether under your alternative you 10 would see them selling that generation to either the 11 spot market or to other market participants. 12 MR. BARNSTAPLE: I don't think we are 13 particularly bothered with generation that's currently 14 in place and owned by utilities in the same way that 15 our members that have projects that are in the 16 province. What we are concerned with is a level 17 playing field for new investment. That's basically 18 what I am talking about here. 19 MR. O'RILEY: Thank you. 20 Mr. Hewson? 21 MR. HEWSON: I just have one question 22 for the panel. On page 4 of your -- I guess, some 23 principles of the paper that was filed the last week 24 and it's regarding point 3. I just wonder if you could 25 explain a little bit more this view that the fixed 26 price multi-year contract market will provide better 27 signals for the capacity than the spot market. 28 MR. BARNSTAPLE: I think what we are 1040 BARNSTAPLE/CHUDDY 1 getting at there essentially is when you enter into a 2 longer-term contract both parties make some assumptions 3 about the future. To make those assumptions, they 4 usually are fairly diligent in assessing what are going 5 to be the factors that can affect price in the future. 6 So normally you would look at the 7 overall demand/supply balance. If you see it 8 tightening two or three years down the road and you are 9 into, say, a five-year contract, you are going to try 10 to account for that somewhere in your pricing, 11 particularly if you are a supplier because you don't 12 want to give up opportunity that you might be able to 13 pick up if you were in the spot market. 14 What happens in the spot market is we 15 don't think the pricing in the spot market is 16 particularly responsive of demand/supply that is not 17 right in the immediate future. If there is a 18 demand/supply imbalance that appears to be rearing its 19 head, say, three or four years down the road, the spot 20 market probably will not react to that at all. 21 MS O'RILEY: Thank you for your 22 presentation. 23 MR. BARNSTAPLE: Thank you. 24 MS O'RILEY: Are there any procedural 25 matters that we should hear about before we adjourn? 26 MR. POWER: There are, indeed. Maybe 27 I can address that. 28 Firstly, for those who are following 1041 BARNSTAPLE/CHUDDY 1 through the transcripts, as well as for those of you 2 here, I am trying my darndest -- and I think I am 3 fairly close -- to getting not only the Notice of 4 Motion finalized, but the supporting materials. They 5 will be available today in the next couple of hours. 6 What we propose to do is, by fax to all intervenors, 7 fax out the Notice of Motion and the Affidavit. 8 As all the supporting materials have 9 already been previously supplied, we are going to ask 10 that people look to the transcripts and the Board's 11 notices, but if they need anything, we will have it. 12 This will save a pile of photocopying and bundling. 13 The Notice of Motion and Affidavit should be out this 14 afternoon. 15 Other matters are we have been asked 16 about the Ministry of Finance study that had come up 17 during the proceedings, so we will file that later 18 today. We have also been asked about Mr. Dewees' CV. 19 We will file that later today. As the Market Power 20 Mitigation Agreement seems to be a matter of some 21 discussion here, we will either file that or some 22 synopsis of it later today as well. 23 That's all, thanks. 24 MS O'RILEY: Thank you, Mr. Power. 25 The Board Secretary's office does 26 have copies of Mr. Dewees' rsum. 27 MR. POWER: If that's sufficient, 28 that's great by us. Thanks. 1042 BARNSTAPLE/CHUDDY 1 MS O'RILEY: Seeing no other matters 2 that need to be brought before us, I will adjourn the 3 conference. Thanks a lot. 4 --- Whereupon the hearing concluded at 10:55 a.m. WPC# Nz.}N'b[^6@ˣL=by2 =/ $JZv+<>)R=PbxSauжU>#W<,&:G)ł| CZ䥧JY\vtby\ M[sX+[XgޒIJ;[h1u8d[Tjlp~<}> az%#ࡱWPC# ە26O>*W -5 >fݤOPF^s>ܲ ģ5vdͤ_bowA1L{ҼmB`GʸCe Vsh M<{n"4W"}6ѓz6!| ~jVՙ۲3 223 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Wednesday, July 14, 1999, 26 commencing at 9:00 a.m. 27 28 VOLUME 2 224 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Society 18 and Producers Society of 19 Ontario, IPPSO. 20 ELIZABETH DEMARCO Various interested parties 21 BRIAN McKERLIE Municipality of Chatham-Kent 22 ROBERT WARREN Consumers Association of 23 Canada. 24 DICK PERDUE Direct Energy and Enershare 25 Technology 26 DAVID POCH Green Energy Coalition, GEC 27 ZIYAAD MIA Coalition of Distribution 28 Utilities et al 225 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 RICK GROULX 11 MARK RONAYNE Competition Bureau 12 KEITH RAWSON TransCanada Power 13 ANDREW BARRETT Ontario Power Generation 14 Inc. 15 RICHARD BATTISTA Union Gas Limited 16 BARBARA BODNER Enbridge Inc. 17 AMIR SHALABY Ontario IMO 18 DAN PASTORIC Energy Advantage 19 JIM RICHARDSON/ Upper Canada Energy Alliance 20 PAUL FERGUSON 21 MICHAEL JANIGAN Vulnerable Energy Consumers 22 Coalition 23 24 25 26 27 28 226 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 227 4 Continued questions of Professor Don Dewees 228 5 Luncheon recess at 12:25 p.m. 356 6 Upon resuming at 1:25 p.m. 356 7 Questions of Mr. John Todd 359 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 227 1 Toronto, Ontario 2 --- Upon resuming on Wednesday, July 14, 1999 3 at 9:00 a.m. 4 MS LEA: Good morning. Welcome to 5 the second day of the technical conference into the 6 Standard Supply Service Code. 7 I have a couple of minor 8 announcements. First of all -- I shouldn't call this a 9 minor announcement -- Mr. Peter Thompson, whose firm is 10 representing Ottawa Hydro, has called to say that 11 Ottawa Hydro invites intervenors with questions 12 regarding their proposal to call Mr. Thompson. If 13 these questions cannot be clarified off the record, 14 then Ottawa Hydro is willing to appear at this 15 proceeding. Peter Thompson's number is (613) 787-3528. 16 If anybody needs that number again, you can come and 17 get it from me. It is on the intervenors list also. 18 MR. WARREN: Jennifer, if we have a 19 question about a car accident do we use that number as 20 well? 21 --- Laughter 22 MS LEA: I am sure if you had a 23 question about almost anything, Mr. Warren, 24 Mr. Thompson would be happy to hear about it. I 25 shouldn't speak for him, though. 26 Are there any other preliminary 27 matters? I see Dr. Dewees is ready and able to take 28 your questions this morning. Is there anything 228 DEWEES 1 further? 2 Thank you. Mr. Warren, I think you 3 are next in the batting order. 4 Can I remind parties that we are 5 under time constraints today because Dr. Dewees is 6 available only in the morning. So to the extent 7 possible, please stick to your time estimates and move 8 briskly along. Thanks very much. 9 Mr. Warren. 10 MR. WARREN: Dr. Dewees, I act for 11 the Consumers Association of Canada in this proceeding 12 and my questions for you are, roughly speaking, in two 13 broad categories. The first category is, I want to 14 try, if I can, to clarify some of the exchanges -- 15 MS LEA: Mr. Warren, you are not 16 coming through as clearly as you might. Could you try 17 adjusting the microphone slightly, I don't know quite 18 what you can do, or leaning into it perhaps? 19 MR. WARREN: The first broad 20 category, Dr. Dewees, is, I want to try, if I can, to 21 understand the MDC's position as a result of some 22 exchanges you had with counsel yesterday, and then the 23 second broad category of areas I want to cover is, I 24 want to try to get your comments on the positions which 25 were being advocated or articulated by some of the 26 other parties here to see if I can understand what your 27 view is of them. 28 First, in the category of 229 DEWEES 1 clarification, toward the end of the day yesterday you 2 had an exchange with Mr. Mark, who appears as counsel 3 to the Municipal Electric Association. Mr. Mark was 4 pursuing, as I understood it, the distinction between 5 risk allocation and risk management for LDCs. 6 First of all, do I understand 7 correctly that the structure of the Electricity Act 8 imposes on LDCs an obligation to provide standard 9 supply? 10 PROFESSOR DEWEES: That's my 11 understanding of the Act. 12 MR. WARREN: Do I understand it, both 13 from your paper and from your exchanges yesterday, that 14 a fixed price regime carries with it some component of 15 risk, albeit risk which may be mitigated through 16 various risk management techniques? Is that correct? 17 PROFESSOR DEWEES: That's correct. 18 MR. WARREN: Would you agree, given 19 those two propositions, that a Board decision which 20 would require a fixed price regime for standard service 21 would amount to requiring some LDCs to assume risks 22 which they may be unable or unwilling to assume? Is 23 that a fair conclusion on my part? 24 PROFESSOR DEWEES: That is certainly 25 possible. I don't know what the situation of all LDCs 26 would be, but I would expect that to be the case. 27 MR. WARREN: Then let me leave out 28 the modifiers "unwilling" or "unable". 230 DEWEES 1 Am I correct in my conclusion that a 2 fixed price regime would have the effect of requiring 3 LDCs to assume some measure of risk whether they are 4 willing or able to accept it or not? 5 PROFESSOR DEWEES: That's correct. 6 MR. WARREN: Okay. So do I take it 7 that the decision of the Board in this proceeding is 8 about -- or would you agree that the decision of the 9 Board whether to accept, for example, a fixed price 10 regime or the spot price pass-through, can we not 11 conclude that it is about both risk allocation and risk 12 management? 13 PROFESSOR DEWEES: Yes, those are 14 certainly two elements that are involved in it. 15 MR. WARREN: Yesterday in questions 16 from Mr. MacOdrum, who was appearing on behalf of 17 Toronto Hydro, raised a question about load profiling, 18 and I regret that I was unable to get the transcript 19 from the Web site last night, so I may, with apologies 20 to Mr. MacOdrum, get it wrong. But as I understood the 21 exchange yesterday, Mr. MacOdrum was suggesting that 22 load profiling represents a risk for LDCs. I would 23 like, if I can, to explore what the MDC position is or 24 what the MDC proposal is on load profiling. 25 My understanding of the MDC position 26 is that the LDCs pay the IMO for what they consume and 27 that there is therefore no risk to them from load 28 profiling. Is that a correct understanding? 231 DEWEES 1 PROFESSOR DEWEES: That's correct. 2 Under the MDC's proposed regime, the LDC would pay to 3 the IMO for all of the electricity that flowed through 4 the meters that connect the LDC to the grid. The LDC 5 would then bill interval meter customers for their 6 consumption, according to their meter readings, and 7 customers with kilowatt hour meters would be billed 8 according to their consumption -- that is, all of the 9 remaining electricity that wasn't billed to interval 10 meter customers -- that is, the net load, would be 11 billed to the kilowatt hour metered customers, so that 12 all of that electricity that comes in through the meter 13 and goes out to customers will be paid for by the 14 customers. 15 The load profile is used to determine 16 the average price to be paid by the kilowatt hour 17 customers, but that average price times their kilowatt 18 hour readings should give the total consumption, which 19 is equal to the amount that came in. 20 MR. WARREN: I then want to move to a 21 question which -- it may have been Mr. MacOdrum, and 22 again my apologies to him if it wasn't, but one of the 23 counsellors yesterday who asked you questions raised a 24 question about the risk which arises for consumers 25 because consumption and prices vary across hours. Is 26 this an issue which was considered by the MDC and, if 27 so, what was the MDC's analysis of the nature and 28 extent of this risk and how it could be dealt with? 232 DEWEES 1 PROFESSOR DEWEES: The MDC 2 recommended a smoothed spot price so that the 3 hour-to-hour variations would be averaged for 4 individual consumers. In fact, that happens 5 necessarily for anyone with a kilowatt hour meter 6 because you don't know what the hour-by-hour take of 7 those customers is. 8 So the draft code recommendation for 9 smoothing over the billing period provides for 10 substantial smoothing of the hourly variations, that 11 is, to the monthly or two-month or three-month average 12 price, and that is consistent with the MDC's 13 recommendation that some sort of smoothing be adopted. 14 MR. WARREN: Is the alternative for 15 dealing with this problem of consumption and prices 16 varying over time the use of interval metering? 17 PROFESSOR DEWEES: Yes, because with 18 a kilowatt hour meter you just don't know how much any 19 individual consumer used in any individual hour, the 20 best you can do is to use some sort of profile to 21 allocate the meter reading over the period of the meter 22 read. That is what we do today. Every distributor has 23 a profile -- every distributor has to allocate 24 electricity to each customer using the meter reading. 25 The alternative to that would be to 26 require customers to have interval meters. The MDC 27 considered this and rejected it on the grounds that at 28 the present time it appeared to be too expensive. This 233 DEWEES 1 would impose an unreasonable burden on consumers. 2 In some other jurisdictions they have 3 said, as a basis for competition, any consumer that 4 switches from the distributor's default supply or SSS 5 to a competitive retailer has to get an interval meter 6 so we know exactly what the hourly consumption of that 7 user is. 8 The MDC considered that possibility 9 and rejected it on the grounds that the cost of 10 installing and servicing an interval meter would be a 11 barrier to competition. Instead, the MDC said that the 12 distributor will establish a load profile for its 13 kilowatt hour metered customers and that same profile 14 will be used whether the customer is served by the 15 distributor or by a competitive retailer. 16 So there is no profile risk in terms 17 of that which has arisen in other jurisdictions when 18 customers switch because the basis on which they are 19 paying is exactly the same as the basis on which they 20 are paying if they stay with a distributor. 21 What we achieve with that is, we 22 avoid the costs of interval metering. As a whole, we 23 avoid the barrier to competition from requiring 24 interval metering for customers who switch, and we have 25 a level playing field because the meter basis on which 26 the customer pays is the same whether it stays with the 27 distributor or goes to a competing retailer. 28 MR. WARREN: Thank you. 234 DEWEES 1 The next question I have arising out 2 of exchanges which you had with various counsel 3 yesterday, if I can summarize that, the questions that 4 were directed to you were under the heading, broadly 5 speaking, of the suggestion that a fixed price system 6 is, from the point of view of the settlement system, 7 simpler than is the spot price pass-through. What is 8 your view on that? 9 PROFESSOR DEWEES: I think it's not 10 simpler. It is likely to be more complicated. With 11 the competitive mechanism that the MDC recommended, 12 basing it on the direct spot price pass-through, the 13 distributor has to be prepared to calculate the spot 14 price for every customer on the system. It will 15 actually do that for any customer that switches so that 16 the distributor can send the spot price bill to the 17 competing retailer. So the retail settlement systems 18 will have to provide for distributors with the 19 capability of calculating the spot price bill for every 20 customer. 21 With the spot price pass-through 22 averaged over the billing period, as the draft code 23 recommends, there is no additional calculation for each 24 customer. The LDC is capable of computing that spot 25 price bill over the billing period and that is the 26 basis on which the bill is sent out. 27 If the distributor offers SSS as a 28 fixed price, then, in addition to being able to track 235 DEWEES 1 the spot price for all customers, the distributor has 2 to keep track of a second calculation, namely, the 3 customer's consumption and a fixed price. The price is 4 truly fixed over the period of a year, the additional 5 complexity is modest, but some of the proposals and 6 some of the discussion yesterday dealt with the 7 distributor buying a portfolio of supply contracts. 8 If a distributor is managing a 9 portfolio of supply contracts, then as those contracts 10 are renewed and new purchases are made, the price of 11 this fixed price offering is going to change, perhaps 12 by small amounts, but it's likely to change during the 13 course of the year. 14 So for those who are talking about a 15 fixed price option based on a portfolio that is going 16 to be changing, as I believe the gas portfolio has 17 changed today, then the fixed price is going to change 18 somewhat during the year. That means the distributor 19 has to be able to keep track of the spot price for each 20 customer and the variations in the fixed price for each 21 customer. It's going to have to have a dual system of 22 some sort, and that necessarily is going to be a more 23 complex information system for the distributor to 24 manage than the single system that deals with the spot 25 price. 26 MR. WARREN: The next area I wanted 27 to cover was yesterday there were questions which were 28 put to you with respect to the fixed price system and 236 DEWEES 1 the suggestion was made -- and again I apologize, I 2 don't have the transcript, so I don't remember who it 3 was, but, as I understand it, the suggestion was made 4 that under a fixed price system the principal or the 5 only factor contributing to a premium under that system 6 was a volume risk. 7 I wanted to know if you felt that 8 there were other factors possibly which might 9 contribute to a premium under a fixed price system, 10 including the volume risk. For example, is there a 11 price risk? 12 PROFESSOR DEWEES: Yes. 13 The MDC mentioned I believe both 14 price and volume risk and at one point or another 15 yesterday I think I mentioned both of those. The 16 supplier of the fixed price SSS, whether it's 17 absolutely fixed or whether it's a portfolio, has to 18 assume the risk that customers will leave SSS, as they 19 are entitled to do, and that imposes the volume risk. 20 One of the main objectives of a fixed price system is 21 to provide price stability, so the supplier of that 22 price presumably will charge a premium for managing the 23 price risk. 24 There are a couple of other 25 additional costs that are associated with managing a 26 fixed price system. There are risk components. If the 27 distributor is actually buying and managing a 28 portfolio, then it has the costs of having a purchasing 237 DEWEES 1 department and a risk management department and running 2 those operations, and it has the additional cost of 3 dealing with the regulatory issues that arise with a 4 regulated fixed price as opposed to the spot price. 5 I think there are a number of 6 components that led the Market Design Committee to 7 believe that the price would be higher with a fixed 8 price offering than the expected cost of a spot price. 9 MR. WARREN: We dealt a moment ago 10 with the potential increase in costs due to the 11 settlement system. Does that also possibly contribute 12 to an increase in costs under the fixed price regime? 13 PROFESSOR DEWEES: Sure. The 14 settlement cost that I was referring to a minute ago 15 would be another component of that. 16 MR. WARREN: Finally, is there an 17 additional cost that may be attributable simply to 18 procurement? 19 PROFESSOR DEWEES: Yes. 20 Under the smoothed spot price 21 pass-through, you don't have to procure; you just need 22 to do the calculations and bill. In the case of a 23 fixed price, if you are assembling a portfolio or 24 negotiating, you have to have an individual or a team 25 that does the buying. So there are some costs 26 associated with that procurement function. 27 MR. WARREN: The final area with 28 respect to clarification is there was much discussion 238 DEWEES 1 yesterday with respect to the issue of level playing 2 field. One of the suggestions that was made to you by 3 Mr. Mark towards the end of the day was, as I recollect 4 it, that there was an unlevel playing field because the 5 natural gas utilities were able to compete in the 6 retail market. 7 Is it your understanding under the 8 laws of the Province of Ontario that the natural gas 9 utilities can compete in the retail market? 10 PROFESSOR DEWEES: By "utility", you 11 mean the distribution company? 12 MR. WARREN: Yes. 13 PROFESSOR DEWEES: I am not an expert 14 in gas. My understanding is that it would be the 15 competitive affiliate of the company that would engage 16 in competitive activities rather than the distributor 17 itself. I am not sure that that distinction came up 18 yesterday. 19 MR. WARREN: I am moving to the 20 second category of my questions and that is to try and 21 get you, if you would, to join issue on some of the 22 other positions that have been taken by other parties. 23 It's really with a view to understanding. My principal 24 concern is whether or not the concerns that were 25 articulated by the MDC and have been set out in your 26 paper or addressed, in your view, adequately by some of 27 the other positions. 28 I want to deal first with the 239 DEWEES 1 position of Mr. Todd. Mr. Todd will be on later today. 2 In fairness to him, I haven't had a chance to seek 3 clarification from him. 4 As I understand Mr. Todd's position, 5 it is predicated principally on a concern that 6 consumers will not know the price for the gas they are 7 paying in advance. Mr. Todd I believe uses the 8 language of saying that that is fundamental to a truly 9 competitive market. 10 Is that an issue which the MDC was 11 aware of in its deliberations? 12 PROFESSOR DEWEES: I don't recall 13 discussion of -- at least I don't recall extensive 14 discussion of that particular issue. 15 There was an expectation I believe 16 that as experience with the smoothed spot price built 17 up an understanding would be developed as to the likely 18 price, certainly the price history. During the first 19 few years, there is an expectation that the price is 20 likely to be pretty close to 3.8 cents -- so averaged 21 over some period, I assume a year -- but the MDC did 22 not talk explicitly about the extent to which customers 23 were likely to know what the price during the next 24 month or two months or three months is going to be. 25 MR. WARREN: Let me pause at the 26 question. The concern, as articulated by Mr. Todd, is 27 a concern the consumers under the proposed spot price 28 pass-through will not know the price they are going to 240 DEWEES 1 pay. If we accept for a moment that that is a 2 legitimate concern, is it sufficient, in your view, to 3 warrant moving to another system, for example, a fixed 4 price system? 5 PROFESSOR DEWEES: No, it's not. I 6 think there are a couple of responses to that concern, 7 and I think it is a legitimate concern. 8 One is that there is likely to be a 9 predictable seasonal variation in the spot price. We 10 would expect the price to be higher in the winter when 11 demands are at their peak, lower in the spring or fall, 12 medium in the summertime. This is what marginal cost 13 pricing would likely lead to. 14 If that is in fact the predictable 15 pattern, I think consumers will come to understand that 16 with experience, in a relatively short period of time, 17 just as we experienced variations in the price of other 18 commodities. 19 Vegetables become cheaper when the 20 Ontario vegetables come in during their season, in the 21 summertime; the rest of the year you pay for shipping 22 them from Mexico or California. I think most consumers 23 understand this. So I think that those predictable 24 variations will be well understood by consumers. 25 The random variation, it is true, 26 will not be known. My expectation is that those would 27 generally be relatively small. So for me, that doesn't 28 impair the ability of the consumer to understand the 241 DEWEES 1 price they are going to be paying. 2 In the case of many residential 3 consumers, there won't be very much response to price 4 in any event. So it's not as if major decisions were 5 going to be made badly because of not knowing exactly 6 what the price in the upcoming period is going to be. 7 In the case of large sophisticated 8 consumers who might adjust some aspects of their 9 operations, I expect that they will have the services 10 of their own energy purchasing department or of 11 retailers or energy service companies that will provide 12 them with price histories and price forecasts that are 13 sufficient for them to make the adjustments that are 14 warranted. 15 So I think in terms of customers 16 behaving reasonably in the face of these prices, I 17 don't see a problem presented by the fact that you 18 don't know in advance exactly what the price will be 19 for the next month. 20 MR. WARREN: You don't need to turn 21 it up, but at page 4 of your prefiled paper you 22 reviewed the fixed price proposals which had been 23 considered by the MDC and you discussed the problems 24 which the MDC felt were associated with them at a broad 25 level of generality. 26 Does Mr. Todd's proposal, in your 27 view, adequately address the concerns that MDC had 28 about the fixed price regime? 242 DEWEES 1 PROFESSOR DEWEES: I don't think it 2 does. I was interested to read Mr. Todd's submission 3 and the other submissions, looking to see whether we 4 could find something that was better than what the MDC 5 had recommended and better than the proposals that it 6 had considered and could not accept. I don't see that 7 the Todd proposal provides that solution. 8 Among other things, Mr. Todd's 9 proposal offers a variety of options. I spoke 10 yesterday about the concern that, number one, the SSS 11 customer who doesn't choose has to be given one thing, 12 he can't be given three things, so there has to be a 13 default. 14 Under Mr. Todd's proposal, which as I 15 recall involves a bidding process, there is still the 16 concern whether all areas of the province will be able 17 to secure reasonable bids, and there is the concern 18 that there has to be some regulatory oversight by the 19 OEB, and we now, under his proposal, have three 20 regulated offerings. It seems to me that this is not a 21 good way to move toward a competitive market, to have 22 three regulated offerings. I think retailers will find 23 it difficult to compete against that array of products. 24 So if the basic question is do we 25 want to move to competition-setting prices or 26 regulation-setting prices, it seems to me that 27 Mr. Todd's proposal leaves us with regulation-setting 28 prices for the vast majority of customers. 243 DEWEES 1 MR. WARREN: In addition to the 2 question of regulation-setting prices or its impact on 3 the competitive market, do you have any concern about 4 the regulatory cost associated with Mr. Todd's 5 proposal? 6 PROFESSOR DEWEES: Yes. The general 7 concerns that the MDC identified, it seems to me, are 8 not solved by Mr. Todd's proposal, because there are 9 potentially three offerings, three rates for the OEB to 10 regulate; and with a large number of distributors, as I 11 indicated yesterday, I think there is a real risk that 12 either the regulatory cost for the OEB and for the 13 distributors is going to be high, or regulation will be 14 ineffective, which seems to me not to be in the 15 interest of consumers. 16 MR. WARREN: Let me leave Mr. Todd 17 aside for a moment and turn to the Adamson analysis. 18 Does the Adamson analysis, in your 19 view, adequately address the concerns which the MDC had 20 about fixed price proposals? 21 PROFESSOR DEWEES: No, it doesn't. 22 The regulatory mechanism that is proposed in the 23 Adamson paper is an interesting one, and I am not sure 24 that the MDC considered this explicitly. But it seems 25 to me it leaves in place really all of the concerns 26 that the MDC had with fixed price offerings. 27 It raises the concern of exactly what 28 happens to the distributor that is above the broadband 244 DEWEES 1 range within which the price is deemed to be 2 reasonable. 3 If the distributors in fact purchase 4 electricity at that price, what does it do when it is 5 told that the price is too high? If it doesn't pay a 6 penalty, then the customers aren't protected; if it 7 does pay a penalty, are the taxpayers paying or is this 8 somehow going to come back to the consumers later on? 9 It is not clear how that would be effective. 10 So, no, I didn't find that the 11 Adamson paper solved the array of concerns that MDC 12 had. 13 MR. WARREN: My final area of 14 questioning is with respect to the issues which have 15 been raised variously by Mr. Todd and Ms Woolf, and 16 Mr. Adamson as well, and that is with respect to the 17 intermediate market. The burden of their criticism, as 18 I understand it, is that the spot price pass-through 19 will have the effect of deterring the development of an 20 intermediate market. 21 I have two questions: First of all, 22 is this a concern, this break, if you wish, on the 23 development of intermediate market; and, if so, do any 24 or all of Woolf, Adamson and Todd fix that problem in a 25 way which is acceptable to you? 26 PROFESSOR DEWEES: My view of the 27 intermediate market is that it is not an end in itself 28 but it's a vehicle that may satisfy demands by both 245 DEWEES 1 suppliers and consumers. So the question is: Do 2 suppliers and consumers want this? 3 As I indicated yesterday, some 25 per 4 cent of the Ontario demand consists of customers whose 5 demand is rated in 5 megawatts. These are large 6 customers spending I believe over a million dollars a 7 year on electricity. If they find the intermediate 8 market serves their needs, surely the demand of that 9 group by itself would be sufficient to support such a 10 market. 11 In addition, I would expect that a 12 significant fraction of the 48 per cent of the general 13 services market that ranges from very small operations 14 up to just below 5 megawatts will be sufficiently 15 sophisticated on their own to participate in such a 16 market. So if they want it, they will be there 17 supporting it. 18 Even for some of the smaller users, 19 for example, McDonald's franchises or Home Hardware 20 stores, each of which may individually be a pretty 21 small consumer, my understanding from discussions at 22 the MDC is that retailers may approach those 23 organizations and offer to serve those customers. 24 So the fact that a Home Hardware 25 store is in fact quite a small customer doesn't mean 26 that it might not get advice from -- I don't know 27 whether it is a franchise or whether they are 28 managers -- get advice from head office as to what 246 DEWEES 1 electricity purchase options would best serve their 2 interests. 3 So I think even at the small end of 4 the market there will be some consumers like those who 5 will have acting for them sophisticated participants 6 who could enter into the intermediate market. 7 If there is a demand for that -- and 8 I expect there will be -- it seems to me that 9 intermediate market can grow and thrive on the basis of 10 that contingent, even if it turns out that most 11 residential consumers and a lot of other small 12 consumers stay with the smoothed spot price and 13 therefore are not involved in such a market. 14 So I don't see that market being at 15 risk as a result of the smoothed spot price 16 pass-through unless it turns out that nobody wants it. 17 I think that is unlikely, but if it turns out that the 18 big sophisticated customers don't want it and the 19 intermediate customers don't want it, then I don't 20 think we should change the market design to make it 21 spring up. 22 MR. WARREN: Thank you. Those are my 23 questions. 24 MS LEA: Thank you, Mr. Warren. 25 Mr. Poch. 26 MR. POCH: Thank you. 27 Dr. Dewees, first a few questions 28 about the nature of the MDC. 247 DEWEES 1 Would you agree with my 2 characterization that the majority of the members of 3 the MDC were from the electricity sector, the industry 4 itself, and the very large consuming groups? 5 PROFESSOR DEWEES: The industry being 6 generators, transmission, distribution, big consumers 7 and -- 8 MR. POCH: Yes. You have indicated 9 decisions were by substantial consensus. What did that 10 work out to, as rule of thumb, in terms of percentage? 11 PROFESSOR DEWEES: Generally 12 speaking, substantial consensus was 11 out of 14 or 13 better. It ranged of course up to unanimity. 14 MR. POCH: Something in excess of 15 two-thirds? 16 PROFESSOR DEWEES: Generally, yes. 17 MR. POCH: Okay. 18 I take it from your earlier comment 19 that groups such as environmental groups and small 20 consumer groups didn't have 33 per cent of the floor 21 vote? 22 PROFESSOR DEWEES: That's correct. I 23 don't know how much support they generated among other 24 members, but Julie Girvan was there specifically as a 25 consumer representative. 26 MR. POCH: But the nature of the 27 decision-making process of the MDCs meant that the 28 industry sector, say, for example, generating, 248 DEWEES 1 transmission and the competing retail sector, would 2 have amongst them sufficient numbers that they could 3 affect veto proposals brought forward to the MDC by 4 groups such as environmental groups or small consumer 5 groups? 6 PROFESSOR DEWEES: Certainly, any 7 proposal had to generate pretty broad support in order 8 to be carried. 9 MR. POCH: Turning to the Board 10 staff -- or the straw man proposal, as it has been 11 called, would you agree that it's in keeping with the 12 MDC approach? You have described that indeed in your 13 first slide. I think, as a guiding objective of the 14 MDC, you show the objective as "to get the lowest 15 price". 16 PROFESSOR DEWEES: I think, with 17 respect to retail competition, the -- I forget the 18 exact wording, but it was to get a best combination of 19 price and service at the wholesale level to get the 20 lowest price, yes. 21 MR. POCH: But, indeed, isn't it fair 22 to say that was how the MDC interpreted the White 23 Paper, that is, we are looking for the lowest price, 24 including other service objectives? 25 PROFESSOR DEWEES: That's correct. 26 That wasn't the only interpretation. 27 We did spend quite a bit of time on environmental 28 matters. 249 DEWEES 1 MR. POCH: Right. 2 PROFESSOR DEWEES: But, with respect 3 to price, that was the objective. 4 MR. POCH: The White Paper uses 5 different phrases, but in its listing of objectives it 6 uses the phrase "reasonable prices". It also refers to 7 enhancing safety, reliability and environmental 8 protection. 9 Can we agree that the lowest price is 10 not necessarily -- or that a reasonable price is not 11 necessarily the lowest price, if we include such 12 factors as risk and social costs? 13 PROFESSOR DEWEES: Sure. 14 MR. POCH: I understand you are an 15 economist who has worked fairly extensively on 16 environmental economics issues? 17 PROFESSOR DEWEES: That's correct. 18 MR. POCH: You would agree, having 19 looked at that matter extensively, that in the broader 20 scheme of regulating the sector, and I use that word in 21 its broadest sense, it is appropriate that social costs 22 not be ignored? 23 PROFESSOR DEWEES: Absolutely. 24 MR. POCH: Now, we can agree that the 25 Board staff straw man doesn't address that issue? I am 26 thinking here of environmental costs in particular. 27 PROFESSOR DEWEES: That's right. 28 Like the MDC, I think the Board staff focused on other 250 DEWEES 1 issues. The MDC recommended a set of environmental 2 measures which it felt would address environmental 3 issues, and then for standard system supply focused on 4 price, assuming that the environment would be taken 5 care of by the other recommendations that it had made, 6 and I think the draft code is consistent with that 7 approach. 8 MR. POCH: The MDC didn't just 9 endorse, in fact, it practically insisted that there 10 needs to be, simultaneously with market opening, the 11 putting in place of a cap-and-trade style environmental 12 management regime if we are receive some assurance that 13 competition is not going to reduce environmental 14 quality. Is that a fair characterization? 15 PROFESSOR DEWEES: Yes. The MDC 16 certainly said that it was important to have air 17 pollution regulation, and a cap and trade, in 18 particular, in place at the time of market opening in 19 order to protect the environment. 20 MR. POCH: Is it fair to say, then, 21 thereafter, having come to that decision fairly 22 early -- I believe it was in Q2 -- the Committee, the 23 MDC, structured the rest of its conclusions and dealt 24 with other proposals for environmental initiatives in 25 light of that, saying, in a sense, having selected that 26 approach, advocated that approach, it then relied on 27 that approach as a reason not to have to put on other 28 add-ons of an environmental nature? 251 DEWEES 1 PROFESSOR DEWEES: Yes, I think 2 that's correct. 3 MR. POCH: All right. 4 Indeed, turning to the practical 5 reality we now face, while we may get an update on NOx 6 and SOx regulation regime in Ontario, am I correct in 7 saying no one is forecasting we are going to have a 8 carbon cap in place by the time we get markets open? 9 PROFESSOR DEWEES: I confess I 10 haven't been following what is going on at the Ministry 11 of the Environment recently, so I am just not in a 12 position to comment on what they are likely to have in 13 place by market opening. 14 MR. POCH: Can we assume, for our 15 purposes of discussion, that we are not talking about 16 having a carbon cap in place? Although many of us are 17 advocating for it, we are not talking about having one 18 in place, in the next month. 19 PROFESSOR DEWEES: I am prepared to 20 work on that assumption. 21 MR. POCH: All right. 22 Would you agree that merely allowing 23 competitive retailers to offer green power, enabling 24 it -- switch the labelling or what have you -- but 25 merely a permissive act of allowing it, does nothing to 26 cause social costs to be dealt with as a whole? 27 PROFESSOR DEWEES: It allows those 28 who have a particular concerns about environmental 252 DEWEES 1 protection to discuss those concerns, but you are 2 right, it does nothing for those who are concerned. It 3 provides no environmental protection, with respect to 4 those consumers. 5 MR. POCH: As an economist, an 6 environmental economist, would you agree that we can 7 predict with some accuracy that most -- not all, but 8 most general service and industrial large users are 9 going to focus on price and price risk concerns and not 10 particularly be interested in paying anything for 11 social cost reduction? 12 PROFESSOR DEWEES: We see examples 13 from time to time of corporations not choosing the 14 lowest cost because they want to be seen as supporting 15 the environment or other causes, but I wouldn't expect 16 that to be a dominant force. 17 MR. POCH: A body shop might do it, 18 but they are going to be the exception to the rule? 19 PROFESSOR DEWEES: I would expect so. 20 MR. POCH: All right. 21 I am unaware -- and perhaps you can 22 help us -- but at present I take it there is no 23 mechanism in place to force internalization of many 24 environmental costs, such as carbon, greenhouse gas 25 emissions, on brown power producers, nor is there one 26 to subsidize green producers or retailers to level that 27 field from a societal perspective, correct? 28 PROFESSOR DEWEES: With respect to 253 DEWEES 1 C02, I believe that Ontario Hydro, now OPG, has agreed 2 to a voluntary cap on those emissions. Its emissions 3 of other air pollutants are subject to existing 4 regulations by the Ministry of the Environment. 5 MR. POCH: Yes. I was thinking of 6 carbon, in particular, and the sector as a whole. 7 PROFESSOR DEWEES: Okay. 8 Outside of the OPG voluntary 9 commitment, there is no constraint that I am aware of 10 on carbon. 11 MR. POCH: You have noted in your 12 discussion yesterday about the driver for the various 13 MDC proposals, that one driver seems to be -- maybe I 14 have interpreted this correctly; I am not using your 15 words -- that there was a desire to separate the 16 monopoly function from the competitive. Is that fair? 17 PROFESSOR DEWEES: That's correct. 18 MR. POCH: All right. 19 Would it be fair to characterize a 20 parallel distinction on the -- let me rephrase that. 21 Would it also be fair to make a 22 distinction between matters that the market is good at 23 and where a fair result will arise and matters that the 24 market is not good at and will not happen either fairly 25 or adequately in the market? The monopoly ones are -- 26 PROFESSOR DEWEES: It sounds like a 27 distinction. I guess I am not sure where this is 28 going, but I would agree there are some things the 254 DEWEES 1 market does well and other things the market doesn't do 2 well. 3 MR. POCH: Let's put it this way. We 4 want to regulate the monopoly aspects because the 5 market is not particularly good at getting a fair 6 result there. 7 PROFESSOR DEWEES: That's right. 8 MR. POCH: We are backing away from 9 regulation of the commodity because we have some 10 confidence that the market will do an adequate job and 11 do it fairly. 12 PROFESSOR DEWEES: That's correct. 13 MR. POCH: Would you agree that 14 social costs, for the moment, until we have a cap and 15 trade regime, are going to fall in that first category 16 where we need to regulate somehow? The market is not 17 going to do an adequate or a fair job. 18 PROFESSOR DEWEES: Sure. That is why 19 we have a Ministry of the Environment, because the 20 market doesn't provide the socially desired degree of 21 pollution control, in general. 22 MR. POCH: The context we find 23 ourselves in before this Board is this Board has a 24 statutory mandate in the new Act to facilitate the use 25 of cleaner, more environmentally-benign energy sources, 26 and obviously it does that in the context -- and it 27 explicitly says so -- in the context of government 28 policy, from time to time, and in the context of 255 DEWEES 1 government regulation. 2 Given the context we have just spoken 3 about, I want to table a proposal and get your 4 comments. 5 The proposal, and it is a relatively 6 vague one of necessity, is that some green 7 power -- "green" defined by whatever the strictest 8 category under the eco-logo definition turns out to 9 be -- gets bundled into the SSS with spot until such 10 time as either the market or a broader provincial 11 regulation is adequate to bring on significant green 12 generation, that is, the Board would desist from 13 regulating when it no longer needs to, as is its 14 obligation generally now. 15 The presumption in this proposal, 16 which I invite you to question if you wish to, is that 17 new green power development of any scale, the producers 18 will require some kind of contract and will likely 19 require some kind of premium above marginal coal costs 20 until externalities are eliminated by cap and trade or 21 otherwise; and, obviously the per cent of green power 22 in the SSS would involve a consideration of the social 23 benefits, compared to the premium it entails, and be 24 constrained by the need to keep SSS at a reasonable 25 price level relative to competitive offerings. 26 That is the proposal I am suggesting 27 as a means to bridge the gap we have been discussing in 28 regulation. Maybe I will just take you through some of 256 DEWEES 1 the concerns you have already mentioned and ask you if 2 you have any others. 3 First of all, in responding to 4 Mr. Gibbon's ideas tabled yesterday, I think you 5 characterized it as a kind of second-best approach, 6 where the municipals are regulated by the OEB and you 7 were concerned about the Board getting the green 8 quotient right. First of all, have I characterized 9 that as one of your concerns correctly? 10 PROFESSOR DEWEES: Yes. 11 MR. POCH: Isn't that just the same 12 as saying that you would prefer a provincial 13 bureaucracy to regulate -- to decide what the social 14 costs are and how much society should have to pay to 15 overcome them as opposed to an open public regulatory 16 process deciding that? 17 PROFESSOR DEWEES: Another way to put 18 that is that I think it is the responsibility of the 19 elected government to reflect the will of the people in 20 deciding the appropriate degree of regulation of 21 environmental matters. Whether we are happy with the 22 way that is interpreted at any particular time, it 23 seems to me that is the basis of our democratic 24 government. We elect a government with a mandate to 25 carry out a set of programs and it is the democratic 26 process that pushes the government to apply the degree 27 of environmental protection that the people of Ontario 28 want. 257 DEWEES 1 MR. POCH: Couldn't you say that is 2 an economic regulation too? If the government has 3 chosen to delegate that to this Board, and indeed they 4 have chosen to delegate some concerns for environment 5 to this Board explicitly, is that not an appropriate 6 delegation? 7 PROFESSOR DEWEES: I guess my 8 concern -- this Board has experience and expertise in 9 economic regulation. On environmental matters, I would 10 be happy to be corrected, but I expect that there is 11 not much experience, and it is not clear to me that the 12 Board is constituted or structured adequately to 13 consider and reflect environmental matters, whereas I 14 think it has been designed to deal with the sort of 15 economic matters that traditionally come before it. 16 I have some sympathy for the proposal 17 that you make, but I have trouble with -- there is an 18 institutional problem in trying to get the OEB to do 19 something that, in my view, the Ministry of the 20 Environment should really be doing. 21 MR. POCH: I won't enter into a 22 debate with you. I will just mention to you, as 23 something you may want to pursue for your own interests 24 later, that the OEB has in fact been regulating on the 25 gas side for some time the inclusion of demand-side 26 management initiatives, even before the new Act, for 27 many years, and in doing so has considered social 28 costs, and that the gas companies' own evidence shows 258 DEWEES 1 they are now forecasting some hundreds of millions of 2 dollars in net benefits, both societal and financial, 3 for customers as a result. 4 Let's move on to other concerns. 5 You have mentioned regulatory burden 6 as one. First of all, in terms of the suggestion I 7 have just made, you are familiar with the eco-logo 8 process? 9 PROFESSOR DEWEES: Yes. 10 MR. POCH: You would agree that 11 offers a convenient way that the Board, or other 12 regulator, might not need to have to spend a terrific 13 amount of time deciding what is green? 14 PROFESSOR DEWEES: Yes. Indeed, as 15 you know, the Market Design Committee embraced eco-logo 16 precisely because it involved an available, fairly 17 straightforward means of defining "green" that probably 18 saved us two years of trying to come up with a 19 definition ourselves. 20 MR. POCH: You are also aware that 21 this Board will be regulating the MEUs in terms of 22 their distribution costs, OM&A and capital, for 23 example? 24 PROFESSOR DEWEES: Yes. 25 MR. POCH: And that the Board is 26 developing yardstick and price cap regulatory modes to 27 minimize regulatory costs? 28 PROFESSOR DEWEES: I am not involved 259 DEWEES 1 in that in any way, but I understand that it is going 2 on. 3 MR. POCH: Are you aware that the 4 MEUs have been grouping themselves of late, either in 5 small groups or they have set up a buying co-operative 6 mechanism? 7 PROFESSOR DEWEES: I am aware of 8 INNERConnect. 9 MR. POCH: Right. And INNERConnect 10 has over 200 potential participants amongst the MEUs? 11 PROFESSOR DEWEES: I don't know what 12 the -- 13 MR. POCH: All right. We can ask 14 them later. 15 I have indicated that I have been 16 dealing with specifics about regulatory burden. Do you 17 have any other particular concerns arising from the 18 proposal I tabled? 19 PROFESSOR DEWEES: I have several. 20 One I have already articulated, which is the general 21 institutional concern. 22 Second is: What are the rules under 23 which this would be done? Is there any limit on the 24 price that may be paid for the qualifying green power, 25 the price increase to consumers, or is it unlimited? 26 In my view, as an economist, 27 pollution control is desirable and indeed necessary, 28 but you have to consider the cost, so any proposal like 260 DEWEES 1 this would have to have some limitation on the price 2 that we are implicitly paying for cleaner power. The 3 way to measure that is not the increase in the average 4 consumer's bill. The way to measure that is what is 5 the price of the cleaner power vis-a-vis the power that 6 it is displacing, that is, if you are only getting a 7 small amount of green, it is only worth paying a small 8 amount of money for it. 9 MR. POCH: Let me just interrupt you. 10 That would just involve a comparison of green power, 11 which, if we assume it is wind or something of that 12 nature, has very few externalities, and compare it with 13 the marginal and spot market which for the foreseeable 14 future will be coal. Is that correct? 15 PROFESSOR DEWEES: Without judging 16 whether it is going to be coal, certainly a lot of the 17 time coal will be on the margin, yes, you would need to 18 compare the marginal cost there and then ask whether 19 the pollution reduction benefit was worth that cost. 20 The other concern that I have is if 21 what you really want to do is to reduce air emissions, 22 the best way to do that is to mandate a reduction in 23 air emissions, and to subsidize an alternative is an 24 indirect means. For example, under the proposal that 25 you have suggested, or others that the MDC considered, 26 you can't be sure whether the green power that comes in 27 is going to displace a megawatt hour from a highly 28 controlled relatively low-emission coal-fired plant or 261 DEWEES 1 a not very well controlled high-emission coal-fired 2 power plant, or from a medium cost gas-fired operation. 3 There is no way of knowing exactly 4 what is being displaced, and that means that the 5 benefit of the green power that you are subsidizing is 6 harder to measure directly. You can do studies and try 7 to forecast what that will be, but -- 8 MR. POCH: There is some uncertainty 9 is what you are saying? 10 PROFESSOR DEWEES: Yes. 11 MR. POCH: Inherent in that approach. 12 Yes. 13 You have also mentioned risk as a 14 concern, generally, with anything involving fixed 15 price. I understand your concerns. Let me ask you 16 this. 17 First of all, it's clear that the 18 government, as a policy matter, has decided it is 19 acceptable for publicly owned municipal utilities, or 20 municipal corporations at least, to enter into, if they 21 wish, the risk of fixed price offering through their 22 affiliates. 23 PROFESSOR DEWEES: That is allowed in 24 the legislation. 25 MR. POCH: Right. 26 Mr. Warren points out, though, that 27 the difference here would be that you would be imposing 28 it on municipal utilities because they are obliged to 262 DEWEES 1 offer SSS in the statute. 2 Can I ask you, if an MEU is risk 3 averse, would you agree, in the proposal I am 4 suggesting, it could still limit its exposure by 5 limiting its fixed portfolio, the fixed portion of its 6 portfolio, to the small amount that it is required to 7 obtain from the green power market? Would you agree? 8 PROFESSOR DEWEES: Certainly the 9 smaller the share of the SSS current or anticipated 10 demand that is represented by a fixed price, the less 11 likely that demand is to fall down to or below that 12 level. 13 MR. POCH: Right. 14 If we were to make this proposal 15 voluntary, that they could include fixed, and if they 16 do say they have to include some green, then that 17 overcomes that concern entirely because nothing is 18 being imposed, correct? 19 PROFESSOR DEWEES: It is not being 20 imposed on the distributor, but if the distributor so 21 chooses, it is being imposed on its consumers. 22 MR. POCH: Right. Throughout the 23 discussion -- 24 PROFESSOR DEWEES: I'm sorry. 25 MR. POCH: Yes? 26 PROFESSOR DEWEES: And on a class of 27 its consumers, namely, those that are on SSS. It is 28 not being imposed on anyone who switches out. 263 DEWEES 1 MR. POCH: Correct. 2 You have spoken throughout about this 3 idea that customers can get spot through the SSS, and 4 if they wish fixed they will presumably be able to find 5 that elsewhere, correct? 6 PROFESSOR DEWEES: Yes. 7 MR. POCH: That assumes that some 8 retail market develops. 9 PROFESSOR DEWEES: That's correct. 10 MR. POCH: Isn't it also true that if 11 the Board mandated that SSS include a fixed component, 12 or could include a fixed component, it is equally 13 possible that customers would be able to find a pure 14 spot option out in the competitive retail offerings? 15 PROFESSOR DEWEES: Yes. It would 16 have to be spot plus the -- 17 MR. POCH: Plus a mark-up. 18 PROFESSOR DEWEES: The mark-up. The 19 marketing costs and whatnot. 20 MR. POCH: Sure. Okay. 21 From your examination of both the gas 22 market in Ontario and the developing competitive 23 electricity markets elsewhere, is it correct to say 24 that they were likely to see some inertia on the retail 25 side, and the residential side certainly, that is, 26 people tending to stick with the default option? 27 PROFESSOR DEWEES: Yes. I think it 28 is fair to say that the experience elsewhere has been 264 DEWEES 1 that you need a significant price advantage before you 2 get a significant number of customers switching. 3 MR. POCH: So if my proposal involved 4 a relatively small amount of green power at a small 5 premium, offered through SSS without profit mark-up, it 6 is not likely to risk a flight from SSS. It alone 7 wouldn't create that spread in price that is likely to 8 send people packing? 9 PROFESSOR DEWEES: Certainly if the 10 premium is small and the percentage is small, then the 11 impact on switching would be relatively quite small. 12 MR. POCH: Therefore, the concerns 13 about quantity or price risk are contained. 14 PROFESSOR DEWEES: They are certainly 15 diminished as those things become smaller. 16 MR. POCH: Finally, on an only 17 somewhat related topic, I have one question. This is 18 just about the basis for billing without interval 19 meters. 20 Did the MDC have a proposal, and what 21 is your understanding of how it is going to work, for a 22 small customer who obtains an interval meter, say, five 23 years down the road when the solid state interval 24 meters are more commonplace and we have achieved some 25 economy of scale there, and perhaps retailers are 26 offering to install an interval meter as part of you 27 signing on for a year -- will the basis that the MEU 28 bills the retailer then be on the interval meter, or 265 DEWEES 1 will it still be on the profile? 2 PROFESSOR DEWEES: I am trying now to 3 recall exactly what we said. 4 I think we said that initially the 5 metering would not be unbundled or would not be 6 competitive for customers smaller than 50 kilowatts, 7 which would be residential customers, but we invited 8 the OEB to review that with the hope that within three 9 years it would be possible to make metering 10 competitive, and at that time any customer who wanted 11 an interval meter and found a provider willing to offer 12 it could then get the interval meter and get the spot 13 price directly from the distributor, or get some other 14 pricing arrangement through, say, a retailer that 15 provided the meter, and a supply contract as well. 16 MR. POCH: I guess my concern is that 17 if a customer gets an interval meter and its 18 arrangement with its retailer is based on actual 19 metering, retailers may be reluctant to offer such an 20 option if they are having to pay the MEU based on the 21 profile, which may differ significantly from the group 22 of customers that have gone for this option, and that 23 is presumably customers interested in going for an 24 option with interval metering are customers who feel 25 there is some advantage for them in interval metering 26 because of their peculiar load or willingness to 27 control. 28 PROFESSOR DEWEES: I see. Your 266 DEWEES 1 question is: If a small customer gets an interval 2 meter, is it then in the interval metered part of the 3 distributor's load and billed by the LDC on the spot 4 basis, on the interval meter basis, or is it on a 5 profile basis? 6 MR. POCH: Yes. That was my original 7 question, yes. I'm sorry, maybe it wasn't clear. 8 If it isn't, wouldn't that create a 9 risk for the retailer? 10 PROFESSOR DEWEES: I'm sorry, I don't 11 recall whether the MDC spoke precisely on this issue. 12 I think we had a recommendation in our second quarter 13 report that said that a customer with an interval meter 14 would be billed by the distributor on the basis of that 15 interval metering. I think we were thinking of larger 16 customers at that time. 17 But, as I say, I would have to check 18 the report to see whether that's in fact what we said. 19 That was what was in my mind at the time. I am not 20 sure what was in the minds of the members of the MDC. 21 I would agree that would be a desirable outcome. 22 MR. POCH: Thank you. Those are my 23 questions. 24 MS LEA: Thank you, Mr. Poch. 25 Mr. Mia? Mr. Mia, I'm sorry, who do 26 you represent? 27 MR. MIA: I lost my list. 28 It's Brampton, Guelph, Oakville, 267 DEWEES 1 Waterloo North -- I have my list. 2 MS LEA: I'm sorry, sir. I wasn't 3 sure whether you were on my list and had given me an 4 estimate of time. Did you do that? 5 MR. MIA: Yes, I did. 6 MS LEA: Okay. Thank you. So where 7 would I find you here? 8 MR. MIA: I think about 15 to 9 20 minutes. 10 MS LEA: Okay. Thank you. 11 MR. MIA: Just to start, you will 12 correct me if I am wrong, I take it from your paper 13 that basically you think that the Board's Standard 14 Supply Code meets the MDC's recommendation for smoothed 15 pass-through? 16 PROFESSOR DEWEES: That's correct. I 17 think it is consistent with the recommendations that 18 the MDC made. 19 MR. MIA: You will agree with me that 20 it's stated in your paper that the basic goal is for 21 retail customers to get the best possible combination 22 of price and service? 23 PROFESSOR DEWEES: That's right. 24 MR. MIA: Is it correct that the MDC 25 recommended the smoothed price because it was concerned 26 about exposing small consumers to frequent price 27 volatility? 28 PROFESSOR DEWEES: Yes. 268 DEWEES 1 MR. MIA: Would you agree as well 2 that the salient difference between the spot price and 3 the smoothed price is just basically the frequency of 4 price changes? The price remains the same, it's just 5 the frequency of changes, the ultimate price they pay. 6 PROFESSOR DEWEES: Yes. The price 7 averaged over a long time is the same. The shorter the 8 smoothing period, the more variation there is from one 9 bill to the next. 10 MR. MIA: On page 6 of your paper, at 11 paragraph three -- I will just cite it, you won't have 12 to look at it -- you state that, quote: 13 "...a majority of consumers 14 would prefer a low ... spot 15 price to a higher fixed price." 16 In the same vein, would you agree 17 that a majority of consumers would prefer a more stable 18 smoothed price to a more volatile spot price? 19 PROFESSOR DEWEES: It depends on what 20 the level of the price is. A more stable smoothed 21 price that was at the same level as the spot price, of 22 course. If it was going to be at a higher level, then 23 we don't really know exactly what the consumer 24 trade-off is. 25 MR. MIA: Further to my previous 26 statement, if the prices held the same, ultimately 27 would you say that a consumer would choose less 28 volatility throughout the year as opposed to sort of 269 DEWEES 1 frequent monthly or bi-monthly changes? 2 PROFESSOR DEWEES: I suspect, given 3 the assumption that the average in the long run is 4 going to be the same, I think many consumers would 5 choose a longer averaging period over a shorter. 6 MR. MIA: Yes, and that would sort of 7 meet the MDC -- I mean, that was the MDC's concern, 8 basically, in recommending a smoothed price? 9 PROFESSOR DEWEES: Yes, although the 10 MDC did not recommend a particular smoothing period. 11 It really left that up to the OEB. 12 MR. MIA: But it was concerned that 13 it would dampen price volatility. That was their 14 concern, dampened price volatility? 15 PROFESSOR DEWEES: Yes. 16 MR. MIA: Would you agree, then, that 17 the smoothed price really doesn't offer the same 18 combination of price and service that the spot price 19 pass-through does because, ultimately, price being held 20 the same, under the smoothed you receive better service 21 from the customer's perspective because you want to be 22 exposed to less frequent volatility? 23 As a consumer, I don't want to see my 24 bill change every month or every two months. I would 25 rather have the type of plan for a shift in prices, if 26 there are any. 27 Would you agree, then, that on the 28 point of service, because it's price and service, the 270 DEWEES 1 smoothed price is a better option? 2 PROFESSOR DEWEES: I'm sorry, a 3 better option than...? 4 MR. MIA: Than the spot pass-through. 5 PROFESSOR DEWEES: Smoothed over what 6 period? 7 MR. MIA: Say smoothed annually. We 8 are holding price the same. Ultimately, the price to 9 the customer is the same. It's the spot price. You 10 are just paying over a year or you are paying as it 11 comes to you. 12 PROFESSOR DEWEES: Holding the 13 ultimate price the same, I would expect that many 14 consumers would prefer a longer rather than a shorter 15 smoothing period, which I think is why some MEUs today 16 offer equal billing for their customers and I would 17 expect them to continue to do so under the draft code. 18 MR. MIA: I just wanted to get 19 clarification. I don't mean to beat this to death. 20 The question was: On the point of price and service, 21 the smoothed comes out ahead because it provides the 22 same price and better service to the customer? 23 PROFESSOR DEWEES: Yes. 24 MR. MIA: With respect to managing 25 price volatility, you suggested yesterday that 26 customers already manage seasonal variability in price, 27 therefore, they should be okay with managing 28 variability in the spot market price. 271 DEWEES 1 PROFESSOR DEWEES: I'm sorry. I 2 think I said that with respect to electricity they 3 manage seasonal variation and quantity. 4 MR. MIA: Okay. We will clarify 5 that. 6 I thought you mentioned that there is 7 a price difference, but they are used to summer/winter 8 pricing changes, so they are used to that variation. 9 PROFESSOR DEWEES: I suggested that 10 was true for other commodities. 11 My understanding is that today the 12 price is the same throughout the year for residential 13 consumers. At least I think that's true for Toronto 14 Hydro; I think it's true throughout the province. What 15 customers manage today is the difference in their bill 16 between the seasons arising from the different quantity 17 that they consume as a result of heating in the winter 18 and air conditioning in the summer. 19 MR. MIA: So they have no experience 20 with price volatility, then? 21 PROFESSOR DEWEES: With respect to 22 electricity -- 23 MR. MIA: Yes. 24 PROFESSOR DEWEES: -- I don't believe 25 residential consumers have experience with in-year 26 price volatility. We had experience with prices rising 27 at a great rate in the early 1990s. At the beginning 28 of the year, it took a big jump. So consumers have 272 DEWEES 1 experience with changes from one year to the next, but 2 not with in-year, as I understand it. 3 MR. MIA: So, basically, the seasonal 4 variation is they are used to volume changes, and that 5 is not going to change unless they can shift their 6 load, but they can't do that under the present scheme. 7 So they are used to that. That is not going to change. 8 The seasonal variations will remain unless there is a 9 change in the weather. 10 Would you agree, then, that they are 11 not used at all to market-related volatility? 12 PROFESSOR DEWEES: To price changes, 13 that's correct. 14 MR. MIA: You are aware of the 15 significant price changes in the U.S. last summer about 16 this time of year? 17 PROFESSOR DEWEES: In the midwest, 18 you mean? 19 MR. MIA: Yes. 20 PROFESSOR DEWEES: Yes. The MDC 21 followed those with some considerable interest. 22 MR. MIA: It's not a submission. 23 There is a report from the FERC which touches on this 24 that I will just refer quickly to. They list quite a 25 few factors that contributed to this, only one of which 26 was weather. Others were system constraints and 27 problems with the market. 28 Is it foreseeable that this could 273 DEWEES 1 happen in Ontario? 2 PROFESSOR DEWEES: I think that there 3 are some very important differences between the U.S. 4 midwest energy situation and the Ontario market that we 5 are designing. 6 In the midwest where those price 7 spikes occurred, there is not a spot market. There is 8 not a central economic dispatch of generating units 9 over that area. What you have is the traditional 10 vertically-integrated monopolies operating their own 11 generation, transmission and distribution, linked 12 together, as they always have been, as part of a large 13 network and from time to time trading electricity 14 between them. 15 My understanding is that the high 16 prices that were recorded both last summer and in the 17 last month were prices for bilateral trade between 18 vertically-integrated utilities to cover local 19 shortages or to allow surpluses to cover local 20 shortages. That is individual bilateral trades in the 21 absence of any spot market, in the absence of 22 region-wide economic dispatch and, at the time this 23 happened last year, in the absence of any forces that 24 would lead to a demand response. I don't know what 25 changes they have made on the demand side, but the 26 other factors that existed a year ago still exist 27 today. 28 The market that we have designed for 274 DEWEES 1 Ontario will have central dispatch by the independent 2 market operator of generation within the province, 3 across the whole province, dispatching plants in merit 4 order. We specifically recommended demand-side bidding 5 so that large customers, any substantial customer, I 6 guess any wholesale customer that was prepared to 7 reduce its take if the price got above certain levels 8 could indicate that to the IMO and could therefore 9 reduce its demand if prices rose. 10 It seems natural that a 11 well-functioning market of that type should be able to 12 respond to the kinds of supply and demand fluctuations 13 that drove the price spikes in the U.S. much better 14 than the system that exists in the U.S. 15 It's sort of apples and oranges. I 16 don't think you can compare the likely result of an 17 efficient spot market in Ontario with the result of 18 negotiations between interconnected utilities that are 19 not jointly dispatched economically in the midwest. 20 MR. MIA: I take your point about the 21 differences in the market. 22 I am not an economist, but just as a 23 general statement, we are moving away from a 24 centrally-planned monopoly situation -- with all its 25 faults, it is stable -- and we are moving to sort of an 26 open market with multiple players. Wouldn't that 27 introduce more unpredictability than we are used to? 28 Just as a general statement, we are moving towards a 275 DEWEES 1 more open market, more players, everything can't be 2 governed, so there is more of a chance of 3 unpredictability in the system. 4 PROFESSOR DEWEES: I think what we 5 are likely to have is more short-run unpredictability. 6 I think we will be protected against some of the cost 7 increases that we have had in the past in Ontario. One 8 of the objectives of the White Paper was to put new 9 investment decisions on a more businesslike basis and 10 with a competitive generation market investors will 11 decide whether or not to invest in new capacity. 12 If they do invest and it turns out 13 that their costs are reasonable and the market needs 14 that power, they will make money at it. If the project 15 runs way over budget, there is no guarantee that they 16 can recover those costs from consumers. 17 So the price increases that Ontario 18 electricity consumers faced when Darlington came on 19 stream were a result of a monopoly. We had to pay the 20 costs because they were part of Ontario Hydro's 21 rolled-in costs. 22 In a competitive market, if a plant 23 like that came on stream at a time when its capacity 24 was not needed, the owner would be unable to charge 25 higher prices just because it has incurred those large 26 costs. The consumers don't bear the investment risk. 27 So I think that as we look to the 28 future, the competitive market is going to protect 276 DEWEES 1 Ontario consumers against what, after the fact, turned 2 out to be bad investment decisions on the generation 3 side, and I think for me that's one of the major 4 benefits of moving to a restructured market. So that 5 is a longer-range consideration, but all of us today 6 are paying for these investment decisions in the past. 7 I think it's an important protection 8 for Ontario consumers to not pay for investment 9 mistakes in the future, but part of the price for that 10 is that in the short run there will be more price 11 variability. 12 I think it's a trade-off. My 13 personal feeling is that it's a good one. I think the 14 Market Design Committee, if the members hadn't thought 15 that that was the right trade-off, since that was 16 implicit in what they were doing, I presume they would 17 have refused to serve or resign. So I think the 18 Committee felt that overall the benefits of this were 19 going to be good for consumers. 20 MR. MIA: And you will agree -- I 21 guess somebody mentioned yesterday -- that the White 22 Paper stated that default customers should basically 23 get the service that they are used to. That is the 24 principle that came out of the White Paper. 25 That is, basically, I would suggest, 26 what "default supply" means is by default you go to the 27 status quo, what you are used to. You don't want to 28 switch. 277 DEWEES 1 PROFESSOR DEWEES: That's right. The 2 MDC interpreted that as meaning -- we had one proposal 3 that customers should be auctioned off to retailers. 4 There was little support for that. The White Paper 5 said customers who don't want to switch shouldn't have 6 to. I think the Market Design Committee was faithful 7 to that in trying to find a standard system supply that 8 would be a good deal for consumers so they wouldn't 9 have to switch. 10 MR. MIA: And we agreed just a few 11 minutes ago that customers in Ontario are not used to 12 price variability. They are used to stable prices, at 13 least on an annual basis. 14 PROFESSOR DEWEES: That's right. 15 They have some experience within the last decade of big 16 increases from one year to the next, but there is not 17 much experience with in-year fluctuations in the price. 18 MR. MIA: Would you agree then that 19 when the spot price pass-through gives you different 20 changes throughout the year, that is not really meeting 21 the White Paper goal of default supply or giving 22 customers what they are used to? 23 PROFESSOR DEWEES: If you took the 24 White Paper statement to give customers what they are 25 used to, if you took that literally, it would mean we 26 won't change anything, we will stay with a monopoly, 27 generation monopoly, at the retail level, and that 28 can't be what the White Paper had in mind because it is 278 DEWEES 1 all about restructuring. 2 I don't know exactly what those words 3 meant, but the MDC interpreted them to mean you should 4 get a good deal from the distributor, the familiar 5 supplier. Then, in asking what is a good deal, 6 smoothed spot price was the recommendation the MDC felt 7 would best serve the customers' interests. 8 MR. MIA: Right. 9 Back to my original point. I would 10 suggest that the smoothed price better reflects the 11 White Paper goal and the MDC goal which spoke about 12 giving customers what they are used to and giving them 13 the best combination of price and service, as opposed 14 to the spot price pass-through. 15 Would you agree with that statement? 16 PROFESSOR DEWEES: That is why the 17 MDC recommended a smooth spot price, because it felt 18 that some smoothing would be beneficial for the 19 customer. 20 MR. MIA: To take that one step 21 further, basically the smoothed price pass-through is 22 different essentially in meeting these objectives than 23 what the Board's Standard Supply Service Code spot 24 price pass-through has put forward? 25 PROFESSOR DEWEES: The MDC didn't 26 specify what the smoothing period should be. It looked 27 at a range of smoothing periods. 28 As I suggested yesterday, using the 279 DEWEES 1 billing period as a smoothing period is at the short 2 end of what the MDC considered, but I don't think it is 3 outside the bounds, especially when linked with the 4 opportunity for distributors to offer equal billing 5 over the course of a year, it seems to me that that 6 provides good service for the customer. 7 MR. MIA: But no smoothing period 8 wouldn't be really a smoothing period. Nothing has 9 been suggested in the Code as it stands. 10 I mean, you could have different 11 ones. Customers would likely be used to a year, but 12 the Board hasn't suggested anything, so they haven't 13 really picked up the ball from the MDC, then? 14 PROFESSOR DEWEES: Except that the 15 MDC discussed quarterly smoothing as one option, and 16 for those whose billing period is three months, that is 17 quarterly smoothing. So that is entirely within the 18 range that the MDC considered. 19 Frankly, at the end of Q2 when we 20 made the initial recommendation, I am not sure that we 21 had focused on the interaction between the length of 22 smoothing period and the billing period. That 23 certainly came up later on in the year, and the retail 24 technical panel considered that issue. 25 But I don't think that the minds of 26 the members of the MDC were focused on that specific 27 issue at the time we made the recommendation. 28 MR. MIA: Yesterday we heard about 280 DEWEES 1 regulatory burden, and we heard about it today, that 2 is, forecasting for fixed and smoothed prices. 3 You also mentioned yesterday that 4 basically with respect to volatility, because of the 5 Market Power Mitigation Agreement, it is going to be a 6 range but it is not going to be out of sight. There is 7 not going to be much variability. You are going to be 8 hovering around that 3.8 cents. 9 So given your statement with respect 10 to that, again I am not an economist, but I don't see 11 why it is that difficult then to predict, within a 12 range, what the price could be to forecast that price. 13 Wouldn't that minimize your risk? 14 PROFESSOR DEWEES: I'm sorry? Who is 15 predicting? 16 MR. MIA: You spoke yesterday about 17 the range of price variability and that because of the 18 Market Power Mitigation Agreement -- and that is a 19 whole side issue -- basically you were going to be 20 within the 3.8-cent range because the bulk of OPGI's -- 21 PROFESSOR DEWEES: That's right. 22 Averaged over the year, the price is not going to 23 deviate substantially from 3.8 cents. 24 MR. MIA: I am just tying that in to 25 the regulatory burden in forecasting a price, whether 26 there are going to be excessive profits or it's too 27 difficult to forecast a price for a smoothed annual 28 price. 281 DEWEES 1 If the range is so small, it is 2 basically predictable within the range what the price 3 could be, so wouldn't that minimize the regulatory 4 burden and eliminate any of the dangers that we spoke 5 about yesterday? 6 PROFESSOR DEWEES: You mean with 7 respect to choosing a longer smoothing period than the 8 billing period? 9 MR. MIA: Yes. If we are setting the 10 price for this year, the smoothed price, and then we 11 will have true-ups or rebates at the end, we can 12 minimize risk because, to take your earlier statement, 13 there is not going to be much variability in the 14 ultimate price day-to-day, so we can peg it somewhere, 15 and if there is a little variation, well it's not very 16 much, and you can take that same notion to the fixed 17 price. 18 PROFESSOR DEWEES: Setting aside the 19 fixed price for a moment, I think that during the first 20 year or two, until OPG achieves substantial decontrol, 21 I would agree that forecasting the price over the 22 course of a year, after rebate, if there is one, would 23 not be a great burden. 24 There is another point here, though, 25 that I think goes back to what I said in response to 26 some earlier questions. 27 One of the advantages of the 28 smoothing being just over the billing period is that 282 DEWEES 1 for distributors they only have to do one set of 2 calculations, they do the spot price calculations for 3 the customers and then issue a bill on that basis. As 4 soon as you start smoothing over a longer period or 5 offering a fixed price, you now have to keep track of 6 the spot price variations for the consumer, and you 7 have to keep track of the smoothed price. 8 My understanding is that the 9 settlement system cost, the cost for the settlement 10 system for the information technology system for the 11 distributor, would be significantly increased if you 12 move either to smoothing beyond one billing period or 13 to a fixed price alternative. 14 That is not a consideration that MDC 15 had in mind during its second quarter, but it is 16 something that surfaced I think in the technical 17 committee later in the year and should be a 18 consideration for the OEB today. 19 MR. MIA: That could be a cost which 20 could be seen as a trade-off for giving customers some 21 stability. 22 PROFESSOR DEWEES: That is a cost, 23 and then the question is: What is the value to the 24 consumer of having the stability that that would buy? 25 MR. MIA: I will try to speed it up 26 here. I have a question about -- it's just a quick 27 note, a couple of other people raised it -- of having a 28 PBR-type scheme for picking a fixed price or a fixed 283 DEWEES 1 smoothed price, giving them a range. 2 We already know that we could 3 forecast the price. Why can't we just set a range? We 4 don't have to sit here and have the regulatory burden 5 of 200-and-whatever distributors coming in here. We 6 could sit here, set up classes, and give them a range, 7 "Here you go. You provide standard supply within this 8 range, and you have the incentive to lower your cost." 9 PROFESSOR DEWEES: What happens if 10 you do that on the 1st of November, and the 11 distributors have a month or two months to go out and 12 arrange a portfolio of purchase contracts and during 13 the course of that month something changes in the 14 energy market that significantly affects forecasts of 15 the likely price for the upcoming year? A large plant 16 or two goes down or a large plant or two comes back -- 17 you know, Pickering "A" comes back or Pickering "B" 18 goes down, events like that. 19 The day that the Board issues the 20 price or the price range, starting the next day that 21 price is going to begin to be out of date. Some years 22 it may be easy to stay within that price range; other 23 years it may be impossible. 24 What happens at the end of December 25 when the distributors have finished their purchase 26 process, whatever it is, and it turns out that a bunch 27 of them are either way below the regulated range or 28 away above it? If they are way below, do they get to 284 DEWEES 1 keep the difference? This conflicts with giving the 2 best price to the consumer. It gives them an incentive 3 to discourage customers from switching. 4 If the price is away above, are going 5 to beat up on a majority of distributors because the 6 world changed after the OEB issued its statement of 7 what it thought would be a reasonable price for the 8 upcoming year? 9 It is hard for me to see how you 10 could actually implement that in the real world. 11 MR. MIA: Just a side note. 12 I believe that the PBR has an 13 adjustment factor. That is the nature of the PBR, to 14 have adjustment factors to catch things like this. 15 Just a side point. 16 Just a couple of questions about 17 customer mobility. 18 You will agree that that is a key 19 principle of standard supply? 20 PROFESSOR DEWEES: Yes. 21 MR. MIA: Is it a proper 22 characterization to say that this principle means that 23 customers should not have incentives or disincentives 24 to stay with or switch from a default supplier? 25 PROFESSOR DEWEES: We can't control 26 the incentives. If retailers are offering a much 27 better price -- 28 MR. MIA: I mean aside from that, 285 DEWEES 1 sort of internal to the -- 2 PROFESSOR DEWEES: There should be no 3 artificial barriers to switching. 4 MR. MIA: And given the MDC's concern 5 to dampen price volatility, would you agree that a 6 consumer faced with more frequent price changes may be 7 more apt to switch to another supplier as compared to 8 one that faces less frequent price changes? 9 PROFESSOR DEWEES: If the price 10 changes are downward, I expect the customer is not 11 going to switch. 12 MR. MIA: In terms of volatility, if 13 it is just up and down and up and down, and they are 14 just -- I think what I am trying to get at is that the 15 MDC was concerned to, (a) in default supply, give them 16 what they are used to, which is basically a stable, 17 predictable price. So whether it goes hugely up one 18 month and then away down the next month, it is the 19 unpredictability that they may want to run away from. 20 PROFESSOR DEWEES: I think the MDC 21 recognized that, other things equal, consumers would 22 prefer stability to variability. But it also felt that 23 consumers would prefer low prices to high prices, and 24 it felt that the smoothed spot pass-through, which is 25 reflected in the draft code, offered a reasonable 26 trade-off: good price, but some variability -- there 27 is no question about that, and I would expect retailers 28 to do some marketing based on eliminating that 286 DEWEES 1 variability. 2 As I understand the submissions, 3 there are differing views as to whether very many 4 consumers are going to actually choose that. If the 5 experience in other jurisdictions carries on here, if 6 most consumers stay with it, then it seems to me they 7 are saying that their discomfort with that variability 8 is not enormous. 9 MR. MIA: In the new market, 10 customers should switch for rational reasons, and in 11 your paper at page 7 you state, quote -- I will just 12 read it out for you: 13 "...the customer must be able to 14 evaluate all available energy 15 supply options, comprehend the 16 differences between those 17 options, and then switch 18 suppliers if he or she perceives 19 benefits of changing to a new 20 retailer." 21 Given our discussion, would you say 22 it is correct to say that switching primarily because 23 of fear of price volatility is not a rational and 24 considered decision? 25 PROFESSOR DEWEES: I'm sorry? Is not 26 rational or is not irrational? 27 MR. MIA: Is not rational. It 28 doesn't fall within your description of why customers 287 DEWEES 1 may want to switch. 2 PROFESSOR DEWEES: I think it is 3 perfectly rational for customers to be risk averse. 4 Even though, on average, the smoothed spot price is 5 likely to be lower, I don't think it would be 6 irrational for a consumer to say, "Price stability from 7 one billing period to the next is very important to me, 8 and it is so important that I am prepared to pay a 9 premium to have that price stability." That is not an 10 irrational choice to make. 11 MR. MIA: But just contrasted with 12 the list of considerations that should go into a 13 switch, if primarily they are switching just because -- 14 they are happy with the supply and the service, they 15 are just not happy with price variations. 16 PROFESSOR DEWEES: I'm sorry. What 17 was the question? 18 MR. MIA: I'm sorry. 19 If that is the primary reason they 20 are leaving, it doesn't seem to match with what you are 21 saying, that they should be considering alternatives, 22 et cetera. 23 PROFESSOR DEWEES: Could you point me 24 to the sentence that you are referring to? 25 MR. MIA: I will forego that. 26 I will just go to the last question 27 and we can finish up. 28 At page 8 of your paper you state 288 DEWEES 1 that, quote: 2 "-- those customers who are not 3 comfortable with the variability 4 of the smoothed spot price can 5 seek supply from competitive 6 retailers offering fixed 7 prices." 8 You also state in your paper, and you 9 reiterated in your testimony yesterday, that the spot 10 price will likely provide the lowest price. 11 How would you reconcile your 12 statement that customers may switch to more 13 predicability when in reality it is unlikely that a 14 viable retail market will develop because of low 15 prices? 16 Basically, my point is: Doesn't this 17 really give them a hollow choice? It locks them in to 18 the spot market volatility because with the lowest 19 price there may be nowhere else to go. 20 PROFESSOR DEWEES: I think my point 21 yesterday and in the paper was that, for standard 22 supply service, the smoothed spot price will be lower 23 than any other offering, and I suggested a number of 24 reasons why I believe that to be the case, and the MDC 25 report suggested the same thing. 26 A retailer offering a competitive 27 fixed price can lock the customer in for a year or two 28 years, avoid the volume variability, and should be able 289 DEWEES 1 to do better than an SSS fixed price. Whether that 2 retailer can do better than the expected smoothed spot 3 price, I am sceptical, but I don't have a real strong 4 position on that. So I don't know what premium a 5 competitive retailer that is in a position to lock the 6 customer in for a year or two years -- I don't know how 7 much of a premium that retailer is going to charge. 8 If it turns out that it is a very 9 substantial premium, then I think customers are likely 10 to stay with smoothed spot because it is better for 11 them than the alternatives. If that premium is 12 relatively small, then I would expect some customers 13 are going to switch, and the proportion that switch 14 would depend on the magnitude of the premium that is 15 being charged. 16 MR. MIA: Thank you. 17 MS LEA: Thank you very much, 18 Mr. Mia. 19 We will take a 15-minute break, now. 20 Can I ask two favours. During that 21 break, anyone who has questions for Dr. Dewees that has 22 not let me know that, could you do so. 23 Secondly, I am going to put a sheet 24 on that desk down there of time estimates for the next 25 presenter, John Todd. If you haven't given me an 26 estimate perhaps you could fill one out. Thanks very 27 much. 28 Fifteen minutes, please. Ten to 290 DEWEES 1 11:00. 2 --- Upon recessing at 10:35 a.m. 3 --- Upon resuming at 10:51 a.m. 4 MS LEA: Mr. Rawson, for TransCanada. 5 If you can find a seat, sir, with a microphone. 6 Thank you very much. 7 Thank you, Dr. Dewees, for your 8 continued work. 9 We will proceed. Thank you. 10 MR. RAWSON: Keith Rawson, 11 R-A-W-S-O-N, for TransCanada. 12 Dr. Dewees, in your submission and in 13 discussions so far, you have made quite a bit of 14 reliance on the spot market price being representative 15 of low cost. Would you say that it is essential for 16 that to be true, that the spot market price be 17 dependent upon a significant amount of competition? 18 PROFESSOR DEWEES: During the first 19 few years, the spot market price is going to be limited 20 by the Market Power Mitigation Agreement, to the range 21 of 3.8 cents. The MDC recognized the market would not 22 be competitive with OPG having 85 or 90 per cent of 23 generation capacity and so in the early stage that is a 24 regulated price. That cap will come off as OPG 25 decontrols, so by the time that cap is no longer 26 binding there should be a competitive price. The MDC 27 was satisfied with that price as the SSS price during 28 the period while OPG can exercise market power and is 291 DEWEES 1 relying on competition when it can no longer do so. 2 MR. RAWSON: If there had been no 3 indication that the spot market price would have been 4 the result of competition, somewhere down the road 5 would the spot market price have been your preferred 6 option? 7 PROFESSOR DEWEES: You are suggesting 8 that OPG might continue to exercise market power 9 indefinitely. At that point, if that turns out to be 10 true, we haven't achieved the goal of a competitive 11 wholesale market. 12 The retail market is sort of built on 13 the wholesale market, so if that price is not 14 competitive, in the long run, we haven't achieved the 15 wholesale goal. I'm not sure that would have led the 16 MDC to choose some different basis for the standard 17 supply service, though. 18 MR. RAWSON: What I am trying to get 19 at here is that the fundamental value you see in the 20 spot market price, the fact that it would likely be the 21 lowest price, is that not ultimately dependent on a 22 high degree competition and if that high degree of 23 competition does not exist, you wouldn't be able to 24 rely on the spot market price being a low price? 25 PROFESSOR DEWEES: If there is an 26 interaction between the spot market and the contract 27 market, and I don't know what the relationship would 28 be, our expectation was that even during this period 292 DEWEES 1 when the Market Power Mitigation Agreement is in 2 effect -- that is, when the wholesale market is not 3 competitive, in the early stages -- the MDC believes 4 that the spot price would be the lowest price. 5 I'm sorry. I am sort of working this 6 through in my mind as we talk. 7 I think the MDCs assumption was, even 8 when it is not competitive, that is the best available 9 price. 10 MR. RAWSON: That is specifically 11 because of the Market Power Mitigation Agreement that 12 it is the best available price in the absence of open 13 competition? 14 PROFESSOR DEWEES: No. It is because 15 to offer a fixed price involves the other factors I had 16 spoken about before, including volume risk, that would 17 lead to any generator charging a higher price. 18 MR. RAWSON: Let's depart for a 19 moment from the spot market price as a standard service 20 offering and talk about the spot market price as just a 21 representative price in the marketplace -- so not 22 compared to fixed, not compared to anything else, just 23 on its own merit. 24 Is not the fundamental value of the 25 spot market price being representative of the market 26 price dependent on there being a competitive 27 marketplace? 28 PROFESSOR DEWEES: Even if the market 293 DEWEES 1 is not competitive, the spot market price should 2 reflect, in some way, the cost of generators because it 3 is a price that is available to anyone -- that is, 4 because the spot market price comes from economic 5 dispatch of generation it is a price available to 6 anyone. It is electricity flowing down the wires; it 7 can be bought by wholesale consumers at the spot market 8 price. Under our competitive mechanism, any consumer 9 could ask for the spot market price. So it is a price 10 available to everyone. It is a public price and 11 therefore one against which contractual arrangements 12 are going to have to compete, even if the structure 13 isn't competitive. 14 MR. RAWSON: So, then, the spot 15 prices is the price marker that has some value in the 16 marketplace, even without the advantages of 17 competition. Is that the way you would say that? 18 PROFESSOR DEWEES: I think that is -- 19 that is a better summary than I gave, yes. 20 MR. RAWSON: Two questions. 21 Was the Market Design Committee aware 22 of the structure of the North American natural gas 23 market, the fact that there is a high volume of buyers 24 and sellers often referred to as "liquidity" and that 25 that results in a spot price equivalent called "index" 26 that is very representative and also is the result of 27 competition? 28 PROFESSOR DEWEES: More or less, yes. 294 DEWEES 1 MR. RAWSON: In that scenario, where 2 you have a price that is well recognized and reflective 3 of the marketplace, and also reflective of a high 4 number of buyers and sellers, is that not a desirable 5 state to end up with? 6 PROFESSOR DEWEES: I don't know. It 7 seems to work for gas. As I pointed out yesterday, 8 there is a fundamental difference between the gas 9 market and the electricity market. There is not an 10 economic dispatch mechanism that generates the spot 11 price that we will have in Ontario, so the markets 12 aren't perfectly comparable, in that respect. 13 But the point is, you can have 14 competition. The gas market has competition among 15 buyers and sellers, on a contract basis. I am happy to 16 accept that as true. 17 MR. RAWSON: You have mentioned, a 18 couple of times this morning and in this past few 19 minutes and previous, that you are depending on 20 centralized -- well, let's call it centralized 21 dispatch, as being a fundamental characteristic and in 22 fact that is one of the reasons why a spot price is a 23 good index? 24 PROFESSOR DEWEES: Yes. 25 MR. RAWSON: Are you aware of the 26 situation that took place in New England over the last 27 month or two where there were some price spikes and in 28 fact the New England market is characterized by central 295 DEWEES 1 dispatch? 2 PROFESSOR DEWEES: No. I haven't 3 been following that. 4 MR. RAWSON: Moving on to the 5 standard supply for a moment. 6 Was the Market Design Committee aware 7 of a practice that is reasonably common in North 8 America to have a standard offer as a transmission 9 mechanism? 10 PROFESSOR DEWEES: What market are we 11 talking about? Electricity or gas? 12 MR. RAWSON: Electricity. 13 PROFESSOR DEWEES: As a transition 14 mechanism. That doesn't ring a bell. 15 MR. RAWSON: For example, in New 16 England and other parts of the United States, as they 17 move to an open market there is a standard offer, a 18 price, that is determined in advance, often 19 transitioning to a market price. 20 Was the Market Design Committee aware 21 of that mechanism? 22 PROFESSOR DEWEES: We talked about 23 California and PJM. I don't think we talked much about 24 New England. 25 MR. RAWSON: Did you come across any 26 standard offer type of the way I have characterized it. 27 Any of those type examples? 28 PROFESSOR DEWEES: We are certainly 296 DEWEES 1 aware that most jurisdictions require that there be a 2 default supply available to customers, at least those 3 who don't make a choice and maybe one that customers 4 can elect. I am not sure what distinction you are 5 implying by the words "standard offer". 6 MR. RAWSON: The standard offer is a 7 price that is known, essentially, in advance. Somehow 8 or other, the people who set up the market come up with 9 a price that is offered to essentially the default 10 customers. Often that price will transition over time 11 to a market price. 12 PROFESSOR DEWEES: We may have 13 discussed that. I don't recall in detail. 14 MR. RAWSON: Yesterday, and to some 15 extent today, there was some discussion about the 16 degree of competition in the Ontario marketplace and 17 that in fact you expect there to be relatively 18 wholesale competition at market opening and for some 19 time thereafter. Is that fair? 20 PROFESSOR DEWEES: Certainly, at 21 market opening we expect very little. And, then, when 22 it emerges, the mitigation agreement says in 42 months 23 OPG should have achieved decontrol, substantial 24 decontrol of its price-setting units. Will it happen 25 faster than that? It is hard to tell. 26 MR. RAWSON: Would it be desirable 27 for there to be more competition earlier? 28 PROFESSOR DEWEES: I think that would 297 DEWEES 1 be desirable. 2 MR. RAWSON: Is there any awareness 3 that the -- let me rephrase that. 4 In putting forward the standard 5 supply position, was the impact on the competitiveness 6 of the marketplace a factor or was it more just driven 7 by a concern about the customers paying the most price? 8 PROFESSOR DEWEES: I think the MDC 9 considered both of those. 10 MR. RAWSON: The MDC viewed the 11 standard supply offer as being neutral, better than 12 neutral, worse than neutral, with regard to 13 competition? 14 PROFESSOR DEWEES: I think the MDC 15 regarded it as being neutral. It felt that the price 16 was pretty good, likely the best price available. 17 Recognizing that consumers might want to choose a fixed 18 price offer as an alternative, that provided some 19 opportunity for retailers, and it would be up to 20 consumers to decide whether they wanted to go with 21 competitive retailers. So it didn't preclude 22 competition, but it didn't force customers into the 23 hands of retailers. 24 MR. RAWSON: With the Market Power 25 Mitigation Agreement setting a revenue cap at 3.8 cents 26 a kilowatt hour, is it not possible that some classes 27 of customers might pay on average higher than 3.8 and 28 some pay on average lower than 3.8, but the average 298 DEWEES 1 then results in 3.8? 2 PROFESSOR DEWEES: That is possible. 3 It depends on what OPG does. 4 MR. RAWSON: If customers could 5 depend on -- particularly small volume customers who 6 may not have any market power -- in fact, don't have 7 any market power -- if they could depend on a fixed 8 price offering at 3.8, would they not then be better 9 off compared to a price which could be on average 10 higher than 3.8? 11 PROFESSOR DEWEES: If you are asking 12 me if 3.8 is better than more than 3.8, sure. 13 MR. RAWSON: No, I am talking about 14 the regime. The proposed market power mitigation 15 regime talks about an average for all customers at 3.8. 16 If there is a regime that fixed the 17 price at 3.8 for every customer as a standard supply 18 offer, could not then the small volume customers take 19 some comfort in knowing that their price could not be 20 higher than 3.8? 21 PROFESSOR DEWEES: But there would be 22 the concern that if the market price dips below that 23 they are not going to get the benefit of it. Yes, they 24 get some security on the upside, but they lose the 25 opportunity for enjoying the downside should it occur. 26 MR. RAWSON: The possibility of the 27 market price dipping below 3.8, is that not dependent 28 on there being competition? 299 DEWEES 1 PROFESSOR DEWEES: It depends on 2 competition and on what happens to supply. There was 3 some thought at the MDC, at least some people thought, 4 that OPG might have trouble keeping the price up 5 to 3.8. 6 MR. RAWSON: Could you please explain 7 to me how there could be any problem keeping the price 8 up to 3.8 when in fact Ontario Power Generation has 9 market power and can set the price at any level they 10 want, subject to the Market Power Mitigation Agreement? 11 I am afraid I don't understand that. 12 PROFESSOR DEWEES: I wasn't the one 13 who had that concern. I am not sure I can articulate 14 it in detail. 15 I think the thought was, suppose that 16 MAOP is successful and the nuclear plants come back on 17 line, there is lots of supply around, and the tie-lines 18 are expanded so that there are opportunities for 19 imports from other jurisdictions, at the margin, that 20 puts pressure on the price. 21 Is it sufficient to drive it 22 below 3.8? I don't know. All I am saying is that some 23 people thought that was a possibility. 24 MR. RAWSON: If the nuclear plant 25 were to come back still under the control of Ontario 26 Power Generation, would there truly be pressure on 27 price? In fact, they would have more plant to use to 28 sell at the price they set, would they not? 300 DEWEES 1 PROFESSOR DEWEES: I'm not sure. 2 MS LEA: I wonder if you are getting 3 into areas where Dr. Dewees is not an expert. 4 MR. RAWSON: Thank you. 5 PROFESSOR DEWEES: I have spent more 6 time on retail and very little time on market power 7 mitigation. Thank you. 8 MR. RAWSON: All right. Thanks. 9 I think my last set of questions 10 relates to the variability in the spot price about 11 which we had a significant amount of discussion this 12 morning and yesterday. 13 Is it not possible, with the proposed 14 spot price pass-through and the market power mitigation 15 regime, for the spot price to be just as variable as if 16 there was no market power mitigation regime in effect? 17 In fact, the market power regime does not control price 18 variability, it just deals with the outcome of that. 19 PROFESSOR DEWEES: Certainly under 20 the Market Power Mitigation Agreement the price can 21 vary hour by hour and from one season to another. The 22 agreement deals with average revenue over a period of 23 time. It provides a refund if the average revenue has 24 been above 3.8. 25 I expect that the effect of that 26 would be to reduce volatility, but it need not 27 eliminate it. What it does is to guarantee to the 28 consumer at the end of the year that 90 per cent of the 301 DEWEES 1 OPG's share of that power is going to cost no more than 2 3.8 cents. 3 MR. RAWSON: You mentioned that you 4 would think it would reduce volatility. That really 5 does depend, though, on Ontario Power Generation's 6 bidding process and strategy, does it not? 7 PROFESSOR DEWEES: That's right. 8 MR. RAWSON: Thank you. 9 Those are all of my questions. 10 MS LEA: Thank you, Mr. Rawson. 11 Mr. White. 12 MR. WHITE: I am Roger White. I am 13 with ECMI and I am representing a number of municipal 14 electric utilities. 15 Let me characterize for a minute what 16 I think I heard you say about the risk avoidance nature 17 and the decision-making or recommendations of the MDC 18 as it related to the natural monopoly wires business. 19 Traditional regulation of these businesses has been on 20 the basis of risk-free debt, plus a risk premium on top 21 of that risk-free debt for the allowed rate of return. 22 Is that generally the way distributors have been 23 regulated in monopoly environments? 24 PROFESSOR DEWEES: I didn't say 25 anything about capital structure. I understand that. 26 My understanding is that the regulation is based on 27 costs, the cost of capital, and a rate of return on 28 capital. 302 DEWEES 1 MR. WHITE: To the extent that the 2 natural monopoly gets involved in competitive or more 3 risky environments, would that tend, in the debt 4 marketplace, to increase the cost on that natural 5 monopoly? 6 PROFESSOR DEWEES: Yes. I would 7 expect, the more risky the business, the higher the 8 cost of capital. 9 MR. WHITE: Was it the focus of the 10 Market Design Committee to try to minimize the risk 11 exposure to the natural monopoly wires business in its 12 true-up recommendation? 13 PROFESSOR DEWEES: I think it was a 14 general concern of the MDC to try to minimize risk to 15 the wires company. 16 MR. WHITE: At what point would you 17 have a concern -- to the extent that the true-up 18 mechanism might be imperfect, at what risk level as a 19 per cent of the rate base for the LDC would you be 20 concerned that the risk was having an adverse impact on 21 the retail price of electricity -- not the energy 22 component, but the price the customer pays? 23 PROFESSOR DEWEES: The MDC didn't get 24 into anything like that level of detail. I don't have 25 an opinion on that at this time. 26 MR. WHITE: In your earlier 27 discussions I think I heard you talk about the LDCs 28 having a monopoly. Was I correct? 303 DEWEES 1 PROFESSOR DEWEES: Yes. 2 MR. WHITE: Are you aware that they 3 have no exclusive franchise under their licence? 4 PROFESSOR DEWEES: I haven't looked 5 at the licence, no. By "natural monopoly", I was 6 referring -- I take the point that maybe someone else 7 can build a line somewhere within a service territory, 8 but down a given street there is likely to be just a 9 single line running, it seems to me unlikely. We all 10 have very many examples of competing lines going down 11 the street. I think that is the sense in which I think 12 of it as a natural monopoly. 13 MR. WHITE: OHSC, incidentally -- and 14 this is a point of information for you -- in meetings 15 has indicated that they intend to build wires within 16 municipal LDCs' service areas, in direct competition 17 with the utility, to supply end-use customers. 18 Non-interval metering, currently used 19 by LDCs or municipal electric utilities, those meters 20 are read periodically during the month, regularly. 21 They are not all read on the same day. 22 PROFESSOR DEWEES: That is my 23 understanding. 24 MR. WHITE: If the true implication 25 of the SSS requires billing delays typically in the 26 order of three weeks, does that produce an acceptable 27 financial burden on the consumers who pay the end-use 28 bills? 304 DEWEES 1 PROFESSOR DEWEES: I don't know what 2 the magnitude of that risk would be, so I am not in a 3 position to answer that question. But I think that 4 Mr. MacOdrum pointed out that there could be a billing 5 delay as a result of the spot price mechanism, and I 6 accept that that does produce a cost for the 7 distributor. 8 MR. WHITE: And, correspondingly, the 9 end-use customers? 10 PROFESSOR DEWEES: Yes. 11 MR. WHITE: Do you have any concerns 12 about the likelihood of the administrative costs 13 incurred by an LDC dealing with an after-the-fact 14 adjustment in the 3.8 price should OPG fail to achieve 15 the 90 per cent 3.8 threshold required by the 16 agreement? 17 PROFESSOR DEWEES: The MDC didn't 18 deal with the mechanics of how that refund would be 19 handled, and I haven't been involved in any discussions 20 of it, so I don't know whether that will be easy or 21 difficult. 22 MR. WHITE: If you are dealing with a 23 situation -- and to try to simplify things, maybe if we 24 can think about a distributor that has only two 25 consumers. For that distributor, meters can be read at 26 the same time, so whether the time line fits the month 27 does not matter in terms of the billing. 28 In other words, if the two meters are 305 DEWEES 1 read simultaneously, then the profile of the 2 non-interval meter loads over the same period, even 3 though it may not perfectly match one customer, or 4 either customer for that fact, but on average, for the 5 two of them, it is easy to match the spot market 6 profile price for those two customers? 7 PROFESSOR DEWEES: I would think it 8 would be pretty easy. 9 MR. WHITE: To the extent that you 10 move the meter reading dates and shift those windows, 11 does that make it more difficult to match the load 12 profiles of those two customers with the spot market 13 price? 14 PROFESSOR DEWEES: I haven't been 15 involved in discussions of the settlement system and 16 the mechanics of working that out. I think the 17 principle is that the LDC should get paid for all of 18 the electricity it delivers to its customers, but 19 exactly how that is worked out with different reading 20 dates I don't have an opinion on. 21 MR. WHITE: Can I characterize that 22 answer as being that what is essential from your 23 perspective is that there be a true-up as opposed to 24 specifically when the true-up must happen? 25 PROFESSOR DEWEES: I don't see the 26 connection between the true-up and the problem that you 27 are discussing. 28 MR. WHITE: Let me -- because we are 306 DEWEES 1 trying to help here. 2 If when the utility issues the bill 3 they are not aware of what the spot market price is, 4 then they are going to have difficulty, implicitly, in 5 matching that spot price, and because of the 20-day 6 delay that produces costs and adverse costs for 7 consumers. 8 PROFESSOR DEWEES: You are suggesting 9 that the utility may choose to issue a bill based on an 10 estimate of what the spot price was, and if it does 11 that and the spot price deviates significantly, then 12 there may be a true-up. 13 MR. WHITE: I am suggesting that is 14 what the Market Design Committee recommendation 15 recognized, that in fact, in order to maintain the cash 16 flow that the municipal electric utilities had, it's 17 normal to render the bills and try and do a true-up 18 down the road based on what the actual was and what the 19 current was and therefore not have the cash flow 20 implications. Are you comfortable with that 21 perspective? 22 PROFESSOR DEWEES: The committee 23 itself did not go into that level of detail and, not 24 having been involved in those details, I don't feel 25 comfortable making a judgment on that. 26 MR. WHITE: If the delay in knowing 27 the true spot market price were to increase the price 28 that customers pay, would that be a good thing, from 307 DEWEES 1 your perspective? 2 PROFESSOR DEWEES: You always have to 3 ask: What are the choices? I can't say whether one 4 thing is a good thing without looking at what the 5 alternatives are and how big is the cost. 6 You are asking about the details of 7 implementing the system and these are very important. 8 The Market Design Committee had a retail technical 9 panel that looked at some level of detail and I believe 10 the OEB -- in fact, I think I saw a sign out in the 11 hall saying there is a settlement panel working right 12 now, and I suspect they are dealing with precisely some 13 of the issues that you are raising now. 14 The MDC's advice was at a higher 15 level. I don't think it's going to be helpful for 16 sorting out those matters. I think those things are 17 best sorted out by the participants who understand the 18 details. 19 MR. WHITE: My concern, on behalf of 20 my clients, is that in fact what we are dealing with in 21 the standard supply service criteria is in fact 22 something which will impose a standard that the 23 mechanics may not be able to reach and therefore you 24 get into all the rate issues that we had the discussion 25 about at the front end as to whether the charges that 26 the LDCs are levying for standard supply service can 27 have in fact force of law. 28 PROFESSOR DEWEES: I recognize the 308 DEWEES 1 concern and I would assume that the technical panels 2 that are working on these things will look for 3 solutions that provide a combination of reasonable 4 service to the customer and reasonable cost for the LDC 5 and all other participants. 6 MR. WHITE: Thank you. Those are all 7 my questions. 8 MS LEA: Thank you very much, 9 Mr. White. 10 Mr. Reghelini? 11 MR. REGHELINI: I would like to 12 return to your discussion about the level playing field 13 and competitive advantage and just make sure I 14 understand your comments of yesterday. You indicated 15 that gas utilities could compete in the electricity 16 marketplace through the use of an affiliate. 17 PROFESSOR DEWEES: That's my 18 understanding. I'm not an expert on the gas industry, 19 by any means. 20 MR. REGHELINI: And you considered 21 that that affiliate's use of the existing relationship 22 that the utility had with its customers through a 23 similar name and brand were a source of legitimate 24 competitive advantage for that affiliate. Is that 25 correct? 26 PROFESSOR DEWEES: That's correct. 27 MR. REGHELINI: Would you also say 28 that if that affiliate had the use of a customer list 309 DEWEES 1 from the gas utility, that would also be a source of 2 legitimate competitive advantage? 3 PROFESSOR DEWEES: I am not aware 4 that the competitive affiliate would have access to a 5 list from the distribution utility itself. I would 6 think that the competitive affiliate would be -- our 7 design proposal for electricity was that the 8 competitive affiliate could not take advantage of the 9 distributors' customer data and, while I don't know 10 what the arrangements are on the gas side, the parallel 11 requirement would be that the competitive affiliate 12 could not take advantage of the customer list from the 13 distribution utility. 14 MR. REGHELINI: So, in your view, 15 then, having access to that list would not be a 16 legitimate source of competitive advantage? 17 PROFESSOR DEWEES: Would not be "a" 18 legitimate? 19 MR. REGHELINI: Right. 20 PROFESSOR DEWEES: That's correct. 21 MR. REGHELINI: Also, yesterday in 22 speaking about the prohibition of a standard service 23 supplier in providing competitive retail within the 24 same service area, you acknowledged that one structure 25 utilities could use to deal with the concern about 26 utility information going to a competitive retailer 27 would be to set up two affiliates, one that would work 28 with the competitive retail and one which would just do 310 DEWEES 1 standard supply, and that would ensure that knowing 2 proper use of customer information took place. 3 PROFESSOR DEWEES: Yes. "Ensure" is 4 probably too strong a word, but it would help to 5 assure. 6 MR. REGHELINI: Is there another 7 possible structure in which the utility either chose to 8 do the billing internally itself or through a separate 9 billing affiliate and then used a different affiliate 10 to provide standard supply and contracted strictly on 11 an aggregate basis without providing that standard 12 supplier any customer information? In that event, 13 would there be the same level of concern if that 14 affiliate doing standard supply also did competitive 15 supply in the same service area? 16 PROFESSOR DEWEES: The problem that I 17 have with that proposal is I don't understand why 18 anyone would do that. In fact, I may not understand 19 exactly what you said. 20 On the first part, what do I think of 21 having a party that's not providing competitive 22 activities doing the billing and bookkeeping that's 23 associated with standard supply, fine, I see no problem 24 with that. The other part of your question was what 25 about having an affiliate that provides competitive 26 activities, providing bulk power for standard supply 27 service. Is that -- 28 MR. REGHELINI: That's right. Rather 311 DEWEES 1 than the utility providing the standard service 2 supplier individual customer information, instead 3 provide the standard supplier what its aggregate 4 requirements were for standard supply. 5 PROFESSOR DEWEES: The problem I have 6 with that is that with the spot price pass-through 7 there is no advantage to the distributor. The 8 distributor can get the spot price pass-through direct 9 from the IMO. In fact it's going to be billed by the 10 IMO for that spot price. 11 Why would it turn around to a third 12 party, even its good friend the affiliate, and say, "I 13 will buy this from you, so I will send you the bill 14 from the IMO and you pay that and I will pay you. We 15 are going to write some extra cheques here, but for 16 exactly the same amount of money"? It doesn't make any 17 sense to me. 18 As I pointed out in my paper, if the 19 affiliate thinks it can make money on this somehow, 20 that it can buy power at a fixed price and resell it at 21 spot, it can do that without having any customers. It 22 doesn't need the SSS customers. This is essentially 23 making a bet about what is going to happen with the 24 spot price and you can do that on a financial basis 25 without the customer list. So I don't understand the 26 motive for the arrangement. 27 MR. REGHELINI: Setting aside that 28 concern, if we just focus strictly on the affiliate's 312 DEWEES 1 inappropriate use of customer information by doing both 2 competitive and standard supply from the same entity, 3 would the concerns about that be lessened if it was 4 done in aggregate? 5 PROFESSOR DEWEES: If the affiliate 6 doesn't get any customer information, then my concerns 7 about customer information are satisfied, yes. 8 MR. REGHELINI: Thank you. 9 MS LEA: Thank you, Mr. Reghelini. 10 Mr. Ronayne? 11 MR. RONAYNE: Hi. Mark Ronayne from 12 the Competition Bureau. I have a few questions I would 13 like to go through as quickly as I can. 14 One is that I wanted to clarify a 15 couple of things about what you would include in the 16 pass-through option. Would there be a mark-up to 17 encourage retailers? Do you think that's something 18 that might be anticipated if they are having a problem 19 meeting the spot market price? 20 PROFESSOR DEWEES: No, I think that's 21 inconsistent with the MDC recommendations. 22 MR. RONAYNE: What about the costs 23 of -- can you give me a brief explanation why you think 24 that would be a problem? 25 PROFESSOR DEWEES: Because the whole 26 idea of the spot price pass-through is that it gives 27 the customer the wholesale spot price for the 28 electricity, it allows the distributor to recover the 313 DEWEES 1 actual costs of administering what is essentially a 2 billing function -- it's not even a procurement 3 function, but a billing function -- for managing that 4 spot price pass-through and there is no reason for the 5 price charged to the customer to be any greater than 6 the spot price plus the actual administrative costs. 7 Some submissions suggested that the 8 price should be raised further because retailers can't 9 compete with this. The whole point of competition is 10 to see whether competition can provide better service 11 and for that you need the price to reflect the costs. 12 So if retailers can compete with the spot price 13 pass-through with only the administrative costs, 14 terrific, they will take customers away. If they can't 15 compete with it, customers are better off not going to 16 them. 17 To charge any more than that is to 18 provide excess profits for the distributor and, 19 essentially, to subsidize switching to retailers. 20 There was nothing in the MDC Report that suggested 21 support for that. 22 MR. RONAYNE: Earlier there was a 23 discussion about what might be incremental cost to LDCs 24 to put together the spot price pass-through option. 25 Would those then be passed on through the spot price 26 pass-through, the incremental cost? 27 PROFESSOR DEWEES: Yes. Those costs 28 should be recovered by the distributor. 314 DEWEES 1 MR. RONAYNE: What about default 2 customers? I am talking about ones that don't pay for 3 which there is an obligation to serve for a period of 4 time. Do you see that sort of thing being included in 5 a spot price pass-through option or is that something 6 separate or should be dealt with in some other way? 7 PROFESSOR DEWEES: The MDC didn't get 8 down to the level of deciding how specific costs like 9 that should be allocated, but it seems to me that the 10 obligation to provide standard service supply should 11 also mean that the supplier can recover all costs 12 associated with it. If that includes unpaid bills, 13 that's part of the costs. 14 MR. RONAYNE: Onto another area. 15 Thank you very much. 16 On the signalling properties of a 17 spot price pass-through mechanism, let's say we had a 18 rebate from Ontario Hydro that was done on a 19 retroactive basis so customers were seeing what the 20 actual variability was in their -- while they are 21 somewhat protected from volatility in their net bills, 22 the net price or the average price they are paying, 23 they are seeing something like a signal for what the 24 price is going to be maybe 42 months down the road when 25 the market is deregulated, if in fact it is at that 26 point in time. Do you see that as a signalling benefit 27 possibly from this option? 28 PROFESSOR DEWEES: I am not sure how 315 DEWEES 1 I would interpret deviations from the 3.8 cents during 2 the time when OPG has substantial market power as a 3 forecast of what is going to happen once there has been 4 decontrol. Personally, I wouldn't be inclined to infer 5 very much from that. 6 MR. RONAYNE: There was a discussion 7 that came up yesterday which was about access to 8 forward markets. You don't believe, then, that 9 consumers should be precluded from forward markets. Do 10 you see this as something that is probably more in the 11 realm of a retailer -- that access to these forward 12 markets is something more in the realm that a retailer 13 should be providing? 14 PROFESSOR DEWEES: Yes. I don't see 15 small residential customers participating directly in 16 forward markets, although large industrial or 17 commercial customers may well do that. To the extent 18 that there is residential consumer demand for price 19 protection, I would expect that would be provided by 20 retailers who would aggregate residential customers. 21 MR. RONAYNE: Fair enough. 22 You made reference yesterday to the 23 difference between competition and competitors. Does 24 that touch to the heart of the price pass-through 25 option in the sense that this option is designed to 26 pull through the benefits of wholesale competition to 27 retailers in a particular household, that maybe if you 28 don't have a bunch of competitors at the retail end of 316 DEWEES 1 the business you can still have competition for 2 supplying those customers through the wholesale market? 3 PROFESSOR DEWEES: Yes. 4 MR. RONAYNE: If I can go to page 10 5 of your submission, there is a paragraph that starts 6 with: 7 "Comments on the draft Code 8 suggest that distributors should 9 not be restricted to obtaining 10 supply from the spot market, but 11 should be allowed to contract 12 for SSS power through a physical 13 bilateral contract indexed to 14 the spot price with a discount. 15 The motive for such a discount 16 would be to build a long-term 17 relationship with distributors." 18 Could you expand a bit on what you 19 are intending to get at with that statement? 20 PROFESSOR DEWEES: All I was doing 21 was repeating what the commentator had said in the 22 comments that had been submitted. So that is my 23 repetition of what somebody else said. 24 The next sentence is my own, saying I 25 am not sure where the commodity like electricity -- 26 what the value of the long-term relationship is. I 27 would guess the distributors, if they were purchasing 28 power, would be looking primarily for price, if the 317 DEWEES 1 product is the same. 2 MR. RONAYNE: Okay. You also have a 3 reference in here, if I can find it, about this 4 possibly raising some concerns about price 5 discrimination, and some other matters. 6 You have not thought more fully on 7 what those concerns might be? 8 PROFESSOR DEWEES: No. The text 9 reflects my thoughts there. 10 MR. RONAYNE: Later in that paragraph 11 there is a statement: 12 "If undertaken by a dominant 13 generator, it might be perceived 14 as price discrimination, the 15 abuse of market power, or 16 manipulation of the spot price." 17 Is that a concern that might be 18 possible also in regard to, say, bilateral physical 19 contracts? 20 You are talking here about standard 21 supply service. Is that an issue that could come up in 22 regard to bilateral physicals that are not SSS 23 contracts, supposing the dominant generator is 24 contracting through bilateral physicals instead? 25 PROFESSOR DEWEES: Yes. The problem 26 is trying to find the same commodity being sold at two 27 different prices. I think it would be easier to 28 identify that in the spot market where it is clear what 318 DEWEES 1 the product is. 2 But physical bilateral contracts 3 might raise the same concern. 4 MR. RONAYNE: Did the MDC contemplate 5 whether this might be a source of concern in the 6 marketplace, depending on how the 3.8 cents is 7 enforced? 8 PROFESSOR DEWEES: I don't recall 9 discussions of that. 10 MR. RONAYNE: Do you have any 11 thoughts on that? 12 PROFESSOR DEWEES: I have a concern, 13 as expressed in this paragraph. 14 MR. RONAYNE: Okay. Thank you very 15 much. 16 MS LEA: Thank you, Mr. Ronayne. 17 Mr. Power. 18 MR. POWER: Yes; thank you very much. 19 Mr. Dewees, I believe I am the last. 20 I will try to get you out of here by 12:30, is it? 21 PROFESSOR DEWEES: Thank you. 22 MR. POWER: I will do my best. 23 By way of background, for your 24 information, I am here on behalf of ATCO Power, GPU 25 Electric, ENERConnect, the International Brotherhood of 26 Electrical Workers (Local 636), and Hydro Mississauga, 27 London Hydro, Oshawa PUB, Sarnia Hydro, St. Catherines 28 Hydro, Whitby Hydro, Ingersoll PUC, Petrolia PUC, and 319 DEWEES 1 St. Thomas PUC. 2 My apologies. I wasn't here 3 yesterday, so if I need to, I may have to stand back 4 and ask a couple of questions. If they have been 5 solved, just let me know and I will move on. 6 I have taken the time to go through 7 the MDC reports, your reports, and I have spoken with 8 various MDC members. What I am going to try and get at 9 in the next little while is the foundation for some of 10 the thinking behind what occurred at the MDC, the 11 underlying information and thoughts at the time. 12 Just before I get into that, I need 13 one clarification, if I may, in terms of your 14 appearance here today. 15 If I understand correctly, you are 16 here as a neutral facilitator of the MDC process who is 17 here to report on the MDC process itself. Is that 18 correct? 19 PROFESSOR DEWEES: Yes. I was asked 20 by the Board staff if I would make a written submission 21 and speak to explain the basis of the MDC 22 recommendations and to talk about those in connection 23 with the draft code. 24 MR. POWER: You are not appearing, 25 then, as an expert in electricity markets or 26 electricity market regulation, and these sorts of 27 things? 28 PROFESSOR DEWEES: Well, I am an 320 DEWEES 1 economist. I have a year's experience now with the 2 MDC, so I am relying on that expertise in what I am 3 doing here. 4 MR. POWER: But you wouldn't qualify 5 yourself on the marketplace as an expert in the 6 regulation of electricity marketplaces, and I take it 7 you haven't been retained by a jurisdiction in the 8 world to advise them on the regulation of their 9 marketplace: codes, licences, these sorts of things? 10 PROFESSOR DEWEES: That's right. 11 Aside from working for the MDC for a year, I have not 12 had other assignments in electricity. 13 MR. POWER: Okay. So your knowledge 14 comes from the MDC process? 15 PROFESSOR DEWEES: And from my 16 training as an economist and as an electrical engineer. 17 MR. POWER: Right. I understand 18 that. I have your CV here. 19 I would like to go through your paper 20 and just distinguish in your paper the comments of the 21 MDC, on which I have some questions, versus the 22 comments which you have fairly, I think, characterized 23 as your personal comments, and then just divide those 24 out. 25 PROFESSOR DEWEES: Okay. 26 MR. POWER: On page 5 of your report, 27 in the bottom paragraph, the third sentence on the 28 right-hand side begins with: 321 DEWEES 1 "I believe that it was not 2 supported because it would allow 3 distributors..." 4 And then you go on to the bottom and 5 say: 6 "Not having to change suppliers 7 should mean not being 8 overcharged if you do not 9 change." 10 I take it that is a personal comment, 11 the way you have qualified that? 12 PROFESSOR DEWEES: That is correct. 13 MR. POWER: On to the next page, 14 page 6. In the paragraph at the top, in the third line 15 you state that: 16 "While the MDC did not address 17 these items in particular, I 18 believe that it was the intent 19 of the MDC that the regulated 20 distribution charge should 21 include reasonable costs 22 associated with the distribution 23 function..." 24 You go on with the rest of the 25 sentence and carry on and say: 26 "I see nothing in the MDC 27 recommendations..." 28 Then you go on in the next sentence 322 DEWEES 1 to say: 2 "Indeed section 2.5.4 of the 3 draft Code..." 4 And you reiterate that in the rest of 5 the sentence, and you then go on to say: 6 "This does not mean that the 7 charges should be the same as 8 those of competitive 9 retailers..." 10 If I understand correctly, those 11 comments within the majority of that paragraph are your 12 personal comments as well. Is that fair? 13 PROFESSOR DEWEES: The MDC didn't see 14 the draft code. These are my comments based on my 15 understanding of the intent of the MDC as it was doing 16 its work. 17 MR. POWER: Thank you. 18 Down lower in the page, the second 19 paragraph from the bottom, on the fourth line you start 20 off with: 21 "I believe that the MDC choice 22 is consistent with the principle 23 that the purpose of competition 24 is to provide consumers with a 25 desirable combination of price 26 and service and with the belief 27 that a majority of consumers 28 would prefer a low smoothed spot 323 DEWEES 1 price to a higher fixed price. 2 Indeed, I view the assertion 3 that the retailers may be unable 4 to beat the spot price as a 5 tribute to the smoothed spot 6 price pass-through. It means 7 that without effort small 8 consumers will have the best 9 deal available." 10 I take it again that this is a 11 personal view of yours? 12 PROFESSOR DEWEES: That's correct. 13 MR. POWER: On page 7, in the second 14 paragraph from the bottom, in the latter half there are 15 a number of comments in there. In the seventh line up 16 from the bottom of that paragraph, on the right-hand 17 side, it says: 18 "I believe that this should 19 provide a basis for a futures 20 market in Ontario if there is a 21 demand for it." 22 And you carry on with other comments, 23 such as: 24 "...I do not think that they 25 should be forced to do so by a 26 regulatory requirement. I 27 believe that the futures market 28 is not an end in itself and 324 DEWEES 1 should drive the design of the 2 retail market..." 3 Those are personal comments as well, 4 I take it, and not the MDC's. 5 PROFESSOR DEWEES: Yes. I think 6 there was some discussion about this issue at the MDC, 7 and I recall at least some comments that if there is a 8 demand for a futures market it would emerge. But there 9 was no formal statement by the MDC. These are my own 10 views and I think the views of some members expressed 11 during that discussion. 12 MR. POWER: That is consistent with 13 my understanding in reviewing the report. That is your 14 commentary on it, then. 15 PROFESSOR DEWEES: Right. 16 MR. POWER: At the bottom of page 7, 17 that last paragraph starts out with: 18 "I also believe that adoption of 19 a fixed price SSS might hinder 20 the development of futures 21 markets." 22 Again, there are a number of comments 23 in there, and it goes on to say "yet I believe", and 24 then over to the top of the next page, the remainder of 25 that paragraph. 26 As I understand this, and comparing 27 it with the MDC report, these are your personal 28 comments as well. Is that correct? 325 DEWEES 1 PROFESSOR DEWEES: That's correct. 2 MR. POWER: And then on page 8, in 3 the first full paragraph at the top of the report, 4 starting on the second line on the right-hand side, 5 again it continues on: 6 "I believe, and a number of 7 stakeholder comments on the 8 draft SSS Code seem to agree, 9 that the smoothed spot price 10 will be lower..." 11 And it carries on for the rest of the 12 paragraph. 13 Again, from my review, this is a 14 personal comment of yours? 15 PROFESSOR DEWEES: Actually, the 16 conclusion that "the smoothed spot price will be lower, 17 on average, than a fixed price SSS could be", I think 18 is an MDC -- there is a statement in the second quarter 19 report to that effect, as I recall. 20 MR. POWER: There is on that 21 particular point, I agree. 22 PROFESSOR DEWEES: On that issue, 23 yes. 24 MR. POWER: But generally, the 25 remainder of the paragraph is your analysis of comments 26 others have made and the implications of it. 27 PROFESSOR DEWEES: That's right. 28 Certainly discussion around the customers that are not 326 DEWEES 1 comfortable can seek supply from competitive retailers, 2 that was generally in the minds -- I think that was 3 what we talked about around the table at the MDC. 4 But the next sentence is my 5 characterization. 6 MR. POWER: Thank you. 7 In the first full paragraph under 8 "Procurement", in the fourth line down there is a 9 comment: 10 "The draft Code imposes little 11 additional burden on 12 distributors beyond what they 13 already will have to do in the 14 move to wholesale and retail 15 competition." 16 Is that your personal comment as 17 well? 18 PROFESSOR DEWEES: Probably so. 19 MR. POWER: Okay. Thank you. 20 Then at the bottom of the last full 21 paragraph, in the third line from the bottom on the 22 right-hand side there is a statement: 23 "...and would result in little 24 additional burden on 25 distributors beyond what they 26 already would be required to do 27 under the proposed competitive 28 retail market." 327 DEWEES 1 So the same point there: that is 2 your personal observation? 3 PROFESSOR DEWEES: Yes. The MDC, at 4 the time it made the spot price pass-through 5 recommendation in the second quarter, had not set up a 6 technical panel and started looking at settlement 7 mechanisms, and whatnot. 8 The results may have come up in that 9 process late in the day, but more in the technical 10 panel, I think, than at the MDC itself. 11 MR. POWER: They weren't analyzed by 12 the MDC and a formal conclusion drawn on that. 13 PROFESSOR DEWEES: That's correct. 14 MR. POWER: So then when I go to 15 page 9, to the second paragraph from the bottom, the 16 third line from the bottom of that paragraph on the 17 right-hand side, the same thing: 18 "The draft Code does not impose 19 any additional burden on 20 distributors beyond what they 21 already will have to calculate." 22 The MDC does not have a view on that, 23 I take it? 24 PROFESSOR DEWEES: That's correct. 25 MR. POWER: On page 10, the bottom 26 paragraph, in the second line on the right-hand side it 27 states: 28 "I do not see the need to decide 328 DEWEES 1 this question because the 2 proposed arrangement serves no 3 commercial purpose." 4 And following that are a number of 5 arguments to advance that proposition. It goes over to 6 page 11 and a financial analysis that is included in 7 that top paragraph. 8 I take it these are also your 9 personal views as well? 10 PROFESSOR DEWEES: That's right. We 11 had some discussion of this at the MDC, but there was 12 no formal conclusion or recommendation that came out of 13 that. 14 MR. POWER: Thank you. 15 On page 12, the first full paragraph 16 states: 17 "The draft Code accomplishes the 18 aims of the MDC recommendations. 19 And it goes on to talk about the 20 draft code. I assume, again, those are your personal 21 comments, given that the Code has come out after the 22 fact? 23 PROFESSOR DEWEES: Yes. 24 MR. POWER: Again at the bottom 25 paragraph, in the third line in the middle, it says: 26 "The draft Code meets the MDC's 27 concern in two ways..." 28 And then it carries on with an 329 DEWEES 1 analysis of the Code. Again, those are your comments 2 as well? 3 PROFESSOR DEWEES: Yes. 4 MR. POWER: And on page 13, at the 5 top of the document there is a statement there that: 6 "It is difficult to monitor and 7 enforce confidentiality of 8 customer information." 9 And it continues with the analysis of 10 the Code that was started on the prior page and goes 11 into the next paragraph as well. 12 I take it this is also your personal 13 analysis and not the MDC's. 14 PROFESSOR DEWEES: There was 15 certainly discussion at the MDC about the problems of 16 enforcing codes of this sort. I think that was one 17 reason why the MDC recommended a strong separation. 18 I am not sure that this statement 19 particularly appears in one of the MDC reports. 20 MR. POWER: Thank you, sir. That is 21 consistent with my research. 22 Now, just a question on the MDC 23 process. 24 If I understand correctly, is it fair 25 to say that the MDC relied pretty well exclusively on 26 one consultant, PHB? 27 PROFESSOR DEWEES: PHB was the lead 28 consultant and they provided enormous assistance. The 330 DEWEES 1 14 members brought to the proceedings their own 2 background and experience with, in some cases, the 3 MacDonald Committee, with the electricity business, and 4 in some cases the gas business. I was impressed by the 5 depth of the experience of the MDC members themselves. 6 Many members brought to many MDC meetings their 7 consultants, consultants and advisers. So we had the 8 benefit of not just the input from PHB and the input 9 from members but also from consultants to those members 10 throughout the proceedings and that was, in many cases, 11 very valuable. 12 MR. POWER: But it is fair to say 13 that PHB did the lion's share of the original analysis 14 and work? 15 PROFESSOR DEWEES: Yes, I think that 16 is true. 17 MR. POWER: Was there any peer review 18 by other recognized expert consultants that the MDC 19 retained to review the work and advice of PHB from time 20 to time? 21 PROFESSOR DEWEES: No. We chose PHB 22 in a competition. We solicited proposals and reviewed 23 them and chose PHB. But having chosen them, we relied 24 on them and on the other input that we got from the 25 other consultants. 26 One other important part of the 27 process was an international workshop that we held in 28 the spring of 1998 where we invited individuals from 331 DEWEES 1 around the world who had been involved in other 2 restructuring experiences to come in and give us the 3 benefit of their experience. I think they were there 4 for two days. 5 MR. POWER: I was there for that, 6 actually. It was quite useful. 7 I remember one of the comments of one 8 of the fellows saying that, "No matter how much you try 9 and regulate, the free market will always find a way 10 around it". It sort of resonated in my head. 11 PROFESSOR DEWEES: It was an 12 excellent workshop and I think everybody found that 13 very helpful. 14 MR. POWER: I would just like to go 15 back to your paper. 16 On page 1, in the third paragraph, 17 five lines down, it says: 18 "-- the smoothed spot price 19 pass-through has vastly smaller 20 regulatory burdens for the OEB 21 and market participants than the 22 principal alternative SSS 23 proposals." 24 I'm sort of focusing on "vastly". 25 What analysis do you have to support the contention 26 that "vastly" smaller regulatory burdens would exist? 27 PROFESSOR DEWEES: I can't point to a 28 research or analysis that would support the "vastly". 332 DEWEES 1 The MDC, I believe, concluded that 2 the regulatory burdens would be smaller. 3 I think that "vastly" is my own word, 4 and that arises from comparing what has to be done with 5 this new spot, which is simply record the price, do the 6 calculation, charge it to the consumer. 7 The regulatory oversight is really 8 simply to ensure that that accounting has been done 9 accurately, whereas, with any other mechanism, some 10 assessment of a price, or a portfolio of prices, has to 11 be made, some judgments have to be drawn. It seems to 12 me there is an enormous difference in the nature of the 13 work that has to be done if one is to effectively 14 regulate a fixed price or a portfolio price as compared 15 to seeing whether they actually did the calculation 16 that passes the spot price through to the consumer. 17 MR. POWER: So the highest we can put 18 this is that there was some discussion and, perhaps, 19 consensus in the belief that there be a vastly smaller 20 regulatory burden, but nobody has modelled or analyzed 21 this directly? 22 PROFESSOR DEWEES: That's correct. 23 MR. POWER: On page 2, at the bottom 24 of the page, the last paragraph there, the second to 25 third line says: 26 "Consultants presented analyses 27 on the potential effect of price 28 volatility on Ontario 333 DEWEES 1 consumers." 2 I just want to make sure I haven't 3 missed anything. 4 My understanding is that there is 5 only one presentation that was made on this. There 6 wasn't a series of analyses conducted. 7 PROFESSOR DEWEES: That's correct. 8 As part of this discussion, we had the document that is 9 cited in footnote 3. 10 In addition, Enron, at about the same 11 time, or shortly after this, submitted a report that 12 they had done or had been done for them analyzing the 13 price volatility in the midwest during that June or 14 July, which had captured the attention of the MDC, and 15 the report that Enron provided was posted on the MDC's 16 Web site so it was available for members and the 17 general public. 18 MR. POWER: Do you have a copy of 19 that document with you here, because I have some 20 questions specifically on it, the footnote, the 21 reference that you make for the statement, the PHB 22 report, quote: 23 "The Effect of Volatile 24 Electricity Prices on the 25 Residential Customer's Bills"? 26 PROFESSOR DEWEES: This is 27 Retail 9-4? 28 MR. POWER: Yes. Do you have that 334 DEWEES 1 with you? 2 PROFESSOR DEWEES: I may have that. 3 If you will just give me a moment. 4 MR. POWER: If you don't, I have some 5 spare copies of that, just because I know there are 6 probably questions on it. If anybody else wants a 7 spare copy, I have about 30 of them here. 8 PROFESSOR DEWEES: I have a copy. 9 MR. POWER: Okay. 10 --- Pause 11 MR. POWER: Somebody grabbed the 12 wrong pile and handed them up, but that's okay. There 13 are two sets here. I will let this go around. 14 PROFESSOR DEWEES: You just passed 15 out the INNERConnect business plan for next year. 16 MR. POWER: We will try and get 17 there. I think that is the one. 18 There are two of them, but the one we 19 are focusing on right now is RET 9-4, which is, "The 20 Effect of Volatile Electricity Prices on the 21 Residential Customer's Bills", dated August 25, 1998. 22 So, if I understand your testimony 23 correctly and your document correctly, this is the work 24 done by PHB that the MDC relied on in addressing the 25 issue of volatility on the residential customer's bill. 26 Is that fair? 27 PROFESSOR DEWEES: Yes. As I recall, 28 this is the principal analysis that was done for us. 335 DEWEES 1 As I said, we had at least one other submission on 2 volatility and we had quite a bit of discussion. 3 MR. POWER: Right. Okay. 4 So we have two documents: there is 5 the Enron one; and this one, this one being prepared by 6 the prime consultant. 7 Is it fair to say that there is 8 really just a series of overheads? There is an absence 9 of any footnotes, you know, of significance, where you 10 can trace the assumptions behind it. It's not in the 11 nature of a journal article where I can understand the 12 logic behind it and independently check the assertions. 13 PROFESSOR DEWEES: It is a set of 14 overheads. I am looking through to see if there are 15 footnotes but I presume you have looked carefully and 16 the answer is: No, there are not. 17 MR. POWER: We tried to research the 18 background assumptions of this and this document 19 couldn't help us. So we assume that it stands on its 20 own, so to speak, in terms of what the MDC looked at? 21 PROFESSOR DEWEES: Yes, I think so. 22 MR. POWER: Okay. When I looked at 23 page 2, it mentions in fact this is just a 24 presentation, so I guess the report confirms that 25 status. 26 I note that the first several pages 27 talk about extremely high electricity prices in other 28 jurisdictions. 336 DEWEES 1 I take it that was the focus of this 2 presentation? 3 PROFESSOR DEWEES: I would have to 4 look through the whole thing to see if that was the 5 focus. 6 That was one of the factors that led 7 us to be concerned about this issue, but the focus of 8 this was trying to provide some information on what 9 might happen in Ontario. 10 MR. POWER: Right. Trying to reach 11 an analysis of what might happen in Ontario. 12 Is it fair to say that the MDC 13 members, it sounds like, as a whole, from what I found 14 out, were very concerned about volatility when this was 15 presented to them? 16 PROFESSOR DEWEES: I think there was 17 concern about volatility before -- you are saying at 18 the time this was presented there was some concern? 19 MR. POWER: Yes. 20 PROFESSOR DEWEES: Yes, I think 21 that's true. 22 MR. POWER: If I understand the 23 report correctly, what it does is it looks at the 24 extreme volatility in the U.S. and then it looks at 25 Alberta prices and then it suggests that we can look to 26 Alberta as a model of what might occur in Ontario. Is 27 that fair? 28 PROFESSOR DEWEES: That's correct. I 337 DEWEES 1 don't know whether it is in here or whether it was 2 delivered orally, but the caveat is that it is 3 difficult to move from one market -- to make a forecast 4 of what is going to happen in one market by looking at 5 another simply because there are significant 6 differences among these markets. But I think the 7 feeling of PHB was that looking at the Alberta market 8 would be -- that the Alberta market would be more 9 useful for trying to forecast what would happen in 10 Ontario than looking, say, at the midwest, for some of 11 the reasons that I enunciated earlier. 12 MR. POWER: Some of the concerns I 13 would have with that is Alberta is not going to be 14 interconnected with Ontario, so it wouldn't deliver us 15 price indications of what might affect our market. Is 16 that fair? 17 PROFESSOR DEWEES: That's right. 18 There is no spill-over. Rather the question is: What 19 will happen within the market? Alberta has a 20 reasonably self-contained market. We looked at what 21 would happen there to see what would happen within the 22 Ontario market. 23 MR. POWER: Would it not have also 24 been useful to compare with a jurisdiction that we are 25 interconnected with to see what prices signals that 26 they would be sending? Surely, that would have had an 27 influence on volatility. 28 PROFESSOR DEWEES: There are lots of 338 DEWEES 1 other things you could do in looking at interconnect 2 prices. I'm not sure how you would integrate that with 3 the analysis that's here. 4 MR. POWER: I think the difficulty is 5 that there is a lack of analysis. There is no 6 explained rationale for the choice of Alberta over 7 others. There are pretty strong suggestions that other 8 marketplaces are perhaps equal or better benchmarks 9 upon which to extrapolate. 10 Do you have any disagreement with 11 that? 12 PROFESSOR DEWEES: My recollection is 13 that Alberta was chosen because it was -- they have 14 established a competitive market, so in that respect it 15 is comparable, that the data were readily available. 16 One problem we had was to introduce an analysis, you 17 need to be able to find the data. Alberta seemed to be 18 as good as any, in terms of having some comparability 19 and data availability. 20 MR. POWER: Is there any analysis of 21 the Alberta market's cap on the $1,000 megawatt cap 22 they have on price and how that affected data on their 23 volatility? 24 PROFESSOR DEWEES: I don't recall 25 that there was any analysis. There was certainly an 26 understanding that because of the way their computers 27 are programmed the price couldn't go above $999. 28 MR. POWER: Right. Okay. 339 DEWEES 1 Then, looking at what we have here on 2 Alberta, on page 16 of the document, page 16 of the 3 document provides a snapshot of volatility. 4 I think it is fair to say that, over 5 the time period indicated on that chart, volatility is 6 continually increasing over the time frame. Is that 7 fair? 8 PROFESSOR DEWEES: Over this time 9 frame, I would say the price level is increasing, the 10 trend line seems to be moving up and volatility seems 11 to be increasing. 12 MR. POWER: Okay. Thank you. 13 So when we get to page 20 and 22, 14 after looking at Alberta, there were some assumptions 15 made about the Ontario residential marketplace and what 16 we could extrapolate from Alberta. 17 I am particularly curious, because 18 this seems to be a really seminal point in the 19 discussion, this analysis of what might occur in 20 Ontario, as to, I guess, what other sober thought was 21 presented around this Ontario analysis. I mean, I have 22 the lead consultant who has given me overheads; I have 23 some assumptions laid down here without explaining the 24 basis of the assumptions, to any great degree, why we 25 chose some over others; I have no comparison to other 26 markets to give me a sense of how it might look; and, I 27 have an absence of a peer review on this, yet it is a 28 fairly seminal analysis -- or presentation, more 340 DEWEES 1 accurately. 2 Am I missing something? I seem to be 3 missing something here. 4 PROFESSOR DEWEES: At the time of the 5 presentation, there was certainly discussion of many 6 aspects of this. As I recall, there was some 7 discussion of the assumptions that went into it. 8 But was there a competing analysis? 9 No, not that I am aware of. I don't think anybody had 10 available, at the time, another analysis that looked to 11 be as useful as this was. 12 MR. POWER: I note this analysis 13 itself, on page 28, lists just some of the caveats that 14 they have put on the analysis. So is it fair to say 15 that this PHB presentation was incomplete in terms of 16 it didn't analyze a variety of factors that may affect 17 the Ontario marketplace? Is that fair? 18 PROFESSOR DEWEES: Well, any analysis 19 is incomplete in that you could always do some more. A 20 colleague of mine once said, "Research is never 21 completed; it is merely abandoned." So here I think 22 PHB did what they could in the time that was available. 23 If we had had a year, I am sure they could have done 24 much more. 25 MR. POWER: So their study was 26 constrained by the timing, then? 27 PROFESSOR DEWEES: Sure. 28 MR. POWER: Then I turn to page 29, 341 DEWEES 1 which is the conclusion. The conclusion is: one, 2 nothing is risk free; and, two, you can pay me now or 3 you can pay me later. 4 What should I draw out of that 5 conclusion? It doesn't seem to be the most 6 professional summary of an analysis. 7 PROFESSOR DEWEES: As I recall, the 8 conclusions that were drawn during the discussion at 9 the MDC were drawn by looking at the figures in the 10 middle of the report, starting on page 13, and going on 11 from 13 through 19. As I recall, there was some focus 12 on what had happened in Alberta and what did it mean. 13 Part of the concern that was raised 14 was when people read about prices of $999 a megawatt 15 hour, compared to a normal price of $30 or $40 an hour, 16 that is very high. What is the implication of that? 17 So this presentation takes us 18 through, looking at the hourly prices on page 13, 19 showing the distribution of the marginal price on 20 page 14, and accumulative distribution, which shows 21 that, on page 15, most of the prices are in the $20 to 22 $40 range, and then there is a thin tail that goes up 23 to $100 and beyond. 24 For me, the graphs on pages 16 and 17 25 were central. We spent some time on those, because 26 those show what would happen if you smoothed over 27 various periods. 28 MR. POWER: I guess my question, 342 DEWEES 1 though, was simply on page 29, the conclusion. There 2 is an absence of a conclusion here. Was there some 3 other conclusion brought by the consultants that is not 4 self-evident in this report? 5 PROFESSOR DEWEES: I think the 6 consultant pointed, as I am suggesting now, to the data 7 and, for example, on page 16, noted that -- let's see. 8 Page 16 is bi-monthly averages. It shows the variation 9 in bi-monthly prices. I think our attention was drawn 10 to the fact that, not surprisingly, the variation in 11 bi-monthly prices is enormously less than the variation 12 in hourly prices. That follows naturally from 13 statistical principles, but this shows exactly what it 14 meant in Alberta. 15 Then, on page 17, hourly prices 16 versus annual averages, my recollection is that when 17 the consultant directed our attention to page 17 they 18 pointed out that, while yes there is variability in the 19 bi-monthly prices on page 16, there is also variability 20 in the annual prices -- that is, if we assumed a regime 21 of prices that were fixed on an annual basis in 22 Alberta, and if they tracked the average of the spot 23 price, then Alberta consumers would not have been 24 spared volatility, they would have been spared 25 short-term volatility, but they would have experienced 26 price jumps in 1997 and another price jump in 1998. 27 MR. POWER: I guess the document is 28 self-evident, but with the benefit of this having been 343 DEWEES 1 recorded somewhere else, I guess we are just left with 2 what is evident here in the conclusion at the end. I 3 am just asking a simple question. I am also aware of 4 your timing. There is nothing else anywhere else? 5 PROFESSOR DEWEES: I'm sorry. I will 6 try to talk less. 7 I guess my point is I don't think 8 that the conclusions that are listed on page 29 capture 9 the important elements that I, and I suspect many 10 members of the MDC, took away from this presentation. 11 MR. POWER: That is fair. 12 On page 4 of your document there is a 13 reference that the MDC and the retail technical panel 14 evaluated four alternative price calculation 15 methodologies and spot price pass-throughs, and the 16 authority for this is footnote 9. Footnote 9 reads: 17 "Retail Technical Panel, 18 `Evaluation of Default Supply 19 Options.' September 4, 1998." 20 Do you have a copy of your reference 21 document there? 22 PROFESSOR DEWEES: No, I don't. 23 MR. POWER: I think we have a copy 24 here for you. 25 Could you tell me who prepared this 26 document? 27 PROFESSOR DEWEES: I believe that it 28 was prepared by the PHB consultant who was sitting on 344 DEWEES 1 the retail technical panel, for the technical panel, in 2 consultation with that panel. 3 MR. POWER: As an aside, I take it 4 that it is fair to say that PHB was a proponent of the 5 spot market price pass-through. That is certainly what 6 other MDC members have led me to believe. 7 PROFESSOR DEWEES: PHB suggested 8 that. I think it was Larry Ruff who suggested that 9 back in April when we first began discussing retail 10 competition. 11 MR. POWER: Again, I look at this 12 document -- and you would agree with me that they are 13 only overheads? We have no reference materials here 14 and no back-up data. There is a suggestion of a 15 subjective model for evaluating criteria, but no 16 explanation of the basis of it. 17 I take it, again, there is no other 18 back-up document that was presented to the MDC which 19 explains the subjective judgments that are laid out in 20 this document? 21 PROFESSOR DEWEES: I don't recall 22 another document that accompanied this. 23 Once again, there was quite a bit of 24 discussion at the presentation, but again we were under 25 a serious time constraint. We had asked the technical 26 panel to look at this for us and they worked very 27 quickly and produced this report for us to look at. 28 MR. POWER: Yes, and in fact the 345 DEWEES 1 consultant was very fair about that, because on page 19 2 of this document they say: 3 "There are important policy 4 issues that apply to all default 5 supply options but were not 6 addressed by the Retail 7 Technical Panel." (As read) 8 Then they go on to list six pretty 9 important caveats on this study which strongly 10 suggest -- in fact, they say that the analysis or the 11 review is incomplete. 12 Were those six points ever addressed 13 later in the process? 14 I can't find it if it was. 15 PROFESSOR DEWEES: We certainly spent 16 a lot of time talking about No. 2. 17 MR. POWER: I am asking, I guess: 18 Did the consultant provide a report, in writing, that 19 addressed those six caveats and any other ones that 20 they clearly identified as important policy issues not 21 addressed by the retail technical panel? 22 PROFESSOR DEWEES: Certainly the MDC 23 talked about some of these issues in its later 24 deliberations on through the end of the year and I 25 simply don't recall at this point what documentation we 26 may have been provided along the way. We saw tonnes of 27 paper. 28 MR. POWER: Yes, I believe that. It 346 DEWEES 1 has a wall in our office. 2 I guess it is fair to say that this 3 assessment is incomplete in a number of other ways. 4 If you could turn to page 17 -- just 5 prior to getting to page 17, on page 12 this document 6 talks about the technical sub-panel having set out the 7 following 15 evaluation criteria, and then it goes to 8 the criteria, just by way of context. 9 When we get to page 17 there is 10 evaluation criteria there for the effect on 11 competition. Is it fair to say that this evaluation 12 criteria on the effect on competition that are listed 13 there have missed the effect on new generation? 14 PROFESSOR DEWEES: I don't see that. 15 I certainly don't see "effect on new generation" on 16 page 17. Are you suggesting that it is in the earlier 17 criteria? 18 MR. POWER: No, it is nowhere in the 19 document, actually. 20 PROFESSOR DEWEES: Okay. 21 MR. POWER: Again, when I turn to 22 page 18 about risk management, which is what a lot of 23 this discussion is about, there is no analysis of risk 24 management on other market participants, such as 25 generation: impacts on financing new generation and 26 impacts on competition and, therefore, impacts on the 27 price to the customer at the end of the day. 28 PROFESSOR DEWEES: That's right. We 347 DEWEES 1 talked on several occasions about financing new 2 generation, but that was not part of this discussion 3 here. 4 MR. POWER: In fact, though, as a 5 result, if you accept that generators are market 6 participants, we have missed an analysis of the risk of 7 a spot market pass-through on your generation 8 completely then. 9 PROFESSOR DEWEES: It is not in here. 10 As I say, it was at least discussed at the MDC. 11 MR. POWER: Then on page 18 we have 12 also missed the analysis of the impact on the spot 13 market pass-through on retailers, who are also market 14 participants. 15 PROFESSOR DEWEES: That's right. 16 This looks at risks to customers, the distributor, the 17 default supplier and -- yes. 18 MR. POWER: Okay. Thank you. 19 I take it that both in this document 20 and in the MDC process, generally, there is no analysis 21 of the yardstick approach that has been presented by 22 Seabron Adamson. Is that correct? 23 PROFESSOR DEWEES: I don't recall 24 that we -- that may have been mentioned at some point, 25 but I don't recall any substantial discussion of that 26 particular approach. 27 MR. POWER: If I understand 28 correctly, the MDC did not have an evaluation of the 348 DEWEES 1 spot price pass-through in other jurisdictions. 2 PROFESSOR DEWEES: Did not -- 3 MR. POWER: Have an evaluation of the 4 impacts on market participants of the spot price 5 pass-through in other jurisdictions. 6 PROFESSOR DEWEES: We had the 7 benefits of the international conference and Norway, 8 which has a spot price pass-through, talked about the 9 operation of their system. I recall seeing some 10 documents about the experience in Norway. 11 Once California started operating we 12 had some information from there. They have a spot 13 price pass-through, although their experience doesn't 14 tell much about what happens to it. 15 I think we had such information as 16 was available, but there wasn't much to analyze at that 17 time. 18 MR. POWER: Okay, that's fair. Thank 19 you. 20 I can't find any analysis of the spot 21 price impact on Genco's divestiture and market 22 mitigation plans. Are you aware of that? 23 PROFESSOR DEWEES: I'm sorry? I 24 missed what you said. 25 MR. POWER: I can't find, through the 26 MDC process, an analysis of the spot price impact on 27 Genco's divestiture and market mitigation plans. It is 28 certainly not in here. 349 DEWEES 1 PROFESSOR DEWEES: As I indicated 2 earlier, I wasn't involved in the market power 3 discussions in detail. There was an enormous effort 4 that went into working out the Market Power Mitigation 5 Agreement. I don't know to what extent that discussion 6 and the analysis that support it -- there was quite a 7 lot of analysis that went on in support of the 8 development of the market power mitigation. I just 9 don't know to what extent they incorporated the spot 10 price pass-through. 11 MR. POWER: All right. You have no 12 knowledge of it. I can't find anything in the MDC 13 report, so we are on the same wavelength there. 14 Are you familiar with the materials 15 filed regarding the impact of spot price pass-through 16 on the Lakeview project? 17 PROFESSOR DEWEES: Which? 18 MR. POWER: This is the proposal to 19 convert part of the Lakeview generating station, the 20 first step in Ontario Hydro-Genco's divestiture plan, 21 whereby they are bringing in three other partners to 22 convert part of a coal-fired station to gas fire. Are 23 you familiar with that? 24 PROFESSOR DEWEES: My understanding 25 was that they weren't going to change the existing 26 boiler, they were going to build a new gas-fired unit 27 there. 28 MR. POWER: Right. 350 DEWEES 1 Have you read the materials filed by 2 the others who will be presenting here in the next few 3 days about the impact of the spot price pass-through on 4 that proposed $400 million-plus project? 5 PROFESSOR DEWEES: I have read those, 6 yes. 7 MR. POWER: Their evidence is that 8 the spot price impact on that Lakeview project, which 9 is the first step in decontrol, is going to at least 10 substantially delay the project if not kill it 11 outright. Do you have any reason to disagree with 12 their evidence? 13 PROFESSOR DEWEES: I think the 14 question is: What does this have to do with spot price 15 pass-through? If that project is going to produce 16 power at a price lower than the expected market price, 17 which for the next couple of years is likely to be 18 3.8 cents, I don't see why the proponents of that 19 project can't sell the power directly to some of the 20 large industrial customers in this province who will 21 have an interest in low-cost power. 22 There is 25 per cent of the market in 23 customers over 5 megawatts. There is a large chunk of 24 demand out there that I would think would be interested 25 in low-cost power, if that is what this plant is going 26 to generate. 27 If what it is going to do is generate 28 power that is more expensive than 3.8 cents, then I 351 DEWEES 1 would imagine that the proponents will have trouble 2 selling that to sophisticated customers and, on behalf 3 of the small residential consumers, I don't see why 4 they should be expected to pay a price that 5 sophisticated customers wouldn't pay. 6 So I don't see that the spot price 7 pass-through has any impact on that project. The real 8 question is: Is that project economic in the 9 environment that we expect to see over the next few 10 years? If it is, I just can't imagine that 11 sophisticated investors and sellers and sophisticated 12 buyers can't make a deal. 13 MR. POWER: I take it you have no 14 experience in financing $400 million-plus projects. Is 15 that fair? 16 PROFESSOR DEWEES: That's correct. 17 MR. POWER: Would you tell me what 18 the financial criteria are for investors who roll 19 $400 million? 20 PROFESSOR DEWEES: I have no idea. 21 MR. POWER: Nobody is going to roll 22 $400 million unless they have a substantial assurance 23 that they are guaranteed to sell their product at the 24 end of the day. 25 PROFESSOR DEWEES: Okay. 26 MR. POWER: On the spot market price 27 pass-through mechanism that is proposed here in the 28 Codes, there will be no bilateral contracts or other 352 DEWEES 1 contracts to have some assurance of a revenue stream 2 earlier to the project with the possible exception of 3 the directs that command 25 per cent of the market that 4 you have referred to. Is that correct? 5 PROFESSOR DEWEES: The 25 per cent 6 could enter into direct contracts and of the 48 per 7 cent that constitute general service customers smaller 8 than 5 megawatts, I would expect there would be a 9 substantial amount of that demand that either is large 10 enough to enter into such contracts or could be 11 aggregated by retailers if there is really a good price 12 to be had. 13 MR. POWER: You are guessing, aren't 14 you? 15 PROFESSOR DEWEES: On the latter 16 part. I don't know what the size of that is, but we 17 heard at the Market Design Committee that retailers 18 were good at aggregating customers together and putting 19 together buyers and sellers. If the price is good -- 20 MR. LEA: I think, Mr. Power, you may 21 be asking Dr. Dewees things again which stray outside 22 the scope of his presentation. This is why he may be 23 trying to assist you and perhaps not as certain as he 24 might be about the answers. 25 MR. POWER: He gave me an answer that 26 he believed that the spot price pass-through would have 27 no impact on divesture or the Lakeview project in 28 particular, which is fundamental to price and the cost 353 DEWEES 1 to consumers at the end of the day. So I think these 2 questions are fairly reasonable. 3 MS LEA: I am not doubting that the 4 questions arise from that, sir. 5 Dr. Dewees, can you help him further 6 or not? 7 PROFESSOR DEWEES: I don't mind 8 continuing this discussion for another couple of 9 minutes. 10 MR. POWER: I think it's fair to say 11 one thing, that the market participants will dictate 12 what risk is reasonable on major projects like that. 13 Is that correct? 14 PROFESSOR DEWEES: Yes. In fact I 15 think that's the intent of the design of this market, 16 to allow private investors to decide what risks they 17 want to take and what they don't. 18 MR. POWER: Thank you. 19 On page 5 of your report -- and I am 20 moving rapidly to try and get you out of here in the 21 next eight minutes, if that is helpful -- you expressed 22 a concern. It said: 23 "It was noted that distributors 24 may be owned by municipalities, 25 so if the supplier fails there 26 are no shareholders to absorb 27 the loss, only customers and 28 taxpayers." 354 DEWEES 1 I guess that was a concern that was 2 raised at the MDC. 3 PROFESSOR DEWEES: That's correct. 4 MR. POWER: Is it fair to say that 5 Bill 35 has essentially ended that debate by enabling 6 municipalities and their subsidiaries to engage in 7 risk-based business? 8 PROFESSOR DEWEES: It enables them. 9 I don't think that that eliminates the concern that 10 arose at the MDC. 11 MR. POWER: But the legislature sort 12 of has the say at the end of the day, doesn't it? 13 PROFESSOR DEWEES: The legislature 14 says what is allowable. The MDC's job was to further 15 constrain what goes on. You missed it yesterday and I 16 will be brief, but if we didn't need detailed market 17 design, we wouldn't have had a market design committee. 18 We would have had just legislation and do whatever you 19 want in the legislation. 20 The whole purpose of the Market 21 Design Committee was to set a bunch of rules. We wrote 22 hundreds of pages of rules that would constrain or 23 intend us to do something less than all that was 24 allowed within the legislation or to say how it is to 25 be done. So part of what we did, I think 26 appropriately, was to set those constraints. 27 MR. POWER: I understand a comment 28 you made yesterday is that you expect prices to decline 355 DEWEES 1 with decontrol. 2 PROFESSOR DEWEES: That's my 3 expectation, but, as I indicated yesterday, it's not 4 based on deep analysis. It's based on putting together 5 what I have heard. 6 MR. POWER: Are you familiar with the 7 Ministry of Finance analysis, which shows that prices 8 will increase as decontrol proceeds? 9 PROFESSOR DEWEES: That was asked 10 yesterday and my answer then was I was familiar with it 11 from a distance. 12 MR. POWER: Thank you. Those are all 13 my questions. I appreciate it very much. 14 MS LEA: Thank you very much, 15 Mr. Power. 16 Any other questioner that I may have 17 missed? 18 No response. 19 MR. DADSON: Ms Lea, I might have had 20 some questions, but I think Mr. Power has covered all 21 of them. 22 MS LEA: Thank you. 23 Thank you, Mr. Power. 24 Dr. Dewees, thank you very much for 25 your attendance here and for your two days of 26 testimony. We really appreciate it and I am sure the 27 Board will benefit greatly from the questions asked and 28 the answers given. Thank you very much. 356 DEWEES 1 PROFESSOR DEWEES: You are welcome. 2 I hope it has been helpful. 3 MS LEA: Yes, thank you, it has. 4 We will take one hour for lunch, 5 please, as our presenter for the afternoon also has 6 time constraints. So we will reconvene at 1:25. 7 --- Upon recessing at 12:25 p.m. 8 --- Upon resuming at 1:25 p.m. 9 MS LEA: Good afternoon. I think 10 Mr. John Todd is our next presenter. 11 Mr. Todd, if you would like to take a 12 seat right at the front. 13 Mr. Janigan, I understand you are 14 counsel for Mr. Todd. 15 MR. JANIGAN: Yes. Thanks very much. 16 I don't know if I have made an 17 appearance in this proceeding as of yet. I am Michael 18 Janigan appearing on behalf of the Vulnerable Energy -- 19 MS LEA: Could you spell your name 20 for the reporter, please, sir? 21 MR. JANIGAN: Sure. It's 22 J-A-N-I-G-A-N. I am appearing on behalf of the 23 Vulnerable Energy Consumers Coalition. We have 24 tendered in evidence in this proceeding comments and an 25 alternate proposal of John Todd. 26 MS LEA: I don't think your 27 microphone is picking up very well, Mr. Janigan. 28 MR. JANIGAN: I think we have a 357 DEWEES 1 defective one here because I think the same thing 2 happened -- 3 MS LEA: Once you get closer, it 4 works. Lean in. 5 MR. JANIGAN: Technical advice. 6 MR. POWER: Can I interrupt briefly, 7 if I may? 8 MR. JANIGAN: Sure, go ahead. 9 MR. POWER: I have a brief public 10 service announcement, I guess -- I had hoped there 11 would be more people around -- just to let you know 12 that we have instructions to file a motion for the 13 Board to seek an amendment to the procedural order. We 14 will hopefully have our formal notice of motion in 15 terms of the Board's procedural directions here 16 available tomorrow and then I guess we will have to go 17 from there, but you could pass that on to whoever the 18 powers are. 19 MS LEA: Whoever they are, I will 20 attempt to pass it on. 21 MR. POWER: Okay, great. Thank you 22 very much. 23 MS LEA: But you are thinking that 24 you will be filing tomorrow? 25 MR. POWER: Hopefully, we will have 26 at least a notice, as normally required. I understand 27 there is a two-day notice period available tomorrow. 28 MR. JANIGAN: And the motion is to 358 DEWEES 1 the effect of...? 2 MR. POWER: To amend the Board's 3 procedural order. 4 MR. POCH: In regard to the nature of 5 the hearing structure or -- 6 MR. POWER: Yes, the hearing 7 structure and what we are going through. 8 MS LEA: I am just thinking about the 9 notice period. We sometimes shorten it as people -- 10 you know, you are kind of beginning to give notice now. 11 We may be able to accommodate a shorter notice period 12 and I think it is in all our interests to do so. 13 Perhaps we can talk, then, at the break about when we 14 might want to have this motion heard. I will attempt 15 to find out some possible dates. 16 Thanks very much. 17 MR. POWER: Thank you. My apologies. 18 MS LEA: Mr. Janigan? 19 MR. JANIGAN: The Vulnerable Energy 20 Consumers Coalition has offered comments and an 21 alternate proposal by John Todd. Mr. Todd, as a 22 witness and consultant, is well known to the Board. In 23 the interests of brevity, we propose that we commence 24 the questions immediately. Mr. Todd will not be making 25 a presentation on his comments unless it's elicited in 26 the course of the questions. 27 MS LEA: Thank you very much, 28 Mr. Janigan. 359 DEWEES 1 Mr. Todd, if you are ready, I think 2 Mr. Gibbons is the first questioner. 3 MR. GIBBONS: Thank you, Jennifer. 4 John, on page 3 of your testimony, 5 paragraph 3, you state: 6 "It follows that the SSS should 7 not be designed (explicitly or 8 implicitly) so as to be 9 unattractive to customers in 10 order to create a bias in favour 11 of retail alternatives." 12 Then on page 17 of your testimony you 13 suggest that an LDC could have up to or maybe more than 14 three standard supply service options. Is that 15 correct? 16 MR. TODD: That's right. 17 MR. GIBBONS: Yesterday when I asked 18 Don Dewees if there would be any problem of an MEU 19 offering the spot price pass-through as one option, 20 plus if the MEU wanted to also offer another option 21 which could include a mix of portfolio made up of spot, 22 medium and long-term contracts, I asked if he thought 23 that would create any harm and, according to Don, the 24 reasons why he didn't think that was the right way to 25 go was if the MEUs could offer multiple SSS options, 26 then it would be extremely difficult for other 27 companies to compete against them in the residential 28 and small commercial market. 360 TODD 1 My question to you is: In order for 2 Ontario to experience the benefits of electricity 3 competition, is it necessary for the MEUs to experience 4 significant loss of market share in the residential and 5 small commercial markets? 6 MR. TODD: The way my proposal is set 7 up, I have described the role of the LDC as kind of a 8 consignment seller,; so, in essence, marketers, other 9 people that want to participate in the marketplace. 10 One of the ways to take that accessed customer is by 11 offering the lowest bid to a particular MEU being on 12 their list of options for their customers and, in 13 essence, they gain the customer, though it was done 14 through the MEU. 15 There is some restriction. If the 16 mobility objective is to be achieved, then there may be 17 some restriction on what the MEU would offer and the 18 examples I have given were all to a maximum of a 19 one-year fixed price term or a one-year pricing 20 arrangement. Marketers, if they go the route of gas, 21 may be offering five-year pricing arrangements, which 22 may have escalators in them or could be at a fixed 23 price. 24 So I think there are enough 25 alternatives out there that the more attractive -- the 26 more acceptable you make the SSS option, the smaller 27 will be the share that goes to the rest of the market. 28 If your objective is to get people 361 TODD 1 away from the SSS and away from the LDC to the retail 2 market alternatives, then this will work against that 3 goal. I have tried to balance that off by saying that 4 the very same people who may be offering services in 5 the retail market would be able to, in effect, access 6 the customer through the LDC by coming up with an 7 attractive offer. 8 The difference is that by accessing 9 those customers through the LDC, their marketing costs 10 are much lower and, therefore, the price they can offer 11 will be much lower, plus they would probably go to 12 regions they might not otherwise go to. They might not 13 want to go Goderich and knock on doors or wherever, but 14 if you go to the local MEU and sort of through a 15 check-off ballot you can get those customers, you would 16 probably find it more attractive to go. Plus you are 17 certainly focusing on competitive price because the 18 only selling technique that would really work in this 19 model would be having the best price of those offered 20 to the MEU for a particular set of terms and 21 conditions. 22 So, in my view, there are lots of 23 opportunities. The marketers, the retail competitors 24 will be accessing the market in a different way. They 25 act as intermediaries as opposed to knocking on doors. 26 MR. JANIGAN: I wonder if you could 27 move your microphone a little closer to your mouth. I 28 am having trouble hearing back here. 362 TODD 1 MS LEA: Again it's a question, I 2 think, of leaning in. You are in the big board chairs 3 and they tend to be not very accommodating at this 4 time. 5 MR. TODD: What I like about this one 6 is I see right in front of me "priority override", so 7 be careful in your questions. 8 MR. GIBBONS: So, in short, it is 9 possible, in your view, for us to gain the benefits of 10 competition in the electricity market without the LDCs 11 losing significant market share in the residential and 12 small commercial markets? 13 MR. TODD: If it is truly the LDC 14 that is providing the supply, nobody else is involved, 15 as in the draft proposal, they are buying from the IMO, 16 then almost by definition they have to lose market 17 share for other players to have a role in the 18 marketplace. Under my model where they are a 19 consignment retailer, the SSS could have a significant 20 market share and you still have lots of other 21 participants. 22 So it depends on what the LDC is 23 offering. If the LDC is offering, in effect, 24 competitive alternatives, no, they don't have to lose 25 market share. But if they were offering something that 26 they themselves are assembling, then almost by 27 definition you have to lose significant market share, 28 unless you are arguing something like a contestability 363 TODD 1 view of the marketplace of competition as opposed to 2 competition through active alternatives. 3 MR. GIBBONS: Just to get a bit more 4 clarification on your proposal, the LDC is a 5 consignment retailer. That starts on page 16 of your 6 testimony. I believe you are suggesting three 7 different pricing options would be available to 8 customers. One would be the spot pass-through, another 9 one would be where there was kind of a mixed portfolio 10 of medium and long-term contracts. Under your 11 proposal, would the LDCs be making any profit margin on 12 this consignment business? 13 MR. TODD: First, let me emphasize 14 that what was set out here as options were just 15 examples. The examples would be arrangements that 16 would be available from an intermediary. So it would 17 not be a portfolio. They wouldn't be assembling 18 portfolios to create a product. 19 It could be an intermediary to effect 20 the assembling of a portfolio in order to create an 21 offering that they would bid on with the LDC, but there 22 would be a supplier of electricity under certain terms 23 and conditions and that would be flowed through to the 24 customer with a mark-up to reflect costs, such as are 25 proposed under the draft proposal with the pure spot 26 market pass-through, so marked up to cover customer 27 care costs. That would still be there. 28 Since it's a fixed price, in effect, 364 TODD 1 it potentially would be to profit if the LDC was able 2 to carry out that function at a lower cost per customer 3 or per kilowatt hour, but there is no explicit profit 4 margin. 5 MR. GIBBONS: And under your proposal 6 of the LDC as a consignment retailer, would that 7 increase the LDC's business risk? 8 MR. TODD: No, because it's a 9 straight pass-through of a product that is available to 10 them from an intermediary. The intermediary is the one 11 that is bearing the risk, not the LDC. 12 MR. GIBBONS: Okay. Turning to the 13 subject of regulatory cost, Don Dewees raised the 14 spectre that we have 200-plus municipal electric 15 utilities, and if they all came before the Board with 16 separate gas supply portfolios, other than as a spot 17 purchase pass-through, there could be very high 18 regulatory costs. 19 It is my belief that if utilities 20 were given the option of doing a spot price 21 pass-through, plus one or two other options, some kind 22 of portfolio of a combination of spot and long-term 23 contracts, there is a relatively few number of 24 utilities or groups of utilities that would come 25 forward with that option. 26 What springs to my mind is that 27 Toronto Hydro might do it, and the G6 group of 28 utilities might do it as a group, and the ENERConnect 365 TODD 1 might do it as a group. So there would be a relatively 2 small number of utilities or groups of utilities that 3 would pursue an option like you have sketched out. 4 Would you agree with me about that? 5 MR. TODD: Yes. To emphasize the 6 point, this morning we heard of one of the evaluation 7 default supply options in the retail technical panel. 8 If you turn to page 8 of that, there is an option 9 called a Regulated RFP. In this regard, that is the 10 same proposal. 11 They say there -- and I think it 12 describes mine well: 13 "The bidding process follows a 14 predetermined protocol 15 established by the OEB. The OEB 16 will not second-guess the 17 resulting fixed price as long as 18 the conditions of the 19 competitive bidding process are 20 met." (As read) 21 So one of the attractions of mine, as 22 far as I am concerned, is that there is no regulatory 23 overstep required. We are supposed to be going to a 24 competitive market. What we are doing is saying we 25 will let the competitive market set the price. 26 The point of this proposal is to say: 27 We don't want the spot price to be the only 28 competitively determined market price. We would like 366 TODD 1 to see a competitively determined one-year fixed market 2 price, or a month-by-month price or seasonal price. 3 We can structure whatever sort of 4 makes sense that they can be in, but which one of the 5 market price-setting competitors is coming in to create 6 a competitive price for that product. Once you have 7 competitors determining the price through a competitive 8 bidding process, regulatory oversight would be 9 inappropriate, exactly as described in that retail 10 technical panel document. 11 MR. GIBBONS: Are you suggesting that 12 there would be no regulatory oversight? Would the OEB 13 not establish some kinds of rules for the public 14 tendering process and the monitoring -- 15 MR. TODD: Yes. What it said here, 16 exactly the same as mine, is that the oversight is of 17 the process. There would be a standardized acceptable 18 process. As long as the process is followed, that 19 would be determinative of that being a prudent price. 20 There are clearly competition issues. 21 You obviously have to be wary of bid rigging, that 22 there is a limited number of suppliers that come in. 23 Are there enough players that they could actually get 24 more than one bid? Those kinds of issues. 25 But those would not be addressed on a 26 MEU-by-MEU basis. Those would be issues related to the 27 marketplace generally. I guess ultimately, if we 28 cannot get competitive bidding at the MEU level, do we 367 TODD 1 really think we can have competition in this 2 marketplace at all? 3 It is inconsistent with the whole 4 concept of moving to a competitive market to say you 5 are not going to have competitively determined prices 6 that don't need to be reviewed by a regulator. 7 MR. GIBBONS: Thank you. Those are 8 my questions. 9 MS LEA: Thank you, Mr. Gibbons. 10 Mr. Adams. 11 MR. ADAMS: I have a couple of 12 questions of clarification. 13 To start, I will flip through a 14 couple of pages with you. 15 If I could ask you to turn to page 6 16 of your remarks in the last paragraph, the first 17 sentence reads: 18 "...in most commodity markets 19 both producers and end-users 20 rely primarily on fixed-price 21 contracts reflecting 22 risk-aversion." 23 I just want to clarify: Does that 24 statement apply to a wholly unregulated energy 25 commodity? 26 I am thinking of gasoline, fuel oil, 27 fuel wood. 28 MR. TODD: First of all, I realize 368 TODD 1 that the draft I am working off was printed in my 2 office and is slightly different I guess than the one 3 that went around. 4 Michael, do you have a spare copy of 5 the official version? 6 MR. ADAMS: I am working from a faxed 7 version sent July 5th. 8 I will let you find it first. 9 --- Pause 10 MS LEA: Try again, Mr. Adams. 11 MR. TODD: So you were finding it on 12 page 6, in the last paragraph. 13 MR. ADAMS: In the last paragraph. 14 It's under a heading -- 15 MR. TODD: Does it say "The 16 development of a market" at the beginning of the 17 paragraph? 18 MR. ADAMS: The next paragraph, 19 starting with "Indeed". 20 MR. TODD: Okay. Even with this one 21 there is a page difference. 22 Just as a warning to everybody, there 23 seems to be a few different versions of this going 24 around. I think the words are all the same, but the 25 formatting is a little bit different. 26 MR. ADAMS: I will try to help wade 27 through paragraph numbers in my further references. 28 MR. TODD: Okay. 369 TODD 1 MR. ADAMS: I am just referring to a 2 sentence that reads: 3 "Indeed, in most commodity 4 markets both producers and 5 end-users rely primarily on 6 fixed-price contracts reflecting 7 risk-aversion." 8 Have you got that? 9 MR. TODD: Yes. 10 MR. ADAMS: My question is: Are you 11 referring to wholly unregulated energy commodities, and 12 if so, give me an example? 13 I have never bought gasoline on the 14 basis of a fixed-price contract. 15 MR. TODD: Okay. 16 Firstly, I was not referring to 17 energy specifically; I was referring to commodities. 18 If it is not in that paragraph, there is a comment 19 about impediments to the marketplace, market 20 imperfections. 21 I guess, actually, it is the next 22 sentence: 23 "The primary limitations to 24 reliance on fixed prices are 25 high transactions costs and 26 other market imperfections." 27 If you look at large producers and 28 large end-users, transaction costs are not a problem. 370 TODD 1 If you go to other markets -- and I guess I am thinking 2 a lot of manufacturing industries generally buying 3 copper as a commodity, methane. You go through 4 actively traded commodities, you know, pork bellies. 5 There is a certain reliance on the marketplace. 6 But Colonel Sanders writes contracts 7 for chickens. He doesn't buy chickens on the spot 8 market, though they would be available. If you have 9 production requirement, end-users -- I am using 10 end-users generally -- like a certain amount of price 11 certainty. 12 In the gasoline market there are 13 transactional problems. If you write a contract for a 14 fixed price, if that contract can't be enforced you 15 would go in and take a price unless that day you can 16 get a lower price somewhere else. So nobody is going 17 to write a fixed contract with a customer. 18 I fully admit that in markets for 19 individual customers there is an impediment to 20 fixed-price contracts. 21 MR. ADAMS: The focus of our 22 discussion here is primarily the small general service 23 firm customer; right? 24 We are talking about households 25 basically, I thought. I didn't think we were talking 26 about Colonel Sanders. 27 MR. TODD: This section is talking 28 about spot versus intermediate markets. So if you want 371 TODD 1 a conceptual discussion of the role of intermediate 2 markets as opposed to spot prices, it is the norm in 3 actively traded commodities that there is an 4 intermediate market. That is the basic point. 5 And end-users and producers, when 6 they have access to that, like to go for a fixed price. 7 With mortgages, if you take a small customer, mortgage 8 customers tend to go with fixed rather than variable 9 price, certainly a significant proportion of them, 10 where they have access to fixed prices. 11 In natural gas, the product that is 12 being sold today in Ontario are fixed-price contracts. 13 MR. ADAMS: We do have a profound 14 role of regulation in the natural gas market, wouldn't 15 you agree? 16 MR. TODD: In direct purchase, people 17 sell what they want to sell. 18 MR. ADAMS: I mean, customers are 19 getting billed from the gas company. The relationship 20 between the customer and the producer in the gas 21 industry is a little bit more abstract than it is in 22 the gasoline industry, when you go to the pump and as 23 you drive along, you are shopping. 24 MR. TODD: What I have said is that 25 you cannot have an enforceable contract to a fixed 26 price in gasoline, therefore, they are not available in 27 the marketplace. But that is a matter of what I am 28 suggesting. That is a matter of inability to enforce. 372 TODD 1 If there were enforceable contracts 2 from the producer's side, and somebody went out and was 3 offering gasoline at a fixed price for the year, I 4 would hypothesize, although we haven't got the 5 opportunity to test the markets in this regard, that a 6 lot of people would opt for that, assuming it's a 7 competitively determined and attractive price. 8 You know, if you accept that 9 customers have some risk aversion, they don't like 10 price uncertainty, the only question, then, is how much 11 of a premium are they prepared to pay in order to fix 12 the pricing? 13 MR. ADAMS: Well, you would think, in 14 the gasoline market, if there was much of a market for 15 price protection, somebody would figure out a way of 16 meeting that market. Some marketer would come up with 17 this. 18 Anyway, I think we are getting too 19 far -- 20 MR. TODD: You can't enforce the 21 project. 22 MR. ADAMS: Don Dewees was expressing 23 his view that he anticipated that, over the long haul, 24 a spot price pass-through will perform better for 25 customers in terms of generating lower long-term prices 26 than a fixed price alternative. 27 Are you comfortable with that 28 assertion? 373 TODD 1 MR. TODD: I agree with that 2 assertion, but it's two different products and what the 3 customer is willing to pay for a fixed product versus a 4 floating price -- 5 MR. ADAMS: I have no argument with 6 that, that it is two different products, but -- 7 MR. TODD: The general thesis is that 8 you will pay less in the long run if you take a spot 9 price because there is a premium for the risk 10 associated with and transaction costs of providing a 11 fixed price. That is generally applicable to markets. 12 MR. ADAMS: Okay. 13 Maybe I can turn you specifically 14 with regard to that statement. 15 If you go to the first paragraph 16 following the heading that reads, "The Monthly Spot 17 Market Price is Not an Efficient Price" -- 18 MR. TODD: Yes. The first paragraph. 19 Page 9, for other people, in mine. 20 MR. ADAMS: Right. I have page 9. 21 The last two sentences of that 22 paragraph read, as follows: 23 "The monthly spot market 24 pass-through price will be a 25 monthly price, but it will 26 understate the price that would 27 be necessary to provide a fixed 28 monthly price to the customer in 374 TODD 1 advance." 2 MR. TODD: That is reflecting my 3 comment that you just referred to of Don Dewees'. 4 MR. ADAMS: Okay. Then, you add: 5 "It will therefore provide a 6 deceptive price signal in the 7 market." 8 MR. TODD: Yes. 9 MR. ADAMS: Now, I would have thought 10 that the Vulnerable Energy Consumers' Coalition would 11 have been in support of the lowest price that could be 12 designed into this market? 13 MR. TODD: This is the lowest monthly 14 price. 15 There are other design 16 considerations. If you look at the other design 17 considerations, of primary concern for small customers 18 is not in the price volatility that will occur month to 19 month with the draft proposal, but also the fact that 20 they don't know the price to pay until after it is too 21 late to do anything about it. There are some serious 22 problems. There is a maybe, particularly in the early 23 years, in terms of price spikes which could be 24 sustained. At the end of the month you find out, "Gee, 25 I'm paying a lot. I wish I had turned my air 26 conditioning down this month." 27 MR. ADAMS: If the price spikes up, 28 wouldn't you expect to see that information in the 375 TODD 1 newspaper? 2 MR. TODD: The price spike is not the 3 price the customer sees. 4 MR. ADAMS: Well, the price the 5 customer sees is a price that is generated after the 6 fact, as you have described. If the customer sees the 7 price go up, knows their consumption, during that 8 period, has an ability to influence the consumption 9 during the period of the high price -- 10 MR. TODD: The customer doesn't see 11 that high price, specifically. What you have is you 12 can have a two-hour price spike. It's a huge 13 difference in terms of the impact on the monthly price 14 as compared to a two-day price spike. You would need a 15 very sophisticated customer to read in the paper that a 16 price spike is happening today and then from that 17 figure out what it's going to do to the monthly price. 18 I mean, sure, it can be done, but that's pretty 19 academic as far as I'm concerned. 20 MR. ADAMS: Did you have a look at 21 this -- there was a significant discussion previously 22 about this volatility of electricity price discussion 23 from the retail panel 9-4. Right? 24 MR. TODD: Yes. 25 MR. ADAMS: Would you share with me 26 an observation that although it looks like prices are 27 very volatile, through a smoothing mechanism the 28 differentials in the prices don't appear to be really 376 TODD 1 hugely large? 2 Let me rephrase my point. 3 MS LEA: Please let him answer the 4 question. 5 MR. ADAMS: I will rephrase my 6 question. 7 MS LEA: All right. 8 MR. ADAMS: I will withdraw my 9 question and rephrase it. 10 My question is: If you have a 11 one-hour price spike, do you think most customers will 12 notice or care? Again, talking about the customers we 13 are talking about here. We are talking about small, 14 general service firm customers. If you have a 15 one-hour, $1,000 megawatt price spike in a month where 16 the prices the rest of the time are 3.8 cents, do you 17 think customers care? 18 MR. TODD: Given the market power 19 mitigation agreement and the 3.8 cents over the year, a 20 sophisticated customer that realizes it is probably 21 going to say, "I don't care." This is what Don was 22 saying this morning, that no matter what you do, you 23 are not going to get much of a price response from your 24 average, small residential customer. 25 I am a little less pessimistic than 26 he is. I think that, you know, with appropriate market 27 signals, you are going to get some adaptations in the 28 marketplace and consumption behaviour over time. But 377 TODD 1 if the customer -- and it is going to be a 2 sophisticated customer -- actually realizes that they 3 are paying a smoothed spot market price, they are not 4 going to respond to that $1,000 price, specifically -- 5 although they may if they don't really understand the 6 mechanism -- they may respond to it if they think it is 7 going to have an impact on their average monthly cost. 8 But it is a pretty diffused price signal. It is not 9 what we are really trying to create. 10 My point is that they are paying a 11 monthly price so why not have them pay a market 12 determined monthly price rather than some 13 artificially-created market price? 14 MR. ADAMS: You are advocating a 15 position that the smoothed spot -- you know, an 16 averaging period reflecting the meter reading 17 interval -- is not a marketed-determined price? 18 MR. TODD: No. It is a monthly price 19 that is not determined by the market. It doesn't 20 reflect the price that would be paid for a fixed 21 monthly price. What that is is a smoothed spot price, 22 which is different from a fixed monthly price. It's a 23 different price because the risk is on the customer not 24 on the supplier, although there is a fixed price being 25 paid. 26 I mean, this smoothed monthly price, 27 I defy you to find a real market where that 28 spontaneously appears in the marketplace. A fixed 378 TODD 1 price is a standard creation or evolution out of 2 competitive markets. This is totally a governmental 3 regulatory artifact to create this smoothed price. 4 MR. ADAMS: It is an artifact of 5 government or it's an artifact of the metering 6 technology? Which is it? 7 MR. TODD: What I suggest is that if 8 you have a limitation on your metering technology, what 9 you do is you create market-determined contractual 10 terms that reflect that and you have a monthly price. 11 But for that, what you do is you go out to the market 12 and say, "Okay, what is it going to cost me for a fixed 13 price on a monthly basis", and what you are going to 14 pay for a fixed monthly price is different from the 15 monthly smoothed spot price pass-through. 16 MR. ADAMS: If we had interval meters 17 on everybody, would you have an objection to a spot 18 price pass-through? 19 MR. TODD: As an option, if everybody 20 had an interval meter and everybody -- 21 MR. ADAMS: That is what I said, sir. 22 MR. TODD: -- and everybody paid 23 the -- well, I wouldn't support a monthly smoothed 24 price. 25 But if customers chose to pay the 26 hourly spot price on the hourly consumption, as large 27 industrials do, and if that could apply to everybody, 28 fine. Then there would be -- 379 TODD 1 MR. ADAMS: Let me rephrase my 2 question. 3 MR. TODD: -- pricing on the same 4 basis as they are actually consuming it, and that would 5 be a market-determined price. 6 MR. ADAMS: Just so that the 7 transcript is clear here, if we had interval meters on 8 all customers, would you support a spot price 9 pass-through as SSS? 10 MR. TODD: Not the one being proposed 11 in the draft. 12 I would support, as an alternative, a 13 spot price pass-through where the customer pays the 14 hourly price for their consumption in that hour, the 15 hourly spot market price. 16 MR. ADAMS: Fine. 17 MR. TODD: As long as they are 18 charged the same thing as the market-determined price. 19 MR. ADAMS: Several times in your 20 paper, in two locations -- my page 3 and my page 17, 21 and I can take you to those paragraphs -- you advocate 22 restrictions on customer mobility. 23 In your bullet point 2 of section 2 24 of your paper and -- 25 MR. TODD: Yes, I advocate that there 26 may be an appropriate trade-off between objectives that 27 may involve less than perfect mobility. I said that in 28 at least one place, probably in two places. 380 TODD 1 MR. ADAMS: Would you agree that all 2 regulated contract supply options do necessitate 3 restrictions on mobility? 4 I will clean up my question. 5 Do you agree that all regulated 6 contract supply options will necessitate restrictions 7 on customer mobility? 8 MR. TODD: I don't think all would be 9 appropriate. I mean one could -- 10 MR. ADAMS: Give me an example of one 11 that wouldn't. 12 MR. TODD: It seems to me that the 13 after-the-fact pricing, with all of its other 14 imperfections, you would see why you would have to 15 restrict mobility in, for example, what is being 16 proposed in the draft proposal. 17 MR. ADAMS: The draft proposal was 18 not a contract supply proposal. 19 MR. TODD: You could have a contract 20 for supply under those terms. 21 What do you mean by a contract supply 22 proposal? 23 MR. ADAMS: Fixed price, fixed term. 24 MR. TODD: Okay. If you have a fixed 25 price, fixed term, yes, there have to be limitations on 26 mobility. You can have a contract for a floating price 27 too, of course. 28 MR. ADAMS: I have one final point. 381 TODD 1 A couple of times in your paper you refer to 2 deficiencies in the not fully competitive nature of the 3 wholesale market, sharing an observation that probably 4 many people have that the wholesale market will not be 5 fully competitive. 6 My question is: Do you agree that 7 the lack of full competition in the wholesale market is 8 a problem for all retail pricing proposals; not just 9 spot price pass-through, everything? 10 MR. TODD: It is a problem that one 11 would hope that certain proposals may address more 12 effectively than others, because the point of the 13 observation is that the problem suggests that you would 14 like to introduce a mechanism that will help reduce and 15 ultimately overcome that problem by being compatible 16 with the development of independent supply and, in my 17 submission, encouraging the development of 18 inter-marrying markets, which will help mitigate that 19 over time. 20 What you are trying to do is -- this 21 whole thing is designed to move the market over time, 22 so the issue is not -- I agree with you entirely. When 23 you start off with ineffective competition, no matter 24 what you do, you are going to have ineffective 25 competition. The relevant issue is where you go from 26 day one and how quickly you address that problem. 27 MR. ADAMS: Just to follow up on 28 this, do you take the view that the design of pricing 382 TODD 1 mechanisms for customers taking supply from their 2 municipal distribution utility ought to be guided by 3 somebody's view of how much and what kind of power 4 plant ought to be built in the marketplace? 5 MR. TODD: No. I think that what is 6 offered as an SSS should be guided by what customers 7 want, which is why I make my proposals. Let customers 8 choose and that will drive the market, and to the 9 extent that certain power supply options have a role to 10 fill economically in the marketplace, they will have an 11 opportunity to step in and offer something attractive 12 to customers. 13 MR. ADAMS: But just to clarify, my 14 question was: Should we be designing a pricing 15 mechanism for customers of LDCs that causes a 16 particular kind of plant to be built? 17 Your answer just now was no, and I 18 want to confirm on the record that your answer is still 19 no. 20 MR. TODD: My answer is, no, you 21 should not be designing it for that reason, but if that 22 is a consequence of a good design, so be it, and then 23 probably that is good. 24 MR. ADAMS: Thank you. 25 MS LEA: Thank you very much, 26 Mr. Adams. 27 Mr. Stephenson. 28 MR. STEPHENSON: Thank you. I want 383 TODD 1 to follow up on the mobility question that was raised 2 earlier. 3 Assuming that the Board determined 4 that, either as a matter of law or as a matter of 5 policy, full mobility for SSS customers, both on and 6 off SSS, was going to be the way it was done, what 7 impact would that have on your proposals? 8 MR. TODD: It means you would not be 9 able to have a fixed price arrangement for an extended 10 period of time. It would be a monthly fixed price at 11 most, from a practical perspective. 12 Even with some mobility, you could 13 probably still have a monthly price because mobility is 14 never going to be hourly mobility or even daily 15 mobility. But it would make it very difficult, if not 16 impossible, to have seasonal or annual fixed prices. 17 Even seasonal you might get away with. It is not how 18 much opportunity is there for a gaining of the system. 19 MR. STEPHENSON: I don't know if you 20 have had an opportunity to review the Seabron Adamson 21 proposal. Have you had a chance to review that at all? 22 MR. TODD: Fortunately, I had a 23 couple of hours on the plane last night and got through 24 it. 25 MR. STEPHENSON: Can you assist me? 26 In terms of your review of that and your understanding 27 of that, if the same issue that I have raised about 28 customer mobility were true, that is, that the Board 384 TODD 1 decided as a matter of law or policy that you would 2 have virtually complete customer mobility, do you have 3 any views as to the workability of that proposal? 4 MR. TODD: What I would consider to 5 be the essential elements of it in terms of, as I 6 understand it, the utility assembling a portfolio, that 7 price being looked at through yardsticking regulatory 8 mechanisms and so on, that in itself would not create 9 a -- I'm sorry. 10 Those essential elements of the 11 proposal would not be compromised by full mobility. 12 If, however, what was being assembled 13 was a product which is going to have a longer term 14 fixed price, then it would create a problem because 15 customers could leave the utility at selected times to 16 try to gain that system. 17 But, as I say, I don't see that term 18 of price necessarily as being a necessary condition of 19 that proposal. They should speak for themselves on 20 that. 21 MR. STEPHENSON: One of the issues 22 that Professor Dewees raised was the issue of LDCs 23 providing an equal billing service in conjunction with 24 the spot price pass-through SSS option as a de facto 25 mechanism for providing price stability over time. 26 Insofar as price stability is an 27 issue for customers, and obviously you view that it is, 28 do you have any views as to whether or not that kind of 385 TODD 1 mechanism available to LDCs in fact would provide 2 customers, particularly residential customers, with the 3 kind of comfort that they are looking for? 4 MR. TODD: First of all, equal 5 billing provides bill stability, not necessarily price 6 stability. You could have a significant amount of 7 price volatility and have bill stability through the 8 equal payment plan mechanism. Probably most customers 9 would be satisfied with that. My pure speculation is 10 that -- although I guess it is informed speculation -- 11 you will get a lot of feedback from customers that all 12 they want to know on their bill is, "What do I owe this 13 month?" 14 MR. STEPHENSON: Let me just stop you 15 there. 16 At the end of the day, actually, when 17 you talk about customers wanting price stability -- and 18 I think everybody says that -- really isn't what they 19 want bill stability, more or less? 20 MR. TODD: I think they are two 21 separate issues. Bill stability is very attractive to 22 customers because it gives them the opportunity to 23 budget. You know, particularly for VECC-type clients, 24 a monthly payment that is pretty stable is very 25 attractive because their income is fixed per month and 26 most other expenses, rent and food and everything are 27 pretty much fixed per month. They can budget with that 28 and that is extremely attractive. If you have rate 386 TODD 1 stability and bill stability, you end up with -- at 2 least over the year you paid the same amount. 3 You know, there is another, a very 4 different element, which is this rate instability, 5 which can create uncertainty over the year. Certainly 6 rate instability can accentuate the month-to-month 7 instability for people who are not on the equal billing 8 plan. 9 The equal billing plan probably takes 10 a lot of the problem away. 11 For example, even with the Market 12 Power Mitigation Agreement so that the price over the 13 year with the rebate at the end is going to be 3.8 14 cents, there is little risk in terms of volatility of 15 the price averaged over the year, but the price could 16 actually fluctuate quite a bit from month to month. 17 Obviously, an equal billing plan would eliminate that. 18 To the customer, the thing that 19 matters is that it's 3.8 cents average over the year. 20 Without an equal billing plan, you could see 21 substantial fluctuations which would accentuate both -- 22 there would be price instability, but it could 23 accentuate bill instability because there would be a 24 tendency that in the high consumption months price is 25 higher and therefore you would accentuate the monthly 26 variations in the bill. 27 MR. STEPHENSON: I guess what I come 28 back to is,assuming that the draft code was the sole 387 TODD 1 SSS option but equal billing was something that LDCs 2 provided to customers on an optional basis, insofar as 3 customers were concerned about that kind of volatility, 4 doesn't that come pretty close to being almost a 5 complete answer to that concern? They could either opt 6 into the equal billing if it's a concern or, if it's 7 not a concern, they don't need to. 8 MR. TODD: Only in the short run. In 9 practice, with the Market Power Mitigation Agreement, 10 the price is essentially known -- the average price 11 over the year is known and if you have equal billing, 12 there would be some variance in your consumption. So 13 what it is going to cost you per year will vary only 14 with your aggregate consumption over the year, but 15 that's a limited time. 16 Once you don't have the constraint on 17 the price for the year, then there is also simply the 18 risk that you don't know what you are going to be 19 paying on average per kilowatt hour over the year. It 20 not only will vary per month, but also the average 21 price can vary. 22 So there would be some uncertainty 23 going into the year 2004 that if you are following the 24 spot market, you don't know what you are going to be 25 paying average per kilowatt hour for the year 2004, but 26 if you have the option of going to a fixed price 27 contract, you would know exactly what you are paying 28 and that is the reduction of risk. 388 TODD 1 MR. STEPHENSON: Let me turn to a 2 different issue. 3 One of the advantages you see of your 4 proposal is that it, in a sense, fosters the 5 development of the intermediate market. 6 Professor Dewees, basically, as I 7 understood him, indicated that he assumed that the 8 25 per cent of the marketplace -- that is, large, 9 sophisticated users -- would be ready, willing and able 10 to access that market if they considered it to be 11 attractive to do so and, moreover, there was another 12 segment of the market which is large and sophisticated 13 as well. He viewed that segment, however big it is -- 14 some percentage in excess of 25 per cent -- as plenty 15 large enough to provide the incentive for a 16 well-developed intermediate marketplace even if all of 17 the residential or small users stayed on SSS. 18 Do you have any views about those 19 thoughts? 20 MR. TODD: You can view the 21 intermediate market as encompassing a couple of 22 different things. If what you are talking about are 23 market mechanisms like NYMEX or something equivalent to 24 that being developed in Ontario where you have futures 25 prices and options, if you talk about financial 26 instruments to be used to mitigate risk, it's not 27 enough to have a number of large players in, shall we 28 say, the direct purchase market because one way they 389 TODD 1 can do it is simply doing contracts with somebody for 2 supply. It depends on what time frame we are looking 3 at here. 4 When you have to come through the 5 IMO, you have a different mechanism, but it could be 6 one-on-one contracts, shall we say, instead of making 7 use of these market instruments. So what you need is 8 active trading and that would -- so you need something 9 more than just a number of players out there making 10 their own pricing arrangements with somebody who is 11 supplying power. 12 Probably the reality is they would go 13 into intermediaries and you would get the development 14 of the intermediary market. I guess all I am saying is 15 that, all other things being equal, if you have 100 per 16 cent of the market functioning through intermediaries, 17 you probably have a more quickly developing and more 18 efficient intermediary market than if you have 25 or 40 19 per cent active in that market. 20 MR. STEPHENSON: Let's assume, just 21 for the purpose of this discussion, that it's about a 22 third of the market, something like -- I probably have 23 the number wrong, but say 10 terawatt hours a year. 24 That is a pretty big market, isn't it? 25 The real issue is: Isn't this a 26 threshold question about whether you get enough of a 27 market working in conjunction with some form of 28 intermediary to make it go or not? Doesn't the 390 TODD 1 marginal benefit of making the market bigger decline 2 and then the real question is: Do you get to the 3 threshold or not? I guess the question then is: Are 4 you at the threshold at 10 terawatts or whatever a 5 third of the Ontario market is? 6 MR. TODD: My understanding of the 7 electricity features in the NYMEX market is that there 8 is fairly efficient trading one and two months out, but 9 there is not enough trading volume to have efficient 10 meaningful pricing if you are looking out several 11 months or the year, year and a half that they offer in 12 terms of features prices. Similarly, with the options, 13 they only put 12 months but, again, longer term there 14 is not enough trading. 15 On NYMEX there are a couple of fairly 16 large areas in terms of the instruments that are being 17 priced on that market. What is the threshold? Yes, I 18 guess in a sense you are saying it's a threshold 19 question. I have not looked at that specific question, 20 but I would not presume that a third of the Ontario 21 market would give you a dynamic intermediary market 22 where you have a meaningful one-year forward price, for 23 example. 24 MR. STEPHENSON: Those are my 25 questions. Thank you very much. 26 MS LEA: Thank you, Mr. Stephenson. 27 Mr. Power, you asked to be stood 28 down. 391 TODD 1 Mr. Rodger, please. 2 Do you need water, John? 3 MR. TODD: I have my own jug here. 4 I apologize for my throat, people. I 5 have been abusing my body recently, not in any fun 6 ways, but just through too much travel. 7 MR. RODGER: Thank you, Ms Lea. 8 Just a couple of questions, Mr. Todd. 9 I am appearing as counsel for Toronto Hydro. 10 I want to turn again briefly to your 11 concept of a consignment retailer on page 16, as it 12 appears at least in my version of your paper. I 13 understand that your approach here is that LDCs who 14 would be providing the standard supply service wouldn't 15 actually be procuring power themselves, but suppliers 16 would be selected through a tendering process. Is that 17 correct? 18 MR. TODD: That's right. 19 MR. RODGER: Because it's a tendering 20 process, your view is that no OEB oversight would be 21 necessary in terms of the prices that are selected 22 under that process? 23 MR. TODD: That's right. 24 MR. RODGER: Could you explain to me 25 what is the basis on which you are advancing this 26 tendering concept in the context of the Ontario market, 27 as we know it today, and what it is proposed to be some 28 time in the year 2000 when this new market opens up? 392 TODD 1 MR. TODD: I am not sure what you 2 mean "on what basis". 3 MR. RODGER: I guess it's a simple 4 question of: How is it expected to work here? You can 5 use the example of my client, Toronto Hydro, 6 approximately 25 per cent of the provincial load. 7 Assume that a significant majority of their customers 8 will stay with the standard supply service. How would 9 the tendering process that you envision work for 10 Toronto Hydro? 11 MR. TODD: For simplicity of 12 discussion, let's assume that there is going to be one 13 option offered to customers and let's say that option 14 is a one-year fixed price arrangement. Toronto Hydro 15 would put out to tender that its system supply 16 customers would be supplied on the one-year price and 17 anybody who is prepared to guarantee that price or to 18 guarantee a price, which could be 3.8 cents because 19 they know they can get that from the IMO, it could be 20 3.9 cents, it could be 3.7 cents, depending on what 21 instruments they plan to use, they would come in and 22 bid on the right to provide that supply. 23 The lowest bidder would then enter 24 into a contract with Toronto Hydro. The Hydro 25 customers would be billed that amount and that 26 intermediary would be responsible for making sure that 27 the effective cost of power to Hydro is that price, 28 which you would then pass through to customers. 393 TODD 1 MR. STEPHENSON: But in the case of 2 Ontario, where we are not going to have a real 3 competitive market because one player, Genco, has 4 market dominance, some 90 per cent of the market, you 5 can use the analogy of Toronto Hydro has this big 6 wooden bucket. That is the standard supply customers. 7 Isn't Toronto Hydro essentially going to the same well 8 and the issue is can you really have a tendering 9 process with such market power? It is all going to 10 come from the same spot. 11 MR. TODD: Toronto Hydro will 12 probably have the biggest challenge, that and OHSC, 13 because you have the largest -- you are talking pretty 14 large blocks. To the extent that there is, I believe, 15 15 per cent of the market outside of OPGI, it may be 16 hard to get enough of that power. Plus, given the 17 dominance, is there really going to be any price other 18 than 3.8 cents averaged over the year? 19 What you may end up with is a squeeze 20 on the risk premium for fixed price because what is 21 going to be happening -- even that, I guess, was in the 22 first couple of years with the Market Mitigation 23 Agreement, the rebates and so on. I agree it's a bit 24 of a tricky issue, but it doesn't change the fact that 25 you are going to have competitive bidding. 26 You are going to end up with price 27 that reflects the market value of power. You are going 28 to have an incentive for individual players in the 394 TODD 1 marketplace to find other sources of power, to expand 2 on that 15 per cent. Whether it's a matter of 3 developing new sources of supply, new generation 4 facilities, whether it's importing power, whatever they 5 do, it is going to be a strong incentive for players to 6 find a way to beat that going price. 7 What we have is something which 8 inevitably next year is not going to be competitive in 9 the market. I agree with you entirely. What we are 10 basically talking about, in my view, is structuring 11 system supply so that it moves us ahead towards a more 12 competitive market that is sufficiently priced as 13 quickly as possible. All I am saying is this 14 instrument would seem to provide a mechanism for 15 getting the development of the market to effective 16 competition more quickly than the draft proposal. 17 MR. STEPHENSON: I suppose my concern 18 is where we are here on December 31st of the year 2000 19 and the market is opening today. What would be the 20 rationale for Genco to even respond to a Toronto Hydro 21 tender when they know that Toronto Hydro cannot get its 22 load met elsewhere in the market because there just 23 isn't the generation capacity on December 31st, 2000? 24 MR. TODD: But there is a market for 25 power with the IMO. Anybody can get power. It's just 26 that they may be getting OPGI power. I thought the 27 point you were making was that there is only going to 28 be one price out there, 3.8 cents averaged over the 395 TODD 1 year. The only question is the volatility in that 2 price through the year. 3 MR. STEPHENSON: Price and supplier. 4 I guess to bring it back to your statement, would it be 5 fair to say that in this context of market dominance by 6 Genco the tendering process may not be appropriate for 7 at least the first few years of the market until we in 8 fact have a real market and that is multiple 9 generators? 10 MR. TODD: My concern is that in the 11 absence of that proposal, there won't be any players in 12 the marketplace. Under the draft proposal, there won't 13 be any, with two consequences: one, is there is not 14 going to be much of an incentive to change that 15 situation of market power; and, second, as it does 16 change and as there is room for competitors -- say it 17 takes the three years, say it takes the five years -- 18 the development of competitive alternatives, the 19 appearance of competitors on the scene and some name 20 recognition and so on, is it going to be pushed for 21 those three to five years and are we going to be 22 starting to develop a competitive market that is 23 visible to the marketplace three to five years out, 24 maybe 10 years out? 25 What this proposal would do is allow 26 other players to come into the marketplace and appear 27 on the ballot as a supplier to Toronto Hydro and begin 28 getting some name recognition. People competing 396 TODD 1 through a regulated process might include everybody 2 from a Toronto Hydro affiliate or Toronto Hydro working 3 with some others, to international trading companies, 4 to the marketers who are active on the gas side. They 5 will be all in there trying to establish themselves in 6 the marketplace. 7 I take your concern. Your problems 8 seem very, very real. What we want to do is give a leg 9 up to getting out of that dilemma as quickly as 10 possible. 11 MR. STEPHENSON: Just one final 12 point, Mr. Todd. 13 Mr. Dewees, on a number of occasions, 14 recalled one of the goals stated in the White Paper 15 with respect to retail competition, that the goal of 16 the White Paper was to ensure that any customer is not 17 forced to switch suppliers if they don't want to. Is 18 that your understanding as well as one of the goals? 19 MR. TODD: Yes. 20 MR. STEPHENSON: Mr. Dewees also 21 stated that if it turns out that, despite all the good 22 intentions of the Market Design Committee, the smoothed 23 spot pass-through price just isn't attractive to 24 customers, price volatility or other issues, Mr. Dewees 25 was saying customers then can just switch and that's 26 really the answer to the question. Would you support 27 that approach? Does that solve the problem? 28 MR. TODD: No, I don't accept that 397 TODD 1 approach. First of all, given the limitations in 2 supply, if the only place they can go -- and we are 3 talking small volume -- is out to the market, and given 4 that the source of supply to the alternatives is 5 exactly the same 3.8 cents over the year, the 6 alternatives are going to be 3.8 cents plus marketing 7 costs, plus whatever. 8 My suggestion is let's keep those 9 marketing costs low so that when they go to 10 alternatives the premium they are going to pay is going 11 to be as low as possible. 12 If we design the SSS so that it is 13 unattractive, we are pushing people out into the 14 competitive market. But the competitive market does 15 not have that capacity to provide the competitively 16 priced, attractive -- if they can provide a part that 17 is priced attractively in terms of a fixed price over 18 the year, but it is not attractively priced in the 19 competitive sense, then I think you have a problem. 20 Plus there is the problem that if 21 customers actually understand that they are going to be 22 paying 3.8 cents per kilowatt-hour over the year, 23 period, are they going to pay 3.5 to somebody else? 24 They may tolerate the instability. 25 They may rely on the equal billing plans and look at 26 other things. Either everybody will stay on the 27 default option, the SSS, because they have an 28 understanding that over the years it is going to work 398 TODD 1 out fine for them, or you could end up with a price 2 hike in the summertime where people see a very high 3 price in one month and they become very interested in 4 the alternatives. 5 Perhaps people don't realize that 6 over the year it is going to come back to 3.8 cents 7 thanks to rebate or something. 8 MR. RODGER: And finally, if the 9 scenario that I described does happen, that customers 10 in Ontario, for whatever reason, are very unhappy with 11 the standard supply prices proposed by the MDC, and in 12 your words are pushed out into the market, would you 13 agree with me that that is tantamount to forcing 14 consumers to switch suppliers, and that would be 15 contrary to the White Paper's goals? 16 MR. TODD: There is perhaps a 17 semantic in the legal question there. Yes, I would say 18 to all intents and purposes, if you provide them with 19 something that is unattractive, you are pushing them 20 out. Technically, you may not have given them an 21 option. 22 There are mitigating circumstances, 23 like peak plant and so on and the Market Power 24 Mitigation Agreement, where it will be arguable that 25 they are not being pushed out. If they actually 26 understand what is going on and they see a very high 27 price in July, they should realize that that doesn't 28 mean anything so they shouldn't get driven away from 399 TODD 1 SSS because they pay a high price in one month. 2 But in the practical, real world, 3 human terms, you probably are pushing them out -- which 4 is violating the spirit. 5 MR. RODGER: Hopefully, we are still 6 talking about customers in human terms. 7 Thank you very much. 8 Thank you, Ms Lea. 9 MS LEA: Thank you, Mr. Rodger. 10 Mr. Mark. 11 MR. MARK: Thank you. 12 Sir, who constitutes the Vulnerable 13 Energy Consumers Coalition? 14 MR. TODD: It is the Ontario 15 Coalition Against Poverty and the Ontario Coalition of 16 Senior Citizens Organization. 17 MR. MARK: Do you have a position or 18 function with the Energy Marketers Association? 19 MR. TODD: Yes, I do. 20 MR. MARK: What is that position? 21 MR. TODD: I am Chairman of the Board 22 of the Ontario Energy Marketers Association. 23 MR. MARK: And that is the position 24 you hold today? 25 MR. TODD: Yes. 26 MR. MARK: How long have you held 27 that position? 28 MR. TODD: As Chairman of the Board, 400 TODD 1 I think it was March. 2 MR. MARK: Did you have an 3 association with that organization before you were 4 Chairman of the Board? 5 MR. JANIGAN: Excuse me, Mr. Mark. 6 If this questioning has some relevance to the 7 testimony, I am prepared to let it proceed. 8 MR. MARK: If you want to take the 9 position that your man's background qualifications and 10 experience are irrelevant, I will accept that, and we 11 can present his paper to the Board on that basis. 12 Otherwise, why don't you let me get on with it. 13 MR. JANIGAN: Mr. Mark, you are 14 entitled to ask any question you want concerning his 15 presentation, but this is not a cross-examination on 16 his credentials. 17 MR. MARK: I am asking for 18 clarification on his qualifications. 19 If you want to withdraw any 20 suggestion that the man did anything other than fall 21 off a turnip truck yesterday, then I am happy to do 22 that. But if you are putting him forward as somebody 23 who knows from whence he speaks, will you do me the 24 courtesy of letting me ask him about his background. 25 MR. JANIGAN: I am not going to have 26 a cross-examination on his expert credentials. If you 27 want to ask him on what basis he gives this evidence, 28 or what is his experience is to give this evidence, 401 TODD 1 then ask him. But I am not going to have a 2 cross-examination of his credentials. 3 MR. MARK: Well, I don't accept that 4 limitation. 5 How long has your association with 6 the Energy Marketers been, sir? 7 MR. JANIGAN: I am instructing him 8 not to answer that question. 9 MS LEA: Gentlemen, one moment, 10 please. 11 Mr. Mark, do I understand, then, that 12 you are suggesting that John Todd is not qualified to 13 give his evidence or that he has a conflict of 14 interest? 15 MR. MARK: He hasn't given us a 16 resume. I don't know whether the man is qualified or 17 not. 18 MS LEA: Mr. Janigan, could you 19 assist us by taking Mr. Todd briefly through his 20 qualifications and then allowing Mr. Mark to question 21 him on those? 22 MR. JANIGAN: I would also undertake 23 to file a resume, which ordinarily would have been 24 filed in the context of evidence to accompany his 25 comments, however I don't happen to have a copy of it 26 before me. 27 I wonder, Mr. Todd, could you outline 28 in general terms your experience with respect to the 402 TODD 1 matters on which you have commented in this proceeding? 2 MR. MARK: Could we take time out for 3 a moment here? 4 He has had his opportunity. He has 5 presented his paper. He has had his opportunity to 6 give his presentation today. My friend passed on that 7 opportunity. I now have the opportunity to ask 8 questions in clarification. 9 My questioning is not an opportunity 10 to correct the record that somebody else has left 11 deficient. 12 MS LEA: As I said earlier, this 13 technical conference is intended to allow parties to 14 clarify the evidence presented in the presentations by 15 presenters. 16 I hear Mr. Mark, that he wants to 17 understand the qualifications of the witness, although 18 I wasn't completely clear that his questions tended 19 only to that issue. 20 Can we suggest a resolution here that 21 will satisfy parties? If not, then I will pass to 22 another questioner and we will deal with this matter on 23 the break between ourselves, not on the record, and 24 then we will deal with it on the record when we get a 25 resolution. 26 MR. JANIGAN: As I have indicated, if 27 Mr. Mark wishes to inform himself concerning the 28 credentials of Mr. Todd, I am happy to undertake to 403 TODD 1 file a resume of his credentials for this proceeding. 2 If there are any questions that arise from that 3 resume, Mr. Todd will be in attendance again on Monday 4 and will certainly be prepared to entertain any 5 questions associated with that resume at that time. 6 MR. MARK: Let's move on, because I 7 take it, Mr. Janigan, that whether or not you provide 8 me with the resume, you are not going to let me ask 9 this witness any further questions about his 10 affiliation with the Energy Marketers Association. 11 Is that a fair conclusion for me to 12 draw? 13 MR. JANIGAN: Well, I would like to 14 hear the question and how it relates to his evidence 15 before I give you an answer that I am going to object 16 to the question. 17 MR. MARK: Well, I can't do much 18 better than ask the question I have tried to ask 19 several times: How long have you been associated with 20 the Energy Marketers Association? 21 MS LEA: I think it was March of last 22 year, Mr. Todd? 23 MR. TODD: I have been involved with 24 the Ontario Energy Marketers Association since it was 25 created, and it was a name change from the prior Direct 26 Purchase Industry Committee, which was created after 27 the direct purchase hearing in 1994, 1995, something 28 like that -- anyway a number of years ago. 404 TODD 1 I have participated in that 2 committee, and subsequently OEMA, since its inception, 3 because of my involvement in the direct purchase 4 hearing on behalf of Ontario Coalition Against Poverty. 5 The follow-up was that issues were transferred over to 6 that organization, and since that time I have been very 7 much involved in it. 8 That committee has chaired the 9 downstream committee. I have sat on the board, and now 10 I am Chair. 11 MR. MARK: I want to assure you, sir, 12 that I meant no disrespect by the question. I was 13 simply -- 14 MR. TODD: I didn't think you did. 15 MR. MARK: -- inquiring with respect 16 to counsel's presumption that it was intended to deal 17 with your credibility. I want to assure you that it 18 wasn't. 19 The concept of the distribution 20 company, the LDC, performing this function on a 21 consignment basis, is the consignment aspect of it 22 critical to the success of your proposal in terms of 23 its objectives of fulfilling the needs of creating an 24 efficient market? 25 MR. TODD: It's not fundamental to 26 that objective. It is fundamental to Objective No. 5 27 out of the Board's paper, which says a distributor 28 should not bear any volume or price risk in providing 405 TODD 1 standard supply service. 2 MR. MARK: Yes. I just want to 3 clarify that in fact the consignment feature of your 4 model is intended to respond to Objective No. 5, which 5 is one of the objectives set out in the Board's staff 6 paper, correct? 7 MR. TODD: Yes. 8 MR. MARK: As I understand it, sir, 9 you have not set out to develop your own list of 10 objectives or critique whether or not the Board staff's 11 list of objections is complete or appropriate? 12 MR. TODD: The words in my paper are 13 that, in my view, these objectives are an appropriate 14 design criteria for the FSS, although I add three. 15 MR. MARK: Yes. But as I understand 16 your paper, you have taken as a starting position 17 working with the assumptions set out in the Board 18 technical staff paper, and you have come to the 19 conclusion that they are appropriate. But you didn't 20 start from an empty basket, if you will. You were 21 responding to a proposal that was on the table. 22 MR. TODD: Yes, that's correct. And 23 that is taken as the constraints going back, not just 24 the Board paper obviously, but the MDC and the White 25 Paper, and so on. There is a history of policy issues, 26 and I accepted that as one of the policy issues or 27 constraints in developing my proposal. 28 MR. MARK: Are you suggesting to me 406 TODD 1 that the issue of no risk on the distributor is 2 something that comes from the White Paper? 3 MR. TODD: No. I am just saying that 4 when you look back over the debate over the entire 5 time, it doesn't appear for the first time in the staff 6 paper. They were adopting it as this seems to be the 7 direction where things are going and to be an important 8 criterion. 9 MR. MARK: Fair enough. Would you 10 have any objection, sir, to the retail affiliate of an 11 LDC being the intermediary? 12 MR. TODD: No, provided that it is 13 all done in accordance with the process and that there 14 is no favouritism being shown. 15 MR. MARK: Would you expect that the 16 intermediaries, the non-retail affiliate 17 intermediaries, as I think you envisage in your 18 proposal, are going to be active in other aspects of 19 the market? 20 MR. TODD: I expect so. Different 21 ones would be different -- what I should say is that 22 some of them are likely to be and some may not. 23 MR. MARK: And some are likely to be 24 involved in other retail marketing efforts. 25 MR. TODD: I would anticipate a 26 variety of types of organizations with different 27 strategies in the marketplace would participate. 28 MR. MARK: Have you in your proposal 407 TODD 1 dealt at all with the concern raised by the Market 2 Design Committee and others about that resulting in 3 these intermediaries getting preferential access to 4 customers or customer information? 5 MR. TODD: I haven't dealt with that 6 explicitly. I think that is an area of the draft 7 proposal that I was comfortable with. 8 MR. MARK: Assume with me for the 9 moment that this Board accepts, as one of the primary 10 objectives of any scheme, that performing the default 11 supply function should not result in transfer of 12 customers or customer information to competitive 13 entities. How do we incorporate that objective in your 14 proposal? 15 MR. TODD: The LDC is acting sort of 16 as an intermediary in that relationship. In essence, 17 the market intermediary is bidding on a block of power, 18 and the customer contact relationship is between the 19 LDC and the customer. So there would not be any 20 customer-specific information going back to the 21 marketer. 22 MR. MARK: You envisage this simply 23 as a procurement function. You don't see any 24 contractual or information relationship between the 25 intermediary and the consumer. 26 MR. TODD: The pass-through 27 procurement in the sense of going in and passing it 28 through to the customer, not for the cumulative sense 408 TODD 1 of going out and assembling a product. 2 Procurement has often been used in 3 the sense of -- 4 MR. MARK: Who has the obligation to 5 pay the intermediary? In other words, who is assuming 6 the credit risk here? 7 MR. TODD: The credit risk in terms 8 of bad debts from customers? 9 MR. MARK: Let's start with that one. 10 MR. TODD: The LDC. 11 MR. MARK: So the LDC is responsible 12 as principal to the intermediary? 13 MR. TODD: I have not specified 14 whether they would -- there are probably legal 15 questions that you may be interested in that don't 16 interest me. 17 In terms of would the LDC legally 18 have to take possession of the electricity, I am not 19 sure what is required under the Act. But as we have 20 seen on the natural gas side, for example, natural gas 21 utilities have had to take possession of the natural 22 gas to resell to customers in the past in order to 23 complete the transaction. That is part of the 24 arrangement. 25 I guess my presumption was that -- to 26 be honest, I didn't think about who has title to the 27 electricity in each step of the chain. Logically, it 28 probably would be the utility, but I didn't think about 409 TODD 1 that question. 2 MR. MARK: So, as you envision it, 3 then, the utility is going to be taking possession of 4 the electricity, is going to have the obligation to pay 5 the intermediary for the electricity, is going to have 6 the credit risk associated with the consumers? 7 MR. TODD: Yes, and whether they take 8 possession or not, they have the credit risk. 9 I mean the two models on the gas side 10 are buy/sell, where the utility takes possession, and 11 the ABC service, agency-between-collection service, 12 where title, at least in the future, would transfer to 13 the customer. It's a transportation service, but the 14 utility still is responsible for collecting the monies 15 and they absorb the debt risk, and that is part of 16 their mark-up. 17 MR. MARK: So, if I may, what is the 18 consignment aspect of the arrangement you are 19 proposing? 20 How is it a consignment transaction, 21 as opposed to a purchase and sale transaction between 22 the LDC and the intermediary and then the LDC and the 23 customer? 24 MR. TODD: Because the LDC does not 25 take possession in advance. It's a ballot. I'm 26 suggesting there may be alternatives. So they are not 27 committing to a quantity or number of customers on 28 anything specific. They are going up and getting 410 TODD 1 customers to buy. 2 So if I walk into a consignment 3 store, I walk in and I buy that and when I agree to buy 4 a particular product, then the transaction is done, and 5 the person in the store only gets involved at that 6 point. If I give them a cheque and that cheque 7 bounces, then they may be at risk. But you don't go 8 out and buy products and then try to sell it. They 9 don't procure for themselves and then try to sell it. 10 What they do is they are in the middle, facilitating an 11 arrangement between a supplier and an end-use customer. 12 MR. MARK: I understand that in a 13 consignment arrangement the retailer has no obligation 14 to pay the seller of the goods, if you will, unless and 15 until that item is sold to a retail customer. That is 16 the feature of consignment, correct? 17 MR. TODD: Yes. 18 MR. MARK: But am I not correct, sir, 19 that in your model the LDC is in fact assuming the 20 obligation to pay for the supply? 21 MR. TODD: Only after the customer 22 has chosen it. They have the billing responsibility 23 and collection responsibility. 24 MR. MARK: Yes. But, in fact, that 25 obligation arises once the electricity is delivered to 26 the customer, regardless of whether the customer gives 27 the retailer the cheque? 28 MR. TODD: Yes. 411 TODD 1 MR. MARK: There is some discussion 2 in your paper, and you have had some discussion with 3 some of the other counsel, about the issue of 4 mobility -- and I may be a bit confused at this point. 5 As I understood your presentation, 6 sir, your concern was that the proposal for standard 7 supply service, as contained in the Board's staff 8 paper, in fact was going to be pushing people off 9 standard supply to other arrangements. Is that your 10 concern? 11 MR. TODD: It could be, and it 12 depends on what volatility customers actually reserve 13 in the marketplace once the market is opened up. Its 14 customers would be pushed by extremes if there is a 15 high month-to-month volatility, which there may well 16 be, and then they would be pretty well pushed into 17 fixed price arrangements which they only get elsewhere. 18 MR. MARK: I understand it may or may 19 not happen. But the concern you have on the mobility 20 issue is that, if anything, the proposed structure in 21 the Board's staff paper will, if you will, unnaturally 22 or artificially create migration off SSS? 23 MR. TODD: Yes, and then naturally, 24 because SSS is defined in a very narrow way and it may 25 be something that is unattractive to customers. 26 MR. MARK: You had some discussion 27 with one of the previous counsel about circumstances 28 when customers might or might not notice price spikes. 412 TODD 1 Recently, in Alberta, there were 2 three days when the price was over $560.00 for eight 3 hours a day. Is that a price spike that you would 4 expect customers to notice? 5 MR. TODD: I mean that type of price 6 spike hits the newspapers, and the way customers will 7 take that information depends on their understanding of 8 the marketplace. I mean, if they think of themselves 9 as paying that price, they may well respond to it, 10 although, if they reported that yesterday it went, you 11 know, to a high price but today it has come back down 12 again, by the time they hear about it it may be too 13 late for them to shut down their air conditioning. 14 Others that are a little bit more 15 sophisticated and recognize they are paying a smoothed 16 monthly price may say, "Well, you know, whether I 17 consume in this high-priced period or not, I am going 18 to pay the same price per kilowatt hour for the month 19 and my cost per kilowatt hour spread over the month is 20 actually going to be quite low, maybe five cents or 21 something. I'm not going to be paying a price that 22 directly relates to this one day's spot price. I pay 23 the monthly average for consumption during that price 24 spike." 25 So if a customer understands it 26 correctly, he would probably have a very limited, if 27 any, response. 28 That, in some social sense, 413 TODD 1 achieves -- like voting, you know, "If I do it and 2 everybody else does it, we will keep that price down 3 and we will do better on the monthly average." 4 MR. MARK: Or more likely you will 5 ask a neighbour if he is switching. If he is not, you 6 may just decide, "I might as well stay on board." 7 MR. TODD: Or canvass the 8 neighbourhood and sign up and everybody will do it 9 together, or we are not going to do it at all. 10 MR. MARK: Safety in numbers may be 11 an issue here. 12 MR. TODD: Well, it's just a matter 13 of: Is there going to be a big enough impact to affect 14 the price? 15 MR. MARK: All right. Thank you, 16 sir. Those are my question. 17 MS LEA: Thank you, Mr. Mark. 18 Mr. Brett. 19 MR. BRETT: Yes. Thank you. 20 I just have a few questions, 21 Mr. Todd, brief questions. 22 I recall, in your paper, that you 23 make some comment about there being some policy 24 justification in certain circumstances for some 25 restriction on customer mobility. 26 Could you just elaborate a bit on 27 that, like how you would see that working and what the 28 importance of that might be? 414 TODD 1 MR. TODD: Well, the tradeoff is that 2 you cannot offer a longer than one-month fixed price, 3 like a quarterly, six-month, one-year fixed price, and 4 allow customers full mobility rights, especially if he 5 has a right to move back and forth. You could end up 6 with a customer taking the system supply fixed price 7 option and, you know, take that when the market price, 8 the current market price, is high and go to some other 9 source of supply when the current market price is low 10 and then they are not, I should say, fulfilling their 11 part of the bargain, as -- I think it was with 12 Mr. Adams, earlier -- if you gave a long-term fixed 13 price, you have to commit to that term. 14 So I was saying that there is a 15 tradeoff between the ability to offer a fixed price and 16 mobility. 17 MR. BRETT: I apologize, Mr. Todd, I 18 was a little late coming back, if I ask you a question 19 that you have answered, just tell me and I will pass on 20 to expedite things here. 21 Is my recollection correct that in 22 the gas industry there are some notice provisions and 23 things of that nature to, for want of a better word, 24 inhibit switching back and forth on a monthly basis on 25 kind of an infinite basis? 26 MR. TODD: On the gas side, there is 27 sort of practical constraints of how long it takes from 28 when you sign up to when you would be transferred and, 415 TODD 1 also, in all cases I'm aware of, when you go to a 2 marketer you are committing for a period of time and 3 therefore you can't switch back. 4 In the return system, there is 5 different treatment by the two companies, but there's 6 also -- for one union there have been some restrictions 7 on -- 8 MR. BRETT: That was my 9 understanding. 10 Just a couple of brief questions. I 11 wanted to address the points that were -- some of the 12 points that were laid in Dr. Dewees' paper, when he 13 read out -- I guess what he really did was reiterate 14 the Market Design Committee's problems with a fixed 15 price option. 16 There is one reason he gave, though, 17 that wasn't in the summary in the paper. He seemed to 18 be saying yesterday that one of the reasons why he 19 didn't like the notion of the distributor offering a 20 fixed price option was that this would somehow leave 21 the retailer with nothing to do; the competitive 22 retailer would have his thunder stolen, as it were. 23 Could you comment on that 24 consideration? 25 MR. TODD: I believe that the concept 26 of the fixed priced that he was looking at was the LDC 27 procuring petroleum power, doing its own risk 28 management and actually providing the product, if you 416 TODD 1 want, to the customer. 2 That is different than what I am 3 proposing. 4 MR. BRETT: Okay. 5 The second item in here I'm really 6 referring to, at the bottom of page 4, page 5 of his 7 proposal -- you probably don't have to turn this up. I 8 can summarize, briefly, each of them. We heard a lot 9 of talk about the regulatory burden of the fixed price 10 proposal at anything other than a spot market proposal. 11 Could you just briefly sketch what 12 involvement you see the regulator having in your 13 proposal if -- 14 MR. TODD: I think I did answer that 15 question in that if it's competitively determined they 16 would only be overseeing -- they would be approving the 17 process -- 18 MR. BRETT: Overseeing an RFP 19 process? 20 MR. TODD: An RFP process. 21 Therefore, there would be no regulatory burden. 22 MR. BRETT: Okay. The next point 23 that was raised was -- and I know you covered this in 24 your paper, toward the end, but a point was raised, by 25 the MDC and by Dr. Dewees that in the, for want of a 26 better word, hinterland areas of the province people 27 might not want to offer a fixed price offering and 28 therefore customers would be disadvantaged if that was 417 TODD 1 the only product they had access to. 2 MR. TODD: I see no reason why 3 anybody would not want to offer a fixed price option in 4 the hinterlands. They may not want to offer anything 5 in the hinterlands, particularly if they have to market 6 on a customer-by-customer basis. 7 I think the day is a long time off 8 before we see energy marketers knocking on farm doors, 9 as they do on city doors, walking from farm to farm 10 or -- you know, they will just be going to small towns 11 a long way away. I mean they are going to focus on 12 major markets, as one would expect. There tends to be 13 movement first to major markets and then going out to 14 smaller and smaller markets. 15 So, you know, I certainly have a 16 concern that, under the draft proposal of Board staff, 17 alternatives will not be readily available, although 18 that may depend. If it is a matter of advertising in 19 The Globe & Mail, that goes everywhere and people phone 20 in, probably they will market -- you know, they will 21 provide a product available anywhere in Ontario. If 22 they have to sell by marketing techniques similar to 23 those in natural gas, there will be a tendency not to 24 go to hinterlands, as you referred to it. 25 The attraction in my proposal, one of 26 the attractions, in my view, is that if what you are 27 doing is going to a smaller utility -- and it may well 28 be going through a block of smaller utilities, which 418 TODD 1 together are significant -- you have the opportunity to 2 pick up a large chunk of customers through making one 3 bid. You are probably much more likely to have a large 4 number of players entering that market when they have a 5 product that is attractive to sell, that the customers 6 will be interested in. 7 MR. BRETT: There was another point 8 made that said, in effect, there was a concern on the 9 part of the MDC and Dr. Dewees that anything other than 10 a spot market price could result in -- that there might 11 be a tendency for suppliers to default and leave the 12 customer or the distributor with a -- that is to say, 13 default when spot market prices were above whatever the 14 fixed price, or contract price to be more precise, was 15 agreed to. 16 Is that, in your view, anything more 17 than a normal commercial phenomenon that might occur 18 rarely but certainly would result in the supplier that 19 did so default never being asked to tender again? Has 20 that happened, to your knowledge, in the gas business, 21 to any extent? 22 MR. TODD: Well, on the gas side 23 there's significant experience with that issue. There 24 would be a contractual relationship between the MEU and 25 the supplier. The supplier, of course, would have to 26 be licensed, so they would have to fulfil their 27 contractual obligations. If they failed to deliver at 28 any point in time, clearly the MEU would be drawing 419 TODD 1 power, which would in effect presumably come from a 2 backstopping arrangement at the IMO. There would be a 3 cost to that to be passed through to the company that 4 had an obligation that delivering didn't. 5 The only place where there is both a 6 failure to supply and an inability to collect for 7 backstopping supply is if a supplier has gone out of 8 business -- and that can happen. It certainly is a 9 possibility, although it's not one that has been a 10 problem on the gas side. But in that extreme 11 eventuality, it would probably mean that the customer 12 no longer gets a fixed price because their fixed price 13 supplier is no longer there to provide it. 14 MR. BRETT: Thanks very much. Those 15 are all of my questions. 16 MS LEA: Thank you very much, 17 Mr. Brett. 18 Mr. Poch. 19 MR. POCH: Thank you. 20 Mr. Todd, I just have a few 21 questions. 22 You were here this morning, I 23 understand, when I was discussing with Dr. Dewees his 24 suggested green tweak of bundling in a minimum green 25 power requirement to SSS? 26 MR. TODD: Yes. 27 MR. POCH: Could you comment on the 28 compatibility of that suggestion with your proposals? 420 TODD 1 MR. TODD: If the Board were to want 2 to build that in, I mean, it is totally compatible. It 3 could be built in in a number of ways, either requiring 4 that to be a part of the portfolio that the utility 5 provides -- having it as one of the options. People 6 can choose it as opposed to non-green options, "If you 7 want it: Yes or No." Whatever their objective is, you 8 set rules around it, because there are rules around the 9 bidding process and what is being offered. 10 MR. POCH: So you could simply make 11 it a minimum requirement to be met in the bidding 12 process. 13 MR. TODD: Presuming the Board could 14 do that, yes. 15 MR. POCH: All right. 16 If they did that, then, the benefits 17 of the reduced regulatory burden that you and I think 18 Putnam, Hayes pointed out and discussed earlier of an 19 RFP-style process would be obtained: minimum 20 regulatory burden and still harnessing the 21 competitiveness? 22 MR. TODD: Yes, but it still has to 23 show that they have adhered to the RFP process. If 24 that were to be part of it you wouldn't have to, on a 25 case-by-case basis, review it. You wouldn't have to 26 review it on a case-by-case basis. 27 MR. POCH: Right. Okay. 28 Does my suggestion raise any alarms 421 TODD 1 or significant concerns for you? 2 MR. TODD: The issue of green power 3 is being raised by the province. It is part of the 4 context in which the Board is deciding. If the Board 5 decides that is the way to go, I have no concerns, that 6 is just part of it. 7 MR. POCH: As an economist, I take it 8 that you would agree that in some fashion it is 9 appropriate that the restructuring take into account 10 the problem of externalities? 11 MR. TODD: Yes, which could be 12 addressed in totally different ways. They would feed 13 through here, but in some ways that is not inconsistent 14 with the policies that are established and economic 15 principles. 16 MR. POCH: Right. 17 Finally, could you just confirm for 18 me, is it within your knowledge -- my understanding is, 19 in several U.S. jurisdictions a mandatory green or 20 renewables component is part of the restructuring 21 regime. I think the most recent one of note is in that 22 bastion of the free market, Texas. 23 MR. TODD: Is that a question? 24 MR. POCH: Yes. Is that your 25 understanding, that this is a feature that is showing 26 up in a number of places, other jurisdictions that are 27 restructuring toward competition? 28 MR. TODD: I have not looked at that 422 TODD 1 issue closely, but I understand that is correct. 2 MR. POCH: Thank you. Those are my 3 questions. 4 MS LEA: Thank you, Mr. Poch. 5 Mr. Warren, I understand that you 6 have more than 15 minutes of questions? 7 MR. WARREN: I do. 8 MS LEA: Thank you. Then let's take 9 a 15-minute break at this time, please. We will return 10 at 3:17 p.m. Thank you. 11 --- Upon recessing at 3:02 p.m. 12 --- Upon resuming at 3:17 p.m. 13 MS LEA: Good afternoon. There are a 14 couple of comments on scheduling. As you have been 15 noticing, we are falling a bit behind, about half a day 16 behind, on our original schedule. As I understand the 17 order of things for tomorrow, the plan is that Mr. Mark 18 and Mr. Jennings will begin the day at 9:00 a.m. -- 19 9:00 a.m., not 9:30. I will check with them, but I 20 think that is all right with them. 21 Then the first witness panel will be 22 called by Mr. Power, that consisting of Fiona Woolf, 23 Barry Conway, et cetera, followed by the MEA panel, and 24 then the Seabron Adamson panel will follow that. 25 I would be surprised if we get 26 anything else done tomorrow. That is what the thought 27 is for tomorrow's activities. 28 If anyone has a problem with that, 423 TODD 1 let us know. Otherwise, let's continue. I think that 2 Mr. Janigan is here. 3 Mr. Warren, please. 4 MR. WARREN: Thank you. 5 Mr. Todd, I have questions in two 6 broad categories. The first are questions that are 7 designed to try to understand the premise on which your 8 proposal is based, and then a few questions on the 9 proposal itself. 10 Can I ask you first, if you look at 11 pages 3 and 4 of your paper, you make an observation 12 there, beginning at the bottom of page 3, that: 13 "The distributor can avoid all 14 volume and price risks either by 15 purchasing power exclusively on 16 the spot market, which shifts 17 all of the risk down to its 18 customers, or by purchasing from 19 a qualified intermediary under 20 terms that shift all of the 21 volume and price risk to the 22 intermediary." 23 Do you see that observation? 24 MR. TODD: Yes, I do. 25 MR. WARREN: Let's take the second 26 half of that proposition, which is that the volume and 27 price risk is shifted to the intermediary. May I 28 conclude that one of the virtues of your proposal, from 424 TODD 1 your point of view, is precisely that, that it shifts 2 the volume and price risk to the intermediary away from 3 the LDC? 4 MR. TODD: Away from the customer, 5 yes. 6 MR. WARREN: Away from the customer. 7 In addition to that, is not one of the virtues of your 8 proposal that it shifts the volume and price risk away 9 from the LDC as well? 10 MR. TODD: Yes. Taking it out of the 11 context of the sentence, yes, it would do that as well. 12 MR. WARREN: Now, is it reasonable 13 for me to assume that there will be a premium to be 14 paid by somebody -- and we will get to whom in a 15 minute -- there will be a premium to be paid for the 16 assumption by the intermediary of that volume and price 17 risk? 18 MR. TODD: Yes. Whoever bears that, 19 there will be a premium determined by market forces for 20 that shift. 21 MR. WARREN: And we can presume, all 22 things being equal, that that premium will be absorbed 23 by the customers. Fair enough? 24 MR. TODD: Yes. 25 MR. WARREN: Now, assuming for a 26 moment -- and we will get to this question later, but 27 assuming for a moment that full mobility to and from 28 the standard service is permitted under your 425 TODD 1 scheme -- and I appreciate that you have talked in some 2 circumstances about limiting that, but just assume for 3 the moment that there is full mobility -- do you have 4 any way of determining the level of the premiums that 5 would be required in order to shift all of the risk to 6 the intermediary? 7 MR. TODD: No. We don't have free 8 electricity markets and electricity markets have their 9 own risk characteristics. They have comparatively very 10 high volatility high risk. 11 But the key determinant of the risk 12 premium, if you want, that would be required is the 13 ability to mitigate that risk. Can it be diversified 14 by a supplier? And the extent to which they can 15 actually have a portfolio of customers and suppliers 16 that diversifies the risk, or, for example, finding 17 suppliers who also want a fixed price. It creates the 18 opportunity to mitigate the risk and keep the premium 19 down, and we will not know what the premium would be in 20 Ontario until we see market forces driving that out. 21 MR. WARREN: Let's follow through on 22 this question of allocation of risk. 23 What do you do in a circumstance 24 where the intermediary -- let's assume that you have in 25 your scenario an intermediary who walks away from the 26 contract. Just to follow up a little bit on Mr. Mark's 27 analysis, the contracts that we are talking about are 28 contracts between the intermediary and the LDC to 426 TODD 1 supply power. Is that correct? 2 MR. TODD: That's right. 3 MR. WARREN: If the intermediary 4 walks away from that, then the LDC has to assume the 5 burden of that obligation. Is that fair? 6 MR. TODD: The rules could be written 7 in different ways. When you say that an intermediary 8 walks away, presumably they are exiting the Ontario 9 marketplace. Is that what you are saying? 10 MR. WARREN: Let's suppose they fail. 11 Suppose an intermediary in your scenario bids, wins a 12 contract to supply power, and the intermediary fails 13 and there is no power which is available from the 14 intermediary. We have two circumstances in this 15 scenario. One is that the LDC in those circumstances 16 retains the statutory obligation to provide standard 17 service. Is that fair? 18 MR. TODD: Yes. 19 MR. WARREN: So the LDC has to go out 20 and find power somewhere else. 21 MR. TODD: Yes. 22 MR. WARREN: In those circumstances, 23 I take it that there is still -- notwithstanding the 24 benefit of shifting the risk, as you put it, from the 25 LDC to the intermediary, there remains the risk of 26 contract failure which the LDC always bears. Is that 27 fair? 28 MR. TODD: No. First of all, there 427 TODD 1 would be contractual terms that if the supplier failed 2 to supply, one would expect, as is the case in gas and 3 so on, that if there is a failure to supply, then the 4 LDC makes up, if you want, the volumes that have not 5 been delivered and charges the supplier, in effect, for 6 back-stopping service. 7 So costs would only be visited upon 8 the LDC if the supplier were to exit the market. 9 MR. WARREN: Given that the contract 10 is between the intermediary and the LDC, can we not 11 agree that the LDC continues to bear a risk, even under 12 your scenario? You haven't shifted the risk wholly 13 away from the LDC. Is that not fair? 14 MR. TODD: Yes, but that risk, of 15 course, can be mitigated through contractual terms, 16 providing a requirement to have their own back-stopping 17 in place. 18 MR. WARREN: And who would set those 19 contractual terms? The Board? 20 MR. TODD: It would be a 21 Board-approved process for the bidding, and the Board 22 could have requirements that as part of this mechanism 23 the terms and conditions for bidding are that there are 24 requirements which minimize those risks. Clearly there 25 is always going to be some residual risk, and that is 26 why -- I guess I was reading a lot into it, but that 27 was the intent of the phrase "a qualified 28 intermediary". In other words, I am not going to be 428 TODD 1 able to walk in and win a bid by having the lowest 2 price. 3 MR. WARREN: You wouldn't just fall 4 off a turnip truck and go and bid, would you? 5 MR. TODD: Well, I might want to do 6 that if I fell of a turnip truck, but I probably 7 wouldn't be a qualified bidder. 8 MR. WARREN: Would you in your 9 scenario -- with the LDC in your circumstance, in order 10 to mitigate its risk of contractual failure, might it 11 engage in forms of risk management? 12 MR. TODD: The primary risk 13 management would be contractual terms. Perhaps there 14 could be on top of that some risk that is beyond the 15 ability of contractual terms to provide protection. It 16 may be appropriate to ensure against that. 17 There are two ways for the LDC to 18 mitigate or manage that risk. One would be that part 19 of the terms and conditions with the customer in 20 setting up these arrangements is, if your supplier 21 failed absolutely, to have the risk float back to the 22 customer, that although they had a price of 3.75 cents 23 for the year, you would have to make up -- if the 24 supplier failed halfway through the year, he is gone. 25 We couldn't back-stop. We couldn't recover any costs 26 from the supplier. It would cost us 4 cents for the 27 balance of the year, so you would have to pay 4 cents 28 for the power in the balance of the year because your 429 TODD 1 supplier failed. 2 That would be one way to protect the 3 utility. Obviously that doesn't protect the customer 4 and it doesn't guarantee the customer's contractual 5 rights, having chosen that option. 6 The other way would be to have, in 7 effect, an insurance mechanism, either Board-sponsored 8 or they go out and do it themselves. That would be 9 incorporated into the mark-up. That concept has been 10 dealt with quite a bit on the gas side, through the 11 Market Design Task Force and so on, not to any final 12 resolution. 13 MR. WARREN: Can we agree that any 14 risk mitigation measure which an LDC might engage in to 15 protect itself has costs which would ultimately be 16 borne by the consumer? Is that fair? 17 MR. TODD: Yes. 18 MR. WARREN: Could I ask you to turn 19 to page 4 of your paper? You refer to one of the 20 principles that formed the Board staff's and the MDC's 21 analysis of these problems, and that is that rules 22 related to standard supply service should ensure that 23 all retail market participants operate on a level 24 playing field. 25 There are various suggestions which 26 have been made in this hearing and in some of the 27 submissions about the importance of the LDCs being able 28 to compete, for example, by the retail side getting 430 TODD 1 access to customer information. 2 Is it a fair summary, on my part, of 3 your proposal that what you want to do is to set up a 4 system which, in effect, has as one of its principal 5 objectives the creation of a competitive market? 6 MR. TODD: One of the things I 7 advocate in consideration of design is the creation of 8 effectively competitive markets, yes. 9 MR. WARREN: But one of the things 10 you want to do, as I understand it, is you want to 11 advance the interests -- correct me if I am wrong in 12 this -- of the marketers, the existing marketers, by 13 allowing them at little marketing cost or relatively 14 low marketing cost to be able to, as I think you put it 15 to someone before, make a name for themselves in the 16 market and, indeed, if they can bid effectively, to 17 supply service to customers. That is one of the 18 objectives of your proposal. Is that not fair? 19 MR. TODD: No, that's not fair. That 20 may be an observation of a consequence of it. I am 21 trying to achieve very different things, which is let 22 the customers choose the different products they want 23 and to make specific products, not just the spot price 24 but other products available to them at the lowest 25 possible cost. So it's customer-driven, not 26 marketer-driven. 27 MR. WARREN: I will return to that 28 later when I talk about the details of the operation of 431 TODD 1 your proposal itself. 2 On page 5, you address the question 3 of the importance of facilitating the development of a 4 spot and intermediate market. You indicate in the 5 middle of numbered paragraph 9 that: 6 "...an active spot market will 7 not drive the development of an 8 active intermediate market if a 9 large share of the market is 10 precluded from utilizing the 11 intermediate market." 12 Can you tell me what it is that 13 constitutes a large share? 14 MR. TODD: What I was referring to 15 there is the SSS market. We don't know now what the 16 market share of SSS will be of the total electricity 17 consumed in Ontario, but it would be, I think in 18 earlier discussions, potentially two-thirds of the 19 market. If there is significant erosion, it might be 20 half and going down. I would say the large share I am 21 referring to there is the SSS market, assuming that a 22 significant number of customers opt for that. 23 MR. WARREN: Do you disagree with 24 Professor Dewees' observation that an intermediate 25 market is likely to develop even under a spot price 26 pass-through system? 27 MR. TODD: I am not as confident as 28 he is. I think I did comment on that earlier, 432 TODD 1 suggesting that it depends on the vehicles used by 2 those who opt out of standard system supply and it also 3 depends on how significant standard system supply is. 4 The intermediate market requires active daily trading 5 to really be efficient for people to go in and out of 6 the market on a daily basis and that requires a high 7 level of activity. 8 Given transmission constraints and 9 other things, we are probably ultimately going to be 10 needing to rely on an Ontario market, a pricing point 11 in Ontario that is going to require significant 12 trading. I do not believe that there is any that will 13 necessarily get an active intermediate market with 14 efficient pricing out of the draft proposal for SSS. 15 MR. WARREN: I'm sorry. I didn't 16 quite catch the balance of your answer. You do not 17 believe -- 18 MR. TODD: The draft proposal -- 19 MS LEA: I am sorry, I couldn't hear 20 either of you that time. 21 MR. WARREN: Is your answer that you 22 do not believe that an intermediate market will 23 necessarily develop under the proposal in the Board 24 staff paper? Is that what you said? 25 MR. TODD: That's what I am saying, 26 yes. 27 MR. WARREN: On page 6 of your paper, 28 at the end of the third full paragraph, you indicate 433 TODD 1 that: 2 "On the other hand, they may 3 prefer the certainty of a fixed 4 price contract, even if there is 5 a market premium for price 6 certainty. Given risk aversion, 7 the latter option is likely to 8 be the one most relied upon." 9 Can you tell me, first of all, 10 Mr. Todd, what analysis you have undertaken about price 11 volatility in this province? 12 MR. TODD: In the last couple of 13 months I did a study on price volatility in this 14 province and that's part of the basis. Or at least my 15 office did. I participated in it. 16 MR. WARREN: It wasn't attached to 17 your paper. Is it somewhere else? 18 MR. TODD: It was not done in 19 connection with this submission. 20 MR. WARREN: The conclusion of that 21 analysis which we haven't seen is what, there is 22 certain to be significant price volatility, maybe? 23 What is it? 24 MR. TODD: The basic observation is 25 that if you -- in the absence of mitigating factors 26 such as the Market Power Mitigation Agreement, if we 27 look at electricity markets throughout the world, 28 electricity markets, certainly spot price markets, are 434 TODD 1 highly volatile compared to other commodities. That is 2 a direct result of the inability to store electricity. 3 Secondly, it looked at mitigating 4 factors and concludes that the Market Power Mitigation 5 Agreement, while providing some stability in terms of 6 the average annual price, doesn't look like it would be 7 particularly effective in controlling month-to-month 8 fluctuations and daily and hourly fluctuations in the 9 price and could well lead to some very high volatility, 10 even if it results in a rebate at the end of the year. 11 Therefore -- 12 MR. WARREN: I am sorry, even if it 13 results in what at the end of the year? 14 MR. TODD: In a rebate at the end of 15 the year. 16 MS LEA: A rebate at the end of the 17 year? 18 MR. WARREN: A rebate at the end of 19 the year. 20 MR. TODD: The way it's designed is 21 if the average price is over 3.8 cents, then OPGI does 22 a refund of the price overall with respect to the 23 marketplace. 24 MR. WARREN: Does your analysis draw 25 any conclusion about the impact on bills of this 26 volatility? 27 MR. TODD: Yes, it looks at the bill 28 impact of what would happen and essentially takes spot 435 TODD 1 market prices, using the methodology of the draft 2 proposal, and examines using experiences in other 3 markets where there are spot prices already established 4 and examines what the impact on bills would be. It 5 shows that they are highly volatile. That of course 6 does not consider equal billing options, which would 7 eliminate that volatility. 8 MR. WARREN: I take it that the fear 9 of volatility is one of the drivers for your proposal. 10 Is that fair? 11 MR. TODD: I wouldn't say it's the 12 fear of volatility. It's saying that one of the things 13 that customers are prepared to pay for is price 14 stability and, given the volatility of the market, 15 there is a market value to providing a fixed price. 16 All I am saying is that I would like to see customers 17 being given that option through a mechanism that has 18 some protections in it that avoids high marketing costs 19 and is subject to effective competition through a 20 bidding process that is Energy Board sponsored. 21 MR. WARREN: What I am getting to, 22 Mr. Todd, though -- there is no magic in it -- is that 23 Mr. Power, in some questions he posed to Professor 24 Dewees, asked some questions about what evidence there 25 was. This is a gloss on Mr. Power's question, but the 26 burden of it was what evidence there was about price 27 volatility. 28 What I take it you are telling me is 436 TODD 1 that you have done a study which tells us, assesses, 2 what price volatility is likely to be. My question is: 3 Why wouldn't you give it to us so that we can take a 4 look at it and make an assessment of what the price 5 volatility is likely to be? Is there a 6 confidentiality -- 7 MR. TODD: It was not done for VECC. 8 If you would like the study, I can check with the 9 client and they may be prepared to put it on the record 10 of this proceeding. 11 MR. WARREN: So there is a 12 confidentiality issue, is that it, that it wasn't -- 13 MR. TODD: It wasn't done for VECC 14 for this submission. 15 MR. WARREN: But you are relying on 16 the conclusions of that study, in part, for the 17 recommendation which you are making in your paper. Is 18 that fair? 19 MR. TODD: When I prepare a proposal 20 such as this, I draw on my past experience over 21 10 years in the gas and electricity markets and all the 22 work that I have done and all the perceptions I have 23 gained. Certainly that study is something I consider, 24 that and some experience and some learning, is relevant 25 to my judgments, I guess. 26 MR. WARREN: Is there any other 27 information other than the study about price volatility 28 that you are relying on when you express your concerns 437 TODD 1 about price volatility? Is there some other 2 information other than what Mr. Power referred to in 3 his questions this morning, which is the experience 4 that we had in the midwest United States last year, and 5 the MDC's analysis of it? Is there other information 6 that we should have on price volatility? 7 MR. TODD: There are things that I 8 rely on. Just off the top, I had reviewed studies done 9 by London Economics prior to the change in the 10 legislation a year or so ago. 11 MS LEA: I'm sorry, I couldn't 12 understand those words, sir. Do you wish to continue? 13 MR. TODD: I am okay if you can sort 14 it out. It probably sounds worse than it is. I am 15 supposed to lean. We need a narrower table up here. I 16 guess the Board members don't usually spend a lot of 17 time talking. They listen. 18 Papers or information that I rely on 19 in these kinds of judgments include the London 20 Economics and other studies and information related to 21 the problems in the Alberta market and what led to 22 proposals for change in that legislation, my experience 23 with the natural gas market in Ontario, everything from 24 years of hearings that have dealt with these matters 25 and involvement with the Ontario Energy Marketers 26 Association. All of that is relevant, as well as just 27 simple economics that is almost an article of faith for 28 economists. 438 TODD 1 People are risk-averse and they are 2 prepared to pay for reduction of risk. We see that 3 very clearly. There is a mass of evidence of that in 4 financial markets, just indicators of risk aversion, 5 and that flows through, logically, to this market. We 6 don't have experience in Ontario yet with the spot 7 price, but it does seem to be the case pretty 8 universally. 9 MR. POWER: If I could be helpful, I 10 understand that the study you are asking for -- and I 11 may be wrong, Mr. Todd, but is that the study that was 12 prepared for INNERConnect? 13 MR. TODD: Yes, it was. 14 MR. POWER: I have just been advised 15 that INNERConnect would be pleased to waive the 16 confidentiality on that study, if that is of assistance 17 to you. 18 MR. WARREN: Terrific. I am glad to 19 have co-operation between you and Mr. Power on any 20 issue I can get, Mr. Todd. Can you make the paper 21 available to us -- 22 MR. TODD: Not this minute, but it 23 could be provided tomorrow morning. 24 MR. WARREN: -- as an addendum to 25 your paper? It would be helpful, if you could. 26 MR. TODD: In whatever form they are 27 prepared to provide it, whether it's an addendum or 28 just them -- I mean they are a party to this 439 TODD 1 proceeding. They may want to provide it themselves, I 2 don't know. 3 MR. POWER: Obviously, we don't have 4 copies here, but we can work something out. 5 MR. WARREN: Can I turn you to 6 page 11 of your presentation? You refer at the bottom 7 just before the heading "The Prices Consumers Pay Will 8 Not Be Equitable" to a -- 9 MS LEA: I am sorry, Mr. Warren, we 10 can't hear you. 11 MR. WARREN: You refer on page 11 at 12 the bottom of the second full paragraph to "efficient 13 consumption". Can you tell me, Mr. Todd, am I to take 14 it from this that, in your view, having a fixed price 15 regime will lead to more efficient consumption? 16 MR. TODD: I am using that term as an 17 economist. "Efficient consumption" means that people 18 are consuming in a manner that is consistent with 19 efficient pricing. So, for example, if you have a 20 price that is a spot market price, they should be 21 reacting to the hourly spot market price and seeing the 22 $1,000 price was $1,000 and cutting back consumption. 23 The economic theory on the point of 24 efficiency is that the consumer will only use the 25 amount of electricity that is worth the price or more. 26 They won't consume if the value of it is less, so they 27 may turn off their TV set. If they are somebody like 28 me, other people may choose to turn it on when the 440 TODD 1 price is high. It's individual decisions and that's 2 the concept of efficiency. With a monthly price, the 3 concept is, if you are paying the market price for a 4 fixed monthly product, then you are responding to that 5 price. It's the market price for a fixed monthly 6 price, and so on. 7 You are always getting customers to 8 react to the price that they are being faced with and 9 my basic point is that in the small volume market you 10 can't practically get customers making consumption 11 decisions based on hourly prices, especially not if you 12 give them a price after the fact. If you are going to 13 get efficient consumption, you have to use the market 14 prices that are monthly or quarterly or annually. They 15 are informed in advance. 16 MR. WARREN: So am I right, then, 17 that what you are saying is that a fixed price will 18 lead to more efficient consumption? That is your 19 proposition? 20 MR. TODD: If it is a 21 market-determined price. The point I made earlier was 22 that if you -- there is a monthly price in the draft 23 proposal, which is the average spot price over the 24 month. That is not a market price for a monthly fixed 25 price product. 26 MR. WARREN: Your definition, I take 27 it, of a market price is one that resulted from a bid 28 process where the LDC has had a number of bids, let's 441 TODD 1 say, on a fixed price regime and has accepted one of 2 those. That is your definition of what constitutes a 3 market price. Is that right? 4 MR. TODD: A bid process is one way 5 to switch market price -- 6 MR. WARREN: If you are proposing -- 7 MR. TODD: -- value as well. That is 8 my proposal, which will produce a market price which is 9 an efficient price. And it is not my definition. That 10 is the definition of economics. 11 MR. WARREN: If I can just follow it 12 through, then, what you are suggesting is that 13 following your bid process, a number of people 14 hopefully will bid on the LDC to provide this fixed 15 price. The LDC picks one of them. That is market 16 determined price. And that will, according to your 17 analysis, lead to more efficient consumption. Is that 18 right? 19 MR. TODD: Compared to the draft 20 proposal, yes. 21 MR. WARREN: On page 13 you indicate 22 that -- and I take it this is an issue which Mr. Mark 23 explored with you briefly -- your concern about the 24 proposal in the Board staff paper, in the draft code, 25 is that the spot price, given the volatility problems, 26 will have the effect of driving people away from 27 standard supply. Is that correct? 28 MR. TODD: That is one possible 442 TODD 1 outcome, yes. 2 MR. WARREN: Would you not agree that 3 a fixed price which is too high would have the same 4 effect? 5 MR. TODD: A fixed price that is too 6 high would imply -- I assume what you mean by too high 7 is that it is higher than the price that would be 8 offered by competitors in the marketplace. 9 MR. WARREN: Yes. 10 MR. TODD: It wouldn't even go to the 11 competitors. You can offer the same thing for less. 12 If the bidding process produced that, 13 that's what would happen. But I would be surprised if 14 the bidding process didn't produce a lower price than 15 the market alternatives. 16 MR. WARREN: What is it you mean when 17 you refer, on page 14, to an appropriate market price? 18 MR. TODD: Those paragraphs are 19 numbered. Which one are you talking about? 20 MR. WARREN: On page 14, numbered 21 paragraph 1, at the bottom of the first full paragraph. 22 MR. TODD: What I was referring to 23 there was in light of the comment earlier that the pure 24 spot price pass-through is a fixed monthly price. A 25 fixed monthly price, market determined, has a risk 26 premium factored into it. This one does not. 27 MR. WARREN: I'm sorry? Which one 28 does not? 443 TODD 1 MR. TODD: The draft proposal pure 2 spot price pass-through averaged over the month is a 3 spot price averaged over the month. It does not 4 reflect the cost of risk mitigation. That is why the 5 price is not being set in advance of the month. It is 6 after the month. That is the difference. 7 You ended up with the pure spot price 8 pass-through. You don't know what your monthly price 9 is going to be until after the fact. A market 10 established monthly price for the month in advance 11 reflects the market's expectations. The actual outcome 12 may be a higher price on average or it may be a lower 13 price on the average. It depends on weather. It 14 depends on conditions at the generating plants. 15 So a customer is taking a risk 16 relative to the floor price, if you want, that they may 17 have to pay more or less. They don't know. It depends 18 on the month. They are told the price this month was 19 way up here or down there. 20 The alternative is that you have a 21 market-determined forward price, where some time prior 22 to the month you go to the market and you establish 23 your price. You carry out secondary market or 24 intermediary market transactions, lock in a price, and 25 then get that price for that month regardless of where 26 the spot market goes. 27 MR. WARREN: But the variability 28 issue that you have just referred to, about not knowing 444 TODD 1 what they are going to pay, that is taken care of under 2 an equal billing regime, correct? 3 MR. TODD: No. While you will be 4 billed relatively equally month by month, you don't 5 know what you are going to pay over the year for any 6 month, or in total over the year, until the end of that 7 year. 8 During the term of the Market Power 9 Mitigation Agreement, there is a constraint on the 10 annual cost. That is a very artificial and temporary 11 constraint. 12 MR. WARREN: I just want to stay with 13 this for one last question. 14 Could you turn up pages 11 and 12 of 15 your paper. Particularly on page 12, the first full 16 paragraph, not numbered, begins with the words "Not 17 only will the price conscious consumer". Do you see 18 that? 19 MR. TODD: Yes, I do. 20 MR. WARREN: The second sentence 21 reads: 22 "Even the household that forgoes 23 its air conditioner in a 24 price-spike period will pay a 25 monthly price that does not 26 reflect their sacrifice." 27 What I don't understand is how that 28 is different under a fixed price regime. 445 TODD 1 MR. TODD: Under a fixed price 2 regime, take the example of a price spike similar to 3 the midwest price spike last year. Under my proposal, 4 the price for the month is established in advance. It 5 is the responsibility of the intermediary to supply the 6 power at that price. Therefore, the customer's price 7 is that pre-set price. They will not turn down their 8 air conditioning on that hot day, because it is 9 irrelevant to them. 10 In the other circumstance, if there 11 is a price spike, the amount that the customer pays for 12 the month goes up because of that price spike. They 13 are, in effect, burying the cost of the spike, but they 14 are not burying it in a way that they can avoid it. 15 MR. WARREN: I see. 16 MR. TODD: The person who has 17 locked-in in advance has avoided it by getting a 18 guaranteed price in advance. The price they ultimately 19 pay does not reflect the spike. What it reflects is 20 the risk of a spike. 21 MR. WARREN: All right. 22 Can I now turn to the proposal that 23 you have. It begins on page 16 in the first full 24 paragraph under the heading "The LDC As A `Consignment 25 Retailer'". 26 MR. TODD: Yes. 27 MR. WARREN: You indicate in that 28 paragraph that: 446 TODD 1 "Permitted SSS offerings should 2 include..." 3 When you use the word "permitted", do 4 you mean permitted by the Board? 5 MR. TODD: Yes. 6 MR. WARREN: 7 "...should include fixed annual, 8 seasonal, and possibly monthly 9 rates." 10 First of all, when does the Board 11 make a determination of what the menu of options are 12 that should be made available? Is that an annual 13 process or when? 14 MR. TODD: What I envisage is that 15 the Board would permit options that the market 16 warrants. I see it as not being arbitrarily 17 restrictive. 18 The only thing that would be not 19 allowed would be something which is not workable. 20 MR. WARREN: How does the Board do 21 this, Mr. Todd? That's what I am driving at. 22 How does the Board determine what 23 offerings should be made under your scenario? Is there 24 a hearing, for example, under which this is determined? 25 MR. TODD: I would assume that LDCs 26 that want to make such offerings would make a 27 suggestion that there be -- we have had I don't know 28 how many task forces so far. Here are things that make 447 TODD 1 sense in the marketplace. We would like these 2 offerings to be accepted. 3 It would take maybe an hour's 4 discussion to come up with a main list. If somebody 5 wanted something else, they could apply to the Board to 6 say this should be on the acceptable list. 7 Alternatively, LDCs could be able to 8 generate what they want, based on certain criteria, 9 criteria such as the offering has to be something 10 available in the marketplace where there are 11 competitive bids -- i.e., you don't get just one bidder 12 on it -- and it does not involve any risk for the LDC. 13 MR. WARREN: Mr. Todd -- 14 MR. TODD: We are moving to a 15 competitive market, so what I am trying to get toward 16 is you give the customer what the customer wants -- 17 MR. WARREN: I'm sorry, Mr. Todd, one 18 of the arguments you advanced in support of your 19 proposition is that it reduces the regulatory burden. 20 I just want to understand what the regulatory burden 21 is. 22 Do you imagine that each LDC in this 23 province will come forward and say: "This is the menu 24 of options that should be made available for this 25 period in my jurisdiction." 26 Is that what you are talking about? 27 MR. TODD: No. The Board, for 28 example, may say, "We don't want SSS to be anything 448 TODD 1 more than a one-year fixed price." That is basically 2 what I was getting at here. 3 MR. WARREN: Who says that? 4 MR. TODD: The Board, the Energy 5 Board. 6 MR. WARREN: The Energy Board decides 7 in advance for everybody that the SSS offerings are 8 going to consist of the following, with or without 9 input from 270 LDCs? 10 MR. TODD: No, no. The Energy Board 11 may decide there are certain constraints. 12 What I was saying was -- for example, 13 because of the mobility issue, which seems to be 14 important to them, they may well say, "No SSS offering 15 will have a contract term, a pricing term, of more than 16 one year. Therefore, your options include any fixed 17 term of one year or less and variable terms." 18 MR. WARREN: I apologize for being 19 obviously quite thick about this, Mr. Todd. I am not 20 understanding how this process takes place. 21 Does the Board decide in advance that 22 these will be the range of SSS offerings that will be 23 made available by all of the LDCs across the province 24 in the following 12 months? Is that what the Board 25 does? 26 MR. TODD: The Board will decide 27 which options the LDC chooses from or, more 28 realistically, would put certain constraints that 449 TODD 1 certain things may be outside of what is permitted and 2 then if the Board so desired, it could say, "At a 3 minimum, you must have these two offerings. You must 4 have a seasonal and an annual." 5 MR. WARREN: Does the Board do that 6 by way of a hearing process? 7 MR. TODD: I think the offerings are 8 simply trying to be market-responsive, so I would 9 expect -- as with a number of other task forces that 10 the Energy Board has created and I have been involved 11 in, they just give that as an issue to one of the task 12 forces and the task force would take an hour of meeting 13 time and say, "Okay, here are the parameters for the 14 offerings that would be permitted by an LDC." 15 MR. WARREN: Do you have any concern, 16 in suggesting, Mr. Todd, that that may result in some 17 unfairness for individual of the LDCs, given that they 18 are going to be bound, I take it, by whatever it is the 19 Board decides? 20 MR. TODD: Not if the objective of 21 the criteria is to make it permissive rather than 22 limiting. To say that there may be some desirable 23 restriction such as no more than one year, that would 24 not disadvantage anybody. Yes, some may want to offer 25 longer terms, but that would be contrary to the policy 26 objectives of the Board. Therefore, it is reasonable 27 for the Board to say that you can't do that. 28 MR. WARREN: The list that is in this 450 TODD 1 paragraph -- fixed annual, seasonal and possibly 2 monthly rates -- is that an exhaustive list of the 3 options that you are proposing? 4 MR. TODD: No. They are ones that I 5 am suggesting should be on the list. It would make 6 sense if those are ones that, based on my involvement 7 in the industry, that customers are likely to find 8 attractive. 9 The fixed annual is that customers 10 would like a relatively long-term fixed price contract. 11 We have certainly seen that in natural gas prices that 12 are less volatile than electricity prices. It is very 13 reasonable to expect that in looking for an annual 14 fixed price, that would be something consumers would 15 choose over the other options -- at least some 16 consumers would. 17 Personally, I think the seasonal 18 would be attractive in terms of overall allocation 19 efficiency of the marketplace. A seasonal price would 20 flow through to the customer some perception of how the 21 value of electricity changes in different seasons and 22 should lead to more efficient utilization of 23 electricity in the long run. That seems like a logical 24 thing. 25 I say possibly monthly, because 26 monthly gets into a lot of problems in terms of, as I 27 have addressed elsewhere, the billing cycle versus the 28 pricing cycle. Monthly is less attractive to me. 451 TODD 1 You also get into administrative 2 difficulties with index prices, and so on. 3 So those are the ones that I set out 4 as being the most practical and the ones most likely to 5 be attractive to customers. 6 MR. WARREN: Is it your suggestion 7 that included in the menu of offerings by the local LDC 8 as part of the SSS that the spot price pass-through, 9 smoothed or otherwise, be included in the range of 10 options? 11 MR. TODD: The simple answer is that 12 if customers wanted it, fine. But I find a lot of 13 difficulty with a mechanism that tells customers the 14 price they are paying after the fact. The start of 15 this whole thing was that I felt very uncomfortable 16 with that approach to pricing. But I am not the one 17 who is going to decide this. 18 My personal view -- and it is just a 19 personal view -- is that all the options should have a 20 known price in advance. 21 MR. WARREN: Let's suppose an LDC in 22 Rainy River, for example -- and I don't know whether 23 there is one or not, but let's suppose there is an LDC 24 based in Rainy River comes forward and says: "This is 25 the menu of options that we want." And it has seven 26 options. "We have spoken to the people and this is 27 it." 28 Is it your proposal that the Board 452 TODD 1 would say, "Great. You can have those seven options", 2 or is it that you have to agree in advance to the three 3 options we have decided on? How does it work? 4 MR. TODD: That question is not 5 essential to my proposal. The overall proposal would 6 not be compromised whether you had permitted offerings 7 and the LDC would determine which ones it wanted to 8 make available versus there could be some dictated by 9 the Board. 10 Personally, I would prefer the option 11 of giving flexibility to the LDCs to be responsive to 12 their customer base, put in what they think their 13 customers want. If the Board sees in the first year or 14 two that that flexibility is being utilized is a 15 problem, then they may want to step in. 16 MR. WARREN: Does the Board oversee 17 the bid process itself? 18 MR. TODD: Not oversee in the sense 19 of looking at each one. They would set the rules and 20 they do have the power to go in and look at the 21 documentation to make sure that each LDC adhered to the 22 rules. 23 MR. WARREN: But you don't envisage 24 that the Board would do that, under your scheme, for 25 each of the LDCs for each of their contract bid 26 processes? 27 MR. TODD: No. 28 MR. WARREN: Issues with respect, for 453 TODD 1 example, to -- and I take it that under your proposal 2 the Board does not have regard to the prices for each 3 of the options that are being made? It doesn't 4 actually approve a price which is paid under each of 5 the options, in each of the LDCs? 6 MR. TODD: Not if they -- they would 7 not review the price for reasonableness if the bidding 8 process had adhered to all the rules. 9 MR. WARREN: What do we do with the 10 circumstance where there isn't -- for example, in a 11 remote LDC or relatively remote LDC, there aren't bids 12 that are received for each of the options? 13 Just to carry it through, if you have 14 adjoining LDCs, one of which has three options and the 15 next-door neighbour has one, is that a problem? If so, 16 how is it addressed, under your scheme? 17 MR. TODD: Personally, I consider 18 that as a bit of a red herring, in that the LDCs are 19 forming groups -- the smaller ones, in particular -- 20 and you would probably not have an individual, tiny 21 LDC -- there are some very, very small ones around -- 22 that would be going through this process on its own. I 23 mean I have sat on committees with them; they are not 24 dumb people. They would put together a package that 25 would attract potential suppliers. You know, the only 26 issue of a potential supplier is, you know, we are 27 talking about bidding on a block of power. When you 28 put together a few small utilities to be a bigger 454 TODD 1 block, you know, it is equivalent to bidding on an 2 industrial customer. The players in the marketplace 3 are going to be interested in that opportunity. 4 Maybe I have too much faith in the 5 players, but I don't see that as a problem. 6 MR. WARREN: Is it a concern of 7 yours, for example, that there might be one or two, for 8 example, intermediaries who would bid on all of these 9 contracts and all of the LDCs across the province? If 10 so, how would you deal with that? 11 MR. TODD: I'm sure they would. I'm 12 sure if they get the best price in every location they 13 would, for that period of time, be supplying most of 14 Ontario. 15 MR. WARREN: That is not a concern of 16 yours? 17 MR. TODD: It is a contracted price. 18 I don't see why I would be concerned. That doesn't 19 give them any market power the following year. 20 MR. WARREN: When you talk about 21 restrictions on mobility, as you do at page 17 of your 22 paper, what restrictions are you talking about? 23 MR. TODD: The only restriction is 24 that if you have a one-year contract, you would stick 25 with that source of supply for the year. 26 MR. WARREN: These restrictions on 27 mobility, do I understand you correctly that these 28 restrictions on mobility are necessary in order to make 455 TODD 1 your scheme work which in turn is necessary to help 2 promote the development of a competitive market? Have 3 I got the syllogism correct? 4 MR. TODD: The logic is that wherever 5 you are getting it from, if you have a fixed price 6 contract for a term, you have to have the contractual 7 obligation for that term. Whether it is a retail 8 competitor, whether it is an LDC, that is a matter of 9 avoiding gaming on the price. 10 MR. WARREN: Now, can we not agree 11 that one of the advantages of a spot price pass-through 12 is that it allows for mobility? 13 MR. TODD: Yes. It allows for 14 complete mobility. If that is your number one 15 priority, then, you would have to -- you know, that may 16 be an attractive option. But there are other 17 considerations, in my view. 18 MR. WARREN: So the loss of mobility 19 is a trade-off which you are prepared to make, in order 20 to develop this competitive market. Have I got that 21 fair? 22 MR. TODD: The purpose of the 23 trade-off is not to develop the competitive market. It 24 is to allow the customers to choose the terms and 25 conditions that they prefer. If a customer would 26 rather have a fixed price for one year, instead of 27 having the uncertainty of a spot price pass-through, 28 they should be able to choose that. 456 TODD 1 MR. WARREN: Now, on page 15 of your 2 paper, you make the observation -- it is in numbered 3 paragraph 6, on page 15. 4 MR. TODD: Yes. 5 MR. WARREN: In the middle of that 6 paragraph, it says: 7 "Furthermore, there can be no 8 assurance that alternate retail 9 market participants will be 10 interested in marketing in every 11 region of the province, even 12 where volumes are small and 13 customer densities low. As a 14 consequence, there is a risk 15 that the market for fixed price 16 alternatives to the SSS will not 17 be competitive and many 18 customers will pay an excessive 19 price for the pricing terms that 20 they prefer." 21 How is it, under your scheme, that 22 you propose to deal with that danger? 23 MR. TODD: This is in the section 24 talking about the draft proposal. 25 My concern is that we are taking 26 outlying areas, that there is going to be nobody going 27 out there and targeting that market if you have to go 28 person by person, or household by household, and what I 457 TODD 1 am saying is that these outlying areas would be much 2 more attractive to a potential suppliers if they can 3 simply go in and, in effect, be on a ballot from the 4 LDC to the customers. It's no muss, no fuss. 5 If you can offer a good price for 6 very little marketing cost you can pick up a block of 7 customers. It may be that what you are doing is your 8 are going to a block of 10 or 20 or 200 MEUs that are 9 saying, "We have a standard set of offerings. If you 10 have the best price for a one-year contract, you will 11 be the option available to the customers throughout the 12 200 MEUs", if they wanted to all get together into that 13 big a group. 14 MR. WARREN: Now, I want to turn to 15 the question of who can be players in the marketplace. 16 As I understood your answers to 17 Mr. Mark, the bidders to be intermediaries can include 18 the retail affiliates of the LDC. Is that right? 19 MR. TODD: Yes. 20 MR. WARREN: The protection, for 21 example, against -- I take it you would share a concern 22 about cost subsidy from one from the -- one side of the 23 monopoly side to the non-monopoly side. That would be 24 taken place by the -- taken care of, I take it, by 25 licensed provisions and code restrictions. Is that 26 right? 27 MR. TODD: Yes. 28 MR. WARREN: Does the Board need to 458 TODD 1 oversee that as part of this process? 2 MR. TODD: It would be no different 3 here than any other -- you know, they have to oversee 4 their codes generally. Certainly, if it was pointed 5 out to them that some party had bid 3.7 cents and the 6 affiliate had bid 3.9 cents and the affiliate had got 7 it, that would cause some concern to the Board. 8 MR. WARREN: I take it also under 9 your scenario that a retail competitor, not the 10 affiliate of the LDC, can win the bid to supply an SSS 11 service and can continue in the same market to be 12 competing for alternate services. Is that right? 13 MR. TODD: Yes. 14 MR. WARREN: Do you have a concern 15 about the fairness of that process when they are 16 competing, in effect, against themselves in the 17 provision of services, particularly within very small 18 markets? 19 MR. TODD: They have competing 20 products. You know, they are trying to access the 21 customer in multiple ways. Presumably, since their 22 offer to the LDC for an SSS supply is something they 23 have entered into voluntarily they feel it is a 24 reasonable price for them. If they have been accepted, 25 it is the best price that anybody has offered, which is 26 why they are the one buying the supply. If they want 27 to attack customers in a different way, with a 28 different offering, that is normal behaviour in 459 TODD 1 competitive markets. 2 MR. WARREN: Would these bids take 3 place at one time, across the province annually? 4 MR. TODD: I didn't envisage the 5 Board setting a date, but I think, since they are our 6 annual contracts, there will probably be a period of 7 time where these tend to happen. 8 From a practical perspective, I would 9 expect that municipal electrics will get together and 10 there will be relatively few bidding processes going on 11 in the province. But they probably would happen 12 roughly simultaneously. 13 MR. WARREN: If, as a result of the 14 bid process, there were significantly different prices 15 paid across the province from one jurisdiction to the 16 other, is that a concern? And if so, does the Board 17 retain a residual right to intervene, in those 18 circumstances? 19 MR. TODD: That is fairly 20 hypothetical. What you are suggesting, I guess, is 21 that the bidding process really isn't working and what 22 you have is maybe somebody comes in and does a high bid 23 everywhere and somebody else comes in with a low bid 24 and wins it in some places. The high bidder gets it in 25 the more remote place. 26 If it were a public policy 27 perspective, that would be a concern. From a reality 28 perspective -- you know, the utility presumably is not 460 TODD 1 out there to hurt its customers. If it knows it's 2 small and it's remote, it is probably going to form 3 part of a group so that it is going to get a reasonable 4 competitive bid. 5 If the system is not producing what 6 is transparently not effective competitive bids, yes, 7 it is a problem. 8 MR. WARREN: But, Mr. Todd, it 9 strikes me that the only way to assure that there is a 10 relatively equal and fair competitive process across 11 the province is for the Board to oversee each of the 12 bidding processes. Is that not the way to assure it? 13 MR. TODD: The government has decreed 14 that we shall move to competitive markets. Surely, if 15 we are going to competitive markets, it is incumbent 16 upon the OEB, in setting up mechanisms, to have a 17 little bit of faith in those competitive markets and to 18 structure things so that it happens and to -- when you 19 say "assure", you know, I think what has to happen is 20 that there will be oversight to identify failures, to 21 set up a complex regulatory system in advance. 22 When what you have done is create a 23 bidding process which, in my view at least, has every 24 promise of producing effective competitive bids, it is 25 not that hard to get effective competitive bids. 26 Certainly in the first few years, because of the whole 27 structure of the marketplace, what we can probably do 28 is get a lot of people bidding pretty close to 3.8 461 TODD 1 cents. 2 MR. WARREN: In your model, are there 3 any restrictions on who can be bidders? For example, 4 can generators be bidders? 5 MR. TODD: There are restrictions. 6 Generators could be bidders. 7 MR. WARREN: I'm sorry. I didn't 8 hear -- 9 MR. TODD: There are restrictions. 10 Generators could be bidders. 11 MR. WARREN: Generators could be 12 bidders. 13 The issue of the competitive fairness 14 of this is controlled by whom? The Board? 15 MR. TODD: What do you mean by the 16 "competitive fairness"? 17 MR. WARREN: Well, if it is, for 18 example, is unfair for a generator to compete against 19 another intermediary. Is that an issue the Board 20 determines? If so, in advance or after the fact? 21 MR. TODD: If the unfairness is a 22 matter of competitive advantage, that is a normal 23 marketplace. The customers should get their supply 24 from the person who can provide the lowest bid. If a 25 generator that may have some limitations on diversity 26 can provide the lowest bid, despite that diversity, 27 fine. If somebody else has more ability to mitigate 28 their costs and provide a fixed price, then the other 462 TODD 1 person will win the bid. There shouldn't be artificial 2 restrictions on the competition marketplace if your 3 objective is to get the lowest price for those terms 4 and conditions. 5 MR. WARREN: Who, under your system, 6 bills the customer? Is it the LDC that bills the 7 customers? Or is it the intermediary? 8 MR. TODD: The LDC. 9 MR. WARREN: Have you assessed the 10 impact of your proposal on the settlement systems of 11 the LDC? Do you know if it will be more costly, for 12 example, for them? 13 MR. TODD: I haven't explicitly put a 14 cost on it. There is a settlement task force 15 deliberating right now. From looking at what is 16 happening in there, there are significant challenges in 17 that billing systems are going to have to be modified 18 and re-written anyway. It is just a matter of how they 19 have to be re-written. 20 Frankly, they have two or three 21 options. Known in advance, prices in advance -- I 22 would expect that having been priced it would introduce 23 a lot less complexity. Having to figure out the price 24 after the fact, plugging it into the billing system and 25 getting bills out to customers, dealing with the 26 mismatch between the billing cycle and the meter 27 reading cycle and the pricing cycle, those kinds of 28 things -- to be honest, it is called a wash, and there 463 TODD 1 is no reason that I can see that would make it more 2 expensive or more difficult from a billing system 3 perspective. 4 MR. WARREN: You refer -- and this is 5 on page 20 of your paper, in numbered paragraph 4 -- to 6 the regulated mark-up. What are you referring to? 7 MR. TODD: That would be similar to 8 the mark-up under the draft code, which says that in 9 addition to the actual cost of power there are costs 10 incurred by the utility. Therefore, the utilities 11 would require a mark-up to cover the cost that they 12 bear in passing through the power. But that will be 13 set by OEB regulation. 14 MR. WARREN: I have one final area 15 with respect to the practical implications of your 16 proposal. 17 Some years ago in the natural gas 18 industry there was a proposal for something called 19 retail commodity options, RCOs, which, if memory serves 20 me, had the natural gas utilities offering a range of 21 alternate ways of buying gas in the marketplace. Again 22 if memory serves me correctly, the marketers went 23 berserk about this proposal. Such was the level of 24 their anguish that the thing never saw the light of day 25 for the approval of the Board. 26 Do you remember the retail commodity 27 option, its brief shelf life? 28 MR. TODD: That was a Consumers Gas 464 TODD 1 proposal. Yes, I remember it. 2 MR. WARREN: Can you tell me how it 3 is what you are talking about is different from the 4 retail commodity option? 5 MR. TODD: The difference is that in 6 that case Consumers Gas was going to procure and put 7 together the product itself, which would shut alternate 8 players out of the market of providing that. The 9 proposal is letting the other players in the market 10 make an offering through the utility at a competitive 11 price. 12 So the difference is who can play the 13 game. 14 MR. WARREN: Isn't it the case under 15 your scenario that the LDC may come to the Board and 16 say: "These are the two options which we think are 17 appropriate for our jurisdiction this year"? Doesn't 18 that have the practical effect of their deciding what 19 offerings are going to be made in their marketplace? 20 And I want to get to the point. Isn't that exactly the 21 same as the retail commodity option, is the LDCs 22 deciding what options are going to be made available in 23 the marketplace that year? 24 MR. TODD: No, it is not the same. 25 In the Consumers Gas case, Consumers Gas would have 26 been going out and procuring gas on the market, doing 27 its own management risk and doing all of the 28 transactions in order to then provide a fixed price 465 TODD 1 contractor the various things. But it was assembling 2 the product itself. That is quite different than a 3 pass-through of somebody else's product. 4 MR. WARREN: One of Professor Dewees' 5 concerns about your proposal is that it will have the 6 effect -- and this is directly contrary, I take it, to 7 your assertion -- it will have the effect of actually 8 stifling competition because marketers will not be able 9 to compete with the SSS offerings that are ultimately 10 approved. Do you disagree with that? 11 MR. TODD: That is a possible 12 outcome, that you will not get the alternatives to the 13 standard service supply. But I have advanced in the 14 past that this model is a good model because what it 15 does is it provides marketers a way to reach customers 16 with a very low marketing cost. 17 MR. WARREN: So do I take it, just 18 following up on that point, that one of the benefits of 19 your proposal is that it advances the interests of 20 marketers by allowing them to make at relatively low 21 cost an impact on the market in each of the 22 jurisdictions across the province? Is that not fair? 23 MR. TODD: No, I don't think that is 24 fair. 25 What it does is, it says that what 26 the customer pays is the cost of the commodity plus the 27 marketing costs. If you lower the marketing costs the 28 competitive price goes down. The marketer doesn't end 466 TODD 1 up any better off. They just have lower marketing 2 costs and the price is lower. The customer is the one 3 who benefits because they are paying less for marketing 4 than they would be in the alternative. 5 MR. WARREN: Just one final point. 6 If a marketer wins a bid and is offering one of your 7 SSS options, can that same marketer go to the same 8 customer and offer an alternative? 9 MR. TODD: If the customer is free to 10 move, and when they are free to move, they would 11 probably not realize they are doing it because it is 12 the LDC's SSS customer and the marketer is providing 13 power in a block. So, yes, probably, if this marketer 14 was going around and knocking on doors, they would be 15 knocking on the doors of some of their own customers, 16 and the price of the product they offer at the door 17 would reflect the cost of marketing door to door. The 18 price of the product they are selling through the SSS 19 would represent the cost of preparing a bid. If all of 20 this were certain, all things being equal, the price 21 through the SSS would be a lower price. 22 MR. WARREN: If the marketer had 23 exclusive access to the customer? 24 MR. TODD: No. They don't even know 25 who the customer is. 26 MR. WARREN: Thank you, Mr. Todd. 27 MS LEA: Thank you very much, 28 Mr. Warren. 467 TODD 1 Mr. Mia. 2 MR. MIA: I have just a couple of 3 questions. I will keep it short. 4 Are you aware of any other 5 jurisdictions and how they have protected vulnerable 6 consumers? 7 MR. TODD: How they have protected -- 8 MR. MIA: Yes, I am just -- 9 MR. TODD: Other jurisdictions, 10 particularly in the U.S., have programs that 11 specifically try to address the needs of vulnerable 12 consumers. 13 MR. MIA: Are they using fixed price 14 regimes? 15 MR. TODD: Mechanisms that protect 16 vulnerable consumers are mechanisms that provide 17 subsidies for low income households. Those have been 18 adopted in certain U.S. jurisdictions. That is not 19 something we are talking about here. 20 The fixed price is not targeted at 21 helping vulnerable consumers, per se. 22 MR. MIA: The MDC recommended the 23 smoothed price to dampen volatility. In your opinion, 24 does the standard supply service, as it is now drafted, 25 meet this goal? 26 MR. TODD: It does dampen volatility, 27 but it leaves uncertainty as to what the price will be. 28 I mean, it is less volatile, clearly, then the hourly 468 TODD 1 price. 2 MR. MIA: Let me rephrase that. I 3 was just trying to draw a distinction between the 4 smoothed pass-through and the code as it is drafted 5 now, which is the spot price pass-through. 6 MR. TODD: The spot price 7 pass-through and the code is a smoothed price. 8 I am missing your question. 9 MR. MIA: I'm sorry, sir. The 10 smoothed price over a longer period? 11 MR. TODD: Oh, okay. The smoothing 12 which would take that monthly price and not recover it 13 all in that month would smooth it over, yes. Sorry. 14 So does the draft do that? 15 MR. MIA: Does it meet the 16 MDC's -- if I took the MDC goal to mean that, it would 17 dampen the price over a longer term? 18 MR. TODD: No, it is a month-by-month 19 thing, fully recovered each month. 20 MR. MIA: Thank you. 21 MS LEA: Thank you, Mr. Mia. 22 Mr. White, please. 23 MR. WHITE: I would like to go to 24 your recommendation on page 5, under the criteria. No. 25 8 says: 26 "The SSS should be 27 understandable to the average 28 customer (simplicity). 469 TODD 1 Confusion about the pricing 2 regime will dilute the price 3 signals that it provides." 4 How important is that among the 5 criteria that you have identified? 6 MR. TODD: You know, I haven't 7 weighted them on a different scale. Basically, I think 8 that simplicity is very important to the customer. We 9 could look at the telecommunications market, long 10 distance. People have migrated to simple billing 11 plans. Therefore, in a trade-off situation it is tough 12 to answer that, but I think that to be understandable 13 is almost a threshold criterion. Some of the people 14 who don't understand -- it is inherently a bad idea. 15 MR. WHITE: In the gas 16 industry -- and this is slightly an aversion because I 17 understand that you have been around the gas industry 18 some time -- what is it that the customer buys? 19 MR. TODD: You are talking about 20 Ontario now? 21 MR. WHITE: I am talking about 22 vulnerable customers, the group we are looking at here. 23 MR. TODD: I am not sure exactly what 24 you are asking, but what they buy is gas, natural gas. 25 If they are in the direct purchase market buying ABC 26 service, typically they are buying gas at a fixed unit 27 cost. 28 MR. WHITE: What is the end product 470 TODD 1 from the consumer's perspective? 2 MR. TODD: Energy. 3 MR. WHITE: All right. How does the 4 customer use the energy? 5 MR. TODD: It is -- 6 MR. WHITE: Let me lead you -- 7 MS LEA: The question is just a 8 little obscure. 9 MR. WHITE: Yes. Let me lead you a 10 little bit. 11 In the residential and the very, very 12 small commercial market isn't natural gas used 13 basically for water heating and space heating? 14 MR. TODD: Yes. 15 MR. WHITE: Is electricity the same? 16 MR. TODD: No. There are many 17 applications for electricity. We don't have natural 18 gas-fired TVs. We do have some natural gas-fired 19 lights, but they are very rare. 20 MR. WHITE: From that perspective, 21 and based on your knowledge of customers, do customers 22 have any idea where the kilowatt hours go that they 23 purchase from a supplier? 24 MR. TODD: Fortunately you have 25 worded that in a broad way with "any idea". I think 26 the average customer knows that air conditioning is a 27 relatively heavy load. A computer is a very light 28 load, unless you have a super-duper -- you know, those 471 TODD 1 kinds of things. They have some idea. If they read 2 the light bulb, then they know what the light bulb is 3 and it means something to them, but they don't really 4 have a good idea. 5 MR. WHITE: For the customer who 6 doesn't have central air conditioning, you would feel 7 that the majority of customers could identify, which 8 would be the majority of consumers -- and I guess we 9 should also pull water heating out of that, because 10 customers who have water heating may be a little more 11 sensitive in that area as well. 12 MR. TODD: Certainly with the heavy 13 loads there are ways to moderate usage. But if we look 14 across countries with different prices or prices 15 relative to income for electricity, we see different 16 behaviour. Perhaps it is my economics training, but I 17 would suggest that that is a reflection of the 18 affordability of power in those jurisdictions, and 19 while a change in price hour to hour, day to day or 20 month to month probably won't have much impact on how 21 well I train my kids to turn off lights when they leave 22 the room, the high price of power is going to make them 23 a little more of a disciplinarian when it comes to 24 turning off the lights. You know, there are long-term 25 behavioral responses. We know that long-term 26 elasticity is higher than short-term elasticity. 27 MR. WHITE: If price clarity is truly 28 important -- cost causality is some other language that 472 TODD 1 is sometimes used in this kind of a situation -- even 2 when electricity is, for the most part, invisible and 3 travels at the speed of light, customers largely have 4 very little idea where most of the energy they consume 5 in a residential dwelling goes. Would you say that 6 without an education scheme that your item 8 criterion 7 can be effectively met by this scheme? 8 MR. TODD: Without education, the 9 criteria to be met for my proposal? 10 MR. WHITE: Yes. 11 MR. TODD: I consider my proposal 12 fairly simple because, in general, customers will know 13 the price they are paying in advance, and that's it. 14 So it is simple. It essentially is 15 the current regime. 16 MR. WHITE: I would like to go back 17 to the LDC if it is involved in a bilateral contract to 18 fulfil its default obligations under the statute. If 19 that supplier defaults, goes bankrupt, leaves the 20 market, whatever, and is unable to fulfil those 21 obligations, then you are comfortable that that risk 22 should be passed on to the end use customers that that 23 local distributing company suppliers? 24 MR. TODD: The only concern that you 25 are saying is passed on to the end-use customer is that 26 it may not -- that rule would not encourage the LDC to 27 minimize that risk. He may want to have at least some, 28 in effect, penalty, some cost borne by the LDC of that 473 TODD 1 risk because through their contractual terms -- unless 2 it's all mandated by the Board. It may be that the 3 contract terms and conditions that provide for 4 backstopping are there. 5 You definitely want the utility to 6 make every effort to avoid a situation where those 7 costs are revisited on the customer and you certainly 8 want the utility to exercise due diligence, but, 9 frankly, with that due diligence undertaken, with the 10 kinds of players that we have in the electricity 11 marketplace -- let's step back from abstracting this 12 and say: Who is out there with the ability to be the 13 supplier? 14 While a marketer, in many cases a 15 small organization, they are not doing their 16 procurement of power themselves. There is somebody 17 behind them. Essentially, there are a very small 18 number -- 10 or so, I think -- of players who are going 19 to be out there in the marketplace that are actually 20 procuring and providing services to the marketers or 21 they will be doing it themselves. 22 I think that the chances of a 23 contractual failure -- and when I say "contractual 24 failure", that means that there is a failure both for 25 the power to be delivered and for the commitments to 26 pay for backstopping would not be fulfilled. The 27 chances of that are very low. In that circumstance, I 28 guess, it comes down to a simple matter of 474 TODD 1 practicality. 2 Those costs probably are going to get 3 passed through to the customer. When we say "passed 4 through to the customer", what that means is, in 5 effect, for the balance of the contract term, which is 6 a few months, the customer would be paying presumably 7 the current spot price or some market equivalent. 8 MR. WHITE: I guess one of the other 9 options that you might provide was if the LDC was in 10 default, then perhaps the customer could go elsewhere 11 in meeting its price. 12 MR. TODD: Yes, the customer could go 13 to an alternate resale supplier. 14 MR. WHITE: Notwithstanding the 15 contract. 16 MR. TODD: In that period, yes, if 17 it's not being fulfilled, but I think it's important to 18 recognize that we are not talking about the ability of 19 a supplier to say, "My goodness, the spot price has 20 gone to $1,000, I am going to not supply any power 21 today." 22 MR. WHITE: I understand that. 23 MR. TODD: That's not the issue. 24 MR. WHITE: No. 25 MR. TODD: The issue is it is gone 26 for the remainder of the term of the contract. 27 MR. WHITE: Under the proposals that 28 you put forth, if the LDC has the option of deciding 475 TODD 1 which alternatives it is going to choose to make 2 available to its end-use customers under its supply 3 obligation and if you had an interval-metered customer 4 who was eager to fully embrace the spot market price, 5 unless the default supplier offered that price as one 6 of their options, then is there a potential that the 7 customer could be precluded from arriving at that 8 option? 9 MR. TODD: By and large, it is not 10 going to be practical. 11 Are you suggesting that a 12 small-volume customer has an interval meter? 13 MR. WHITE: There are a number that 14 are -- 15 MR. TODD: Yes. 16 MR. WHITE: Yes. 17 MR. TODD: Where I think you are 18 going is if there happens to be a half dozen -- a small 19 number, a few hundred, customers with interval meters, 20 it would be, I guess, a decision of the utility whether 21 it's worth providing a default option to them. My 22 personal sense would be it's not worth creating an 23 option for those rare and exceptional cases. They 24 would shop the market. 25 But certainly there is a possibility 26 where perhaps the most frequent appearance of interval 27 meters is where customers have participated in special 28 experimental programs. If you are talking about the 476 TODD 1 continuation of experimental programs, I guess there is 2 no reason that that couldn't be done. It wouldn't be 3 inconsistent with this proposal if that was considered 4 to be good public policy. 5 MR. WHITE: I don't think I need to 6 torture you any more. Thank you. 7 MR. TODD: There will be somebody 8 else to torture me. 9 MS LEA: Thank you, Mr. White. 10 I think we have at least one other 11 person to torture you. 12 Mr. Power? 13 MR. POWER: No questions, sorry. 14 MS LEA: No questions. 15 Thank you very much, Mr. Power. You 16 have declined to torture the presenter. 17 Are there any other questioners? 18 Mr. Ronayne? 19 MR. RONAYNE: I was going to ask a 20 few questions, but I wasn't on the list. 21 MS LEA: Please come forward. 22 I can indicate while Mr. Ronayne is 23 coming forward that the questions that Board staff had 24 have been asked by others, so we have no questions. 25 MR. TODD: You can see the 26 Competition Bureau couldn't resist torturing me. 27 MS LEA: Well, you know what they are 28 like! 477 TODD 1 MR. TODD: Yes, any opportunity. 2 MR. RONAYNE: It comes from being, by 3 nature, an investigator. 4 I have a couple of questions. One is 5 that you have an interpretation of the 3.8 cent price 6 cap on Ontario Hydro. I seem to get the sense that you 7 see it as only an annual rebate. Is that established 8 somewhere in the Market Design Committee proposal on 9 that or is that your interpretation? 10 MR. TODD: My understanding is that 11 is enshrined in the Market Power Mitigation Agreement. 12 MR. RONAYNE: It's an annual basis, 13 but that rebates are going to be calculated only on an 14 annual basis and that's it? 15 MR. TODD: Yes. 16 MR. RONAYNE: Okay, thank you. 17 MR. TODD: They won't know until the 18 end of the year whether the average price is above 3.8 19 or not. 20 MR. RONAYNE: Thank you. 21 I wanted to get a bit about what you 22 see really is the value of the LDCs in this process. 23 Is it that they are creating another market in the 24 marketplace that wouldn't develop, anyway, by its own 25 nature? 26 MR. TODD: The market may develop on 27 its own, but my suggestion is that if it did, the cost 28 of providing the equivalent terms and conditions 478 TODD 1 through customer-by-customer contracting would be a 2 much higher transaction cost. Therefore, this is a 3 vehicle for, in essence, giving customers access to 4 alternatives that will be lower cost. 5 MR. RONAYNE: So it is avoiding 6 marketing costs. Is that correct, that is a big part 7 of it? 8 MR. TODD: Well, it's two things. 9 One is it avoids marketing costs. It also, through the 10 bidding process, makes sure that what is put in front 11 of the customer is a highly-competitive bid. It is a 12 result of the bidding process for the right to sort of 13 access a lot of customers and one would expect that 14 potential suppliers will sharpen their pencils much 15 more in that scenario than they will if they are 16 knocking on doors and saying, "Have I got a deal for 17 you." 18 MR. RONAYNE: Is there also a sense 19 in what you are saying that consumers want to have 20 supply from their distribution company, that somehow 21 there is some comfort attached to that? 22 MR. TODD: Some consumers do. I sat 23 in on a focus group run by Consumers Gas a couple of 24 years ago and participated in conducting a survey for 25 them which looked at customer attitudes and there 26 certainly were those customers who basically said, 27 "Utilities are expensive and I will take my chances 28 with anybody else because probably they can do it 479 TODD 1 better." There is the other classic customer that 2 says, "The utility is my known supplier, I trust them, 3 I feel safer in the hands of my local utility", and 4 those customers want to deal with the utility, all 5 other things being equal. 6 MR. RONAYNE: In this process then 7 you see, I think -- correct me if I am wrong on this -- 8 there will be intermediaries and retailers that will be 9 marketing to the first standard supply service that 10 will also be going to consumers as well and making 11 offers outside of that process. Would there be a lot 12 of overlap between the two? 13 MR. TODD: It's hard to speculate. I 14 expect that there are certainly going to be some 15 players in the market who would be interested in this 16 SSS, but would not be interested in signing up 17 individual customers. 18 MR. RONAYNE: Fair enough. 19 MR. TODD: There are others who may 20 well focus on the door-to-door sign-ups. They wouldn't 21 bother even trying to compete for this SSS option. 22 There are others who may find it attractive to do both. 23 They may feel positioned well to do both, but there are 24 a lot of different players with different strengths and 25 weaknesses in the market. Each one will go the way 26 that suits its strengths best. 27 MR. RONAYNE: I have one final 28 question. Where do you think bidders are going to come 480 TODD 1 from in this market -- if you answered this question 2 already, then I haven't been listening carefully 3 enough -- and what if there aren't a lot of bidders in 4 this marketplace? I am thinking starting from day one. 5 Who is going to oversee what is going on in this 6 process to make sure that people are actually getting a 7 good deal? Is this part of it going to be that there 8 is a 3.8 cent price cap on Ontario Hydro and is that 9 critical to protecting consumer interests? 10 MR. TODD: I am comforted in the 11 interim period with the Market Power Mitigation 12 Agreement that power will be available in the spot 13 market at 3.8 cents. It won't be hard for some players 14 to come into the marketplace and offer a price in that 15 range. It would be pretty hard for somebody to bid 16 successfully at a price much higher than that. 17 MR. RONAYNE: I said I wouldn't ask 18 one more, but -- 19 MR. TODD: If we -- 20 MR. RONAYNE: Sorry. 21 MR. TODD: If we implement the 22 mechanisms, it will kind of get the ball rolling and by 23 the time the MPMA is terminated, yes, I would expect 24 that -- well, if we don't have a number of parties 25 prepared to play in the marketplace at that point, it 26 means that our experiment of competition in Ontario has 27 failed and we may want to reconsider where we are 28 going. 481 TODD 1 MR. RONAYNE: Sorry, I misspoke. One 2 final question, if I may. 3 You mentioned that you had looked at 4 the Alberta marketplace and price volatility in the 5 Alberta marketplace. In your view, is the Alberta 6 marketplace, as far as the tightness of capacity 7 available on the system in relation to demand, similar 8 to what you observed in Ontario or have you not 9 examined that in Ontario? I am thinking of this as the 10 reason why there have been a lot of price spikes in 11 Alberta. 12 MR. TODD: There is constrained 13 supply in Alberta. There certainly is a view that that 14 is at least in part attributable -- and I subscribe to 15 the view -- to the regime that was in place prior to 16 the last round of legislative change and even now there 17 is a kind of awkward market, not a normal competitive 18 market. 19 In Ontario, there are some 20 uncertainties about what nuclear plants will be coming 21 back on stream and how much demand will grow. 22 Therefore, it is uncertain as to whether we will be in 23 a constrained supply situation domestically or not. 24 There is a possibility that we will be in a similar 25 situation in a couple of years. 26 MS LEA: Thank you very much, 27 Mr. Ronayne. 28 Thank you very much, Mr. Todd, for 482 TODD 1 testifying this afternoon under what were obviously 2 adverse circumstances. Thank you very much for your 3 assistance in this matter. 4 I have four brief administrative 5 matters. 6 First, the transcripts are appearing 7 on our Web site -- 8 I'm sorry, Mr. Janigan. 9 MR. JANIGAN: Ms Lea, just a small 10 point. I indicated to Mr. Mark during the course of 11 his examination that Mr. Todd would be available on 12 Monday to answer questions on his resume. I was under 13 the assumption that he would have had to return on 14 Monday. 15 I wonder if Mr. Mark still intends to 16 ask any questions on that square. 17 MR. MARK: There is a limit to even 18 how much I will torture a witness. 19 MS LEA: We are glad to hear it, 20 Mr. Mark. Thank you. 21 MR. JANIGAN: Thank you. 22 MS LEA: So, Mr. Todd, you don't have 23 to come back. Thank you very much. 24 Thank you, Mr. Janigan. 25 First, the transcripts are appearing 26 on our Web site at approximately noon of the day after 27 testimony. For instance, the first day's transcript is 28 there. 483 TODD 1 You will find them by going into the 2 Web site and going under documents available from the 3 Board, sub directory transcripts. 4 Secondly, Mr. Power, I don't think 5 you were in the room earlier when I talked about the 6 order of panels for tomorrow. I am assuming you are 7 consenting to Mr. Mark and Mr. Jennings starting the 8 day at 9:00 a.m.? 9 MR. POWER: Certainly. 10 MS LEA: Thank you. And unless 11 anybody has any serious objections, we will be taking 12 the lunch break a little earlier tomorrow, at noon 13 rather than 12:30. So let me know if you have any 14 serious objections. 15 Fourthly, we have found a law firm 16 Calling Card dropped by someone. Tempted as I am to 17 retain it, I wonder if anybody could claim it or guide 18 me to the owner. Let us know if you know who that 19 belongs to. 20 Thank you very much. 21 MR. POWER: One last thing, if I may. 22 MS LEA: Certainly, 23 MR. POWER: In light of the 24 reorganization of the parties, I am concerned about 25 Mr. Adamson having flown up and the need to get him 26 flown out the night after. 27 Could we possibly have him come on 28 before the Fiona Woolf panel? 484 TODD 1 MS LEA: You can call them in 2 whatever order you like, as far as I am concerned, 3 however you want to present those folk, unless anybody 4 else has an objection. 5 Mr. Mark? 6 MR. MARK: At 9 o'clock? 7 MS LEA: Yes, we will begin at 8 9 o'clock with Mr. Mark and Mr. Jennings. 9 Anything further? 10 Mr. Warren? 11 MR. WARREN: Just one question, 12 Mr. Power. The INNERConnect study that we referred to, 13 that is going to be here tomorrow? 14 MR. POWER: I will ensure it is, yes. 15 MR. WARREN: Thanks very much. 16 MS LEA: Thank you very much. 17 We will reconvene at 9:00 a.m. 18 tomorrow. 19 --- Whereupon the hearing adjourned at 4:55 p.m., 20 to resume on Thursday, July 15, 1999 at 9:00 a.m. WPCN  &j+]b} ]?d x*o*}V r"Dnbw'd]bs̚@tۼɜW|(蕼>BI}>=bPbtbK;،WPCY [ÍSW$i JѣH*ٳg5cƏ2zXɼU֮ 3Yd _<.KݻIb&UˤnbL}L*i`e24)<>ݼi]ʘ2)[rWe'۸]oזc6^bE sPy DҠ=s . &(SK,- 739 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Friday, July 16, 1999, 26 commencing at 9:02 a.m. 27 28 VOLUME 4 740 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Producers' 18 Society of Ontario, IPPSO 19 ELIZABETH DEMARCO Various interested parties 20 BRIAN McKERLIE Municipality of Chatham-Kent 21 ROBERT WARREN Consumers Association of 22 Canada. 23 DICK PERDUE Direct Energy and Enershare 24 Technology 25 DAVID POCH Green Energy Coalition, GEC 26 ZIYAAD MIA Coalition of Distribution 27 Utilities et al 28 741 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 Incorporated, ECMI 11 RICK GROULX 12 MARK RONAYNE Competition Bureau 13 KEITH RAWSON TransCanada Power 14 ANDREW BARRETT Ontario Power Generation 15 Inc. 16 RICHARD BATTISTA Union Gas Limited 17 BARBARA BODNER Enbridge Inc. 18 AMIR SHALABY Ontario IMO 19 DAN PASTORIC Energy Advantage 20 JIM RICHARDSON/ Upper Canada Energy Alliance 21 PAUL FERGUSON 22 MICHAEL JANIGAN Vulnerable Energy Consumers 23 Coalition 24 GRAHAM HENDERSON Ontario Hydro Services 25 Company 26 27 28 742 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 743 4 Questions of Mr. Adamson and Mr. Conway 743 5 Luncheon recess at 12:40 p.m. 859 6 Upon resuming at 1:40 p.m. 859 7 Presentation by Ms Fiona Woolf 861 8 Presentation by Mr. John Jenkins 878 9 Presentation by Mr. Gunars Ceksters 896 10 Questions of Ms Woolf, Mr. Jenkins 11 and Mr. Ceksters 903 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 743 1 Toronto, Ontario 2 --- Upon resuming on Friday, July 16, 1999 3 at 9:02 a.m. 4 MS LEA: Good morning. 5 Welcome to the SSS Technical 6 Conference. 7 We will be resuming again with the 8 panel of Mr. Adamson and Mr. Conway. 9 I don't have any preliminary matters 10 myself at this time. Does anyone else? 11 Okay. Thank you very much, then. 12 I think we are to Mr. Brett, please. 13 MR. BRETT: Thank you very much, 14 Ms Lea. 15 Good morning, gentlemen. 16 My name is Tom Brett. I represent 17 the independent generators, the Independent Power 18 Producers' Society of Ontario. 19 I just have a couple of questions of 20 clarification of your papers, which we thought were 21 very good. 22 The first question is: You touch in 23 your paper at one point, on page 5, in the second 24 paragraph, on the question of the usefulness of the 25 intermediate contract markets in helping to send a 26 signal to generators about when new capacity is maybe 27 required in the system. 28 Could you just comment on the 744 ADAMSON/CONWAY 1 relative usefulness of the spot market and the 2 intermediate markets in performing this function as far 3 as a signal to generators as to when new capacity is 4 required? 5 I mean, have a sense that what you 6 are saying here is that while the spot market may send 7 a signal, the intermediate contract and forward markets 8 might be sending a better signal. I just want to know 9 whether I understand that properly. 10 MR. ADAMSON: Yes. From my 11 perspective I think I would basically agree with that, 12 and for two reasons. 13 The spot market of the day obviously 14 may reflect very, very short-term phenomena of the day. 15 What is actually important for the 16 new entrant actually building generation is, in effect, 17 the revenue stream that he or she will get through the 18 project for merchant generation projects. So what is 19 really more important is expected values of market 20 revenues extending forward in time, not just for one 21 hour at a future time but across many hours, many 22 months, possibly many years going forward across that 23 time, because clearly that is what drives the financial 24 viability of a merchant generation project. 25 The power of intermediate markets in 26 these forms of new entry I think is quite strong, 27 because it is relatively -- it is always possible to do 28 forecasts of spot prices. We know that these types of 745 ADAMSON/CONWAY 1 forecasts are almost inevitably imprecise. 2 What is important about the forward's 3 prices and having liquidity and depth in those markets 4 is two things. The price signal more reflects the 5 actual risks that the generator is taking on of longer 6 term time horizons, expected values over those time 7 horizons which match his or her investment risk. So 8 really it is the appropriate price signal to look at, 9 if it's available. We hope to make it available, 10 partially through the design of this mechanism. 11 Secondly, it obviously allows one to 12 hedge those risks quite -- it actually allows one to do 13 something about some of those risks and to hedge them 14 at a reasonable cost, unlike the pure spot market which 15 really doesn't allow me as a new entrant generator to 16 do anything about my risk profile at the time when I 17 have to to make an investment. 18 I am returning slightly to the kind 19 of more practical view of the world as I have seen it 20 from various merchant and generation projects with 21 which I have participated, is that even though the 22 intermediate contract markets may not extend to the 23 life of the facilities that one is building, they are 24 considered as, by far, the best signal available for 25 the term that they do exist about the expectations of 26 prices, and that is for two reasons. 27 Market prices have a value over 28 somebody's opinion because they have actually been 746 ADAMSON/CONWAY 1 created by multiple sets of people, not just one person 2 and, in a sense, might be kind of distilling the wisdom 3 of more than one person, a whole group of people. 4 Secondly, I'm always more 5 comfortable, I guess, in a financing exercise with a 6 price that someone is actually willing to do business 7 with rather than someone is willing to just forecast. 8 You can hire me or another consultant 9 to forecast prices all you like, and obviously anyone 10 in the business tries to do as good a job as possible. 11 I'm always much more comfortable when someone is 12 actually willing to put their money where their mouth 13 is and actually trade at a price rather than simply 14 saying, "Well, here is a view of it. You do what you 15 want. I'm not assuming any of the risk of this. If 16 it's wrong, well, there you go." 17 I believe the generation markets and 18 the very critical interface between electric markets 19 and the capital markets, which mainly comes in merchant 20 plant finance, rely, to the extent that they can, on 21 what forward price signals there are. I am not aware 22 of any merchant plant financing with which I have been 23 involved where there has not been explicit 24 consideration to what type of forward prices are out 25 there in the market as a critical piece of evidence 26 that the revenue forecasts, which are in effect the 27 backbone of the financing plan, are consistent with 28 market expectations. 747 ADAMSON/CONWAY 1 It is one thing to take it to the 2 syndicated loan finance group of a major commercial 3 bank and say, "These are our experts' forecasts of 4 merchant plant revenues"; it is another thing to take 5 the same thing to a bank and say, "These are our 6 experts' forecasts of merchant plant revenues and these 7 are the actual forward prices which people are trading 8 in the market and you can actually see that these match 9 up." 10 MR. BRETT: Thank you. 11 Just switching gears a little bit, if 12 I may, to a separate related topic. 13 We have talked a lot about the 14 importance of forward contracts and intermediate 15 contracts of this market. Is there any danger that 16 focusing on this contract market will impede or destroy 17 the spot market, or in some sense damage it to the 18 point where it is not as useful as it should be? Could 19 you comment on the interrelationship between the two 20 markets? 21 MR. ADAMSON: One is always 22 worried -- I raised the Alberta experience yesterday in 23 some ways in sort of a cautionary note about an initial 24 market design which had created a spot market, the 25 Power Pool of Alberta, and then imposed these 26 contracts, vertical hedging contracts called the 27 legislated hedges, which almost insulated the 28 generators from real exposure to that market for the 748 ADAMSON/CONWAY 1 vast majority of their actual revenues. 2 That does tend to create this 3 extremely thin market where the incentives on players 4 may be magnified because their own financial outcomes 5 are not really dependent on what happens to it. That 6 to me is a very critical risk in terms of designing 7 these systems. 8 But let me point out the critical 9 features of those contracts is, that those are in no 10 way commercial contracts. Those were contracts created 11 at the point of restructuring in the Province of 12 Alberta for a very long term, basically life of plant, 13 covering the vast majority of capacity. So these were 14 contracts not based on any actual market dynamics at 15 the start but are almost like imposed over the top of 16 the market and tended to make, effectively, the Power 17 Pool of Alberta relatively thin. 18 Now, that is not what we are talking 19 about here. That is a risk, but that is not really the 20 same thing we are talking about here. 21 What we are talking about, in terms 22 of contracts between generators and other 23 counterparties and standard supply service providers, 24 are commercially-negotiated contracts and 25 commercially-negotiated contracts, like most of these 26 contracts, based on an interaction and an interplay 27 between the expectations of spot market prices and the 28 prices that people are willing to trade for. 749 ADAMSON/CONWAY 1 In these markets, like I believe most 2 commodity markets that exist, there is a whole 3 succession of prices, which I would describe as kind of 4 evolving together in a lock-step fashion, about 5 expectations of spot prices going forward and about 6 intermediate contract prices going forward. That is 7 how most commodity markets work. That is how the oil 8 spot markets work. Those have been kind of in 9 existence for a long time and, generally, actually seem 10 to work rather well. 11 So there is always the interplay 12 between: I always have the choice in a commercial 13 contract world of trading under a contract or retaining 14 the exposure to spot market prices. That relationship, 15 where spot prices and contract prices evolve over time 16 given the market's expectations of the future, is a 17 very different one than the kind of 18 artificially-imposed contract that I was mentioning or 19 the regulatorially-imposed contracts. They are not 20 necessarily artificial, they were created for a reason. 21 I just think they had an influence in the market that I 22 described in the Alberta case. 23 So while it is true I believe that 24 there would naturally be a substantial volume of power 25 traded under contracts, as I mentioned yesterday, I 26 think that is how these markets really should work. 27 There should be this kind of co-evolution of spot and 28 contract prices going forward. That is how we see 750 ADAMSON/CONWAY 1 markets work in a whole range of other commodities. 2 So I don't see any danger from this 3 scheme by saying we are trying to help intermediate 4 contract development; I don't see any danger that we 5 are harming the spot market. In effect, I think we are 6 kind of making the spot market part of the market 7 system that should exist anyway. 8 MR. BRETT: I take it that that 9 interplay in electricity markets has taken place in 10 other jurisdictions around the world where they have 11 restructured or are restructuring? 12 MR. ADAMSON: Yes. As I mentioned, 13 in most of these systems the vast majority of the power 14 is actually covered under some form of a financial or 15 physical risk-sharing agreement in conjunction with a 16 spot market, and that seems to be the way these things 17 kind of evolve. As I mentioned yesterday, I think it's 18 because it reflects the fundamental dynamics that there 19 are actually risks on both sides of the table. 20 MR. BRETT: If I may just switch 21 gears once more -- and this is really my last 22 question -- yesterday you sketched out sort of at a 23 broad level your proposal for a sort of, I will say, 24 benchmark/incentive scheme for competitive procurement 25 of electricity by the distributors. 26 What would it take, in your view, to 27 fill in the details of that proposal? How much work 28 would need to be done to flesh that out? I take it 751 ADAMSON/CONWAY 1 that some additional work would need to be done. 2 MR. ADAMSON: Oh, yes. As I 3 mentioned yesterday, this was not intended to offer 4 kind of a complete written out solution, nor was the 5 sort of time and resources made available to make such 6 a thing. Clearly, a critical issue I think for all of 7 us is we don't want to try to switch gears to something 8 that might cause any delay. 9 I think the basic principles of how 10 these systems work are quite well known in terms of 11 writing down the details in sort of elapsed time. I 12 think anyone who proceeded assiduously would be trying 13 to have kind of a reasonably detailed almost kind of 14 handbook of how it would work, which, given a 15 reasonably concentrated effort, would have, I don't 16 know, a month, six weeks for any kind of initial set of 17 comments from the industry participants. That is my 18 sort of very much off-the-cuff idea of how long it 19 would take to write things down. 20 Now, clearly, at that point there is 21 still a process of consultation to make sure everyone 22 is comfortable with how it has been designed, but the 23 good thing is that these types of incentive mechanisms 24 are not unknown. The principles are well known. So 25 it's certainly not like changing something really 26 complex in the spot market structure or transmission 27 pricing that would require a huge kind of design 28 process. 752 ADAMSON/CONWAY 1 MR. BRETT: Thanks very much, 2 gentlemen. Those are my questions. 3 MS LEA: Thank you, Mr. Brett. 4 Mr. Gibbons? 5 MR. GIBBONS: Mr. Adamson, I am Jack 6 Gibbons from Pollution Probe. I would like to ask you 7 one question about the mechanics of your fixed price 8 proposal. 9 Under your proposal, an LDC would 10 offer a fixed price and it would be based on their 11 portfolio of supply, which would include medium and 12 long-term contracts, and part of the supply portfolio 13 would probably be spot purchases. Is that reasonable? 14 MR. ADAMSON: Could you just repeat 15 the last line? I'm sorry, I just didn't hear. 16 MR. GIBBONS: The fixed price would 17 be a function of their supply portfolio, which would 18 include medium and long-term contracts and some spot 19 supplies? 20 MR. ADAMSON: Possibly. One has to 21 remember that you have to have a firm enough supply 22 contract portfolio in order to offer the price. So you 23 can't have huge -- you couldn't have a very substantial 24 spot component if you were trying to set a tariff 25 ex ante, if you will. You couldn't have a very large 26 weighting of spot prices, if at all. 27 MR. GIBBONS: So are you assuming 28 there would be no spots in the portfolio for the fixed 753 ADAMSON/CONWAY 1 price option? 2 MR. ADAMSON: You may be able to have 3 some, but you also are incorporating -- if you are 4 offering a fixed rate, I think the mechanics are 5 relatively clear, you can't incorporate a huge amount 6 of spot price exposure in the portfolio without 7 assuming risk. 8 MR. GIBBONS: Right. 9 MR. CONWAY: I think it's possible, 10 too, that a strategy a portfolio manager might use to 11 diversify the risk would be to try and offer portfolio 12 management services to competitive supply. So if we 13 were worried about volume volatility because of 14 movement between the two portfolios, there would be 15 some isolation by diversifying between the two, and it 16 may be therefore possible to use a much lower component 17 of spot in the portfolio itself. 18 MR. GIBBONS: Mr. Adamson, when you 19 said the spot component would be small, can you give me 20 sort of a ballpark figure? Would it be something like 21 5 per cent or 20 per cent? 22 MR. ADAMSON: I don't quite want us 23 to get ahead of the level of detail that I have 24 actually gotten on designing it up to this point. I 25 don't want to make kind of a numerical estimate because 26 I simply haven't done the type of analysis that I would 27 want to do in order to make sort of a precise numerical 28 number. 754 ADAMSON/CONWAY 1 I think the mechanism I have 2 described is reasonably clear about the potential risk 3 if one included a very large spot exposure. I don't 4 want to make a very precise numerical estimate simply 5 because I just don't feel like I have done my homework 6 to be able to make an assertion of that sort. 7 MR. GIBBONS: But is it reasonable to 8 assume it is likely that greater than zero per cent 9 will be spot? 10 MR. ADAMSON: It's likely to be 11 greater than zero? It has to be zero or greater. 12 I think we don't want to get ahead of 13 ourselves in specifying this. I really don't want to 14 design this on the fly while I sit up here. I think 15 the mechanics I have tried to lay out, my objective was 16 to present this as a concept and to explain the 17 incentives that create -- explain how it might work in 18 economic terms. 19 I don't want to get into trying to do 20 the precise -- I don't want to make assertions to you 21 before I have had a chance to do any homework on it. I 22 just don't think it will serve us well to try to kind 23 of design it on the fly. 24 So, in a sense, I am much more 25 comfortable trying to explain what I have been trying 26 to achieve here and how I envision it working. But in 27 terms of the numerical details, you know -- we should 28 always be careful about trying to simply do things off 755 ADAMSON/CONWAY 1 the cuff without having thought it through. 2 MR. GIBBONS: Okay. 3 Let's just assume for a moment that 4 there is a spot component and at the beginning of the 5 year they establish a fixed price based on an 6 expectation of what the spot price will be. Let's 7 assume at the end of the year that the actual spot 8 price is different from the expectation at the 9 beginning of the year, and there is a differential, 10 either that the LDCs electricity costs are higher or 11 lower than forecast and there will be a differential. 12 What happens to that differential? 13 Does that go to the account of the shareholder or is 14 that differential somehow passed on to the customers? 15 MR. CONWAY: I think it depends. You 16 could also hedge the spot price by buying a call 17 option, for instance, so it really depends how the 18 portfolio manager puts the portfolio together as to 19 whether there would even be a differential to start off 20 with. 21 MR. GIBBONS: Let's just assume that 22 there is a differential and that there is a potential 23 profit or loss. Does that go to the account of the 24 shareholder or are you suggesting that it be passed on 25 to the customer? 26 MR. ADAMSON: The objective was to 27 create a set of fixed prices for the customer and not 28 to back-stop all of the decisions of the procurer. If 756 ADAMSON/CONWAY 1 you allow a pass-through of all of these spot prices, 2 it seems to me we have kind of reverted to square one. 3 In any procurement mechanism design 4 exercise we always want to make sure the incentives are 5 pushed the right way, and I think those incentives 6 would be pretty blunt if we allowed any variation to be 7 returned automatically to the customer. 8 MR. GIBBONS: Thank you. Those are 9 my questions. 10 MS LEA: Thank you, Mr. Gibbons. 11 Mr. Poch. 12 MR. POCH: Thank you. 13 Mr. Adamson, I want to ask you about 14 the impact of the choice between spot price 15 pass-through and the fixed option where the MEUs are 16 actually procuring power on the ability, at least in 17 the next few years, of Ontario Power Generation to 18 exercise market power. 19 As a layman, it strikes me that if 20 you have people just at the whim of the spot market, 21 that would give more leeway to the dominant seller into 22 that market, as opposed to having a number of more 23 sophisticated procurers in the market negotiating 24 contracts. 25 Does that bear up under the scrutiny 26 of an economist? 27 MR. ADAMSON: As I mentioned 28 yesterday, from my view, none of these mechanisms are 757 ADAMSON/CONWAY 1 capable of addressing on their own a fundamental market 2 structure issue. Those have to be dealt with in a 3 broader and more decisive manner than what we are 4 trying to -- than the objective of this technical 5 conference. 6 I think we might make a few 7 observations, I guess. 8 We know that if there were to be a 9 substantial potential for abuse of market power in spot 10 markets, that is quite likely to extend to contract 11 markets as well and vice versa. So we might say that 12 while it is relatively -- maybe this is a problem that 13 exists across any mechanism that we have been 14 discussing here over the last few days, whether it is 15 spot or contract-driven or, indeed, Mr. Todd's kind of 16 RFP option-driven. 17 However, there is possibly a few 18 things which I think may tilt the playing field 19 somewhat toward the contractual mechanism. You 20 mentioned -- and it is one which I think is actually 21 relatively valuable -- that in the kind of pure spot 22 mechanism no one is actually kind of negotiating on 23 behalf of the customer. The standard supply service 24 providers are completely indifferent. You know, it is 25 effectively just a calculation. 26 One observation about how market 27 power is applied in these markets has really, I guess, 28 to do with the value of information. It seems to me 758 ADAMSON/CONWAY 1 that the spot price mechanism is not providing any kind 2 of countervailing force for accumulating information 3 and using it in an appropriate way that a procurement 4 mechanism might provide. 5 We might also think that the 6 contractual mechanism at least leaves scope for entry 7 by non-generation players into hedging markets. 8 Persons or organizations might find it possible to 9 offer some sort of risk-hedging services through 10 potentially being able to re-ensure some risk 11 themselves by potentially being able to deal with some 12 of the basis risk between Ontario spot prices and 13 prices in other markets, for example in western New 14 York state or into the NYMEX synergy market or other 15 related markets in the U.S. 16 Most importantly, I would argue that 17 getting these contract market offers, you may not cure 18 it in day one but it offers the best hope for bringing 19 in the only thing which is really going to help, which 20 is the fundamental market structural change, and that 21 is by getting some new entry into this market. 22 Without kind of an accelerated 23 process of market structural change, if we feel that 24 there is a significant potential market power problem, 25 the only cure for that is going to be entry. As I have 26 tried to say before, I do think the contractual 27 mechanism offers a wider scope for entry, particularly 28 by smaller market players. 759 ADAMSON/CONWAY 1 I think the field is actually tilted 2 to the contractual solution as opposed to the spot 3 price solution, in terms of how the kind of potential 4 for abuse of market power might play out. 5 MR. POCH: Thanks. I have a couple 6 of questions on your yardstick regulation model. 7 In such an approach, need we be 8 concerned about sweetheart deals with affiliated 9 generators or power brokers or cross-subsidy? 10 MR. ADAMSON: Yes. You would 11 potentially -- one would always be worried about a 12 self-dealing-type arrangement, and really the reason is 13 pretty clear. 14 I had on the little slide with the 15 coloured bars yesterday these kinds of risk-sharing 16 bands illustrated. If a standard supply service 17 provider was able to effectively get a non arm's-length 18 sweetheart deal, as you put it, with, say, an 19 affiliated generator, and try to include that in their 20 portfolio, would the benefit they were getting from 21 that, would the kind of profit they were getting from 22 that, be matched against the penalty of, say, including 23 a higher average cost in their yardstick? One couldn't 24 be -- it would be more difficult to ensure that that 25 wasn't happening. 26 So I think most procurement 27 mechanisms of any sort have some sort of protections 28 there. 760 ADAMSON/CONWAY 1 To give you an idea -- and I am not 2 quite sure I can remember all of the numbers and 3 percentages right, so perhaps Fiona can help me 4 later -- there were restrictions, for example, on the 5 ability of the regional electricity companies in 6 England and Wales to buy power for their franchise 7 customers from generation projects in which they had an 8 interest. It was partially just to try to sort of 9 control these types of -- to try to ensure that the 10 incentives from non arm's-length transactions didn't 11 distort things. 12 The good thing is that, in general, 13 this has not been the biggest problem in the world of 14 implementing it, at least from my experience. I think 15 the restrictions one would need would be pretty simple 16 and pretty easy to write down. 17 MR. POCH: Indeed, the legislation 18 contemplates that. It is just I am wondering if we 19 need any other special protections. 20 MR. ADAMSON: No. 21 MR. POCH: Okay. In the particular 22 example of yardstick comparative or relative 23 competition -- I forget the phrase you have used -- you 24 have this penalty and bonus regime. 25 If that proves to be problematic 26 under the legislation, can you offer us any other means 27 that keeps regulatory burden in check, any other means 28 of yardstick or other light-handed regulation, but that 761 ADAMSON/CONWAY 1 doesn't require the Board to take cash from one utility 2 and give it to another? 3 MR. ADAMSON: Yes. Let's be a 4 little -- and perhaps I should have been a bit more 5 precise in my terminology. When I say penalty and 6 bonuses, it need not be in a kind of legal sense. My 7 interest is just in the creation of economic incentives 8 for efficient procurement. That is probably a slightly 9 less loaded phrase. 10 To me, it was up on the slide and it 11 is kind of easier to almost explain in a conceptual 12 basis. 13 Let's think of them as economic 14 incentives for efficient procurement. Need that 15 involve money being transferred from one to another? I 16 don't think it does. 17 I think a kind of an accrual 18 mechanism within a utility's own account might -- I'm 19 sorry, a standard supply service provider's own account 20 might serve the same purpose by involving -- and I 21 think these types of accrual accounts are common in 22 almost every regulatory regime, of basically 23 recapturing, either way, the incentive payment in the 24 next period so that no money need flow from A to B or B 25 to A. It may simply be that your "bonus", your 26 incentive payment, comes next period but no money need 27 change hands. 28 From my very simplified reading of 762 ADAMSON/CONWAY 1 the Act -- and again, I would certainly defer to those 2 persons present who have the legal understanding of 3 it -- that system would not pose any problems. 4 MR. POCH: We have comparable systems 5 already in place in gas, as you suggest. 6 MR. ADAMSON: Yes. So it is very 7 similar to a PBR-type system really. It should be 8 thought of as being very similar to the PBR system 9 which is being employed in other aspects of the 10 electric industry here in Ontario. So it is certainly 11 not a foreign concept. 12 I think that the way that the monies 13 would move between periods could be relatively similar 14 to how one would have it in a PBR system. 15 MR. POCH: Right. Okay. 16 Moving on to a subject dear to my 17 heart, the environmental matters, green power, for your 18 information, the Energy Board has a statutory objective 19 to facilitate, to move towards more environmentally 20 benign energy sources. We are suggesting that the 21 Board require a bundling-in of green power, the exact 22 amount of which would be determined, presumably, 23 generically for the sector based on consideration of 24 costs and benefits and price impacts. It could be done 25 with a fixed requirement or through some incentive 26 approach. 27 Does such a requirement conflict in 28 any way with your proposal, assuming it's a small 763 ADAMSON/CONWAY 1 proportion of the fixed portfolio? 2 MR. ADAMSON: I think if you wanted 3 to implement a -- I guess your question is: Is it 4 possible to interface a green power requirement with 5 the standard supply service mechanism that I have 6 discussed? 7 MR. POCH: Yes. 8 MR. ADAMSON: Can those interface 9 together well? 10 I don't see why they can't. I think 11 if you wanted to have a green power portfolio 12 requirement, if that was a policy decision of the 13 province, I don't see why there couldn't be built into 14 the requirement of the standard supply service 15 providers to meet some kind of portfolio green power 16 requirement, if that is what was chosen to be done. 17 Again, in assuming some of this new 18 green power would be built rather than existing green 19 power, it might even help some -- the availability of 20 this risk hedging potential that I discussed earlier 21 might in fact help get some of it built. 22 But I don't see any fundamental 23 disconnect between the system I have described and a 24 green power portfolio requirement if the province 25 decided that that was the way it wanted to go and 26 wanted to implement that. 27 MR. POCH: Okay. I have one final 28 question. I am going to ask you to look at a document 764 ADAMSON/CONWAY 1 that I have obtained from your fair country. 2 I will hand it out. 3 --- Pause 4 MR. POCH: I have put in front of you 5 a document we pulled off the Web entitled "Databases 6 State Incentives for Renewable Energy", published under 7 a program called National Databases State Incentives 8 for Renewable Energy, initiated by the U.S. Department 9 of Energy. 10 I take it you are familiar with the 11 U.S. daily -- 12 MR. ADAMSON: Yes. 13 MR. POCH: This includes two tables, 14 one of which is State Financial Incentives to 15 Renewables and the second which is State Programs and 16 Regulatory Policy table. 17 I should indicate that this is 18 already about six months out of date, this particular 19 printout. 20 I am not asking you to verify every 21 circle and shaded square. I am really just putting 22 this in front of you to see if you can confirm, from 23 your experience south of the border, my impression, 24 which was that things like RPSs, or renewable portfolio 25 standards, or set-asides, or net metering, and so on, 26 which are regulatory supports for renewables, are a 27 fairly commonplace feature emerging in jurisdictions in 28 the States going through restructuring. 765 ADAMSON/CONWAY 1 MR. ADAMSON: Well, I can't say I am 2 intimately involved or knowledgeable of the 3 restructuring programs and legislation which, as you 4 have suggested yourself, is continuously changing in a 5 lot of the States. A lot of the States have relatively 6 early-stage restructuring proposals or draft 7 legislation on the table. 8 Certainly, some of the States I have 9 been involved in the restructuring of, they have had 10 pretty substantial discussions of green power 11 renewables issues. That is not an area that I 12 personally work on in terms of these restructurings. 13 We all have our specialties, even within this field. 14 So I am probably not a great person to confirm these 15 types of things. 16 MR. POCH: Well, I wouldn't ask you 17 to -- 18 MR. ADAMSON: These are certainly 19 issues that have been discussed in a lot of U.S. state 20 jurisdictions through the restructuring process. I 21 guess your sort of table from the Department of Energy 22 suggests, certainly, some of the States have included 23 in the -- some of the States have gotten further along 24 and included some form of these programs in their kind 25 of final regulatory restructuring design. 26 I am probably not the person to ask 27 about how all those work in detail because I'm just not 28 expert enough on it. 766 ADAMSON/CONWAY 1 MR. POCH: I wasn't going to get into 2 detail with you. I was really just asking you to 3 confirm my understanding that generally this is fairly 4 prevalent in the discussions and has been put in place 5 in a number of jurisdictions. 6 I take it that that general take on 7 it is in accord with your understanding? 8 MR. ADAMSON: Yes. Broadly speaking, 9 I agree with that statement. 10 MR. POCH: Okay. That is all the 11 questions, then. Thank you very much. 12 MS LEA: Thank you, Mr. Poch. 13 Is Mr. Rawson, or someone else from 14 TransCanada Power, here? 15 Okay. Thank you. 16 Mr. Ronayne? 17 MR. RONAYNE: I'm Mark Ronayne. I am 18 not a lawyer, I am an economist, a senior economist, 19 with the Competition Bureau, so I'm going to try not to 20 be -- I'm not going to focus on legal issues here, but 21 I would really like to get to the point of what you are 22 saying in this, Mr. Adamson, in particular. 23 I think you are saying that there are 24 various ways for dealing with the standard supply 25 service option and it is a matter of choosing sort of 26 the lesser amongst a bunch of evils. Is that -- 27 MR. ADAMSON: That is one way to put 28 it. I would say it is very important to recognize -- 767 ADAMSON/CONWAY 1 which I think I have put almost as one of the first 2 lines of my paper -- that there is a set of trade-offs 3 in designing this or almost anything, and we need to be 4 very cognizant of what those trade-offs are. So in a 5 very idiomatic way, I guess there is always the choice 6 of the least of evils. 7 MR. RONAYNE: Thanks. 8 MR. CONWAY: I would suggest that one 9 of the options is definitely evil. I'm not sure about 10 the others that we proposed. 11 MR. RONAYNE: Well, let's just say we 12 are in a world of, at best, second best, then, if we 13 can put it that way. 14 I just wanted you to clarify, 15 perhaps, one statement you just made a minute ago. 16 You said that under SSS nobody is 17 negotiating on behalf of the consumer if it's a spot 18 price pass-through mechanism. But that is in regard to 19 the standard supply option only, in that, as far as 20 negotiating on behalf of consumers and packaging energy 21 and waste that are acceptable to consumers, there 22 should be retailers in the marketplace that may be able 23 to perform that function. 24 MR. ADAMSON: Yes. As I think I 25 tried to draw a mental picture of yesterday, remember 26 that the smaller world of standard supply will be 27 surrounded by a kind of a broader universe of the 28 competitive retail market and that the provisions, from 768 ADAMSON/CONWAY 1 my reading of course, always leaves everyone the option 2 to move into that competitive retail market and so, 3 remember that we have focused our attention on the 4 standard supply service issue but it really is kind of 5 imbedded in the kind of larger competitive retail 6 market in the province, which, from my reading, the Act 7 makes perfectly clear is available to people to enter. 8 MR. RONAYNE: I haven't seen your 9 proposal anywhere else, the type of argument that you 10 are making, and I find it quite interesting, so I hope 11 you don't mind if I have a lot of questions. 12 MR. ADAMSON: I have an example of 13 it. 14 MR. RONAYNE: Oh, you do have an 15 example? 16 MR. ADAMSON: Yes. 17 MR. RONAYNE: For a standard supply 18 service? 19 MR. ADAMSON: Well, they don't call 20 it that. In Colombia, in South America, I think the 21 Ono test has the reputation among those of us who kind 22 of deal with this around the world as being one of the 23 more successful Latin American restructuring efforts. 24 They don't have standard supply because they don't have 25 retail competition. What they have is they have 26 distribution utilities that buy on behalf of their 27 customers for everyone, or virtually everyone. So it 28 is somewhat -- it is very economically similar to what 769 ADAMSON/CONWAY 1 we are talking about. 2 MR. RONAYNE: Is there retail access, 3 then, in that -- I wasn't clear. Is there retail 4 access in that -- 5 MR. ADAMSON: No, no retail, or maybe 6 only for a very small percentage of customers. 7 MR. RONAYNE: Okay. So no retail 8 access -- 9 MR. ADAMSON: Unfortunately, I'm 10 having to relay to you information provided by a 11 colleague who has worked a lot on the Colombian market 12 and has the great advantage of speaking Spanish and is 13 able to read all the documentation in the original, 14 unlike me, whose Spanish just mainly consists of words 15 from Mexican restaurants. 16 To give you a little description of 17 how it works, though -- and I think you will see the 18 analogy of what I am discussing here -- is the 19 distribution companies who provide the service in 20 Colombia buy power for their customers primarily under 21 contract, they are required to buy under contract, for 22 the majority of it, from the spot market, called the 23 "bolsa", in Colombia. 24 Now, the regulatory agency, whose 25 name I won't embarrass myself by trying to pronounce in 26 Spanish, allows them to pass through contract costs up 27 to a certain point. I think the number is about 70 per 28 cent, but I want to check this, in terms of the exact 770 ADAMSON/CONWAY 1 percentages. Some amount of it is the pass-through and 2 some amount of what they get to charge to their 3 customers is the average cost across all the 4 distribution companies out of the larger set of 5 distribution companies. So for that component of it 6 you will see it is quite similar to the example I had 7 up on the overhead yesterday of my airplane tickets 8 example, where if I allow Mr. Stephenson to charge me 9 the average price and he keeps the difference if he 10 manages to do it cheaper or pays the difference if he 11 is above the average it produces this quite strong 12 incentive to bring down the average purchase cost. 13 So the mechanism is actually really 14 quite parallel to the one I'm talking about in that it 15 does use an explicit comparative competition mechanism. 16 It is implemented in a slightly different way than the 17 one I have discussed but, really it is more of a -- as 18 much of a difference in how the way I have described is 19 a fundamental economic difference. So it is not a 20 mechanism that hasn't been tried. 21 It seems to have worked rather well 22 in Colombia. One thing I would really quite like to 23 note, because it highlights some of the issues that 24 some of the other people have brought, is that there 25 appears to be quite a strong contract market in 26 Colombia, despite a very widely varying bolsa price, 27 which is partially dominated by hydrological risk and 28 the risk of El Nino years which affect the weather in 771 ADAMSON/CONWAY 1 that part of the world rather substantially. Despite 2 that, the contract market is quite strong. There has 3 been a substantial amount of private investment in the 4 sector, of the sale of generation assets to foreign 5 companies from Chile, from the United States, from 6 Spain. 7 Interestingly, Colombia has one of 8 the first new entrant merchant generation projects 9 coming on line, and this is in a country which has had 10 a series of financial and economic crises and some 11 pretty substantial currency risks and pretty 12 substantial political risks. Even so, I mean there is 13 a pretty good contract market there, which is really 14 helping people who are looking at either building or 15 buying this merchant generation in Colombia. 16 So the mechanism does seem to be 17 aiding the development of the contract market in the 18 way I described. 19 Now, I certainly don't have with me 20 all the details of the exact implementation of the 21 Colombian system, but I could try to get them. 22 MR. RONAYNE: Is the difference 23 between Colombia and Ontario how they are dealing with 24 market power issues at the generation level? Is there 25 an issue in Colombia around having a large generator at 26 the centre of the system? Do they have something like 27 the market power mitigation program in place that is in 28 Place in Ontario? 772 ADAMSON/CONWAY 1 MR. ADAMSON: They don't really have 2 exactly the parallel problem. To my knowledge, there 3 is not an equivalent of the MPMA in Colombia, but they 4 also don't have the same market structural issues. 5 MR. RONAYNE: Fair enough. 6 MR. ADAMSON: In that sense, I think 7 the fundamental differences in market structure has 8 just meant that the issues are just different. 9 MR. RONAYNE: Thank you. 10 So then something that is very 11 different between Columbia and Ontario is the market 12 power monitoring mechanism or the agreement to deal 13 with market power. 14 So in that context, I guess my 15 question is, partly: What intermediate markets are you 16 exactly trying to develop in this marketplace where we 17 have the bulk of the power being capped annually at 18 3.8 cents, and that is going out likely 42 months, and 19 then going beyond that, perhaps up to 10 years before 20 that price cap is going to be removed? So that is kind 21 of a fixed price or a guaranteed price that Ontario 22 Hydro is going to get. They can get up to it and they 23 can't get less. 24 So I guess what I'm wondering about 25 is, given that is going to exist in the marketplace, 26 that the bulk of the power is going to be provided at 27 3.8 cents, what are you trying to build around that 28 3.8 cents through this proposal? 773 ADAMSON/CONWAY 1 MR. ADAMSON: I wasn't sort of 2 present at the birth of the formation of the MPMA so I 3 guess I'm a rather Johnny-come-lately to this. 4 My reading of the MPMA is it is not 5 actually a guaranteed price, it is more of the form of 6 a revenue cap, a kind of a revenue -- yes, kind of a 7 revenue cap arrangement. Part of my problem with it is 8 that it creates the rebate mechanism, as you suggested, 9 at this kind of specified price for a very considerable 10 period of time, a very considerable amount of 11 generation unless decontrol happens on a much faster 12 time schedule. 13 A problem, from my perspective, with 14 the way the thing is laid out, is I'm not sure it 15 absolutely guarantees the price at any particular hour, 16 it actually creates a revenue cap on an annual basis 17 across 8,760 hours based on a formulation of these 18 model "Q"s used, which I can't say I have fully come to 19 terms with exactly how these "Q"s were derived. 20 That can have some relatively 21 different incentives, in my mind, than, for example, 22 the legislated hedge mechanism that we talked about in 23 Alberta. 24 It is not clear that the price is 25 fixed at 3.8 cents, what is clear that on an annual 26 basis there is a formula for revenue capping. That, to 27 me, does not necessarily help to exactly specify prices 28 in any one hour, and in fact, as I think I alluded to 774 ADAMSON/CONWAY 1 yesterday, one would want to investigate carefully and 2 critically the incentive that creates on individual 3 hourly prices under that type of revenue capping 4 scheme. 5 MR. RONAYNE: I thought your concern 6 wasn't with the hourly prices but it is with the 7 intermediate markets. I mean, it wasn't with the spot 8 price. What you are trying to promote -- I mean, that 9 seems to me like it's a spot price issue in 10 interpreting the spot price concern. 11 What you are focusing on is annual or 12 longer type of contractual arrangements. Am I wrong in 13 that? 14 MR. ADAMSON: What I guess is, I'm 15 highlighting the fact that it is not the same as saying 16 that there is an offer price at 3.8 cents which goes 17 for a year. What there is is a mechanism which creates 18 specific incentives on the spot price. 19 A secondary issue, but I think a 20 direct economic consequence of the market structure and 21 the incentive created by the MPMA, is: What does that 22 mean to the contract market. 23 I agree with your assertion, what I 24 take to be your assertion -- and please let me know if 25 I'm saying something you don't agree with -- I agree 26 with your assertion that the potential for the abuse of 27 market power in the contract market is definitely 28 there. Can we have a really well operating 775 ADAMSON/CONWAY 1 intermediate market in a situation of very heavy 2 concentration for an initial period of time? I don't 3 think we can. 4 I would also point out that we also 5 don't, in that case, have much of a spot market either. 6 MR. RONAYNE: I don't think I said 7 that we did have a spot market. 8 --- Laughter 9 MR. ADAMSON: The two are sort of 10 dual. They are almost kind of mirror-type images of 11 each other. They coexist. 12 But I do agree with your assertion 13 that the potential for the ability get a good 14 intermediate market in Ontario will always be 15 constrained for some period of time if there is simply 16 not enough potential natural counterparties -- 17 e.g. generators -- in order to make their market 18 competitive. 19 MR. CONWAY: I would like to add a 20 comment also. 21 There are two schools of thought 22 about how the Market Power Mitigation Agreement should 23 be viewed, as to whether it is a cap or whether it is 24 actually a floor. 25 You will see in the study that we 26 filed yesterday that the cap only protects about 27 three-quarters of the market, 90 per cent or 85 per 28 cent of the Genco volume in the market. Therefore, at 776 ADAMSON/CONWAY 1 least a quarter of the market is unprotected. 2 The rest of the study goes on to say 3 that the volatility before market power mitigation is 4 probably going to be quite high. If you only have 5 three-quarters coverage, basically you have a quarter 6 of the volatility flowing through to the customer even 7 after market power mitigation rebates. 8 So my contention is that a quarter of 9 a very large number is still a large number. So there 10 is going to be some volatility in this market. 11 MR. RONAYNE: Well, we will get to 12 the volatility issue later, because I do want to 13 explore that and exactly what volatility you are 14 talking about. 15 You draw a distinction between -- 16 because you are talking about making a fixed price 17 offer available of some sort. Presumably, that is not 18 going to be a direct spot market price pass-through, 19 but it is going to be maybe a one-year or two-year or 20 three-year type of option. 21 So if we are talking about 22 comparative implications for one or the other, then we 23 are looking at what about over a year, or something 24 like that. What is going to happen from hour to hour 25 to hour in the spot market? There may be ways to deal 26 with that type of volatility, but I will get to that 27 later. 28 Mr. Conway, you said there is maybe 777 ADAMSON/CONWAY 1 25 per cent that won't be subject to the price cap or 2 the market power mitigation measure? That is what you 3 think? Is that who you are focusing on, then, for 4 intermediate markets, that other 25 per cent? The rest 5 is sort of guaranteed at 3.8 cents. 6 I'm trying to figure out what you are 7 getting at here in the intermediate market. 8 MR. CONWAY: Well, the rebate goes 9 back to all players in the market. What I'm saying is, 10 they are only going to get coverage to cover 11 three-quarters of the volatility they would have faced 12 without the Market Power Mitigation Agreement. So 13 virtually every customer exposed to spot is going to 14 see at least a quarter of what is happening in the real 15 spot market. 16 MR. RONAYNE: All right. 17 So you are saying that the volatility 18 for a consumer, then, is on the 25 per cent that is not 19 subject -- over an annual basis, it is the 25 per cent? 20 They have some possible downside? 21 MR. CONWAY: They have some downside, 22 and the upside -- 23 MR. RONAYNE: It is downside in the 24 sense that the price will be lower -- 25 MR. CONWAY: Right. 26 MR. RONAYNE: -- may be lower. 27 MR. CONWAY: Well, on a daily basis 28 they face the actual volatility. After the rebate they 778 ADAMSON/CONWAY 1 have some downside at 100 per cent of what is going on, 2 and the upside is constrained to a quarter of the 3 upside volatility. 4 Like I say, a quarter of upside 5 volatility in any electricity market I have seen is 6 still a pretty large number. 7 MR. ADAMSON: My problem is clearly 8 illustrated by this. There are a lot of ways to get 9 3.8 cents, in fact there is an almost infinite number 10 of -- there is almost an infinite number of ways with 11 8,760 hours to meet a revenue cap. 12 I will be the first to admit I have 13 not made nearly as detailed a study as Mr. Todd, but 14 just from reading the formula and from -- I mentioned 15 the experience of the offers' rather ill-fated 2.54p 16 cap in England and Wales. I can think of a lot of ways 17 to make that number happen. 18 MR. RONAYNE: I'm sure you can. 19 But I guess what I want to get at is, 20 if you have market power and you have a 3.8 cent cap, 21 your concern is going to be getting to that cap, and if 22 some times during the year you can't get it you will 23 probably try to recoup it later on. So you may end 24 up -- and I think this is partly your argument -- that 25 you may see, during some periods, very low prices 26 followed by abnormally high prices, higher than they 27 should be, which are the result of market power in 28 order to achieve the 3.8 cent cap. I will certainly 779 ADAMSON/CONWAY 1 accede that point. 2 But if there is a price cap, which is 3 an annual price cap, in place and a person is rational, 4 in some form of the word, I mean, I don't think it 5 takes rocket science to realize that, well, if they are 6 price capped at 3.8 cents and they are going to have to 7 rebate on the basis of a 3.8 cent price, then over a 8 year what I expect is that power I am going to get at 9 3.8 cents. 10 MR. CONWAY: That is exactly the 11 problem I am trying to address. It's a delusion. 12 MR. RONAYNE: I'm talking about for 13 the Ontario Hydro power, the OPG power. I'm not 14 talking about the other 25 per cent. 15 MR. CONWAY: The market is the total 16 market. So customers are going to see what is 17 happening in the total market, and OPG is not enough, 18 the rebate is not enough to cover the entire case. 19 MR. RONAYNE: So you are agreeing 20 with me, then, that it is the 25 per cent that is the 21 volatile part of the marketplace? 22 MR. CONWAY: No. The whole 23 marketplace is volatile. 24 MR. RONAYNE: On an annual basis. 25 MR. CONWAY: The whole market is 26 volatile. The rebate will tend to mitigate some of the 27 volatility, but it is not going to eliminate it. 28 As I said, the two schools of 780 ADAMSON/CONWAY 1 thought. I think one is delusional, which is the 2 3.8 cents as a cap. The other, probably more realistic 3 view of it, is that 3.8 cents is the floor and that the 4 excursions above 3.8 cents are likely and that the 5 customers are not going to see a full mitigation of 6 those excursions. 7 MR. RONAYNE: There is something in 8 that that would explain to me -- is there analysis that 9 you have done to say that this price cap in the market 10 power mitigation proposal on the table in Ontario is 11 not going to work as intended? 12 MR. CONWAY: I don't know what intent 13 it was. It was intended to give some mitigation to the 14 exercise of market power. In other words, it is really 15 just trying to leash or harness market power to some 16 extent. 17 MR. RONAYNE: Fair enough. 18 MR. ADAMSON: So I think the hope is 19 that price will be around 3.8 cents, but if you go 20 through the analysis that was conducted in the study I 21 referred to, you will find out that there are lots of 22 occasions where a price could go above 3.8 cents net 23 after market power mitigation. 24 MR. RONAYNE: Thank you. 25 MR. ADAMSON: One of my concerns 26 about it, Mark, is that, as I said, I think there are a 27 lot of ways to get that number to come out. 28 Let's assume your assumptions and say 781 ADAMSON/CONWAY 1 that the annual average for that volume will sort of -- 2 well, that needle will be pegged at 3.8 cents. Let's 3 just take that as your assumption -- as an assumption, 4 not necessarily your assumption, that on the annual 5 average basis there will be that 3.8 cents. 6 Now, even under that I suggest we may 7 still have a problem. It is the problem that, 8 particularly under a spot market mechanism, for anyone 9 facing daily prices, these are not just revenue 10 numbers, these are meant to be prices, and prices are 11 supposed to send signals which are allocatively 12 efficient. These are supposed to send signals about 13 when people should consume electricity. 14 So we impose this cap, or this 15 mechanism, and kind of guarantee this average, but we 16 need to be very careful -- well, if I was asked, and 17 since I'm up here I guess I have a microphone and I 18 guess I'm talking about it anyway -- we need to be 19 careful in looking at a system so that there is no 20 incentive for prices to be distorted, because what 21 would potentially worry me is a system where, even 22 though we met kind of an average target, there was the 23 potential, for example, for substantial exertion of 24 market power in specific periods to raise mid-merit and 25 peak prices and suppress off-peak prices, or any one of 26 a number of scenarios one might conjure up. 27 And why is that important? Well, 28 because it really greatly affects -- if you think that 782 ADAMSON/CONWAY 1 behaviour exists and if you think it potentially occurs 2 and continues, it would greatly affect the average unit 3 revenue received by a new entrant generator into the 4 market. If I believe that new entry is not very likely 5 at every point across the price duration curve, it is 6 really probably actually only concentrated in one or 7 two areas, probably pretty near base load for a 8 combined cycle plant. Anything that affects the 9 average unit revenues at those types of capacity 10 factors or artificially suppresses them can have a very 11 strong anti-competitive effect. 12 If I got to dictate prices -- and 13 this again is my assumption -- I would be looking very 14 hard to ensure that I earned most of my 3.8 cents over 15 time during the period of which this mechanism existed 16 in periods which were very unlikely to be attractive 17 for a new entrant to enter at those types of capacity 18 factors. 19 I might be trying to shape the market 20 outcome for the purposes of, over the longer term, 21 ensuring that my competitive position wouldn't be 22 eroded over time because, from a pure capital 23 efficiency standpoint, I think it's pretty clear to all 24 of us that a lot of the likely new entrant generation 25 technologies really can't occur at every capacity 26 factor. No one is going to be able to afford to build 27 a combined cycle plant that's going to operate on a 28 40 per cent capacity factor. The average unit revenue 783 ADAMSON/CONWAY 1 requirement is so much higher than had it ran at a much 2 higher capacity factor. 3 So remember that there are still some 4 effects about what the shapes of prices are, as well as 5 their kind of annual averages under the MPMA, because 6 it can still have competitiveness effects in the market 7 which could affect the investment decisions and again 8 these are meant to be prices for consumption. We are 9 going to have people responding to hourly prices, we 10 know there is going to be industrial load out there and 11 we don't want those massively distorted. It's just 12 purely allocatively inefficient. 13 I think there are some broad lessons 14 and some broad experience to be gained through a little 15 historical excursion in looking into the effects of 16 some of these mechanisms that have been in other 17 jurisdictions, such as England and Wales. 18 MR. RONAYNE: Thanks for that long 19 answer. 20 MR. ADAMSON: Sorry that turned into 21 a lecture. 22 MR. RONAYNE: I want to move on to 23 something else. No, maybe I just have one final 24 question on that. 25 The times when you expect 26 excursions -- load demand times that you would expect 27 in the market tend to be more competitive when 28 Ontario -- well, Ontario is a winter peak area, so 784 ADAMSON/CONWAY 1 let's say in the summer or in the fall, because you are 2 further down the supply curve, competition would tend 3 to be more intense in the sense that, depending on who 4 the competitors are, you may have a more competitive 5 market then, as opposed to a peak where much more of 6 Ontario Hydro's or OPG's capacity would be dispatched 7 in the wintertime. 8 Do you think the excursions might, 9 anyway, kind of track what would happen normally in a 10 marketplace but maybe make it more volatile? Let's say 11 during periods that would be low-priced periods, under 12 a competitive scenario, the prices would still be low, 13 but during the high-priced periods, peak periods, 14 prices would be significantly higher. I am not exactly 15 sure what you would expect to have happen here. 16 MR. ADAMSON: I think you are 17 basically probably familiar with my approach of 18 thinking about these markets from the Alberta 19 experience. Things are very heavily affected by the 20 shape of the supply curve. In very broad terms, 21 though, I think I would probably be in agreement with 22 your statement that the ability to influence prices is 23 clearly correlated to demand and in high demand 24 periods, which, as you suggest, is winter in Ontario, 25 then pricing power is much likely to be increased. 26 A very nice little way to cut through 27 and think about this is to think about the relationship 28 between, effectively, reserve margin and the size of 785 ADAMSON/CONWAY 1 the largest player. One very clear illustration of 2 market power is if the reserve margin is smaller in an 3 hour -- let's say the amount of excess operable 4 capacity, so you would need to account for maintenance 5 and whatever. If the amount of excess capacity in an 6 hour is -- if the excess of that capacity is smaller 7 than the largest player, then that largest player has 8 got to be called. 9 Just think about it as a simple 10 Cournot game. If that largest player has to be called, 11 then he or she gets to set the price that's called. 12 Obviously, the way to think about it in terms of your 13 seasonal picture is that, generally, of course in 14 simple terms, that hourly reserve margin is going to be 15 much, much lower in these peak periods. So are the 16 number of hours going to be much higher? Yes, the 17 number of hours of significant potential pricing power 18 are likely to be much higher when demand is higher. 19 MR. RONAYNE: Thanks. 20 I gather your area of expertise 21 includes really investment measuring risks and that 22 sort of thing, measuring risks for new proposals. You 23 could help me on this because I think the resource 24 costs of what you are proposing are one of the things 25 that go into the equation here. 26 I am just wondering, to be able to 27 provide a portfolio of contracts and do a good job at 28 it, the way that you are proposing that maybe MEUs or 786 ADAMSON/CONWAY 1 others will be doing for the MEUs, what sorts of costs 2 and systems would be involved? 3 I guess the other issue, I suppose, 4 is also human capital, which is extremely important, 5 and I guess expertise in doing this sort of thing. 6 Would you agree? What would you need, really, to do 7 this job well, besides Seabron Adamson maybe? 8 MR. ADAMSON: I wouldn't claim any 9 expertise in terms of the costs or investment 10 requirement for trading in portfolio management. There 11 is a lot of trading operations already existent around 12 the world. Their scope differs a lot from each other. 13 Their systems requirements, their level of effort 14 requirements vary an awful lot between each other. So 15 I wouldn't in any way want to say that I was an expert 16 at this. Barry is a much better person maybe to 17 address that. 18 I think if you were to do a rough 19 kick at the numbers, the costs for a handling franchise 20 service, kind of the equivalent of standard supply 21 service, by the RECs in England and Wales for doing 22 this has not been extraordinarily high, nor have they 23 found it extraordinarily beyond their capabilities. 24 You have to remember that these were publicly-owned 25 bodies as well, when all this kicked off, and probably 26 in many ways were not the quality of the institutions 27 here in Ontario, by any stretch of the imagination. 28 I haven't done any kind of -- before 787 ADAMSON/CONWAY 1 I came up here, I wanted to try to do sort of a 2 rough-cut analysis of what it might cost for a standard 3 supply service provider to undertake these functions, 4 but I think you would need some more time and effort to 5 do a good illustration of it. 6 What I would say is that there do 7 seem to be entities similar to the ones that we are 8 talking about in the world. They are using very small 9 percentages of the actual retail electricity costs in 10 performing these functions. It doesn't seem to me to 11 have been extraordinarily burdensome, so I think we 12 could take a bit of comfort from that. 13 If we took the entire cost of what is 14 called the supply price control in England and Wales, 15 for example, down to the level of the customer's bill, 16 it doesn't add up to much. That includes all the 17 billing activities that have to be done, anyway, under 18 any one of these schemes and call centre management and 19 stuff, which are certainly the most expensive parts of 20 direct supply businesses. 21 So I didn't have a number of what is 22 my cost, but I would note that institutions 23 in -- distribution entities in a number of 24 jurisdictions of quite different characteristics, 25 ranging from England and Wales to Latin America to 26 Australia, seem to be undertaking these kinds of 27 functions and I haven't seen that the cost has been 28 extraordinary. 788 ADAMSON/CONWAY 1 You are going to make a comment on 2 this, are you? You are probably better placed than I 3 am. 4 MR. CONWAY: I think the cost of 5 set-up really depends on how you do it. If you are 6 putting a procurement operation together by extending 7 an existing trading floor, set-up costs are probably 8 quite low. You are talking about the incremental 9 labour cost and a few more desks on the trading floor. 10 To build a small procurement shop is 11 in the order of magnitude of $4 million or $5 million 12 to set it up and $2 million or $3 million to run it 13 annually. 14 MR. RONAYNE: You were asked 15 yesterday about your views on the types of choices that 16 should be made available, and you said that you don't 17 have an opinion on that. 18 I just want to ask, on pain of having 19 to give up your economist's card, which you have put at 20 risk a couple of times: In a competitive market, is 21 not a spot market price pass-through option very 22 important to have on the table? If that spot market 23 is -- 24 MR. ADAMSON: Yes. I think if it can 25 be incorporated into the provider's systems and 26 stuff -- and I don't see any reason why it couldn't, 27 but I am not a systems expert -- that to me seems to 28 be -- 789 ADAMSON/CONWAY 1 If I was going to have two options, I 2 would have a base fixed rate kind of option that every 3 one of these providers could offer, and a spot price 4 pass-through for those who wanted to check that box. 5 My sense is that we don't want too 6 many rates. It just creates a lot of complexity and it 7 creates a lot of system costs and so on and so forth. 8 But two does not sound unduly difficult for people to 9 handle, one fixed rate and one spot price pass-through, 10 and, I don't know, check the box. 11 MR. RONAYNE: In fact, would you add 12 what the spot price, having that sort of pass-through 13 mechanism, could play -- I think you have said this in 14 Alberta -- in promoting demand-side responsiveness? 15 Having access to real time rates could play an 16 important role in mitigating market power? 17 MR. ADAMSON: Demand-side response 18 is, obviously, critical in mitigating market power. At 19 peak in the system it is by far the best control. It 20 is almost a requirement. 21 I do believe that an awful lot of the 22 people on standard supply service rates are not going 23 to be in a position to respond to the prices, 24 especially since you actually don't get the prices 25 until after the fact. It is hard to see the value of 26 these prices after they have already happened. 27 Remember that we are actually mainly interested, in 28 terms of the value of either market power or just sheer 790 ADAMSON/CONWAY 1 production efficiency in demand-side response, in a 2 number of peak periods and we are going to -- even 3 under the spot price pass-through we are talking about 4 offering averages of prices, but we are still not 5 getting that very sharp price signal. 6 I think most of the load that is 7 really critical for that is just going to have jumped 8 out of this process entirely, moved over to the 9 competitive retail market, moved over to interval 10 metering, and then they could be responding to these 11 prices, day one, as they see fit. 12 I think the option of the spot price 13 pass-through, in terms of including it if it can be 14 done at a reasonable cost as maybe one of two options 15 in the standard supply service providers, offers a sort 16 of insurance mechanism. You know, if I think it is 17 possible that my portfolio provider will do a very bad 18 job and whatnot, I can check this and take that as my 19 option, despite the incentive you have put on him. 20 I don't personally imagine that most 21 standard supply service customers are going to be able 22 to react to the prices that much and I am not very 23 confident that monthly prices, presented to me after 24 the fact, are really going to create much demand-side 25 response anyway. 26 I think it can be valuable, but not 27 exactly for the reasons that you have suggested. 28 MR. RONAYNE: Thank you. 791 ADAMSON/CONWAY 1 Mr. Conway, I would like to address a 2 couple of questions to you, if I could, at this point. 3 Mr. Adamson talked about counterparty 4 contracting. I was just trying to kind of get settled 5 in my mind what exactly the role of ENERconnect might 6 be in this marketplace and in facilitating this type of 7 standard supply service operation. 8 Doing this counterparty contracting 9 maybe for municipal utilities, would you see that as a 10 role for ENERconnect in the marketplace? 11 MR. CONWAY: There are three broad 12 groups of services that are required to make this thing 13 work. There are day-to-day operational services that 14 you need to do to just participate in the market, like 15 scheduling, like settlement. There are services that 16 you will need when you go to market, in terms of 17 forming a request for proposal, assessing the people 18 you want to ask to bid on it, assessing their credit 19 capability, assessing their bids later and coming up 20 with a conclusion on which is the best to go with. 21 Those are two kinds of broad groups 22 of services. I think that some people will not even 23 want to do that. They will basically just want to get 24 a fixed price contract, in which case we will do that 25 as well. 26 MR. RONAYNE: I guess, in order to 27 help you to be good at this, you have also retained the 28 services of Enron as an experienced party in this type 792 ADAMSON/CONWAY 1 of thing as well. Is that right? 2 MR. CONWAY: That was the essence of 3 some of my comments yesterday. 4 MR. RONAYNE: I don't want to get 5 into anything that is confidential, I just want to try 6 to understand what the mechanism on operation is here. 7 MR. CONWAY: Don't worry, I won't. 8 MR. POCH: He used to work for Hydro. 9 He knows about secrecy. 10 --- Laughter 11 MR. RONAYNE: They will be a 12 potential competitor, right? There is nothing in the 13 arrangement that would prevent them from being a 14 potential competitor in the intermediate markets? Do 15 you see that as -- 16 MR. CONWAY: I guess already we have 17 bumped into our problem, haven't we? 18 MR. RONAYNE: Okay. That's fine. I 19 will leave that. 20 Under the yardstick competition, I am 21 just wondering about what is going to happen here. 22 Where is the competition going to come from? Where are 23 the intermediaries going to come from in this 24 marketplace? 25 You have some kind of market power 26 mitigation proposal in place of around 3.8 cents, 27 one-year rate, which is persisting on over a number of 28 years. It has yet to be determined, but certainly 793 ADAMSON/CONWAY 1 probably up to three and a half and I suspect actually 2 significantly longer than that. 3 Where are the competitors coming from 4 in this marketplace? 5 MR. CONWAY: That was also part of my 6 comments yesterday. I guess, in general, there are a 7 lot of power marketers who are happy to act as 8 intermediaries in Ontario and elsewhere in North 9 America. 10 As I was saying, there was recently a 11 request for an expression of interest issued by the G6 12 Utilities and that was broadly responded to. In 13 that -- and, actually, I am not quite sure how 14 confidential this is, so I will be careful what I say, 15 but -- 16 MR. RONAYNE: I don't want to put any 17 pressure on you to say anything that is confidential. 18 MR. CONWAY: That process is not 19 confidential, so I wouldn't worry about it. 20 Thank you. Now I will have to 21 stretch my memory to remember everything. 22 --- Laughter 23 MR. CONWAY: There was a broad mix of 24 both generators and power marketers responding to that 25 request. 26 MR. RONAYNE: Thanks. 27 I think we have already talked a bit 28 about the right entry conditions, Mr. Adamson, a little 794 ADAMSON/CONWAY 1 bit, you know, what sort of thing you want from the 2 spot market. But what other things do you think? 3 You are an economist and you have 4 worked on these things. There is a lot of talk about 5 promoting competition for its own sake, but I presume 6 you would rather -- I mean, promoting competitors for 7 their own sake. But an economist would usually say, on 8 threat of losing your card, competition not 9 competitors. Do you have sense of what you would want 10 to have as the right entry conditions so that you are 11 not just trying to put competitors in the marketplace? 12 MR. ADAMSON: I certainly don't want 13 to be seen to be -- we have to go out and create some 14 competitors, whether or not it is efficient to do so. 15 The objective -- the whole program is 16 market-based restructuring, in my mind -- fundamentally 17 has to come down to that of efficiency, of prices for 18 consumers, of what is offered to consumers. That 19 usually moves on to the premise that competitive forces 20 are a good way of doing that, of creating productive 21 efficiency, creating dynamic efficiency. 22 I think that last point is what I 23 would address my comment to. 24 I don't want to, like, we've got to 25 go out and create a bunch of competitors, create a 26 bunch of new entries, if it's not required. If it 27 turns out that the province has a massive generation 28 surplus, we don't want to subsidize the creation of 795 ADAMSON/CONWAY 1 building a lot of plants just to have some more 2 competitors. 3 I like your phrase "it is 4 competition, not competitors". It is competition 5 towards an objective, which is dynamic efficiency. 6 What I do want, though, is that -- it 7 seems like we may, over a period of time, be nearing a 8 serious decision point in which the new entry may be 9 economically and financially justified. I think we are 10 actually going to hear from someone who is going to 11 talk about the Lakeview Plant a bit. I guess it 12 somewhat depends on obviously what happened to the 13 nuclear program here in the province, about how much 14 new generation is going to be required. 15 So I don't want to be seen as we have 16 to go out and create some new competitors. But at the 17 same time, what we do want to create is the conditions 18 in which competitors are given the best chance of 19 entering, as they see fit. I do think that that helps 20 dynamic efficiency and is a powerful -- the potential 21 of entry is always a powerful check on the behaviour of 22 incumbents. 23 What I am trying to get at is: Let's 24 try to make sure that those signals are there. Let's 25 try to make sure that those signals aren't distorted. 26 Then we are leaving it open to other people to put 27 their money where their mouth is and dig the hole in 28 the ground. 796 ADAMSON/CONWAY 1 But I do think, and particularly in a 2 market like this which is starting off with a great 3 deal of kind of uncertainty, if one thinks that new 4 entry is possible and wants to make sure the conditions 5 are right, we do need to consider how what we do now -- 6 or how rather what you do now -- is going to affect the 7 actual commercial realities of investors and their 8 ability to attract financing. 9 The capital markets are, in some 10 ways, a fairly fickle beast. Yes, Ontario is a big 11 part of the Canadian market, but the capital market is 12 not particularly Ontario-specific. There are lots of 13 other merchant generation projects going around. The 14 terms under which that capital will be attracted are 15 very, very dependent on how the institutional side of 16 restructuring occurs. 17 MR. RONAYNE: Thanks. 18 I would like to go to your slides 19 from yesterday. 20 MS LEA: Mr. Ronayne, it is about 21 time for our morning break. Do you know how much 22 longer you will be? 23 MR. RONAYNE: It could be a while 24 yet. 25 MS LEA: With that threat, then, I 26 think we will take 15 minutes, please. We will return 27 at ten to 11:00. 28 --- Upon recessing at 10:35 a.m. 797 ADAMSON/CONWAY 1 --- Upon resuming at 10:50 a.m. 2 MS LEA: Welcome back. 3 I think, Mr. Ronayne, you have more 4 questions. 5 One moment, though. I have two 6 administrative matters. 7 The first is that Mr. Mondrow, on 8 behalf of the HVAC Coalition, does not plan to come and 9 give an oral presentation. If parties do have 10 questions of clarification, they can contact him. His 11 telephone number is on the intervenor list. 12 Secondly, the IPPSO panel has elected 13 to come on Monday rather than attempt to be squeezed in 14 today. The order of proceedings on Monday is at 15 9:00 a.m., Toronto Hydro. Mr. Rawson for TransCanada 16 Power will follow that. I expect that will probably 17 take us to close to the morning break, and then the 18 panel of IPPSO members will follow right after the 19 morning break. 20 Thank you. Mr. Ronayne. 21 MR. RONAYNE: Thank you. I know I am 22 running rather long, so I am going to try to be as 23 quick as possible here. 24 If I can go to your slides from 25 yesterday and the presentation, you made the point that 26 low-income customers are likely the most risk-averse 27 customers. 28 Are they also the ones that are also 798 ADAMSON/CONWAY 1 likely to have the highest marginal utility of income 2 as well? They are vulnerable on maybe both sides of 3 the equation here. 4 MR. CONWAY: Sorry. We are just 5 trying to find which one you are referring to. 6 MR. ADAMSON: I think you mean 7 slide 3, "Economic Principles". 8 MR. RONAYNE: I'm sorry. Right. It 9 was around there. 10 MR. ADAMSON: Yes. Some parties are 11 especially averse, such as low income consumers. Okay. 12 MR. RONAYNE: Is it fair to say also 13 that they are also the ones with the highest marginal 14 utility of income? 15 MR. ADAMSON: Yes, I would say 16 probably so. 17 MR. RONAYNE: Thanks. 18 You referred, I think, yesterday to 19 textbooks that you are basing your analysis on. I 20 think in the earlier material you filed you indicated 21 that there were some articles but that you had not 22 pulled them together yet. 23 Can you give me some indication of 24 what those might have been, or what things we would 25 look at to sort of get the foundation for your 26 analysis? 27 MR. ADAMSON: In terms of thinking 28 about transaction costs? 799 ADAMSON/CONWAY 1 MR. RONAYNE: Well, transaction 2 costs, role of intermediate markets. It was, I think, 3 specifically in regard to the role of intermediate 4 markets and promoting economic efficiency. 5 MR. ADAMSON: I think there is 6 probably a very wide range of industrial organization 7 literature. Probably an easy way to start would be any 8 standard industrial organization textbook, like Lafont 9 and Tirole. 10 I would I think particularly push you 11 to thinking a bit -- I don't have the exact titles and 12 everything today, and I will certainly try to write 13 them down for you and fax them to you, if you want -- 14 on the transaction costs literature, some of the 15 writings of like Williamson. That would be one of the 16 key authors in that area. Oliver Hart at Harvard on 17 roles of contracts, at least partially from a 18 transaction cost framework. 19 I think a good starting point would 20 be any of the sort of basic texts in the industrial 21 organization literature: Krouse. 22 Do you know that book, Clement 23 Krouse? 24 MR. RONAYNE: Krouse, no, I don't 25 know. Lafont and Tirole, I certainly do. 26 MR. ADAMSON: Lafont and Tirole, yes, 27 that is kind of one on everybody's book shelf. 28 I think you could start there. 800 ADAMSON/CONWAY 1 I think another book you might want 2 to look at, just because it has some quite good 3 analysis, and even includes a basic discussion on kind 4 of comparative competition mechanisms, is the Theory of 5 Incentives and Procurement in Regulation. 6 Are you familiar with that book? 7 Another Lafont and Tirol book. But that specific book 8 is really a very good one for anyone who wants to think 9 about these questions from an economic perspective. 10 MR. RONAYNE: Thanks. 11 MR. ADAMSON: I will try to get a 12 list together for you, if you want, and send it to you. 13 MR. RONAYNE: Well, if you think 14 there are any that are of particular interest. 15 MR. ADAMSON: Yes. I will look at 16 the ones that I sort of "yellow stick". 17 MR. RONAYNE: In the course of your 18 presentation you talked about a new entrant and the 19 possibility of new entry at the generation level, and 20 possibly being able to guarantee a lower price. 21 The price is for the commodity, 22 right? That is what you are talking about? 23 MR. ADAMSON: That a new entrant 24 might under the right contractual terms be able to 25 offer a lower like energy price? Is that what you are 26 talking about? 27 MR. RONAYNE: Yes. Let me clarify 28 the circumstance for the question. 801 ADAMSON/CONWAY 1 You indicated, I think, that in any 2 new -- or perhaps it could be anybody else, I 3 suppose -- 4 MR. ADAMSON: A provider. 5 MR. RONAYNE: Somebody who is taking 6 power from a new entrant in the marketplace and at a 7 price which would be possibly just the price that would 8 be paid to the generator could be less than say the 9 forward price for that power. 10 MR. ADAMSON: Remember, we are always 11 talking about expected values of prices. 12 MR. RONAYNE: Yes. 13 MR. ADAMSON: And expected values of 14 prices under imperfect information. What the 15 scenario -- and I think this also related a bit to the 16 comments of Mr. Adams yesterday afternoon, I believe it 17 was. 18 Just place ourselves in the 19 hypothetical scenario that if I was able, as an 20 off-taker, to guarantee to contracted price, not 21 necessarily like a forward price in the conventional 22 sense, but a price of longer duration, I am clearly 23 reducing the risk for the new entrant generator who has 24 these substantial fixed and sunk costs. 25 We may well expect, or could expect, 26 that under those circumstances that the price that a 27 new entrant would be willing to receive -- the entry 28 price for a new entrant with a longer term off-take 802 ADAMSON/CONWAY 1 contract might be lower than the expected value of the 2 spot price, simply because it is a lower risk to the 3 new entrant. And I think probably the commercial 4 realities start to bear that out. The experience of 5 people who have been able to sign up long-term 6 industrial cogeneration deals in some of these markets 7 and just from a very simple basis thinking about how 8 that helps mitigate the merchant risk to the financing 9 of the project. 10 We are talking about durations rather 11 than just points forward in time. 12 MR. RONAYNE: I guess what I want to 13 get at is that the overall riskiness of the project 14 hasn't changed. What you had is a generator, who is a 15 risk-averse generator, entering into a contract where 16 he might get something lower than the spot price. But 17 the risk itself hasn't disappear, it has gone to 18 somebody else. 19 Whether it is priced in the 20 transaction or not, you could have a shadow price for 21 it, and the shadow price, including the risk for that 22 transaction, hasn't really changed. 23 MR. ADAMSON: Well, the risk may be 24 allocated more efficiently if we also have a 25 risk-averse off-taker. Just because one side has risk 26 and the other side has risk, if they are both 27 risk-averse there may actually be a more efficient risk 28 allocation -- maybe -- it doesn't necessarily have to 803 ADAMSON/CONWAY 1 be. It depends on who they are and where they stand. 2 But it may be that there is a more 3 efficient risk allocation if both parties, generator 4 and ultimate consumer, are in fact risk-averse. 5 So you might think there is a broad 6 price risk in the system as a whole which has to do 7 with exogenous parameters, but it is also very 8 important to think about who bears it, who wants to 9 bear it. And of course the attraction of contracts in 10 these markets is that in some ways some of the risks of 11 users and generators offset each other. 12 MR. RONAYNE: So you are saying there 13 may not be an equal and opposite transfer of risk. The 14 alternative is to go to the spot market. Let's just 15 say that the contract price was five cents, and the 16 spot market tanks to 2.5 cents. The capitalized value 17 of that project, then, has gone down to what the new 18 spot market price is, if you are going to put it up on 19 the market. 20 MR. ADAMSON: You are talking about 21 continuously revaluing over time the value of the 22 generation asset, the kind of economic value of the 23 generation asset? 24 MR. RONAYNE: I am talking about the 25 value of the generation asset around what is happening 26 to the spot market price and the alternative available, 27 the other alternatives that are available in the 28 marketplace. It doesn't necessarily have to be a spot 804 ADAMSON/CONWAY 1 market price. 2 MR. ADAMSON: I think the thing to 3 remember is that risk is a function of time, and 4 changes over time. It changes with the expectation of 5 the distribution of market outcomes at any point in 6 time. 7 So at the point in time that you and 8 I choose to contract, I might say I want a very 9 long-term fixed price of power that matches my 10 downstream, whatever I do, run a factory; and you might 11 say I have a significant sunk cost investment here, so 12 I am very worried about the price downstream. At that 13 point in time, there may be a positive welfare benefit, 14 I believe under the right circumstances, from us 15 signing a risk hedging contract. 16 Now, indeed, that, as you suggest, 17 does not prevent us from being wrong about either of 18 our expectations of what market prices are. You know, 19 the price may fall from 5 to whatever your example was. 20 But, at the time, given our joint expectations of 21 prices, distributions we put upon these prices, and our 22 level and our degree of risk aversement, it may be 23 welfare-enhancing to have a risk hedging mechanism set 24 up between us, at that time. 25 Now, over time that may change, 26 because it is always a function of "T" over that time. 27 But, practically -- and I think, again, the economic 28 literature supports this -- the contracts are decisions 805 ADAMSON/CONWAY 1 given risk as a function of time, but at that time, 2 evaluated at that time. 3 MR. RONAYNE: Thanks. 4 MR. ADAMSON: Risk is a function of 5 "T", evaluated at "T" sub whatever. 6 MR. RONAYNE: I would like to turn 7 quickly -- I'm going to try to be as brief as I can -- 8 to page 7 of your slides. You have a graph there. 9 At the last bullet you say: 10 "So if you start with a poor 11 allocation, it is likely to 12 continue for a long time." 13 (As read) 14 When you are talking about the poor 15 risk allocation, it is a function of time, right? I 16 mean, that is critical, that is critical to the 17 equation of whether this thing has net benefits or net 18 costs? 19 MR. ADAMSON: Yes. 20 MR. RONAYNE: So if you put somebody 21 on something that they are mobile off of and the risk 22 allocation isn't quite right, at least they are pretty 23 quick; when the time comes up, they can move to 24 something else that is better suited for them. I mean, 25 at least you can adjust or you can move quickly. That 26 would be a factor that would tend to reduce the 27 possible risk costs or the costs and risk terms of this 28 type of option. 806 ADAMSON/CONWAY 1 MR. ADAMSON: Of the fixed price 2 option? 3 MR. RONAYNE: Well, I'm not saying a 4 fixed price option. I am just saying an option that 5 you are mobile off of. When you make a decision that 6 you want to go to something else, you are mobile off 7 it -- and this one has a different risk portfolio -- as 8 opposed to a contract where you put in for one, two, 9 three or five years that has a risk portfolio that you 10 didn't like, in retrospect you didn't like, somebody 11 put you on it. 12 MR. ADAMSON: An option always has a 13 positive value. I think that is the root of what you 14 are saying. In fact, thinking about it, it is somewhat 15 analogous to a financial option. That option, the 16 right to jump between things, always has a zero or a 17 positive value, right? 18 I think I concur with your statement. 19 I think that's what -- 20 MR. RONAYNE: Even if you go through 21 an exercise that puts people on a contract that you 22 figure, well, on average, this is what they should be 23 on, this is what we think the risk profile is. Suppose 24 it's a three-year contract, either you make people 25 mobile off of that and create all kinds of other 26 problems or the cost of making that choice wrong is the 27 difference between what -- or the welfare between, 28 let's say, the risk profile that you would prefer to be 807 ADAMSON/CONWAY 1 on, in retrospect, times three years, as opposed to, 2 let's say, if it's the same differential and you can 3 move off in two months, then being mobile off will 4 reduce the absolute size of the risk, the loss to you 5 in going to a more preferred risk profile. 6 MR. ADAMSON: I think I follow you. 7 From my understanding -- and we 8 shan't repeat the whole thing again -- clearly, an 9 arrangement that locks people in for three years, if 10 that risk allocation were to be inefficient, would 11 involve a more substantial welfare loss than an 12 arrangement for that person than one where they had 13 either a shorter term or, you know, no term at all and 14 could switch it at will. 15 As I said, an option always has 16 positive value. 17 I don't want to characterize what we 18 are describing as being anywhere necessarily of the 19 term of anything like three years, nor are we 20 necessarily advocating a system that in any way, to 21 that degree, or possibly at all, restricts customer 22 mobility. Which seems to be a distinct policy 23 objective. As I mentioned before, there is probably a 24 trade-off in -- offering kind of complete customer 25 mobility is offering people an option, and that option 26 is never free, and that type of trade-off does need to 27 be incorporated into our thinking. 28 However, I'm certainly not 808 ADAMSON/CONWAY 1 thinking -- and I don't think Barry is thinking, but I 2 haven't talked to anybody about this -- that we are 3 talking about anything like a three-year lock-in 4 arrangement for the standard supply service. 5 MR. RONAYNE: Well, I -- 6 MR. ADAMSON: That would be quite 7 extreme. Even given the kind of policy decisions that 8 have been made, I don't see how you would even -- I 9 don't think it would be advantageous to even do a 10 one-year lock-in. I think we are talking about, you 11 know, much freer or potentially even completely freer 12 customer mobility to that and I think that that should, 13 in many ways, ameliorate the welfare loss concerns that 14 you have just expressed. 15 MR. RONAYNE: I have one quick 16 question, and I'm going to try to roll through these as 17 fast as I can. 18 Around the bands -- the mechanism 19 that you were talking about on comparison of the 20 yardstick purchase cost, if -- 21 MR. ADAMSON: What page are you at? 22 MR. RONAYNE: Page 10 of your slides. 23 If there is variance within the dead 24 bands, then that is picked up by the customer, whoever 25 is on system service costs? 26 MR. ADAMSON: Yes, effectively. 27 MR. RONAYNE: Okay. If there is 28 variance outside of the bands, the cost that is passed 809 ADAMSON/CONWAY 1 onto the SSS customer is dependent on what type of 2 penalty mechanism you have in place? 3 MR. ADAMSON: Let's call it a sharing 4 mechanism. 5 MR. RONAYNE: A sharing mechanism. 6 MR. ADAMSON: I think the literature, 7 and in fact even the terminology we referenced here, is 8 probably more related to PBR-type mechanisms. I mean, 9 really, this is not fundamentally economically greatly 10 different than a performance base rate-making 11 mechanism, somewhat similar to the -- and with some 12 parallels to the other ones we have heard about being 13 proposed. 14 So that would depend on the 15 risk-sharing formula which was incorporated into the 16 mechanism. 17 Again, I didn't want to make it so 18 abstract that you didn't get the advantage of an 19 example, but the idea of the 5 per cent dead band is 20 artistic licence not a design parameter. 21 MR. RONAYNE: I took it as such. 22 MR. ADAMSON: Okay. 23 MR. RONAYNE: I'm just trying to 24 figure out what I no longer have to do here. I had 25 this other list. 26 You mentioned the San Diego Gas & 27 Electric hearing which was -- or have you followed that 28 hearing since, in your -- and I'm not sure exactly what 810 ADAMSON/CONWAY 1 page of your report it was on. 2 MR. ADAMSON: I have looked through, 3 briefly -- I certainly have not participated in -- I 4 have looked through, and I won't even say I have gone 5 as far as really having completely studied it. 6 There was a filing, in the last few 7 months, I believe, by San Diego Gas & Electric, a kind 8 of incentive-based arrangement for their procurement. 9 MR. RONAYNE: I believe, in fact, 10 that the CPUC pronounced on that and they have actually 11 required San Diego Gas & Electric to go to a 12 straightforward spot price pass-through but -- were you 13 aware of that? 14 MR. ADAMSON: No, I'm not aware of 15 the recent CPUC decision. 16 As I was thinking about the policy 17 objectives that go back in the design of the California 18 market -- and this is something that I do have some 19 first-hand knowledge of -- we should also remember some 20 of the policy objectives of the initial design which 21 may be somewhat unusual and may not be completely 22 reflective of the circumstances here in Ontario. 23 An explicit objective is encapsulated 24 in the December 20, 1996 decision of the California 25 Public Utilities Commission which was that the 26 California Power Exchange needed to be partially 27 propped up, given the kind of rather substantial costs 28 that were incurred in setting the thing up -- to which 811 ADAMSON/CONWAY 1 we contributed -- so there was a requirement put on the 2 utilities to buy all their power from the Power 3 Exchange and not to bypass it. That was a relatively 4 California-specific policy objective and I don't think 5 that policy objective has completely gone away. 6 I would note -- and I think I do make 7 some reference to that in the paper -- that the 8 California experience of retail competition has not, in 9 the minds of many observers, been a stellar success. 10 If I can go to page 13 of your 11 proposal, starting with the sentence -- there is a 12 paragraph that begins with "Finally" and going down 13 towards the end of that it says: 14 "If this were a major policy 15 objective in the province and a 16 transparent adder, adjustable by 17 year, could be added for default 18 customers providing the 19 necessary level of cost savings. 20 Since the adder would be simple 21 and transparent, the 22 informational barriers faced by 23 retailers in luring customers 24 away from default service might 25 be lowered as well." (As read) 26 Do you think that is really something 27 that is supported by economics, providing that type of 28 adder? Would Alfred Khan, for example -- I mean, he 812 ADAMSON/CONWAY 1 was referred to in another submission. 2 MR. ADAMSON: I think Alfred Khan -- 3 and here I, again, don't want to put words in the minds 4 of those far more luminous than those of us present. I 5 think one thing he might support is transparency in 6 regulatory mechanisms. 7 Remember, we are talking about an 8 extremely, in my mind, artificial policy objective, but 9 it is one that has been discussed in considerable 10 detail in the United States in many of the proceedings 11 regarding the development of retail competition. 12 I believe I have seen even reference 13 to it in some of the materials -- and I couldn't tell 14 you which ones, in Ontario -- which is that whatever 15 price the default customer is supplied to be has got to 16 be high enough so that competitive retailers will have 17 a large enough margin to want to enter the market. In 18 other words, we are going to -- assuming, if you wanted 19 to go down this route -- we are going to, you know, try 20 to crank up the price enough to make it worthwhile to 21 pay for the TV ads to get people to switch. 22 Now, that to me I don't think Alfred 23 Khan would support, I don't think mainstream economists 24 would support, because it is purely allocatively 25 inefficient. We want prices to be cost reflective 26 because we think that is well for maximizing. 27 I was saying, if that was an 28 objective -- and when I kind of started this paper, 813 ADAMSON/CONWAY 1 which was some months ago now, there seemed to be 2 rumours of the desirability of artificially 3 kick-starting the retail competitive process. 4 The point I was trying to make is, 5 rather than have a Pennsylvania-style shopping credit 6 hearing, which effectively sets a price, and trying to 7 negotiate a price high enough so that as part of this 8 policy objective that retailers could come in and take 9 away load, you know, if you were going to try to do 10 that I would much prefer to have a transparent 11 mechanism of doing that than a nontransparent 12 mechanism. Where subsidies are going to be present, I 13 prefer transparent subsidies. 14 However, so that people can look at 15 them, people can say "Here is what I'm going to save", 16 and so that people can understand the costs of what we 17 are doing. 18 Now, I am not, under any 19 circumstance, arguing that that is what you ought to 20 do, but it seemed at the time that I started this that 21 there was a swell that, you know, "We have to do 22 something to make this retail market happen." 23 Now, I personally think that is the 24 wrong way to go. I think you should not try to 25 subsidize the artificial creation of the retail market 26 in this way. If you did try to once subsidize it, you 27 know, "Economics be damned. We are going to make 28 people want to switch", I prefer for it to be in a 814 ADAMSON/CONWAY 1 transparent mechanism. 2 MR. RONAYNE: Thank you. 3 Those are my questions. 4 MR. CONWAY: Actually, I think I 5 asked Seabron to consider that alternative, perhaps so 6 that you could ask your question and then we could 7 elicit some evidence on the subject. It was widely 8 debated at the Market Design Committee. 9 MR. RONAYNE: Okay. 10 Thank you very much. 11 MS LEA: Thank you, Mr. Ronayne. 12 Mr. White. 13 --- Pause 14 MR. WHITE: It is Roger White and I 15 am with ECMI, Energy Cost Management Incorporated, 16 representing a number of municipal electric utilities. 17 I heard this morning your comment 18 about what would give you a confidence level in 19 competition with respect to the scale or the size of an 20 individual player versus, let's call it the excess or 21 surplus capacity needs. Put it in your own words. 22 MR. ADAMSON: The hourly operating 23 margin. We just invented our own jargon. 24 MR. WHITE: In the absence of the 25 MPMA in Ontario, do you have any faith that a 26 competitive spot market would be created? 27 MR. ADAMSON: Well, based on that 28 principle from the discussion from Mr. Ronayne's 815 ADAMSON/CONWAY 1 question -- and again, I have not done any sort of 2 exhaustive study of potential market competitiveness, 3 but really just thinking about this in very broad 4 terms, as long as this kind of operating margin, the 5 excess generation in an hour over demand, so operable 6 capacity minus demand in the hour -- construct this as 7 a simple thought experiment, which is always a useful 8 thing to do in economics -- as long as that margin is 9 exceeded by the size of the largest player -- or a 10 player, not even the largest player, maybe more than 11 one -- if there is 20 per cent extra capacity -- if 12 there is 20 per cent more capacity than demand in an 13 hour and the biggest player is 40 per cent, he or she 14 has to be called, right. 15 Just think about it as a game where 16 we offer quantities into the market, a Cournot game. 17 In that circumstance, in that scenario, here she has to 18 be called. Without subject to some other constraint -- 19 you know, I'm putting poker cards down on the table, I 20 can write on my card whatever price I want and this 21 option mechanism has to call it. That's all there -- 22 you know. 23 So that to me is one very direct test 24 that one can look at in these markets, because it 25 follows from the very simplest analog to how the 26 clearly mechanism in the spot market works. Whenever 27 the largest players, larger than the excess margin in 28 an hour, he or she has to be called and write down what 816 ADAMSON/CONWAY 1 they want. 2 Going slightly further, because I 3 think that is a test which I think we could all see 4 relatively easily and which we could actually kind of 5 look at the hours in an Excel spreadsheet rather easily 6 and make our own judgments on that. 7 Just because that test doesn't follow 8 through, isn't exceeded in an hour, doesn't mean that 9 there is not a potential market power problem. As we 10 know, these -- let's say even if there were two 11 competitors who could supply that excess generation -- 12 so Barry and I could both write down on a piece of 13 paper a price for enough generation that would cover 14 that last increment of demand. 15 Just because there are two of us 16 doesn't mean that there is necessarily a problem. If 17 we did this game once we might be tempted to undercut 18 each other far enough to push ourselves back to a 19 purely competitive solution. This effectively -- as 20 you are well aware where I'm leading with this -- is 21 the classic prisoners dilemma problem of game theory 22 from a basic economic textbook. 23 But we are doing this day after day. 24 Barry and I start realizing: Well, gosh, you know, we 25 are not doing ourselves any favours by constantly 26 cutting ourselves, constantly shooting ourselves in the 27 foot by writing very little prices down on these pieces 28 of paper, and that in a repeated game that collusion 817 ADAMSON/CONWAY 1 can occur. 2 But if one player has the ability to 3 always have to be called, I think that is a quite 4 strong test. If multiple players have to be called I 5 think we are in an intermediate range where you would 6 need to do some more thinking. 7 If there are 10 players who can 8 supply all the residual demand, then I think maybe 9 there you are in a safe harbour, but if there is only 10 one, I think the results of that, when illustrated that 11 way, are often rather convincing to people. All of 12 this has been discussed, as your example was posed, 13 without any incentives put on Barry and I as the 14 hypothetical generators in this example, without the 15 incentive created from any form of market power 16 mitigation or regulatory constraint. 17 MR. WHITE: Thank you. 18 In the presence of the MPMA, you 19 indicated that there are a number of ways to meet a 20 price or revenue cap. Could one of those mechanisms be 21 withholding generation or scheduling generation 22 maintenance as you approach the end of the period if 23 your price was too high? 24 MR. ADAMSON: I guess you are sort of 25 referring to this little picture I was drawing of the 26 different price patterns. How does one assess prices 27 in these markets? Things come down to quantities in 28 the end. We know that prices and quantities are 818 ADAMSON/CONWAY 1 fundamentally linked in any market, you know those 2 little p's and q's that bedeviled us in school. 3 The analysis of market power in these 4 markets has focused on representing the electricity 5 spot market pools, whatever you want to call them, as 6 Cournot games, where people effectively affect the 7 queue that they offer to the market and the price 8 outcomes are a function of that. It's a representation 9 because I really have multiple variables here. I have 10 p knobs that I can turn and I have q knobs that I can 11 turn in any hour, subject to any external constraints, 12 but the p's and q's are interlinked. So I am just 13 visualizing it as leave the p's the same as cost base 14 can affect the q's. 15 Any time you are looking at bidding 16 in one of these markets, I think the way to represent 17 it is in the form of a Cournot game, where you are 18 effectively changing the quantities you offer. You can 19 either change the quantities or effectively be accepted 20 below the clearing price. I can do that by saying my 21 plant is broke, I can do that by saying I am just not 22 going to bid in this hour, I can do that by saying I am 23 going to bid, but at an extremely high price above what 24 I think the clearing price is going to be, I can bid -- 25 you know, there has to be a quantity effect because 26 prices and quantities are so interlinked in a market. 27 If you turn to any of the economic 28 literature on the subject, you will see representations 819 ADAMSON/CONWAY 1 of bidding in these markets in quantity terms. You 2 could start with Newberry & Green, you could look at 3 Von der Fehr & Harbourd, you could look at the type of 4 analysis -- the type of more numerical analysis that 5 was done in Alberta that I alluded to before. It's 6 representations of these markets in quantity bidding 7 terms. 8 MR. WHITE: Does the yardstick 9 mechanism that you have suggested, to sort of change 10 gears a little bit, drive risk-avoiders to larger 11 purchasing pools? 12 MR. ADAMSON: To avoiding...? 13 MR. WHITE: To avoid any potential 14 penalty if they consider that a higher risk. 15 MR. ADAMSON: For their procurement 16 function? 17 MR. WHITE: Yes. 18 MR. ADAMSON: You might think about 19 this in two ways. You might think, first off, there 20 may be in this procurement function -- there may just 21 be some pure economies of scale. Maybe Barry here can 22 oversee the shop for a greater number of people more 23 efficiently if he is doing it for a larger volume. We 24 don't all have to go and employ someone in his role. 25 So there may just be a pure economy of scale argument. 26 At a certain level, I suspect that 27 may be quite significant. I don't think that a 28 procurement function on behalf of 100 customers is 820 ADAMSON/CONWAY 1 going to be viable. It has to be a long way below any 2 minimum efficient scale. 3 We might also want to think about if 4 we are starting in a structure where there is a 5 potential competitiveness problem. Again harkening 6 back to the sort of thinking from an industrial 7 organization, we might be aware of a powerful -- one of 8 the only countervailing forces to monopoly power may be 9 a downstream monopoly and some form of grouping there 10 in trying to exert a kind of countervailing power may 11 be possible. The economic solution of that can be 12 rather indeterminate and very situational specific. 13 So I would argue that there is 14 potentially two reasons why people might be looking at 15 conducting procurement functions together: (a) it 16 simply may be a more efficient economies of scale type 17 argument and (b) if I am worried about the activities 18 of people upstream, I may be trying to protect myself 19 through a bit of size there. 20 One thing to note, though, is that 21 this is only about the provision of standard supply 22 service and needn't affect what the MEU's, for example, 23 do in their other businesses. The large businesses 24 continue, presumably, as they are because I believe the 25 Act specifically allows the procurement function to be 26 assigned to a third party. So quite possibly the wires 27 business could stay and run and assume some of the risk 28 for this and the third party provider may be larger 821 ADAMSON/CONWAY 1 than the size of an individual MEU. 2 MR. WHITE: The Ontario market seems 3 to have two dominant LDCs with, at the very least, SSS 4 responsibilities, even though maybe not SSS deliveries. 5 We have OHSC and we have the new Toronto Hydro, which 6 are conservatively 25 per cent of the market for each 7 of them, probably. 8 MR. CONWAY: Eighteen per cent for 9 OHSC. 10 MR. WHITE: Okay, I will accept that. 11 Does the existence of those two 12 dominant players influence your view of whether we can 13 have an effective competitive market to fill these 14 needs? 15 MR. ADAMSON: In any comparative 16 competitive mechanism, of course, the question is: Is 17 there a sufficient number of competitors? If there was 18 one person doing it for the entire province, it would 19 be pretty hard to create this kind of yardstick 20 benchmark, just taking it to a kind of extreme example. 21 If everyone else isn't aggregated up 22 into one other exact player, it's not uncommon to have 23 markets with one or two competitors and those markets 24 may prove quite competitive. It's not uncommon where 25 the largest competitor may have 25 per cent in the 26 market and you still have quite competitive outcomes. 27 One thing to remember, of course, is 28 that, unlike over the very short-term generation 822 ADAMSON/CONWAY 1 markets, procurement functions may -- the risk of 2 injury of a new procurer may be quite high. There is a 3 lot of people who are involved in this power marketing 4 business in North America. There is quite a lot of 5 people who offer risk management portfolio management 6 services. So if one of these participants tried to 7 extract an inordinate amount, then I suspect others 8 could come in relatively easily. 9 They already have a lot of the 10 systems and expertise. You know, if Enron was already 11 here, well, gosh, there is only about another X dozen 12 power marketers in North America that you could easily 13 probably attract into the market. So I don't think 14 anyone would be suggesting that there is sole control 15 over these types of skills available to the province of 16 Ontario. 17 MR. WHITE: You may choose not to 18 answer this question. Others have taken that 19 particular answer. 20 I continue to look for someone who 21 has thought through and is comfortable with the 22 mechanics for non-interval metered customers whose 23 meters are read at different times receiving SSS under 24 the Board proposal. Have you gone down that road to 25 think about whether the actual dollars that the LDC 26 would pay, which would be precisely time interval 27 locked, and the dollars that end consumers would pay, 28 how they would be reconciled given different meter 823 ADAMSON/CONWAY 1 reading dates within the pool? "No, I haven't" is a 2 good answer, but I would love to hear one. 3 MR. ADAMSON: Not in the context of 4 Ontario, but I must admit, unfortunately, I have. I 5 mean it's an absolute bug bear. I will give you a 6 little bit of the context. 7 Some is within I guess what was 8 referred to as the 1998 process in England and Wales 9 where they were offering retail competition under 10 profiles, which is in some ways not dissimilar to what 11 you are doing under this. Again in California, on 12 behalf of a client there, who was, indeed, going to be 13 facing the issue with both the PX price pass-through or 14 any other form of profile, it was how do you deal with 15 the fact that they don't read the meters at the same 16 times that the prices are calculated, and you can have 17 this extraordinarily complicated reconciliation 18 process. 19 Typically, the meters will go -- you 20 kind of read a neighbourhood at a time and, inevitably, 21 in a large enough system there is some bug bear that 22 says all the data got lost from one of these 23 neighbourhoods because the guy left his electronic 24 meter-reading box in a bar somewhere. You don't have 25 meter reading data for that month and you end up 26 estimating it. So, instead of a monthly cycle for this 27 guy, it's two months. 28 That is to say that this is common, 824 ADAMSON/CONWAY 1 but when you get that much data, there are data 2 problems. These companies are used to dealing with 3 significant data, but there are data problems when you 4 have millions of customers and their side messes up 5 with it. 6 I have thought about it and the 7 problem is you seem to be stuck with these very complex 8 reconciliation processes about the price changes under 9 different time horizons than the meter reading happens 10 and what that means is you end up tracking an awful lot 11 of who paid what price when and trying to match up part 12 months or whatever your billing cycle is. Maybe it's 13 quarterly or part quarters. 14 So I don't think it's a rocket 15 science exercise. What I think it is is a very 16 complicated accounting settlement and system design 17 exercise. I don't know who your IT providers are for 18 the utilities, but they will greatly thank you for 19 getting into this issue. 20 The amount of money they took out of 21 our client in California was extraordinary. 22 MR. WHITE: If you had to literally 23 comply with the SSS as currently in the Board staff 24 paper, is it achievable? 25 MR. ADAMSON: I am not enough of a 26 systems -- I wouldn't try to profess any sort of 27 expertise on the design and implementation of these 28 billing systems. 825 ADAMSON/CONWAY 1 I think we could draw on a board the 2 number of arrows that would be involved. We could just 3 think about: Does this involve one arrow in this or 4 multiple arrows? 5 To do it, to absolutely capture the 6 fact of when the actual hours were, exactly, when one 7 had been metered, versus when the calculations had been 8 done, would seem to me to be extraordinarily complex. 9 Could that be done by software 10 systems? The people writing software systems always 11 tell me that anything can be done, just like the guys 12 who just finished working on my house always tell me 13 that -- the contractors always tell me, "Yes, we can do 14 that. No problem." The problem is, it took an 15 inordinate amount of time to get back into our house. 16 Can it be done? I wouldn't want to 17 say whether it could be done or not. 18 If you think about the implications 19 of the number of hourly prices, the number of customers 20 and the number of different times in which all of their 21 meters are actually read, if you take that as a matrix, 22 think about how many elements are there in that matrix. 23 That is a big matrix. 24 MR. WHITE: I think it gets back to 25 your two-knob situation on the wholesale side as well. 26 MR. CONWAY: Actually, I would like 27 to kick in here. The answer is yes, it can be done. 28 They are still working out the details. I am not sure 826 ADAMSON/CONWAY 1 whether the group is working today, but the settlements 2 committee is still working out how these mechanics are 3 going to happen. When they finish it will be done. We 4 have already said so and we will put a service out 5 there that will do that. 6 I must say that when we launched this 7 product there was a bit of sticker shock among the 8 partners because it is not going to come out at a low 9 cost, frankly. Even though we can bring considerable 10 scale to this issue, it is still not going to come at a 11 low cost. 12 So I would say that the 13 administrative cost of the spot price pass-through is 14 quite significant. 15 MR. ADAMSON: As a general rule, in 16 any type of situation -- and this is an observation, 17 having been with a lot of utilities and stuff, going 18 through these kinds of restructuring processes. 19 Changing everything at the same time is real, real 20 hard. It is real, real hard. Institutions are only 21 able to deal with so many changes, in my opinion, at 22 the same time. Commercial changes, systems changes, 23 organizational changes -- they can get a kind of a 24 numbness there. 25 Anything that, in my opinion, allows 26 a utility company to rely on existing billing systems, 27 and if those billing systems require fixed prices to be 28 put in upfront, gosh, that is -- it is at least one 827 ADAMSON/CONWAY 1 thing not on the list. I can't say it makes everything 2 completely painless, but it is at least one less thing 3 you are dealing with. Because these systems are 4 extraordinarily expensive and time consuming to write. 5 I don't own stock in Andersen 6 Consulting, unfortunately. 7 MR. WHITE: If I were to characterize 8 your comparison of the short-term spot market 9 pass-through versus a longer term contract market -- if 10 I were to characterize your preference as producing a 11 more stable, evolving supply-side market in a truly 12 competitive energy supply market, is that a fair 13 characterization of your preference? 14 MR. ADAMSON: I have a preference for 15 a market that allows good price discovery. That is 16 quite important for lots of people, for lots of reasons 17 they have already talked enough about. 18 I believe that a system that helps 19 those contract markets to evolve helps that price 20 discovery -- that forward price discovery. That is one 21 of the items that is of -- one of my sort of key 22 objectives which I tried to encapsulate into this 23 thing. 24 MR. WHITE: Thank you very much. 25 MR. CONWAY: I was going to kick in 26 there as well. I would characterize the proposal as 27 having a better chance of introducing workable 28 competition. 828 ADAMSON/CONWAY 1 Secondly, I would say that it has a 2 better chance of -- and perhaps this is what you meant 3 by stable -- having a successful introduction where the 4 rubber hits the road, which is with the mom and pop out 5 on the street, who probably will not like what they 6 see, in my opinion. 7 MR. WHITE: Because you insisted in 8 coming in on this, I would like to go back to your 9 comment on the non-interval metered customers, that 10 they can be precisely matched during a settlement 11 system without an accrual and reconciliation pot to 12 work with, or with an accrual and revenue 13 reconciliation pot to work with? 14 MR. CONWAY: Are you addressing that 15 to me? 16 MR. WHITE: Yes. 17 MR. CONWAY: I don't think I made any 18 comment like that. At least, I don't recall. 19 MR. WHITE: That was my question, and 20 you said, "Yes, we could." 21 MR. CONWAY: I said, yes, we would 22 deliver the system that is required to meet the 23 requirements of the Retail Settlements Code. 24 MR. WHITE: I understood from your 25 comment that one existed and that it could be utilized 26 to deal with the fact that non-interval metered 27 customers within a given LDC had their meters read at 28 different times and that this could be, let's say, 829 ADAMSON/CONWAY 1 perfectly matched without a reconciliation pool against 2 the variable spot market. 3 MR. CONWAY: Like I said, it depends 4 on how the settlements code is written. I am not 5 really sure that it will require a reconciliation. 6 There is sort of an infinite sink for 7 accuracy problems, and I think it is called 8 "unaccounted for energy", which is a carry-over 9 mechanism into future years. 10 So, yes, there are systems that are 11 close to the final design available, and when the 12 design gets finalized I am sure they will be adjusted 13 to do whatever it is that is required. 14 MR. ADAMSON: I think the question 15 is: Are these systems there or are they kind of 16 conceptually there and under development? 17 MR. CONWAY: There are several 18 systems under development. I believe there are a 19 couple of other markets that use systems kind of like 20 this for various purposes and they just have to be 21 tweaked, maybe substantially. I am not sure. I guess 22 we are still waiting to see what the code looks like. 23 MR. WHITE: I would suggest 24 that -- and part of the reason my question was phrased 25 the way it was was that the way the current SSS is 26 worded it may not be physically possible to comply with 27 a precise pass-through of spot market price. 28 MR. CONWAY: I mean, that is almost 830 ADAMSON/CONWAY 1 true by definition. 2 MR. WHITE: Thank you. 3 MS LEA: Thank you, Mr. White. 4 Mr. Jennings. 5 MR. JENNINGS: I have about five 6 questions, all I think clarification. 7 Mr. Adamson, in your discussion with 8 Mr. Ronayne this morning -- I want to make sure I 9 understood what you were saying -- you were talking 10 about the level playing field and whether a matter 11 should be shown or not -- I'm sorry, the retail area 12 and whether a matter should be shown or not. 13 The distinction was made earlier in 14 this proceeding between levelling the playing field and 15 arming or harnessing or restricting the players. Did I 16 hear you correctly in saying that your earlier look at 17 the draft staff-proposed code looked like it was 18 restricting the players rather than levelling the field 19 as far as retailers are concerned? 20 MR. ADAMSON: Can you point me to a 21 reference? 22 MR. JENNINGS: No. I was just trying 23 to understand what you were saying with Mr. Ronayne 24 earlier, when you were talking about the -- 25 MR. ADAMSON: Oh, right, when I was 26 talking with Mr. Ronayne, yes. 27 What I was kind of alluding to was in 28 the generation wholesale market. I think I was 831 ADAMSON/CONWAY 1 agreeing with Mr. Ronayne's position that it is 2 competition that is what is important. 3 We don't want to be in the situation 4 of creating unneeded competitors or subsidizing the 5 creation of unneeded competitors just because we think, 6 "Gosh, we have to have more competitors. Let's go out 7 and have the province go out and found some and 8 publicly finance them." I think that is completely 9 ludicrous. 10 What we don't want is to restrict any 11 potential competitors who should be allowed to enter 12 these markets, which is very different than subsidizing 13 them. We are talking about artificial restrictions on 14 people who would choose to enter, for their own 15 commercial purposes, into a market. 16 I think Mr. Ronayne's hero, Alfred 17 Khan, would agree -- in fact, I think he agrees in the 18 paper that Fiona attached to her paper -- that freedom 19 of entry to the market is a very powerful disciplining 20 force in any market. 21 One thing we do want to ensure that 22 we do is not create any artificial and unneeded 23 restrictions that prevent competitors from competing. 24 We don't necessarily want to go out and create 25 competitors. That's what I was alluding to. I think 26 that was Mr. Ronayne's concern, that we were going to 27 be in a situation where we didn't have enough 28 competitors, and had to go out and subsidize them so 832 ADAMSON/CONWAY 1 that they would be there. That was far from my intent. 2 But we do want very strong freedom of 3 entry, to the degree possible, into these markets -- 4 and that includes the retail market on that -- because 5 over the long term that is the defining price 6 discipline mechanism in almost every industry. It has 7 nothing to do with electricity specifically. 8 I was just trying to make that 9 distinction, because I thought Mr. Ronayne was going 10 down a path of sort of portraying what I was saying as 11 being that we had to go and make people do this. We 12 don't have to go and make people, but what we do need 13 to do is -- one thing we do, as a minimum protection 14 need to do, is ensure that people who do want to come 15 in can come in. 16 MR. JENNINGS: When you were talking 17 about, also on generation, the decontrol situation with 18 Ontario Hydro, I would like to test two things with 19 you -- sorry, with Ontario Power Generation Inc. 20 The Market Power Mitigation Plan 21 deals not with 3.8 cents cap on their whole generation; 22 it is a sieve, in that they have to give back anything 23 they make over that 3.8 on 90 per cent of their load, 24 and the other 10 per cent of their load is 25 unconstrained. 26 The other issue involved in that is 27 that the load that is defined there is not their actual 28 load but some previous estimate of what their load 833 ADAMSON/CONWAY 1 might be. So the potential, with a lot of air 2 conditioning this year, for instance, would be for a 3 much larger than 10 per cent, their actual load to be 4 outside. 5 Does that have a significant impact 6 on the overall volatility of the spot market and the 7 electricity price? 8 MR. ADAMSON: Again, I have only 9 reviewed a -- I don't know how many pages it was -- 10 summary of the MPMA. I have not made a substantial 11 study of it. It is well outside the scope of anything 12 I was asked to do. 13 I was making my comments in reference 14 to the issues I thought about implementation of 15 standard supply service, which is the purpose of this 16 technical conference, not a discussion of 17 competitiveness of the market as a whole. 18 I don't want to be drawn into making 19 too many broad statements. 20 As I did say yesterday, and I 21 continue to say, the design of the mechanism, to me, is 22 an issue of concern about how the wholesale market will 23 work. And that is of immediate interest to me in the 24 context of this technical conference, about how the 25 standard supply service function will be implemented in 26 the province. 27 I have only read a summary of the 28 MPMA. I have not seen how these "Q"s are calculated. 834 ADAMSON/CONWAY 1 They are kind of described -- I think it was described 2 in the summary I saw -- and I am relying on memory here 3 from a document I have only read once or twice -- that 4 there was some kind of calculated "Q"s. 5 So I have not seen enough detail of 6 the calculations to say whether those are appropriate 7 or not. I was only trying to raise as an issue, in the 8 context of standard supply, that consideration of what 9 incentives are created by the way the MPMA is designed 10 does need to be carefully considered. 11 If you want any more thoughts than 12 that, I'm afraid I will have to be able to spend more 13 time on it. I would have to be able to spend more time 14 on it to give it to you. 15 MR. JENNINGS: On a different topic, 16 your discussion briefly this morning about self-dealing 17 if there was an affiliated generator, did I understand 18 your concern about that correctly; that there might be 19 an artificial inflation and an artificial over-recovery 20 on the part of the parties at the expense of their 21 customers? 22 MR. ADAMSON: Let's just take a 23 hypothetical example. 24 I, for example, am a standard supply 25 service provider. You are a generator. You are 26 thinking, you know, the market price, "Gosh, I would 27 really like to do better than that market price", 28 whichever market, contract or spot. And you say, 835 ADAMSON/CONWAY 1 "Well, why don't you deal with me. Pass it on to your 2 standard supply service customers. It's a pretty good 3 deal for you." 4 Since it's a good deal for you, it 5 almost assuredly pushes you up in the yardstick 6 competition measure. But you think that the 7 disincentive you would face from that might be less 8 than the amount you might be making extra on the 9 generation contract, and you might be willing to share 10 that with me. 11 So that would be a clear example 12 under any type of procurement mechanism on behalf of 13 customers that we might consider as problematic. 14 The restrictions that tend to have 15 been put on those types of things in other markets, 16 that I am aware of, are relatively simple restrictions 17 on how much you could buy from generators in which you 18 had any financial interest, requirements that those be 19 done on an arm's-length basis or potentially not at 20 all. 21 But you see the mechanism I am 22 worried about. I think that the controls that stop 23 that type of behaviour are going to be very obvious, 24 indeed. Remember the standard supply service provider 25 has to say, "Here's my contract portfolio that I am 26 doing this on." 27 And one very simple question is: Do 28 you have a financial interest in any of the people from 836 ADAMSON/CONWAY 1 whom you have bought the power for the standard supply 2 service customers? If they say yes, well, you know, we 3 will red flag that. 4 MR. JENNINGS: The clarification I 5 was seeking, and I think I got, was that the concern 6 about that is that through collusion they will 7 over-recover and make too much money at the expense of 8 their customers. 9 MR. ADAMSON: Yes. 10 MR. JENNINGS: I want to also talk 11 about another item that came up this morning, and that 12 was the thought of two offerings. I think you said 13 that it would be desirable, in your mind, to have not 14 only the rate that is provided under section 29 15 customer protection rate standard service, whatever we 16 want to call it, but a spot as well. 17 The Market Design Committee, in the 18 report that Dr. Dewees was referring to, in its next 19 recommendation, after recommending their smoothed spot 20 pass, which we have had some questions about, says 21 that: 22 "We recommend that all local 23 distribution companies should 24 also be required to offer all 25 customers the option of buying 26 energy at the wholesale market 27 hourly spot price, including a 28 regulated recovery of 837 ADAMSON/CONWAY 1 administrative costs. The local 2 distribution company may 3 contract this regulated function 4 out to other appropriate 5 parties." (As read) 6 Does that sound consistent -- 7 MR. ADAMSON: This is to say that 8 everybody has to be offered an interval meter rate. 9 MR. JENNINGS: Available. 10 MR. ADAMSON: Right. Yes. I am 11 going back to various comments -- you know, if you hand 12 it over to somebody who does interval metering and does 13 the settlement for interval metering, if that 14 capability exists, why not? People have that right 15 anyway, because you can always go to a competitive 16 retailer who would probably, if you had the interval 17 meter, offer you the hourly rate plus an administrative 18 charge. 19 I don't think that is necessarily 20 a -- that's a protection that I suspect is available 21 most of the way. Whether they should offer the 22 averaged rate that was espoused by Professor Dewees and 23 the MDC, as I think I mentioned in a response to Mr. 24 Ronayne's question, that may be a very nice option. 25 And options to customers have a value. 26 The policy trade-off, to me, is -- I 27 am happy with that as the only option, because I do 28 believe that most customers prefer a fixed rate and 838 ADAMSON/CONWAY 1 will suffer a welfare loss from being forced to take a 2 risk. 3 For those who don't and who like the 4 idea of the hourly price, the averaged hourly price, 5 there is a question, not necessarily a simply question 6 but a practical question, of how do you incorporate 7 multiple -- is it easy to offer this option or not? Is 8 it expensive? Does it require very complicated systems 9 from Mr. Conway or not? 10 There is an option there. The things 11 needn't be -- the circle needn't be exclusive among 12 these two approaches. How well they -- and the hourly 13 interval metering option is probably out there anyway. 14 Are you going to offer the hourly rate, the averaged 15 process as well, I think is a matter of kind of 16 practical cost and assessment of benefits. 17 MR. JENNINGS: Okay. 18 MR. ADAMSON: The hourly interval one 19 is just out there anyway. If anyone has the 20 infrastructure to do it, they are probably going to be 21 willing to offer you the hourly spot price. 22 MR. JENNINGS: But I may have some 23 difficulty, without the necessary wherewithal being 24 available through the LDC, to -- 25 MR. ADAMSON: There may still be a 26 transactional cost; I agree. 27 MR. JENNINGS: Yes. Going back to a 28 couple of issues from yesterday -- again, I just want 839 ADAMSON/CONWAY 1 to clarify two quick things, and I won't be long. 2 MS LEA: Sorry, I wasn't going to -- 3 MR. JENNINGS: No. I was looking at 4 the clock. 5 We were talking about the -- you were 6 talking about the cost and the nature of the portfolio 7 you would need to meet SSC. I think what was said was 8 so long as the profiles were relatively similar and 9 there was a certain amount of homogeneity, I think in 10 people's minds a single portfolio would probably be 11 adequate. I think in people's minds we were looking at 12 residential customers as a group. But the Act requires 13 that all customers have access to the protections under 14 section 29. 15 So if in fact you had a large 16 industrial customer that chose to take advantage of 17 that, would that have a significantly different impact 18 on the strategy for providing SSC and perhaps the costs 19 involved, particularly, let's say, looking at 29(3) 20 where if some supplier failed and they have to take 21 them back on instantaneous notice? 22 MR. ADAMSON: I mean what you are 23 worried about -- by mixing customer classes with 24 different conception patterns, of course, what you are 25 always worried about is allocative efficiency of 26 prices. Anyone from the regulator's perspective is, no 27 doubt, familiar with the long literature on the 28 desirability of cost-reflective, hopefully, somehow, 840 ADAMSON/CONWAY 1 marginally cost-reflective pricing of electricity. 2 Now, the reason one might consider 3 multiple rates is because, as you suggested, the 4 consumption patterns might just be so different and so, 5 in a perfect world, we would have -- in a perfect and 6 costless world, we would try to match people's cost 7 profiles to the rates we offered them. That, however, 8 costs a lot of money. So, for simplicity sake, we 9 might say, "Well, gosh, it's much easier to have -- 10 it's much easier to attract and to bill and everything, 11 you know, a much smaller number of rates, maybe even 12 just one rate." 13 The reason I say this certainly 14 hasn't made my scheme any worse, in terms of the 15 allocative efficiency is, well, think about the 16 alternatives, think about if you are only offering 17 people this average spot price rate. You have already 18 destroyed whatever allocative efficiency signal there 19 was, in these hourly prices, by offering this average 20 number, to a very significant degree. 21 If we thought that there should be 22 peak and off-peak prices because of the economics of 23 the situation, well, offering an average price, 24 especially an ex-post set average price, has already 25 destroyed that price information. So it has already 26 destroyed the allocative efficiency of the pricing 27 regime. So we are certainly no worse. 28 In fact, you know, the allocative 841 ADAMSON/CONWAY 1 efficiency, I think, of a price signal set after the 2 fact is, indeed, probably weak, indeed. So we are 3 certainly no worse. You always, as a matter of rate 4 making, as a matter of pricing, want to try to reflect 5 differences in costs between serving different types of 6 customers. The trade-off in offering the fixed rates, 7 again, I would suggest, is basically one of 8 practicalities. Is it worth it? Is it -- you know. 9 Is the increased system cost, the increased billing 10 cost and whatnot worth the efficiency loss that you, as 11 the regulator, might presume, from having, you know, 12 people lumped together who ought not be lumped 13 together? But I think that is a judgment that a -- I 14 think that is the kind of judgment one could come to 15 relatively quickly. It is not outside the standard 16 bands of electricity rate-setting practice, in most 17 jurisdictions, about how many classes do we have, what 18 are the different consumption problems. 19 MR. JENNINGS: What I was trying to 20 get at, in part, was what are the different conditions 21 that we are trying to provide for. 22 We have tended to think about the 23 people who just don't want to leave. Small customers. 24 But in 29, there is also the requirement for, in 25 theory, accepting a very large customer who wants to, 26 or needs to, come back. And having a portfolio that 27 can accommodate that, I would think, has a 28 significantly different cost, and there may be 842 ADAMSON/CONWAY 1 justification for pricing differently, for those 2 circumstances. 3 MR. CONWAY: I would agree with that. 4 MR. ADAMSON: Do you have any 5 customers with demand side metering -- demand metering? 6 MR. CONWAY: Yes. 7 MR. ADAMSON: KVA metering? 8 MR. CONWAY: Over 15 kilowatts. 9 MR. ADAMSON: Right. How do you 10 incorporate that into an average? How do you 11 incorporate an average weighted product with demand 12 side metering? The one nice thing about doing a fixed 13 rate in advance, where I can start with the cost of 14 what it is costing me to serve peak demand by looking 15 at the contracts I'm buying to serve peak demand, is 16 that it allows me, under normal principles of marginal 17 cost-base pricing -- which we are all familiar with -- 18 it allows me to incorporate the potential for KVA 19 metering into the rates which -- again, I would suggest 20 you look at any standard textbook on utility 21 rate-setting -- is almost always a preferable option 22 when the costs of serving customers are very strongly 23 driven by peak demands. 24 MR. JENNINGS: Under those 25 circumstances, if spot were available, doesn't that 26 provide large industrial customers an amazingly good 27 back-up option if they always have access to it? 28 MR. ADAMSON: Yes. I mean you get 843 ADAMSON/CONWAY 1 the interval meter and you can get the -- you know, you 2 can get as good a price signal as you want. And so, 3 for the industrial customer the hardware required and 4 whatnot to do that is worthwhile. 5 MR. CONWAY: Well, clearly, the 6 customer who is highly on peak would -- may prefer to 7 go onto what he thought was an average price. In which 8 case, that, I think, supports your argument that he 9 wants to separate it back out again. 10 MR. ADAMSON: Yes. Offering average 11 prices on all classes of service, particularly -- you 12 know, that's why, again, you might want to have -- if 13 these people are KVA metered now, you may still want 14 him on a KVA metered ray because, you know, otherwise 15 you end up -- you end up cross-subsidizing the guy who 16 runs the shopping mall with the huge air conditioning 17 load that happens to be coincident with peak demand, if 18 you let him jump onto an average rate with me, who 19 doesn't run any air conditioner, well, come -- you 20 know, I'm cross-subsidizing the guy. 21 MR. JENNINGS: The same thing would 22 be true on a seasonal basis. 23 MR. ADAMSON: Yes. You have to be -- 24 the introduction of all these competitive principles 25 changes very little of the economics of setting rates. 26 MR. JENNINGS: One last point. 27 You were asked, yesterday, about 28 Mr. Todd's paper, page 22, whether you agreed with a 844 ADAMSON/CONWAY 1 paragraph that basically said that the monthly billing 2 and the fact that some customer-care factors are 3 relatively would somewhat mask the volatility of the 4 electricity, on page 22. 5 Just to be clear, in a couple of 6 paragraphs below that, there is a reference to 7 electricity vis-a-vis gasoline and natural gas and, in 8 this province -- I don't know how true it is 9 elsewhere -- we have a parliamentary committee looking 10 at the volatility of gasoline at the pumps and a 11 special office set up, now, to look at that volatility. 12 Mr. Todd's paragraph that wasn't 13 mentioned, I just wondered if you agree with it, as 14 well: 15 "Despite the various factors 16 that may lessen the volatility 17 of consumer prices of 18 electricity relative to the spot 19 market, monthly and seasonal 20 volatility is likely to be large 21 enough that the degree of 22 volatility seen by customers 23 will exceed the volatility seen 24 by customers in other energy 25 markets, such as gasoline and 26 natural gas." (As read) 27 Do you also agree with him, on that? 28 MR. CONWAY: Yes, I do. 845 ADAMSON/CONWAY 1 MR. ADAMSON: Yes. The actual 2 patterns are somewhat different, but I agree that over 3 time one would expect the volatility to be rather 4 higher. 5 I don't disagree, but I don't 6 completely agree with Mr. Todd's next sentence -- which 7 is an important one, and I will just read that out so 8 that you have it: 9 "It can be expected that 10 risk-averse customers will seek 11 supply arrangements that will 12 give them price 13 certainty." (As read) 14 Now, we have made it -- or I listed 15 it as one of my economic principles, that the majority 16 of customers are risk averse. However, I also 17 highlighted, with that picture with the little hump in 18 the middle, that there are some significant costs to 19 doing anything about this problem. There is the hump 20 that you have to get over before you do anything about 21 it. 22 I suggest that some of them who 23 really are possibly very risk averse might be inclined 24 to move immediately into the competitive retail market 25 with someone who might offer them a fixed price 26 contract. That, indeed, would, you know, allow them to 27 escape the level of risk that the spot price 28 pass-through discussed previously might impose on them. 846 ADAMSON/CONWAY 1 However, I also argue that there are 2 a significant -- an excess of customers in Ontario -- 3 in most places -- who are risk averse who, you know, 4 probably would wish this wasn't happening to them, but 5 who might not get over that hump to just switch away 6 into a competitive retailer who offers me the fixed 7 rate, just because it takes a lot of time to understand 8 this, and it is very hard for us in this industry to 9 forget that most people don't understand this a whit. 10 You know. They are still amazed that you can have 11 competition in electricity because gas -- I don't want 12 anybody else running wires to my house. Everyone I 13 talk to, in Massachusetts says that, you know. My 14 electric company can't do one thing right, in 15 Massachusetts, where we live. Where I happen to live 16 is a particularly -- is not known for great customer 17 service. I really don't want anyone -- I don't want 18 them -- it will be like the cable TV guys: you have to 19 wait for them to show up. 20 People do have these costs in getting 21 away from that. So why stick it with them, in the 22 first place? It's extraordinary. 23 MS LEA: Thank you, Mr. Jennings. 24 Mr. Henderson. 25 Mr. Henderson, as you didn't make an 26 appearance on the first day, I wonder if you could 27 state now who you are acting for, please? 28 MR. HENDERSON: Yes, I will. 847 ADAMSON/CONWAY 1 I am Graham Henderson with Ontario 2 Hydro Services Company. 3 Good afternoon, gentlemen. 4 I have five or six questions related 5 to from a distributor's perspective in carrying out the 6 legislated obligation of standard supply. In 7 particular, I would like to frame it in the context of 8 a distributor that is choosing to fulfil that 9 obligation either through an affiliate or through a 10 third party. 11 My first question is, Mr. Adamson: 12 How would you characterize the degree of risk that the 13 distributor is taking on with the spot price model 14 compared to the fixed price model? 15 MR. ADAMSON: The first word I guess 16 I would use is "avoidable". I think we are going to 17 hear more debate about this after lunch from those of 18 us with more detailed knowledge of its legal workings, 19 but I am pretty sure the Act gives very strong 20 assurances that distributors are able to fulfil these 21 obligations through a third party. 22 So I guess the first comment I would 23 make to someone who said, "I am a distributor and I 24 don't want a lot of risk", is, "Well, don't bear any. 25 You seem to be well within your powers to assign that 26 to someone else." 27 That certainly caps the overall risk 28 exposure, I think, right there. 848 ADAMSON/CONWAY 1 The second one is I don't think the 2 magnitude of the incentives required for the 3 procurement function -- I think people respond 4 relatively sharply to economic incentives. We are not 5 talking about betting the house here and whether I fall 6 below or above the black line, horizontal black line I 7 had earlier. We do want the signal to be strong enough 8 to send the right price signals, but we are not talking 9 about a Nick Gleason betting the bank-type scenario 10 under any stretch of the imagination. 11 So I would characterize it as the 12 levels of risk are limited by nature in a form of 13 infinite mechanisms. They have to be consistent with 14 level of risk that the standard supply service provider 15 can take on. But, most importantly, they are avoidable 16 through the provisions of the Act, from my reading of 17 it, by this standard supply service requirement being 18 obligation being discharged by another. 19 MR. HENDERSON: Barry, what is your 20 comment on the same question? 21 MR. CONWAY: I agree totally. 22 MR. HENDERSON: In terms of 23 discharging the obligation to the third party, then, it 24 is your view that if the distributor chose to go that 25 route the distributor has, in essence, then, is it fair 26 to say, passed on the obligation to that third party 27 and, therefore, through that mechanism they are 28 avoiding the risk or benefit of the yardstick 849 ADAMSON/CONWAY 1 mechanism? 2 MR. ADAMSON: One thing I didn't 3 remember -- and maybe it will become a bit clearer 4 after lunch -- is that the precise nature of how one 5 discharges this obligation I don't remember being 6 described in great detail. 7 I took from the tone of the reading 8 of the thing -- but again, I may well be corrected by 9 those who are probably flipping through the pages as we 10 speak -- that the implication seemed to be that it 11 should be able to be handed off on an arms-length basis 12 and without substantial recourse unless, you know, it 13 turns out the distributor handed it off to somebody who 14 simply couldn't do it. You can't hand it off to me if 15 I don't have an office here and obviously don't have 16 any mechanism for doing it. I would think that would 17 probably be interpreted by the Board as a sign of not 18 discharging one's obligation. 19 But having handed it over to a 20 qualified third party, the tone of the thing would seem 21 to me to indicate that that is discharging one's 22 obligation. 23 Now, perhaps we will get a more 24 precise legal opinion on that. 25 MR. HENDERSON: In passing that on, 26 then, as you described, if a distributor was prudent in 27 assigning the obligation, or the fulfilment of the 28 obligation to a third party, is it your opinion the 850 ADAMSON/CONWAY 1 distributor, then, their primary risk in doing that is 2 a regulatory risk in terms of the view of the regulator 3 regarding whether the distributor acted in a prudent 4 manner? 5 MR. ADAMSON: Thinking very broadly 6 in economic terms about it, I imagine it would come 7 down to that. 8 Again, I am not the lawyer who should 9 express an opinion about the precise intentions of the 10 Act and the precise mechanics of how the provisions on 11 standard supply service obligations need to be 12 conducted by those for whom I believe the Act clearly 13 allocates them to. 14 So, you know, I think that is 15 probably best left to someone who can give you a 16 clearer indication of that interaction between the 17 obligated distribution entity, the regulator and the 18 discharging party. 19 MR. HENDERSON: Barry, I'm interested 20 in your view on that also. 21 MR. CONWAY: It's my understanding 22 you can't pass on the obligation so you would have to 23 protect yourself contractually. You would probably do 24 so by insisting on having no volume in price risk and 25 protecting yourself from supplier default with some 26 kind of prudential requirement. 27 There is probably always some 28 residual business risk, but you would try to minimize 851 ADAMSON/CONWAY 1 that with your contract. 2 MR. HENDERSON: In terms of the 3 distributor -- Barry I'm interested in your answer to 4 this question first, and then Seabron's. 5 In terms of the distributor taking 6 the full requirements approach, I think that is what 7 you are describing in terms of no volume or price risk. 8 MR. CONWAY: Yes. 9 MR. HENDERSON: In your view, and 10 based on your knowledge, is that what is the relative 11 cost of that approach compared to other risk management 12 approaches or strategies? 13 MR. CONWAY: By "relative cost" I'm 14 not exactly sure what you mean. 15 The option is always to do it 16 yourself, in which case you would build your costs into 17 the rates. I would assume there would be some sort of 18 allowance for procurement costs. 19 However, you would have to bear the 20 exposure that you might run to run the portfolio. The 21 cost depends, in that case, in terms of how well you do 22 that. 23 But if you want to bear no risk in 24 that regard, you would outsource it. 25 MR. HENDERSON: Even in 26 outsourcing -- I guess my question is more related to 27 in completely outsourcing and trying to take as little 28 risk as possible from the distributor's perspective. 852 ADAMSON/CONWAY 1 Does that mean the outsourcing of that risk management 2 would result in a premium cost as compared to a 3 strategy where the distributor was willing to take some 4 of the risk? 5 MR. CONWAY: If you have a full 6 requirements contract you will have a certain cost 7 quoted, and there may be a range depending on the 8 competition you run. 9 If you decide to run your own 10 portfolio and take on a little bit more risk, you may 11 be able to minimize the cost of power that would come 12 out of that portfolio. But you would be putting some 13 of your capital at risk at that point and you would 14 expect some kind of return for that. I doubt, from the 15 way you posed this question, that you would want to do 16 that. 17 I would expect that if you were 18 running your own portfolio, in that circumstance you 19 would have a fairly tightly hedged portfolio so that 20 your exposure would be minimized. But the extension of 21 that is just to outsource it, in which case you are 22 basically buying power at a fixed cost with no price 23 volatility at all. 24 MR. HENDERSON: Seabron? 25 MR. ADAMSON: I'm just going to say, 26 I understand the question of residual risk but perhaps 27 we might put this in a wider context. 28 What is the residual risk of a 853 ADAMSON/CONWAY 1 regulated entity, regulated distribution entity in this 2 case, in outsourcing any necessary function? It seems 3 to me utilities outsource quite a number of functions, 4 often. I know utilities that have outsourced various 5 billing functions, meter reading functions, call centre 6 functions, all types of things which are necessary for 7 doing what they are supposed to do in the final 8 analysis, which is get electricity to customers. 9 It seems to me there is probably not 10 a great analogy -- I'm sorry, not a great distinction 11 between what is intended in the Act as regards 12 potentially to this obligation and outsourcing all 13 sorts of other necessary obligations of which I think 14 regulated enterprises do quite a lot of. So that is a 15 good benchmark to think about. 16 To the extent that you think there is 17 a residual commercial risk, you deal with that in the 18 terms of the contract with the supplier, just as you 19 would deal with an outsourcing contract with an IBM 20 subsidiary that was handling various billing services 21 functions for you perhaps. 22 It is certainly an issue, but it 23 doesn't strike me as a regulatory issue limited to this 24 problem. There may well be some evidence of how that 25 has been dealt with in some of these other examples. 26 MR. HENDERSON: I think my last 27 question, as I think I am standing between us and lunch 28 at this point -- 854 ADAMSON/CONWAY 1 MS LEA: No, you are not. 2 MR. HENDERSON: Oh, I am not. Good. 3 That makes me feel better. 4 I think my last question is related 5 to a distributor that chooses to take as little risk as 6 possible in doing this, however that results in them 7 fulfilling the obligation, if it's completely 8 outsourcing with the requirement service. I am 9 interested in both of your opinions. 10 Is that, in your opinion, likely to 11 result in that distributor during the yardstick 12 comparison exercise with other distributors who may be 13 willing to take more risk ending up with a higher cost 14 and, therefore, being more likely to be penalized or in 15 danger, in risk of being penalized through the 16 yardstick comparison? 17 MR. ADAMSON: Facing a negative 18 economic incentive. 19 MR. HENDERSON: Very well, facing a 20 negative economic incentive. 21 So my question is: In your opinion, 22 is that a risk for the distributor if they choose the 23 approach of taking zero risk on the price and volume 24 side? 25 MR. CONWAY: I would say it depends 26 on the contract. If I was doing contracting in that 27 circumstance, I would pass it back to the supplier. 28 MR. ADAMSON: Yes. My vision of how 855 ADAMSON/CONWAY 1 this would work and the relationship of what I was 2 thinking about with the terms of the Act was that if 3 your entity contracted with this other party -- let's 4 just cite for an example this person doing the standard 5 supply service provision. Clearly, you want that 6 incentive to be going in the right place, too, and if 7 they are doing the procurement, they should face the 8 economic incentives, not you. 9 So I think your residual regulatory 10 risk in this would be these guys didn't do their job at 11 all or did it in such an extraordinarily bad way that 12 whoever you contracted with you are open to some form 13 of prudency review about did you discharge your 14 obligation in an incorrect way. I would say that's 15 normally handled under contract law through normal 16 forms of liquidated damages provisions or whatever. 17 So that clearly, to me, seems like 18 that's specific to the contract that you developed with 19 the provider, but it certainly, to me, economically 20 makes more sense that if that third party provider over 21 here is doing this for you, he faces economic 22 incentives because he is the one doing the procurement. 23 What you have done is to say, "I have put this in a box 24 and you and I have a contract about what happens to 25 this box." The only thing you are open to is does the 26 OEB say, "You shouldn't have put it in that box." 27 MR. CONWAY: Perhaps we should 28 continue this conversation over lunch. I am sure I can 856 ADAMSON/CONWAY 1 find a solution to your problem. 2 MR. HENDERSON: I am not surprised. 3 That's all my questions. Thank you. 4 MS LEA: Thank you very much, 5 Mr. Henderson. 6 Ms O'Riley has a question. 7 MS O'RILEY: I had better keep this 8 really short. 9 I was just going to ask if you could 10 clarify some of the discussion around contracts for 11 generation and, specifically, I was wondering if there 12 have been merchant plants that have been financed in 13 other jurisdictions without a long-term contract for a 14 large volume of the output. 15 MR. ADAMSON: Yes, there has. There 16 has been new generation and, very substantially, a lot 17 of what there has been has been effectively 18 divestitures, like in a lot of the U.S. states, in 19 Australia, in some of the Latin American countries, 20 notably Colombia, Argentina. We could come up with a 21 laundry list of them. There are lots of merchant 22 generation activities going on around the world in a 23 lot of different markets. 24 To give you an example, the 25 transaction I recently worked on -- and this is kind of 26 publicly known because you can look it up in the Wall 27 Street Journal -- was the financing of the former 28 thermal assets in New York State Electric & Gas. It 857 ADAMSON/CONWAY 1 was almost predominantly merchant. They had 2 relatively -- they did have a very short sell-back 3 contract to the utility doing the selling, which is 4 sometimes common in these things. 5 It's not that there are not people in 6 the financial community unwilling to assume risk, 7 merchant generation risk. Particularly over very long 8 terms, there is always very substantial merchant risk. 9 The question is anything I can do to help lock down any 10 of those revenues contractually helps me a great deal 11 in the financing. There is no doubt that, by 12 definition, a merchant plant is going to have some 13 merchant risk, revenue risk, predominantly quantity 14 risk. It's a question of degree. 15 There have been projects financed 16 which are almost completely merchant. It's not 17 impossible. There have been ones that have mixtures of 18 some contract cover and some without contract cover. I 19 guess my assertion is that anyone buying or building a 20 merchant plant can forecast revenue stability better to 21 the extent that they are able to hedge those risks 22 contractually or take price signals from forward 23 contract markets. 24 To the extent that those risk-hedging 25 options and forward price signals are available not 26 only to the developer but very critically to the 27 capital market, whether that's the banks that 28 participate in a syndicated loan, whether that is to 858 ADAMSON/CONWAY 1 the rating agencies that rate that issuance, to the 2 extent you are able to rely on those market price 3 signals gives a very strong signal to the capital 4 markets on the longer-term economics of the plant you 5 are looking at. 6 So merchant generation exists. The 7 question is one of relative risk and what relative 8 return on capital one requires for assuming that. The 9 required returns on equity for merchant generation, 10 even for quite solid, highly-competitive facilities, is 11 very high. Even for good relatively base-load plans, 12 it is not uncommon to hear bandied about by people in 13 the financial community real returns on equity in the 14 order of 18 to 22 per cent. 15 For a capital-intensive facility, 16 that is pretty big money and that's a substantially 17 higher cost of equity than one is used to in the 18 regulated world. We also hope that helps allocate risk 19 better over the long term to people building these 20 things. The required returns on equity and even 21 returns on debt can be substantially higher than what 22 one is used to under the kind of franchise-regulated 23 utility model. 24 So anything that helps convince me as 25 the equity participant and helps convince you as the 26 lender, whether you are a commercial bank participating 27 in a syndicated loan, whether you are someone buying a 28 bond which is backed by the revenues from my debt, it 859 ADAMSON/CONWAY 1 just helps lower the cost of capital. So it's not 2 impossible. It's almost always possible to get 3 somebody to invest at some target rate of return, but 4 those can be, in real terms, very, very high. It's a 5 matter of degree. 6 MS LEA: Thank you. 7 Any other questioners that I might 8 have missed? I see none. 9 Thank you very much, gentlemen, for 10 the assistance you have given to parties and the Board 11 through your presentation and the answers to your 12 questions. 13 Thank you, Mr. Power. 14 MR. POWER: Thank you. 15 MS LEA: One hour for lunch, please, 16 returning at 20 to 2:00. 17 --- Upon recessing at 12:40 p.m. 18 --- Upon resuming at 1:40 p.m. 19 MS O'RILEY: Good afternoon. 20 Mr. Power. 21 MR. POWER: Thank you very much. 22 Just for everybody who is in the room, there was a 23 prefiled witness statement for John Jenkins and Gunars 24 Ceksters, and of course the report which we have seen 25 earlier by Fiona Woolf. 26 To my side over here there are 27 overhead presentation materials by Gunars Ceksters and 28 Fiona Woolf. Unfortunately, I forgot Mr. Jenkins'. I 860 ADAMSON/CONWAY 1 will make those available Monday morning, copies of the 2 slides that he will be presenting here today, although 3 they don't vary significantly from the witness 4 statement he had made. 5 In terms of the three people that we 6 have before us today, Fiona Woolf, of course, has had a 7 wide range of experience in advising governments and 8 regulators on almost all parts of the competitive 9 electricity markets. You can see from her CV and 10 attached materials that she has been at this game in 11 nearly every major electricity restructuring for 12 15 years. 13 She has also been the project 14 director on many of the restructurings, which is more 15 than simply giving advice but actually leading the 16 teams. 17 John Jenkins is the Manager of 18 Business Development at ATCO Power Limited. He has had 19 24 years of business development in both natural gas 20 and power project development, and he is the project 21 manager for the Lakeview generating project. 22 Gunars Ceksters is the Executive 23 Director at Hydro Mississauga who is responsible for 24 systems planning and operations. He is also 25 responsible for Hydro Mississauga's participation in 26 the Lakeview project and other generation projects, and 27 is also responsible for Hydro Mississauga's involvement 28 in the G6 initiative consortium, which is six utilities 861 ADAMSON/CONWAY 1 which are analyzing and looking at amalgamating their 2 retail operations for a provincial retail company. 3 With that introduction, perhaps I can 4 turn it over to the panel. 5 PRESENTATION 6 MS WOOLF: Thank you. 7 I am Fiona Woolf from Cameron 8 McKenna. If I could have the first slide, please. 9 I have called this "Implementing the 10 White Paper through the Standard Supply Service Code". 11 The reason I have done that is fairly obvious. When I 12 look at the code I asked myself, as I am sure we all 13 did: What is this trying to achieve? I then looked at 14 the licence, which is the basis through which it is 15 given force, and I looked at condition 14(2) and I 16 said: What is this trying to achieve? That took me 17 back to the legislation, which obviously was trying to 18 achieve a number of things which are set out in section 19 1 of the act. Also, of course, it then took me back 20 to: What is that trying to achieve to the White Paper? 21 Indeed, as I noticed Don Dewees said 22 in his presentation, we were guided by the White Paper 23 of November 1997. Part of our mandate was to follow 24 the White Paper as our terms of reference. We looked 25 there, among other things, for goals. 26 From the point of view of the goals, 27 let's look to see what the White Paper said in relation 28 to the issues that we have been discussing this week. 862 WOOLF/JENKINS/CEKSTERS, presentations 1 Let me say that the emphasis that is 2 on these slides, of course, was added by me. 3 Retailers, brokers and large volume 4 customers, including local utilities, would buy from 5 the spot market or arrange bilateral contracts with 6 generators as they would in a wholesale model. 7 They, meaning customers, would have 8 the choice of staying with their current utility, 9 having an electricity broker arrange supply on their 10 behalf, as in the gas and telephone industries, or even 11 buying directly themselves. 12 Directly on this issue, distribution 13 utilities would continue to supply electrical energy, 14 either directly or under contract with a private firm, 15 so customers would not be required to make any changes 16 if they did not wish to. Customers would always have 17 access to electricity at market-based prices through 18 their current supplier. 19 I was a little bit confused with Don 20 Dewees' statement when he said, "Without doing more, 21 everybody has the benefit of wholesale competition 22 simply by staying on standard supply service. None of 23 the other schemes seems to offer that benefit." It 24 seems to me that the Seabron Adamson proposal, as I 25 have called it, does exactly what the White Paper 26 indicates. It gives customers access to electricity at 27 market-based prices. 28 So in a sense, just as a statement of 863 WOOLF/JENKINS/CEKSTERS, presentations 1 the obvious, the White Paper represents policy 2 objectives in a codified form. It reflects some two 3 years of debate and consultation. What is unusual in 4 my experience where White Papers normally upset 5 everybody -- and they are doing well if they upset 6 everybody equally -- this White Paper commanded a 7 remarkable degree of support and acceptance in Ontario. 8 So I think we can take it that it has established 9 government policy objectives and also there is a lot of 10 accepted wisdom of stakeholders reflected in it. 11 Believe me, these are very important 12 issues because, as much as people love to debate the 13 wholesale market and as much as people love to debate 14 market power and OPGI's position and all that sort of 15 thing, it is in the retail sector that the rubber hits 16 the road. The success of this restructuring will 17 depend upon how well the standard supply service works 18 and how well retail competition works. 19 I have based my paper and this 20 presentation on the assumption that there has been no 21 change in the policy objectives stated in the White 22 Paper. Why have I taken that assumption? Because I 23 believe that Bill 35 very faithfully reflects 24 government policy, and particularly I think that 25 section 79 of the OEB Act remains government policy. I 26 think that the government is that sort of a government 27 where it would have told us if it wasn't still its 28 policy objective when it has actually enacted that 864 WOOLF/JENKINS/CEKSTERS, presentations 1 objective in legislation. 2 What am I talking about in terms of 3 section 79? Let's look at it in the way it has been 4 cast in condition 14(2) of the transitional 5 distribution licence, which is the document that gives 6 legal basis for the SSS code, as I will call it for 7 shorthand. 8 It says that the licensee may fulfil 9 its obligation to supply directly, through an 10 affiliate, through another person with whom the 11 licensee or an affiliate has a contract, or through a 12 combination of the three methods. In a world where 13 distributors are being asked to unbundle, 14 commercialize, merge, achieve economies and 15 efficiencies it is fairly obvious that flexibility had 16 to be given to them to adopt the most appropriate 17 strategy. 18 Why deviate from this? Let's go down 19 the hierarchy. I started with the White Paper. We 20 have been through the legislation, into licensing and 21 we are now into the code. I should say the "codes". 22 The key restrictions are the ARC 23 2.5.7, affectionately known as "the ARC", which 24 restricts transfer to an affiliate SSS provider; SSSC 25 2.2.4 and 5, which restrict third parties to SSS 26 provision only within the distributor's service 27 territory; and SSS 2.2.2 and 2.5, which restrict the 28 use distributors can make of market sources to offer 865 WOOLF/JENKINS/CEKSTERS, presentations 1 SSS customers market-based prices. 2 I do regard the ARC 2.5.7 as being 3 inextricably linked to the Standard Supply Service 4 Code. I think that if you read it at face value it 5 simply makes it impossible to implement condition 14(2) 6 of the transitional distribution licence as drafted. 7 You could not transfer the customers over to a retail 8 affiliate to have the SSS provided. 9 It also means that the retail 10 affiliates must, of course, start from completely 11 nothing. They can't use any customer lists. So they 12 are going to be small, and given that margins are thin 13 in the retail business, it is going to restrict the 14 exercise of choice under the TDL for implementation of 15 the Standard Supply Service Code. 16 I think it is very similar in the way 17 that it operates to the restrictions on standard supply 18 service providers marketing or retailing electricity 19 and gas in the service area of the distribution 20 utility, because both of them restrict market entry. 21 And also from the point of the 22 Seabron Adamson proposal, if it was left untouched, 23 then it would mean that the retail affiliate best 24 placed to manage procurement under Seabron's proposal 25 would be precluded from doing so. 26 I think it is also useful to note 27 that the code that it was taken from, the California 28 code, is nothing like as restrictive as this particular 866 WOOLF/JENKINS/CEKSTERS, presentations 1 provision. 2 Could I have the next slide, please. 3 As I indicated, the Standard Supply 4 Service Code creates restrictions on the choice that is 5 given to distribution utilities under Condition 14(2) 6 of the TDL. As pictures speak louder than words, at a 7 glance you can see that what is created is three 8 companies rather than the two that are envisaged in the 9 legislation. 10 Particularly, the problem for the 11 third party provider is that it can't exploit economies 12 of scope and scale in the LDC's service territory. 13 There is no scope or incentive to make money by 14 efficient power procurement because of the 15 restrictions. 16 In fact, although the staff 17 background paper talks of allowing third parties to buy 18 outside the spot market because 222 of the Code only 19 relates to distributors, why would a third party do 20 that? 21 Why would anybody be mad enough to 22 buy a fixed price and then sell at spot? The price 23 that a third party can sell at is fixed by the Code. 24 They can only sell at the spot price, which is 25 volatile. Nobody would be mad enough to buy fixed and 26 sell at a volatile spot price. 27 If they could buy it at a cost that 28 was lower than the spot price, why would they sell it 867 WOOLF/JENKINS/CEKSTERS, presentations 1 in a standard supply service business with all the 2 restrictions on marketing in the LDC's service 3 territory? Why wouldn't they just sell it back into 4 the spot market? 5 I am really mystified as to why the 6 third party would be interested in getting into this 7 business. 8 By the same token, I don't think an 9 LDC would want to burden its retail affiliates with 10 this business -- or should I call it an obligation, 11 because that in effect is what it is, it is a public 12 service obligation. 13 The affiliate has the same marketing 14 and retailing restrictions as the third party because 15 of the definition of third party in the Code, which 16 includes affiliates. 17 So how on earth did all this trouble 18 arise? Well, I think it probably arose -- and it was 19 probably inadvertent -- because of the need to deal 20 with specific problem areas. I call them "mischiefs" 21 in my paper. People think that is very 19th Century 22 English, so I call them "problem areas" now. 23 Could I have the next slide, please. 24 So what are the problem areas that 25 people have been legitimately, in my view, seeking to 26 address? And indeed the Codes do address these issues. 27 Well, the obvious one is the 28 distributor's potential conflict of interest, as I call 868 WOOLF/JENKINS/CEKSTERS, presentations 1 it; the potential for cross-subsidies between the 2 distributors and affiliates, a preferential service of 3 the affiliate's customers. Indeed, these problem areas 4 Don Dewees mentioned twice in his presentation. 5 Then, of course, there is the 6 protection of customer information. That is just not a 7 regulatory or a market concern. That is also a very 8 legitimate personal privacy issue here, customer 9 privacy issue here, which I will come back to at the 10 end of the presentation. 11 Then there is the obvious issue of 12 regulating the price of the standard supply service for 13 the people who are in effect captured customers, maybe 14 by choice or inertia. But, nevertheless, the price for 15 them needs to be regulated. 16 Then there is the final problem area, 17 which I think has been obsessing everybody, which is a 18 potential for what might be perceived as an unfair 19 market advantage or abuse of market power. 20 The point here is that we must not 21 confuse controlling access to essential facilities such 22 as distribution-wise with controlling or restricting 23 market entry. Indeed, it seemed to me that Don Dewees 24 managed to show easy it is to confuse these issues, and 25 indeed I think Alfred Khan has written on this subject 26 on many occasions as well. It is easy to fall into the 27 confusion. 28 He said in his presentation -- it 869 WOOLF/JENKINS/CEKSTERS, presentations 1 says the third party provider may not retail in the 2 service area. That goes beyond what the MDC said 3 explicitly, but it is consistent with our concern, the 4 MDC's concern, that opportunities for cross-subsidy and 5 preferential treatment be minimized. 6 There, in a single sentence, he leaps 7 from something that controls market entry into 8 something that deals with the first point, which is 9 controlling access to essential facilities. 10 So if a professor of economics can be 11 confused, then I think maybe everybody else can be 12 forgiven for being confused as well. But for the 13 purposes of this afternoon, it is important that we not 14 be confused. 15 There is another risk which has been 16 talked about, which is protecting distributors from 17 risk. I won't go over the eloquent answers of Seabron 18 Adamson this morning, but I had to do it through 19 contract. Where I come from, I think a distributor 20 would shrug his shoulder and say: Well, I am perfectly 21 able to manage risk. I am in a good position to do 22 that and I regularly do it. And I don't really regard 23 myself as being at a disadvantage. 24 I think if we could move on, I would 25 like to concentrate now on the issue of the potential 26 market advantage. I think, as Seabron has indicated, 27 governments and regulators avoid imposing restrictions 28 on market entry unless they are absolutely necessary. 870 WOOLF/JENKINS/CEKSTERS, presentations 1 And this would be the last sort of restriction that 2 they would put in place. 3 As Alfred Khan likes to say, there is 4 a heavy burden of proof that there will be a problem 5 before any regulator starts putting any measure in 6 place that interferes with market forces. 7 Frankly, I don't see how in Ontario 8 you can begin to discharge that burden of proof. The 9 market participants in the retail market haven't even 10 identified themselves. Let's contrasts that with the 11 wholesale market, where obviously we do have some 12 inkling that OPGI would like to participate in the 13 wholesale market. So we do know that at least there 14 will be one participant in there. 15 I think also that the view that this 16 perceived competitive advantage that the LDC retail 17 affiliates might have if they could use the LDC's 18 customer list is unlikely to be unfair in all analysis. 19 There is nothing unfair about exploiting economies of 20 scope and scale. Everybody does it. 21 I was thinking this morning, when I 22 went into Starbucks to get a cup of coffee, that 23 Starbucks were exploiting an economy of scope and scale 24 by offering me a muffin at the same time. 25 Using customer lists and names and 26 reputations is very much open to anybody else with a 27 customer list in Ontario -- notably, of course, the gas 28 companies. 871 WOOLF/JENKINS/CEKSTERS, presentations 1 We are finding in the U.K. that it is 2 essentially the supermarket chains who are very 3 interested in selling electricity and using their 4 customer lists, their credit card facilities, their 5 premises, as economies of scale for entering into the 6 market at low cost. 7 There is another sort of economy of 8 scope and scale which can be utilized, which might 9 surprise you, which is the economy of trading off 10 between the portfolio of contracts for standard supply 11 service and for retail service. I am sure that is 12 exactly what the England/Wales RECs do with their 13 contract cover. 14 Let's just have a look at the next 15 slide on restrictions on entry into the market. 16 Seabron said that the threat of 17 market entry is one of the most powerful 18 pro-competitive forces that there is. It is a highly 19 beneficial source of competition. 20 I was reading last night the famous 21 article in 1989 by Stephen Littlechild, who has just 22 been appointed the electricity regulator in England. 23 He had assumed an obligation that is very similar to 24 the duty on the Board here in Ontario. 25 "Promoting competition involves 26 facilitating the entry of new 27 competitors, including the entry 28 of existing competitors into new 872 WOOLF/JENKINS/CEKSTERS, presentations 1 parts of the market." (As read) 2 We did debate what the difference 3 between promoting and facilitating competition was. We 4 debated endlessly the meaning of the two verbs and came 5 to the conclusion, in practice, that there wasn't much 6 difference between the two. I was on the receiving end 7 of this because the national company that I represented 8 had a duty to facilitate, and the regulator had a duty 9 to promote. We came to the conclusion that in making 10 practical decisions, it pretty much wound up as the 11 same sort of thing. 12 Entry, of course, is normally based 13 on the utilization of existing resources of achieving 14 economy in scope and scale. This enables entry at much 15 lower than any incremental cost, and that of course can 16 result in lower prices and cost to the consumer. 17 And handicapping does not create 18 competition. It is not the level playing field that 19 the staff background paper promised. 20 Of course, I suppose there is a 21 trade-off between facilitating entry and the effect on 22 developing competition when it is up and running. But 23 let's get it up and running first, rather than 24 prejudging what it will eventually look like. 25 Everybody is somewhat pessimistic in 26 Ontario about the extent of retail competition, if Don 27 Dewees was anything to go by. 28 So it seems to me that at the outset, 873 WOOLF/JENKINS/CEKSTERS, presentations 1 what is important is to get it going. 2 Of course, the short point, as you 3 will doubtlessly realize, and as day follows night, is 4 that if you restrict the retail affiliate from 5 utilizing the customer lists and the resources of the 6 distribution utility, and you restrict third parties 7 and retail affiliates from marketing and retailing gas 8 or electricity in the service area, then you are going 9 to find that there are no economies of scope and scale 10 that they are going to be able to utilize. 11 Indeed, I doubt whether you will find 12 them in the market at all. 13 So, in short, I suppose if you are 14 back to level playing fields and teams -- what with 15 references to ball games from last night, anything to 16 go by -- there is a difference between equal access and 17 equal teams, and there is nothing that says that you 18 have to protect the less efficient teams or indeed 19 subsidize the less efficient teams, as Seabron has 20 mentioned, to get things going. 21 What worries me is that you will wind 22 up with, at most, a couple of competitors in a service 23 area. Where I come from, I am afraid that duopolies do 24 not create competition. We think actually that they 25 just create twice the opportunity for the exercise of 26 monopoly power. 27 Could I have the next slide. 28 The other White Paper objective was 874 WOOLF/JENKINS/CEKSTERS, presentations 1 of course the rationalization of the distribution 2 sector. As an international consultant, I can say that 3 the only place that has more distribution utilities 4 than Ontario is South Africa. Therefore, there was 5 obviously a desire in the mind of the government, well 6 expressed in the White Paper, to provide a framework to 7 motivate rationalization and motivated, obviously by an 8 express and indeed an obvious desire to achieve 9 efficiencies and economies of scope and scale. 10 Of course, as I have indicated, the 11 restrictions that are imposed by the Codes could 12 involve diseconomies rather than economies -- you know, 13 the three where two would do -- if of course you could 14 persuade a third party to get into the business anyway. 15 It is an unattractive business case 16 for both competitive retailing and standard supply 17 service provisions for other LDCs looking to merge, or 18 for third party investors contemplating M&A activity. 19 Of course, what motivates merge of the acquisitions? 20 Obviously, the answer is the opportunities to achieve 21 economies of scope and scale. 22 If I could carry on with the next 23 one. 24 I think it is unlikely to attract 25 outside investors to come in and acquire the assets of 26 the distribution utilities. I think it is unlikely to 27 encourage investment even in the business or even in 28 the infrastructure required to provide this public 875 WOOLF/JENKINS/CEKSTERS, presentations 1 service obligation, because the Code doesn't actually 2 provide any assurance that there will even be a return 3 on the investment in the infrastructure servicing the 4 provision of this service. 5 We have heard a lot about the 6 disincentive to invest in generation because of lack of 7 buyers to enter into contracts with -- and you will 8 hear more from John Jenkins about this this 9 afternoon -- and the high cost of entry because of the 10 liquidity in the contract market. So I am happy not to 11 dwell on that and to move forward with that. 12 But I can say that the uncertainty 13 surrounding the SSSC is causing delay to potentially 14 beneficial projects. And by beneficial, I mean those 15 that might create jobs or might be benign to the 16 environment, as well. 17 If I could move to the end -- you 18 will be glad to know -- to the proposal, essentially I 19 think all it would take as an alternative to these 20 restrictions and indeed the slightly strange 21 restriction on the use of information in the 16(6) of 22 the transitional distribution licence -- and let me say 23 that actually all the confidentiality provisions of the 24 ARC and the SSSC and the licence are somewhat 25 differently cast. And they seem to be crying out for 26 rationalization. 27 I think all it would take to 28 implement something that makes sense, as an alternative 876 WOOLF/JENKINS/CEKSTERS, presentations 1 to these restrictions, is to identify the information 2 that we are talking about that needs protection and to 3 essentially give control of all this to the customer to 4 whom it belongs. 5 In the wholesale market, we now deal 6 with confidentiality provisions very specifically, and 7 we identify the information that needs to be kept 8 confidential. That makes it much easier to implement 9 systems and commission software, to make sure that this 10 is effective. And it can be monitored and made to 11 work. 12 The sort of information that I think 13 is sensitive is load profiles, connection information, 14 payment histories, and the inevitable names, addresses 15 and telephone numbers. 16 I have to say that of course names, 17 addresses and telephone numbers are so readily 18 available, you can buy them on CD-ROM, you can hire 19 telemarketing agencies who seem to have the most 20 wonderful lists with value-added socioeconomic data 21 that know even what the length of your driveway is, 22 that you begin to wonder whether this is information 23 that should be kept confidential. It is another reason 24 why I think that not allowing retail affiliates to 25 utilize it does not create an unfair market advantage, 26 because, frankly, you can buy it from anywhere these 27 days. 28 But, nevertheless, I think if you as 877 WOOLF/JENKINS/CEKSTERS, presentations 1 the average customer, if I was to go around the room 2 and say, "Would you like your name, address and 3 telephone number to be disclosed", you would probably 4 say no. 5 So let's be specific about the 6 information. 7 Then I think the offer is made -- not 8 that it is entirely necessary, in my view, but it is 9 there -- that the customer lists should be made 10 available to all licensed retailers prior to market 11 opening. But prior to that release customers could 12 stipulate that the information not be provided. Then 13 after that the information would be updated and 14 available to all licensed retailers on an ongoing basis 15 where approved by a customer. 16 So all of that I think in terms of 17 what it would take to put an alternative in place that 18 would overcome all the problems that I have articulated 19 this afternoon, and particularly the restrictions on 20 market entry, could be done very quickly indeed. 21 In fact, I think in order to 22 implement the Seabron Adamson proposal, essentially you 23 could write the thing up in the distribution rate 24 handbook. It's a scheme that looks to me a lot like 25 the way in which the PBR works, and indeed it doesn't 26 involve changing billing and settlement systems, and 27 I'm sure that those who are grappling with retail 28 settlements would be glad to hear that, one of the more 878 WOOLF/JENKINS/CEKSTERS, presentations 1 difficult issues, obviously, in implementing retail 2 competition, as we all well know. 3 Indeed there is already a hook 4 in 2.5 of the Standard Supply Service Code. There is a 5 reference to the Distribution Rate Handbook in there. 6 As it is in an early stage of development -- it has 7 just gone out for review but doesn't have anything in 8 it relating to the standard supply services -- there 9 is obviously plenty of room for a chapter to be put 10 into it. 11 But I don't think -- just to move to 12 my last slide -- that we are talking about anything 13 other than really sort of relatively minor amendments, 14 minor surgery, even sort of medication, if you like, 15 which could deliver all the policy objectives 16 articulated in the White Paper, Bill 35 and the 17 licences. 18 Thank you very much. 19 Shall I pass to John Jenkins? 20 PRESENTATION 21 MR. JENKINS: Thank you, Fiona. 22 As we said earlier, my name is John 23 Jenkins and I am with ATCO Power Limited. We are a 24 company headquartered in Calgary and we are looking to 25 make one or more significant investments in the 26 Province of Ontario, and have been looking for quite a 27 period of time, leading to where we are today. 28 Just a little background so those of 879 WOOLF/JENKINS/CEKSTERS, presentations 1 you who don't know the ATCO companies -- and I won't 2 give you a long commercial, I will just let you know 3 that we are involved in both the natural gas and the 4 electricity businesses. Our gas companies operate 5 primarily in Alberta and we gather, distribute and 6 retail natural gas and other related services. 7 We also have electric utility in 8 Alberta, Alberta Power -- formerly Alberta Power, not 9 called ATCO Electric -- and that is a traditional 10 utility, although investor-owned considerably different 11 in its operation and approach than provincially-owned 12 utilities such as the former Ontario Hydro, but we have 13 a pretty good understanding of those two businesses as 14 they have developed historically. 15 In particular, ATCO Power is an 16 unregulated company. We are an independent power 17 developer. We have projects in Canada, Great Britain 18 and Australia. 19 Each of the markets in which we 20 operate as ATCO Power is undergoing, and has undergone 21 in some cases, a fundamental electric market 22 transition. The markets are unique, they have their 23 own unique characteristics, but in some cases there are 24 similarities. 25 Ultimately, each market will arrive 26 at a solution that reflects the specific requirements 27 of that market, and our experience really is that there 28 is no single model that can be applied to every single 880 WOOLF/JENKINS/CEKSTERS, presentations 1 jurisdiction, given our experience in both the number 2 of provinces in Canada and internationally. 3 The Standard Supply Code as presented 4 in draft form on the 29th of January of this year was 5 carefully reviewed by a number of people, experienced 6 people within our group. I have to say that my 7 participation here today is perhaps a little unusual, 8 but certainly motivated by what we saw as a concern, a 9 great concern moving forward in Ontario here, that 10 while the overall recommendations were workable the 11 spot price pass-through to standard supply customers 12 did not hold with our understanding of the overall 13 objectives related to electricity regulation in 14 Ontario. 15 The objectives include -- and I will 16 just deal with a couple -- in our view, facilitating 17 increased competition in the electric generation and 18 retail sectors, and the protection of consumers with 19 respect to the price, reliability and quality of 20 electrical service. 21 The outline to the presentation, I 22 will try to hold it brief, I know it is getting late in 23 the day. 24 This is really from a generator's 25 perspective. I am going to try to relate to you our 26 view of this market and some of the things that we see 27 and comment on some of the things that I have seen and 28 heard here in the past few days and some discussions I 881 WOOLF/JENKINS/CEKSTERS, presentations 1 have had in the past, because while we get involved in 2 a session like this and we talk, even at the Market 3 Design Committee, perhaps even at the White Paper 4 level, there are a lot of theoretical approaches and 5 economic models that some learned people in the room 6 here can talk about, but really when it comes down to 7 it someone ultimately has to make an investment. They 8 have to put money on the table. 9 In the case of the generating side of 10 the business it is very large money and mistakes or 11 risks can be catastrophic, even to a company of our 12 size. 13 So it is from that perspective that I 14 will talk -- at least I will try to. 15 What I will do today, quickly, is 16 look at a couple of the differences that we see between 17 the gas and the electric markets. There are some 18 parallels, and sometimes in discussion with people I 19 see that we get on a similar path and gas and 20 electricity are sometimes viewed as much the same in 21 the ability to deregulate them or their operation in 22 the market, some of the physical characteristics. 23 There has been reference to some of the differences, 24 but I will just highlight those quickly. 25 Fundamental to competition from our 26 perspective is in the impact of retail market design in 27 general on generation investment in Ontario. 28 Now, I am one particular generator 882 WOOLF/JENKINS/CEKSTERS, presentations 1 independent investor. There are many. It is a highly 2 competitive business. Certainly what I am speaking of 3 here today is from our perspective, I don't purport to 4 speak for any of my illustrious competitors, but I am 5 fairly aware that they share many of the same views 6 that I have, although if you want to clarify that some 7 are probably in this room, but certainly I am speaking 8 from ATCO's perspective. 9 As well, I will take a brief look, I 10 will take a very brief look at the impact of the 11 current draft code on one specific project that we have 12 announced, which is the Lakeview new generation 13 project. 14 Believe me, we are not used to having 15 a project discussed in an open forum like this, but I 16 hope what you see from my being here is the importance 17 that we place on this issue. 18 Natural gas and electricity, as we 19 have seen and heard, are both tradeable commodities in 20 much the same way as crude oil, soy beans are now 21 traded on world markets. 22 Something to remember is that the 23 commoditization of these energy sources does not 24 detract from our reliance on them in our day-to-day 25 lives, particularly electricity that in many cases is 26 considered an essential service. Spot price 27 terminology is now familiar in both the gas and the 28 electric businesses, but the nature of the two 883 WOOLF/JENKINS/CEKSTERS, presentations 1 commodities is such that the markets operate quite 2 differently, leading to different outcomes from the 3 same set of market dynamics applied to gas or the 4 electricity market. 5 As a result, it is our view that the 6 electricity market, in particular, is not conducive to 7 spot price pass-through for the majority of customers, 8 those customers being those, in particular, who don't 9 have interval metering. I won't go into that. It has 10 been discussed at length. There are certainly the 11 smaller customers and the anticipation is that the 12 costs involved -- it will be many years before those 13 customers or interval meters are introduced to that 14 level. 15 Some of the differences that you 16 see -- in many applications, for example, electricity 17 has no substitutes. Other fuels, natural gas being one 18 of them -- in an industrial setting, for example, a 19 user has the opportunity to substitute either natural 20 gas or fuel oil. Even at the household level there can 21 be a substitution, but the substitution gets to be 22 electricity. That's the default in that particular 23 situation. 24 In addition, operational 25 considerations are more critical for electricity than 26 natural gas. Failure to operate within tight 27 tolerances can impact the stability of the electric 28 system and result in customer outages and, in some 884 WOOLF/JENKINS/CEKSTERS, presentations 1 cases, equipment damage. It is very expensive. 2 Customers who are able to curtail electric demand on a 3 real-time basis are limited. 4 Some industrial customers -- clearly, 5 we deal with many of them -- do manage their loads on a 6 real-time basis at this time. Most do not. For some 7 customers, deficient levels of supply reliability 8 create problems, as I indicated earlier. In gas, it's 9 not quite the same. Full interruption of gas can be 10 difficult, but gas is rarely interrupted on a full 11 basis. Usually, there is enough to keep the pilot 12 lights going and all the rest. So gas has the ability 13 to sag, whereas electricity's ability to sag exists, 14 but it is limited. 15 Electricity supply and demand is 16 instantaneous -- and I have heard this a couple of 17 times over the last couple of days -- while natural 18 gas, if you understand the differences, has a full 19 pipeline fill, there is compression, there is storage. 20 It is much more elastic to swings in either supply or 21 demand. 22 This, I think, above all others, 23 explains the volatility of electric prices relative to 24 gas. Clearly, natural gas can be stored while 25 electricity cannot. Water behind a dam is storage, but 26 it requires large reservoirs. It may or may not be 27 available. With electricity, the lack of storage 28 capability increases that price volatility again, as I 885 WOOLF/JENKINS/CEKSTERS, presentations 1 said. Any time demand approaches the immediate supply 2 capability, rapid price escalation can and usually does 3 occur. 4 Another difference that many people 5 don't recognize is that gas storage tends to occur very 6 close to the demand source, while electricity, in the 7 form of dams of water, is usually far from the demand. 8 This tends to reduce the volatility of gas prices again 9 relative to electric prices in other forms. You hear a 10 lot of discussion about volatility of gas prices, but 11 on a comparative basis to electricity, that is quite 12 minor. 13 Gas, as we know, is priced on a daily 14 basis while electricity can be priced on a 15 minute-to-minute basis. In all jurisdictions we are 16 moving to hourly, 15-minute, 10-minute pricing time 17 frames and that again reflects that instantaneous 18 relationship relative to electricity. 19 Again it's back to, except for the 20 very sophisticated electricity consumers, the typical 21 customer has no visibility of the market price and is 22 not able to react real time to price risk. As we have 23 heard at length, seeing something a week or a month 24 later does not help that reaction. 25 One last difference in natural gas 26 that I think is interesting -- and I have heard 27 references to it here the last couple of days, but 28 there is some similarity that we see. Deregulation in 886 WOOLF/JENKINS/CEKSTERS, presentations 1 the gas market has really taken -- it has been ongoing 2 for the last 15 years. The undertaking on electricity 3 is a tremendous effort and I think it's a credit to all 4 of the people in this room and with the Market Design 5 Committee and elsewhere who have moved forward so 6 quickly with the deregulation here in Ontario. It's a 7 huge effort and there will be things missed. 8 It's important to recognize that 9 those things will be missed and they have to be caught 10 and made right along the way. Oftentimes it is that 11 experience that teaches you the correct way as opposed 12 to the theory that can be applied in the beginning. 13 Back to the gas for a minute. The 14 concept of default supply for gas really does exist 15 here in Ontario and elsewhere. You hear the reference 16 to system gas, which is to some degree the default for 17 spot price. I guess, to a degree, if you are a 18 consumer, you may view it that way, but that particular 19 default supply on gas has been based traditionally on 20 the WACOG, which brings us back to our portfolio of 21 contracts that make it up, being a series of short and 22 long-term contracts that have put it together. 23 We have a situation in Alberta, which 24 is the opposite to that these days, where our gas 25 company supplies gas to most of the households and 26 businesses across the province. We are on a true spot 27 price pass-through after the fact and the couple of 28 times when the price of gas has been out of line 887 WOOLF/JENKINS/CEKSTERS, presentations 1 with -- or, I should say, the true-up mechanism has 2 caused a hit to the bill at a period of time, there has 3 been a tremendous amount of flak in the media and from 4 the public directed at our company, which in this case 5 is a utility who is simply passing along the gas at the 6 spot price. Believe me, the consumers don't understand 7 it, they don't like it, and it's a parallel that I 8 think has useful merit and may be worth investigating. 9 Back to generation investment and the 10 impact of the retail market design on that generation 11 investment. The impact of spot price pass-through has 12 a significant impact on the development of a 13 competitive market in Ontario, particularly as it 14 relates to new investment in generating plants in the 15 province. 16 Market power was one of the most 17 difficult issues addressed by the Market Design 18 Committee. The plan to mitigate the market power of 19 the former Ontario Hydro is complex and far-reaching. 20 Fundamental to this mitigation is the creation of a 21 competitive market for electricity; that is, the 22 generation of electricity. A lot of our discussion 23 here revolves around the retail side. 24 We had some discussion from 25 Mr. Adamson relative to the generation side, but 26 clearly the signals that we took from the White Paper 27 were that the desire of the government in the province 28 was to expand competition at the generation level and 888 WOOLF/JENKINS/CEKSTERS, presentations 1 at least to open the market to new entrants so that we 2 could read the signals and come into the market when 3 the time was right. 4 What we need, in addition to the 5 reshuffling of the deck on the existing OPG generation 6 plants, which is part of the market power plan, we do 7 need the addition of new generating plants into the 8 province; in particular, gas-fired technology. There 9 are many reasons for that and I will touch on some 10 later. 11 The mechanisms to assure energy 12 supply reliability must be consistent with the desire 13 for a more open and competitive electric marketplace 14 capable of sending sufficient and appropriate market 15 signals to generators and consumers alike. I keep 16 falling back to the comparison of the gas market, but 17 staying with that comparison just for a moment, market 18 power at the generation level really hasn't been an 19 issue. When I say "generation", I mean the supply 20 level of natural gas. It has not been an issue. 21 The generators in the gas business 22 are the oil and gas companies across North America. 23 There are thousands of them. They don't have market 24 power. Most of them have direct access to the Ontario 25 market through the ever-expanding natural gas pipeline 26 system. 27 It is also important to understand 28 that transporting natural gas over large distances is 889 WOOLF/JENKINS/CEKSTERS, presentations 1 more efficient than moving electricity. As 2 transmission lines are loaded, electrical losses 3 increase dramatically. As pipelines are loaded, 4 efficiency is increased and profits go up for the 5 pipeline company. 6 Gas deregulation has never had to 7 consider the supply part of the equation since 8 competition has been alive and well at the production 9 end of that business for many years. 10 The difference in the supply side of 11 the electricity market requires that generation be 12 developed close to the load centres. This is best 13 exemplified by a cogeneration facility inside the fence 14 of an industrial facility or by a generating plant in 15 close proximity to a large load centre. 16 A number of points need to be 17 considered in reviewing the impact of market design on 18 generation investment. 19 A wide range of generators is 20 necessary as the first step in the development of the 21 competitive electricity market. This includes new 22 entrants who construct state of the art plants to 23 ensure a reliable supply into the future. 24 We see that through the ECMA, with 25 their objectives to reduce OPG generation down to 35 26 per cent in 10 years. But with market growth and with 27 retirement of plant, new entrants are required and new 28 plant is required in Ontario. 890 WOOLF/JENKINS/CEKSTERS, presentations 1 In developing a market such as 2 Ontario, where re-regulation is in its early 3 stages -- and I mean very early stages -- generators 4 need secure markets for the output of generating plants 5 to obtain financing. We touched on this a little bit. 6 There have been a number of comments 7 about that. Mr. Adamson, I think, referred to some 8 this morning, and I think Mr. Power questioned 9 Professor Dewees with regard to project financing. 10 There was also a question about 11 merchant plants just before lunch and perhaps reference 12 to the ability to finance merchant plants in other 13 jurisdictions around the world. There is always the 14 ability to finance a plant, as Mr. Adamson said, 15 provided that the risk and return for both the lender 16 and for the owner are significantly high. 17 The issue there is that in a market 18 such as Ontario the pricing that would be required to 19 support a merchant plant would be significant. You 20 have a higher cost of capital when you are borrowing 21 and the return on investment for the investor needs to 22 be higher in order to construct the plant. It would 23 obviously raise -- the output of the electricity from 24 that plant would result in a plant that would be 25 uneconomic, given the market that we see developing 26 over the next several years. 27 That is not to say that a merchant 28 plant will never be capable of being financed in the 891 WOOLF/JENKINS/CEKSTERS, presentations 1 Ontario market. I am sure it will. It is the timing. 2 The timing is such that the lead time for building a 3 plant is so significant that at this point in time, 4 plants that are looking at being developed, the 5 earliest they can come on stream is about two to three 6 years after the market opening in 2002-03. So 7 following that "some" experience in the market, if you 8 look at that three to four-year lead time, that is the 9 kind of time frame beyond that 2002-03 date that a 10 merchant plant may have some capability -- and I am not 11 even saying it would be possible -- some capability of 12 coming on stream because there would be experience in 13 the market. The spot price -- pricing over the course 14 of a number of years in the market would be developed. 15 Another point that I found 16 interesting was the reference to standard supply 17 customers that obviously make up a significant part of 18 the Ontario demand, at least on day one. I think the 19 reference was around 75 per cent. That will be the 20 starting point, I think is the way to look at it. 21 The difficulty with that -- and 22 Professor Dewees was fairly cavalier in his reference 23 that, "Well, that doesn't really matter. There is 24 still 25 per cent of the market left." Clearly, when 25 you are looking at investing $400-plus million in 26 plant, whether you are our company or any other, if you 27 have a very small portion of the market to look at to 28 service your investment it is going to make it much 892 WOOLF/JENKINS/CEKSTERS, presentations 1 more difficult, and perhaps costly, to bring on that 2 project. 3 That is not to say that the other 4 25 per cent of the market is being ignored by our 5 company or by my competitors, but it is to say that in 6 order to develop a competitive market and in order to 7 allow new generation to come into the market, 100 per 8 cent of the market has to be available to bring 9 investment on on the terms that not only satisfy the 10 investors but also can be brought on at a price level 11 that will satisfy the market. 12 In markets with surplus or sufficient 13 supply, the spot market provides energy at the 14 short-run cost and consumers get both energy and supply 15 reliability by paying the marginal cost. The supplier 16 reliability is treated in this case as a free resource 17 because consumers can avoid paying for reliability by 18 paying the spot price based on the marginal cost. 19 As demand catches up with supply the 20 price becomes more volatile. Because price and 21 reliability are not linear with respect to the supply, 22 the price impacts can be fast and dramatic, as I said 23 earlier. 24 Over time, the market must return 25 both the marginal costs and the capital costs of the 26 plant or the business will fail. The issue here is 27 very simple. The time frame that we look at developing 28 plants in is anywhere from 20 to 30 years. Over that 893 WOOLF/JENKINS/CEKSTERS, presentations 1 period of time the market, either through a bilateral 2 contract or, in the case of a merchant plant, on a spot 3 basis, must -- the price must be sufficient to pay not 4 only the operating costs but clearly the capital. I 5 don't think that is a big surprise to anyone. 6 As we have discussed, new plants need 7 the certainty of bilateral contracts -- and that is new 8 plants in Ontario here -- for their output to obtain 9 financing. In addition, these bilateral contracts 10 serve to give price signals to the long-term market. 11 Some of that was referenced and I think it is important 12 to understand that. I don't purport to be a futures 13 market expert, but I think that is a very important 14 aspect. It says that without a balance of short and 15 long-term prices in the market the competitive dynamic 16 and liquid foreign market will fail to develop in the 17 electricity market in Ontario. I think Mr. Adamson 18 addressed that as well. 19 Briefly, I would like to have a look 20 at the Lakeview project. There has been some reference 21 to it and I think I would be remiss if I didn't tell 22 you a little bit, specifically, about what we are 23 talking about. The only reason I put it forward is, as 24 I said earlier, Lakeview is a real project. It is a 25 project that we have been working on for close to two 26 years. We have a consortium of partners who are 27 willing and able to do it. It is a $400 million, 28 550 megawatt plant, being developed by a consortium led 894 WOOLF/JENKINS/CEKSTERS, presentations 1 by our company, ATCO Power. Our other partners are 2 Hydro Mississauga, Toronto Hydro and OPG. 3 The project has been in the planning 4 stage, as I said, for well over a year and it is sound 5 technically, economically and we think environmentally, 6 although we haven't yet passed our environmental 7 permitting stage. It is one of those major hurdles 8 that you have to go through when you are developing a 9 project of this magnitude. I am sure that Mr. Gibbons 10 will have some comments with regard to that. 11 The draft proposal for the standard 12 supply service customers being serviced at spot price 13 would dramatically impact this project and, at the very 14 least, in its original form, would delay it and would 15 change the project significantly enough that it may 16 make it impossible for some of our partners to 17 participate. 18 Like any new power plant we need 19 customers to support the operation of the plant in 20 order to obtain financing. I went through that. 21 The impact of the spot price 22 pass-through would be to remove the ability of one or 23 both of our partners, Hydro Mississauga and Toronto 24 Hydro, to take power from the project. It is pretty 25 simple. 26 A number of points are worth 27 considering, I think. 28 One of the fundamental tenets of the 895 WOOLF/JENKINS/CEKSTERS, presentations 1 White Paper, and supported by the Market Design 2 Committee, was the ability of the MEUs to enter into 3 bilateral contracts for their supply of electricity. 4 The current draft code impairs their ability to do so, 5 for the majority of their customer base. 6 The Lakeview Project is dependent on 7 two municipalities to take 50 per cent each of the 8 output of the plant. The financing of the project is 9 based on certainty of the sale of the output of the 10 plant. There is just not enough pricing history in the 11 market here to support a merchant kind of a plant. If 12 there was, this would not be as big an issue as it is. 13 But, clearly, that is the case. 14 I think the other thing that we have 15 talked about -- and I won't dwell on this; perhaps it's 16 a commercial, but I don't intend it that way -- but I 17 think we have some corporate responsibility; perhaps, 18 we are just lucky to be in the gas generation business. 19 But we feel that this project will bring significant 20 environmental benefits to Ontario through reductions in 21 emissions from coal-fired plants somewhere in the -- 22 within range of where we are sitting here today, that 23 includes into the U.S., if you look at the supply/ 24 demand and the way clients get dispatched across a 25 total supply area. 26 In addition to the jobs and 27 investment, delay or cancellation will clearly negate 28 these benefits. 896 WOOLF/JENKINS/CEKSTERS, presentations 1 In summary, spot price pass-through 2 places price risk on the smallest customers, who are 3 least able to react to it. The standard supply service 4 draft code will impair the development of competitive 5 electricity markets by reducing access through 6 bilateral contracts to a large portion of the market in 7 Ontario. Investment in generation and the resulting 8 air quality improvement will be delayed -- and, again, 9 I defer to Mr. Gibbons and others, on that count -- and 10 just to caution, that gas and electricity commodity 11 markets are different and, in many cases, require 12 different solutions. 13 Thank you. 14 MR. POWER: Thank you, Mr. Jenkins. 15 Mr. Ceksters. 16 PRESENTATION 17 MR. CEKSTERS: Thank you. 18 As Executive Director of Operations 19 at Hydro Mississauga, I have been involved with many 20 other staff at the hydro, preparing our company for the 21 coming changes to the electrical marketplace. 22 I would like to first start by giving 23 a bit of background on Hydro Mississauga. 24 We are the second largest municipal 25 utility in Ontario. We have approximately 150,000 26 customers, 300 employees and we consider ourselves to 27 be an industry leader in the approach to changing the 28 market. 897 WOOLF/JENKINS/CEKSTERS, presentations 1 As far back as 1989, we issued a 2 report called the Phoenix Report on the possible 3 consolidation of utilities throughout the province 4 which, in our estimation, could save up to $500 million 5 and reduce the number of utilities to less than 10. 6 Since the mid-nineties, we have been 7 promoting the need to attack the wholesale cost of 8 power, which represents 91 per cent of every dollar 9 that we -- 91 cents of every dollar that we take in. 10 Over that period, we have become very 11 efficient and cost-effective. We have the lowest rates 12 in the GTA. We consider ourselves to have very high 13 reliability levels and, actually, our safety record is 14 one of the best in the province. At the end of this 15 month, we will be celebrating 1.5 million hours of safe 16 work without a lost-time injury. 17 We have been very supportive of 18 Bill 35. Karl Wahl participated on the Market Design 19 Committee. Many of our staff worked on OEB and MDC 20 subcommittees in helping them develop the 21 implementation of the Act. 22 Hydro Mississauga considers itself to 23 really be following the policy objectives of the 24 government. We have introduced efficiency to the 25 distribution of electricity. We are using best 26 practices. We are keeping jobs in Ontario. We are 27 creating expertise within the province that can be 28 exploited, at a future date. 898 WOOLF/JENKINS/CEKSTERS, presentations 1 Our analysis of the White Paper led 2 to two specific examples of action -- and these have 3 been mentioned before; I would like to go through them 4 again. 5 First, is participation in the G6. 6 G6 is a group comprised of Hydro Mississauga, London 7 Hydro, Oshawa PUC, Sarnia Hydro, St. Catharines Hydro 8 and Whitby Hydro. 9 This is a group of like-minded 10 utilities that are exploring the viability of a unified 11 retail entity in the new competitive marketplace. We 12 represent 10 per cent of the Ontario electrical load 13 and approximately 400,000 customers. We have been 14 working together since the spring of 1998 to analyze 15 and prepare for the change in the electric market. Our 16 business plan looked at amalgamating marketing on a 17 unified basis, including common branding, sharing our 18 resources, removing redundancies, even aggregation of 19 load, for the purchase of power. 20 Our report concluded that the new 21 market will present significant challenges for MEUs. 22 Particularly, we feel that a critical mass of between 23 500,000 and one million customers is required to 24 survive in the retail business. 25 We are hoping to attract other 26 utilities within the province to the G6 group. At the 27 present time, the G6 has issued a request for 28 expressions of interest for power procurement to 899 WOOLF/JENKINS/CEKSTERS, presentations 1 approximately 26 potential suppliers. The intent is to 2 finalize an arrangement by the end of this year. 3 Our focus on commercial potential has 4 been stalled, substantially stalled, as a result of the 5 ARC and the SSC complications. Since January, our 6 group has had to refocus and put its attention to the 7 regulatory issues. 8 Repeating something that Fiona had 9 talked about, we feel the G6 utilities address the 10 government policy objectives. In the government's 11 White Paper, an early unphased move to full retail 12 access was proposed. Retailers, brokers and 13 large-volume customers, including local utilities, 14 would buy from the spot market or arrange bilateral 15 contractors with generators, as they would in the 16 wholesale model. 17 As well, the G6 utilities would 18 provide efficiency to the distribution of electricity 19 within the province, keep the jobs in Ontario and 20 create expertise that we could exploit at a future 21 date. 22 I would like to now talk about 23 Lakeview, Lakeview New Generation, which is really a 24 practical example of the application of a government's 25 White Paper and the Energy Competition Act. 26 As John mentioned, it is a consortium 27 led by ATCO Power, out of Alberta. It includes Ontario 28 Power Generation, Toronto Hydro and Hydro Mississauga. 900 WOOLF/JENKINS/CEKSTERS, presentations 1 We have been working together for well over a year to 2 do a feasibility study on the project. 3 This project will convert two of 4 eight coal-fired at the existing Lakeview plant to a 5 new set of generators comprising 550 megawatts of 6 natural gas-fired combined cycle power. 7 At the present time, key investment 8 decisions involving the commitment of substantial 9 capital dollars by the equity partners now need to be 10 made for the project to proceed. 11 Modifications are needed to the 12 codes, in order for the project to proceed in its 13 current form. 14 Lakeview New Generation addresses the 15 government's policy objectives: it will create 16 investment in Ontario generation facilities; it 17 promotes the competition on the generation side of the 18 business; it creates jobs; and, it is environmentally 19 positive, as it converts coal-fired plants to natural 20 gas. 21 But there are issues related to the 22 codes. The first of these being access to customers. 23 Without assurance of some access to 24 customers, retail activity will be too risky to invest 25 in. A lack of a level playing fields to allow 26 competitors with existing customer bases creates an 27 issue. The gas companies have had 15 years of 28 experience in the competitive marketplace, they have 901 WOOLF/JENKINS/CEKSTERS, presentations 1 their existing customer lists -- as do companies such 2 as Amway and Sears, who have stated they will be in the 3 energy marketplace in Ontario. 4 MEUs and groups like G6, that are 5 interested in competitive retailing, should be allowed 6 to keep their customers and transfer them to their 7 retail affiliate. Let the market decide. Let the 8 competitors come and do their best and use their 9 expertise and experience to take the customers away and 10 let the market take care of it. 11 Another issue related to the Code is 12 the issue of spot price. From a distributor 13 perspective, the risk, as mentioned many times 14 throughout the day, of market volatility is placed 15 entirely on the customer. Fixed-income and other 16 vulnerable customers are put at risk. 17 As an example, we replaced our 18 billing system at Hydro Mississauga recently and we 19 just replaced the system; the bill was the same. 20 As soon as the customer saw that the 21 bills looked different, the call centre was overwhelmed 22 with calls. Even though we had bill stuffers stating 23 exactly what the new bill would do and say, and no 24 changes had been made to the bill, the call centre has 25 been inundated with calls from customers asking for 26 clarification. 27 I would welcome all of you to come to 28 our call centre if and when spot price pass-through is 902 WOOLF/JENKINS/CEKSTERS, presentations 1 brought forward. 2 In our minds, fixed price balances 3 the risk between the generator, the distributor and the 4 customer. The cost to comply with the existing draft 5 codes will be significant. The separation of the 6 utilities into multiple affiliates, in our minds, will 7 do away with the efficiencies we particularly have 8 achieved at Hydro Mississauga. The redundant systems 9 that have to be put n place, the overheads to have 10 other affiliates in place, will be quite large. 11 The cost of a billing system to 12 handle a full retail settlement, which has still to be 13 developed, will be quite large. 14 The cost of billing delays inherent 15 in the spot price pass-through mechanism are apparent. 16 From a generator perspective, the 17 issue related to spot price deals with the fact that a 18 fixed price is required or bilateral contracts over 19 time are necessary to sell power. John mentioned this. 20 Without long-term contracts, 21 investors in financial institutions will not risk 22 financing in the present economic conditions of Ontario 23 in terms of how the energy market is to work. Without 24 financing, a project such as Lakeview regeneration will 25 not proceed. 26 Without liquid intermediate markets, 27 power prices will go up to the customer. Our analysis 28 indicates that if Lakeview regeneration can't be 903 WOOLF/JENKINS/CEKSTERS, presentations 1 competitive, no new generation project can be. It has 2 the infrastructure, it has the load, it has the 3 investor, and the investor is ready and able to invest 4 in this project. 5 Hydro Mississauga is supportive of 6 the government initiative to introduce competition. We 7 feel that with some modifications, the Standard Supply 8 Service Code and the Affiliate Relationship Code will 9 reflect the intent of the legislation and the stated 10 policy objectives of the government, as outlined in the 11 White Paper and the Energy Competition Act. 12 Thank you. 13 MR. POWER: Thank you very much. 14 MS O'RILEY: Mr. Gibbons? 15 MR. GIBBONS: No questions. 16 MS O'RILEY: Mr. Adams? 17 MR. ADAMS: Just a couple of 18 questions for you, Ms Woolf. 19 Looking through the first page of 20 your prefiled material, there is a list of the group of 21 stakeholders supporting your presentation. 22 I don't notice Enron on the list. 23 Did Enron support the presentation? 24 MS WOOLF: No. 25 MR. ADAMS: Other than their 26 relationship with ENERconnect. 27 MS WOOLF: They are not a supporter 28 of the paper. 904 WOOLF/JENKINS/CEKSTERS 1 MR. ADAMS: Thank you. 2 Can you, for the record, describe 3 your relationship with the firm Power Budd. 4 MS WOOLF: My firm, Cameron McKenna, 5 has an association with Power Budd. It's as simple as 6 that. 7 MR. ADAMS: What is the form of that 8 association? 9 MS WOOLF: There is an agreement 10 between the two firms that they will work together. 11 It's as simple as that. 12 Let me say that there are highly 13 restrictive bar association rules in Ontario which have 14 to be respected. So it is not the case that Cameron 15 McKenna has a presence here through Power Budd. It is 16 a separate firm with an arm's length association. 17 MR. ADAMS: Thank you. No further 18 questions. 19 MS O'RILEY: Mr. Stephenson. 20 MR. STEPHENSON: Thank you. 21 I think most of this is for Ms Woolf, 22 but by all means if somebody else has something to say, 23 feel free to do so. 24 One of the key recommendations I took 25 from your paper was that your conclusions, your 26 ultimate recommendations -- which I think are at pages 27 31 and 32 of your paper -- were an integrated package, 28 and you caution that if you pulled it apart it's like 905 WOOLF/JENKINS/CEKSTERS 1 pulling a thread out of a cloth. 2 MS WOOLF: Like out of a tapestry. 3 MR. STEPHENSON: The concern I have 4 is this, that the Affiliate Relationships Code, and in 5 particular 2.5.7, is manifestly not on the table in 6 this proceeding 7 MS WOOLF: Yes, I understand that. 8 MR. STEPHENSON: Let's just assume 9 that that provision remains unchanged, as I think we 10 must essentially for the purposes of this proceeding. 11 What are we then left with? 12 Your thread has been pulled. How do 13 you keep the sweater together? 14 MS WOOLF: Well, I think particularly 15 from the point of view of implementing the Seabron 16 Adamson proposal, it presents a very severe difficulty, 17 because essentially, as I said in my presentation, it 18 would not be possible for the retail affiliate to 19 essentially manage the risk in the manner that Seabron 20 proposes. 21 All I can say in response to it is 22 that you can see that this is very much a string that 23 would unravel the tapestry. Apart from anything else, 24 I don't actually see how you can begin to implement 25 Condition 14(2) of the Transitional Distribution 26 Licence, for starters, by utilizing a retail affiliate 27 anyway. 28 It simply says you can't transfer 906 WOOLF/JENKINS/CEKSTERS 1 customers over. You would have to do that to get the 2 Standard Supply Service Code implemented through there. 3 I think we are just reinforcing the 4 point I made; that it doesn't actually hang together. 5 MR. STEPHENSON: Just coming back to 6 Mr. Adamson for a moment -- and I recognize that you 7 are not him and you can't speak for him. But as I had 8 understood it, his proposal regarding essentially the 9 yardstick mechanism and the portfolio, and so forth, I 10 didn't see anything intrinsic in that proposal which 11 was such that it couldn't be carried out by the LDC 12 directly. It doesn't require this activity be taken on 13 by any form of LDC affiliate; it could be done by the 14 LDC. 15 So I didn't see that as having any 16 impact on the Affiliate Relationships Code. Am I wrong 17 about that? 18 MS WOOLF: I think that it goes back 19 to another point that was discussed this morning: what 20 if the distributor doesn't actually want to do that 21 and, being risk-averse, wants to involve either a third 22 party or a retail affiliate to do it? 23 All I can say, to go back to the 24 original point, is that there is a choice that is given 25 under Condition 14(2). The ARC prohibits that. 26 MR. STEPHENSON: Are you familiar at 27 all with natural gas regulation in Ontario? 28 MS WOOLF: No, I am not. 907 WOOLF/JENKINS/CEKSTERS 1 MR. STEPHENSON: For the purposes of 2 this question, let me just advise that, so far as I am 3 aware at least, the Board has I think indicated a 4 preference, generally speaking -- and certainly a 5 number of stakeholders have indicated a preference, 6 generally speaking -- for what they refer to as 7 regulatory symmetry between gas and electricity; that 8 more or less the same sorts of rules apply. 9 I take it that you are aware of that 10 concept in general terms, even if not so in Ontario. 11 Is that fair? 12 MS WOOLF: It's an issue that has 13 arisen in many jurisdictions. In my experience, it is 14 actually extremely difficult to achieve it until you 15 get to a stage where both industries are up and running 16 and equally competitive. 17 That is the reason that in England 18 and Wales they have had separate regulators and 19 separate regulatory regimes until now, when they regard 20 competition as being sufficiently robust to be able to 21 regulate them on a symmetrical basis. 22 Even in other Canadian jurisdictions, 23 I think you will find, for example, that Alberta has 24 found it really quite difficult to achieve symmetry in 25 the regulatory regime between electricity and gas. 26 MR. STEPHENSON: One of the issues 27 that I am sure that the Board will be concerned 28 about -- and I want to give you the opportunity to deal 908 WOOLF/JENKINS/CEKSTERS 1 with this issue -- is in the gas industry the Board has 2 approved an Affiliate Relationships Code already. It 3 contains essentially very, very similar provisions, and 4 2.5 of that Code is identical more or less -- I think 5 it may be exactly identical -- and 2.6 dealing with 6 confidentiality is, I believe, identical to the 7 proposed Electricity Affiliate Relationships Code. 8 I think it may be in fact verbatim, 9 but if it is not I don't think there are any material 10 differences. 11 The question I have for you is: If 12 the Board has decided as a matter of policy that those 13 kinds of restrictions are appropriate for dealing with 14 gas LDCs and their affiliates, why would it be prepared 15 to consider a different regime for the relationship 16 between electricity LDCs and their affiliates? 17 MS WOOLF: Because it is under a 18 different statutory duty in relation to electricity. 19 Under section 1 of the Electricity Act, there is an 20 obligation to promote competition -- I'm sorry, to 21 facilitate competition. 22 At the moment, the electric power 23 market is not competitive. The Board has almost a dual 24 role, one of modern economic regulator, and also, 25 secondly, as the implementer of government. That is 26 why in section 1.1 of the OEB Act you will see that it 27 must be guided by these overall objectives. 28 Therefore, putting in place a 909 WOOLF/JENKINS/CEKSTERS 1 restriction on market entry before the market has even 2 begun operations, when there is no proof that there 3 will be any likelihood of an unfair market advantage, 4 they are imposing the heavy burden that Alfred Khan 5 talks about in terms of justifying imposing 6 restrictions. 7 So there is a tremendous difference 8 between the state of competition in the electric power 9 market as we are on Friday afternoon now and the state 10 of competition in the gas industry in Ontario. 11 MR. STEPHENSON: Can you assist us: 12 What basis do you have for your conclusion that -- or I 13 don't know if it is a conclusion or a presumption, that 14 in the absence of the LDCs being permitted to engage in 15 retailing in the fashion that you propose, we won't 16 have sufficient competition in electricity retailing in 17 Ontario. 18 MS WOOLF: Well, I think for the 19 reasons I mentioned in the paper and the presentation, 20 I think that you will find that only those people who 21 are sitting on substantial potential for economies of 22 scope and scale are going to get into this. 23 So you will find that you have one 24 gas company in each of the service areas who has the 25 potential for the sort of economies of scope and scale 26 that will get them in at incremental costs -- because 27 remember that the margins in retailing are very slim -- 28 maybe one other. But even so, maybe that people will 910 WOOLF/JENKINS/CEKSTERS 1 be comfortable, as we have seen in other jurisdictions, 2 from buying their electricity from a gas company. They 3 may sort of scratch their heads and say, "Why should I 4 buy it from Sears? This is kind of an add thing 5 to do." 6 So I think you really need to 7 understand the retail business is a business where you 8 really have to work on economies of scope and scale to 9 overcome the margin problem. 10 MR. STEPHENSON: This is the problem 11 that I saw, and I hope you can assist me with it. On 12 the one hand the proposition is that in the face of the 13 kinds of restrictions that you are concerned about LDCs 14 will be faced with a competitive disadvantage to the 15 extent that they, practically speaking, won't be able 16 to get in. 17 The question I guess I have is: That 18 presupposes the competitive disadvantage against 19 somebody else. There are a lot of examples that 20 various people have given, and you talked about grocery 21 chains getting in the sale of this, and Sears and Amway 22 and gas companies, and so forth. 23 So when you talk about the 24 competitive disadvantage, it seems to me that you are 25 talking about that there is this group of other people 26 out there that have some readiness, willingness and 27 advantage to carry out this function, which in some 28 sense presupposes that there are in fact a number of 911 WOOLF/JENKINS/CEKSTERS 1 viable and interested competitors, and why doesn't that 2 deal with -- 3 MS WOOLF: Well, I think it goes back 4 again to the fact that they may, for a whole variety of 5 reasons, not decide that the electricity market is the 6 one that they want to get into because the economies of 7 scope and scale for them are not that attractive. 8 MR. STEPHENSON: Well, wouldn't 9 that -- 10 MS WOOLF: Put it this way: You only 11 have to look around the world to see how difficult the 12 retailing business is anyway. 13 MR. STEPHENSON: So if they decide to 14 bail out, I mean wouldn't that leave the door wide open 15 for the LDCs to do it? 16 MS WOOLF: But they can't. 17 MR. STEPHENSON: Sure they can. 18 MS WOOLF: The restrictions that are 19 imposed prevent them from doing -- you can't use the 20 LDC itself for retailing, okay. 21 MR. STEPHENSON: No, but -- 22 MS WOOLF: You can't use a retail 23 affiliate, because ultimately it can't compete from 24 being such a small base. 25 MR. STEPHENSON: The problem I'm 26 having is that if it can't compete, it can't compete 27 against someone else, and that presupposes, I think, 28 the existence of somebody that is out there doing this 912 WOOLF/JENKINS/CEKSTERS 1 on an efficient basis. If that is what is going on, 2 then where is the problem? 3 MS WOOLF: What we are essentially 4 talking about is the ability of you to use your 5 customer lists to essentially do something which is 6 going to be providing a service on price. It's as 7 simple as that. Electricity is going to go flow 8 through customers' meters whatever happens. It is a 9 question of who is paid the money for that service. It 10 is a money game, retailing. 11 It may or may not be attractive -- 12 MR. CEKSTERS: Both Amway and Sears 13 have said they are going to be in the electric market. 14 They are starting with their existing customer base. 15 MR. STEPHENSON: Doesn't that -- 16 MR. CEKSTERS: That is all we are 17 suggesting, is that we start with our existing customer 18 base. 19 MR. STEPHENSON: Doesn't that reflect 20 what a vibrant market this is going to be? 21 MR. CEKSTERS: Exactly. Let the 22 market decide. I agree with you entirely, 23 Mr. Stephenson. 24 MR. STEPHENSON: So the issue about 25 the LDCs not playing a role in this market, if they 26 choose not to, doesn't that mean that we have a vibrant 27 market whether there or not? 28 MS WOOLF: That is where I said that 913 WOOLF/JENKINS/CEKSTERS 1 you would wind up with, I think, most -- if you are 2 lucky, two players in a particular market. 3 MR. STEPHENSON: Sears and Amway. 4 MS WOOLF: Sears and a gas company. 5 MR. STEPHENSON: Let me turn to 6 gas -- 7 MS WOOLF: As I said, where I come 8 from we don't regard duopolies as being competition. 9 MR. STEPHENSON: Let me come to the 10 gas company for a minute. I think everybody 11 understands that gas LDCs cannot sell electricity in 12 Ontario. Is that your understanding? 13 MS WOOLF: No. 14 MR. STEPHENSON: Affiliates of gas 15 LDCs can sell electricity in Ontario. I may be 16 operating under the wrong presumption here, but gas 17 LDCs currently can't sell electricity. 18 Mr. Hewson is shaking his head. I 19 could be wrong. 20 MS WOOLF: Is there anything to stop 21 them setting up an affiliate to do so? 22 MR. HEWSON: Oh, they can set up an 23 affiliate to do so, but they cannot do it directly. 24 MR. STEPHENSON: A gas LDC proper 25 cannot sell electricity in Ontario. 26 MR. HEWSON: They can't transfer any 27 information about their customers. 28 MR. STEPHENSON: Exactly. 914 WOOLF/JENKINS/CEKSTERS 1 A gas LDC's affiliate which can sell 2 electricity is under precisely the same restrictions in 3 terms of its access to the gas LDC's customer lists as 4 an electricity LDC's affiliate is vis-a-vis the 5 electricity LDC. There is symmetry in that respect. 6 Would you prefer there not to be the 7 symmetry, in the sense that the electricity LDC's 8 affiliate has access to electricity LDC customer 9 information when a gas LDC affiliate doesn't have equal 10 access to the gas LDC's customer information? 11 Well, I think that you will find that 12 symmetry question is probably a bit of a red herring in 13 this. The question is that, really, everybody has 14 access one way or another to a customer list, in my 15 view, and restricting the use of a customer list I 16 think is nonsense. 17 MR. STEPHENSON: I think even 18 Dr. Dewees agreed with me that the issue about customer 19 lists comes down to this. It's an equal access issue 20 and that, from his perspective, from market design and 21 competitive purposes, he was indifferent as between the 22 two propositions that no one gets it and everyone gets 23 it. I take it under your proposal you are in the 24 everyone gets it camp. 25 MS WOOLF: Indeed. That is part of 26 the proposal, that before the market opening, everybody 27 would get it. 28 But let me finish with the gas 915 WOOLF/JENKINS/CEKSTERS 1 companies. The gas companies are restricted and they 2 have their handicapping, too. We have equal sympathy 3 with the handicaps, as we would, wouldn't we? So that 4 increases my concern about not having retail 5 competition because if you are handicapping the gas 6 LDCs as well, then you are going to wind up with just 7 Sears Roebuck in the retailing business. 8 MR. STEPHENSON: But doesn't it 9 reflect a policy choice which has already been made in 10 this province? The question is that if that policy 11 choice -- after what due consideration has been made, 12 shouldn't we have a very, very good reason, indeed, to 13 have a different policy choice made here? 14 MS WOOLF: The policy choice that is 15 on the table for the electricity industry is 16 articulated in the White Paper and the implementation 17 of that policy decision is being restricted by the 18 provisions of the Codes. It's as simple as that. 19 MR. STEPHENSON: Just on the issue of 20 customer information -- it's a small point, I think, 21 but it's one that's worth getting to -- I understood 22 your customer information proposal to be essentially 23 the negative option kind of situation that a customer 24 has to engage in a positive act to prevent his or her 25 customer information being released. 26 MS WOOLF: I am a little confused by 27 the question. You are talking about negative options 28 and positive actions. 916 WOOLF/JENKINS/CEKSTERS 1 MR. STEPHENSON: Yes, sorry, this has 2 been -- 3 MS WOOLF: I am aware that there is a 4 sensitivity from the gas background of -- oh, no, 5 sorry, it was in cable, I think, about the use of 6 negative options -- 7 MR. STEPHENSON: Negative options in 8 the sense that if you do nothing, something will happen 9 to you. 10 MS WOOLF: Yes, I see. Right. Okay. 11 MR. STEPHENSON: The thing being here 12 the transfer of your information. It's essentially a 13 negative option structure. 14 MS WOOLF: I think the way in which 15 the form would be designed would probably not 16 necessarily involve -- the proposal doesn't go into the 17 detail of how the form would be designed -- designing 18 it on the basis that your information will be released 19 automatically if you don't say -- I guess it is 20 probably going to get on people's nerves one way and 21 another. 22 MR. STEPHENSON: I guess the concern 23 I have here is that I think everybody agrees there are 24 legitimate privacy concerns around this information, 25 but I think we all also realize that for the apocryphal 26 Mrs. Jones there is -- the fact of the matter is that 27 there is an enormous body of customers out there that 28 simply don't respond and do nothing. Indeed, all of 917 WOOLF/JENKINS/CEKSTERS 1 this whole SSS debate is premised essentially upon the 2 presumption by all of us in the room that there is a 3 very substantial body of customers out there that, 4 frankly, do nothing and that inertia will, de facto, 5 govern a substantial portion of the market. 6 Isn't the effect of a negative option 7 here that you are going to, de facto, wind up with a 8 whole bunch of customer information being released 9 about a bunch of customers who probably just didn't 10 read their bill-stuffer very well? 11 MS WOOLF: I don't think that the 12 negative option route of dealing with the consent is 13 necessarily to be read into this proposal. 14 MR. STEPHENSON: Sorry, I thought 15 that was what your (b) on page 32 indicated. 16 MS WOOLF: It's a question of how you 17 design the form. 18 MR. STEPHENSON: So would you be 19 equally -- you don't have a strong view. You could 20 well structure it that no customer information is 21 released to anybody unless you tick off the box? 22 MS WOOLF: Exactly. 23 MR. STEPHENSON: The way that you see 24 an LDC affiliate participating competitively in the 25 retail market, I take it, is by virtue of leveraging 26 off the LDC's infrastructure in the sense of they can, 27 at incremental cost to the LDC's infrastructure, 28 operate as a competitive retailer. Do I have that 918 WOOLF/JENKINS/CEKSTERS 1 right? That is their price advantage. 2 MS WOOLF: The objection to the ARC 3 is they can't use their customer lists, if that's what 4 you mean by infrastructure. 5 MR. STEPHENSON: I must say I thought 6 you were a little more explicit than that at page 13 of 7 your paper. I don't think this is related to customer 8 lists, per se. I took it more broadly. 9 MS WOOLF: The restrictions that are 10 at play are the ARC 2.5.7, which relates to your 11 customer lists, obviously. The other restrictions are 12 in the Codes, the pricing mechanism and the restriction 13 on third parties and retailers marketing in the LDC 14 service area. So that's essentially what we are 15 talking about. 16 MR. STEPHENSON: Maybe, yes, you 17 could just clarify this for me. I think it's in the 18 last sentence of the first paragraph on page 13 of your 19 paper you say: 20 "More importantly, allowing a 21 retail affiliate to utilize a 22 distributor's customer base and 23 infrastructure to sell retail 24 services would enable the retail 25 affiliate to enter the market at 26 lower, incremental costs which 27 would result in lower prices to 28 the consumer and more effective 919 WOOLF/JENKINS/CEKSTERS 1 competition." (As read) 2 When you used the term 3 "infrastructure" there, I had assumed you meant 4 something more than the customer lists. Am I wrong 5 about that? 6 MS WOOLF: Probably not. It would 7 be, obviously, helpful to the LDC if it could utilize 8 the sort of existing infrastructure, if I use the term 9 loosely, that is within the LDC and the ARC, I think, 10 essentially, very carefully crafts a simple and very 11 clearly drafted set of rules designed to avoid 12 cross-subsidization and to achieve some degree of 13 separation between distributors and the affiliates. So 14 in some small areas they can share and in other areas 15 they can't, and that is all dealt with in the ARC. 16 If that word implies that they can 17 use all the infrastructure that an LDC has, then 18 obviously I am creating a misleading impression in your 19 mind because the ARC, obviously, deals with the 20 separation between the two in the conventional way. 21 MS O'RILEY: I am sorry, 22 Mr. Stephenson. I have to interrupt for a moment. I 23 understand that Mr. Ceksters and Mr. Jenkins are not 24 available to be with us on Monday morning. I would 25 just like to find out if anyone has questions directly 26 for them and then I will let you go back to your 27 questioning. I'm sorry. 28 Does anyone have any questions for 920 WOOLF/JENKINS/CEKSTERS 1 Mr. Jenkins or Mr. Ceksters? 2 MR. PERDUE: Mr. Jenkins, you are in 3 the business of building generation plants, 4 cogeneration plants and what you are looking for, 5 presumably, is a market that would be firm that you 6 could use to ease your financing costs. Have I 7 summarized it more or less? 8 MR. JENKINS: I may not put it 9 exactly as you put it, but I think reasonably, yes. 10 PERDUE: So you don't really care, 11 for example, if the firm contract came from the utility 12 itself rather than from the affiliate, would you? 13 Would that make any difference to you? 14 MR. JENKINS: Not directly, no. The 15 concern there is that the contract that is signed as 16 the out-take agreement is also a financial contract and 17 whatever entity we sign with obviously needs the 18 substance to support its financial commitments made 19 within that contract. 20 MR. PERDUE: I appreciate that, but 21 if the LDC was in a position where, for example, the 22 Board refused the right to move the customers, for 23 example, and the LDC had to keep the customers and it 24 said, "We are going to have a lot of these customers. 25 We are going to need a supply. We can provide them 26 through that supply, that's fine", you would accept 27 that? 28 MR. JENKINS: That's correct. 921 WOOLF/JENKINS/CEKSTERS 1 MR. PERDUE: This is a very efficient 2 plant you are building there, isn't it? 3 MR. JENKINS: We hope so. 4 MR. PERDUE: Yes. You never 5 mentioned the 3.8 cents at all. I gather that is not a 6 problem for you, is it? 7 MR. JENKINS: That is a commercial 8 issue and we have a lot of economic runs on the plant 9 that we can work it one way or the other. But I don't 10 think I want to delve into the pricing issue because it 11 is commercial. 12 MR. PERDUE: That's okay. It is just 13 that I was aware that it was a very efficient plant. I 14 am surprised you couldn't just sell into the spot 15 market. 16 MR. JENKINS: Again I go back to the 17 discussion about financing a plant selling into the 18 spot market, which essentially is a merchant plant on 19 that basis. 20 MR. PERDUE: Yes. And they are not 21 uncommon in the United States? 22 MR. JENKINS: There is a lot more 23 talk about merchant plants than there are merchant 24 plants that are actually on the ground and up and 25 running. Certainly merchant plants are being brought 26 in. Merchant plants are -- some are up and running. 27 But, again, in an immature market like Ontario the 28 timing is not right to move forward with a merchant 922 WOOLF/JENKINS/CEKSTERS 1 plant in terms of the financing capabilities. 2 MR. PERDUE: What percentage of the 3 550 megawatts would you require to have under firm 4 sales before you would consider being able to 5 economically build the plant? 6 MR. JENKINS: I think that is a good 7 question and it would depend, again, on the market in 8 which we were building it. 9 I couldn't answer that for you here 10 in Ontario, again because the market itself is not 11 developed. I can tell you that in other jurisdictions 12 we have plants that have a component of merchant in 13 them. In fact, in Alberta we have a couple of small 14 plants -- and I underline "small" because that 15 obviously makes a difference -- that are 100 per cent 16 merchant. Some are about 40 per cent merchant. 17 So we have three plants currently in 18 Alberta that fall into that range, but I honestly 19 couldn't speculate for you here in Ontario. I wish I 20 could, because if I could do that I may not be standing 21 up here today. 22 MR. PERDUE: So you are trying to get 23 the percentage, obviously, as high as you can. 24 MR. JENKINS: That's right. 25 MR. PERDUE: What about the supply? 26 If it takes you three years to build your plant, who is 27 going to provide the supply during the first three 28 years while your plant is under construction? 923 WOOLF/JENKINS/CEKSTERS 1 MR. JENKINS: Again that is an issue 2 that we are in the process of working out. 3 When you are moving into a market 4 like this, timing is an issue on many fronts, and that 5 is also an issue that has been brought forward and one 6 that we are working with. But if you ask me that 7 question about timing, certainly the timing of the 8 42 months of the 3.8 cent revenue cap for Ontario 9 Hydro, or OPG, has an impact as well, so we could go on 10 forever about those timing issues. 11 Suffice it to say that it is a 12 commercial issue that we have to address in our risk 13 profile of looking at the plant. 14 MR. PERDUE: How firm do the 15 contracts have to be before you and your bankers would 16 consider it an economically feasible project? 17 In other words, SSS customers may not 18 be signed up customers. They may not have a contract. 19 Would that disturb you? 20 MR. JENKINS: It depends on the 21 backing that would be provided by the customer who we 22 would be selling to, who in this case would be the 23 municipals, Toronto and Mississauga. Our arrangement 24 is with them. The back-up behind that is going to be 25 their responsibility. 26 MR. PERDUE: Would there be 27 displacement provisions in the contract? 28 MR. JENKINS: Displacement from what 924 WOOLF/JENKINS/CEKSTERS 1 perspective? 2 MR. PERDUE: Oh, I'm sorry. That is 3 a common type thing in gas contracts -- gas supply 4 portfolio contracts. Most of them have a displacement 5 provision for a customer who wishes to go direct 6 access. 7 MR. JENKINS: No. There would not be 8 displacement in our direct arrangement, as I understand 9 what you have said. 10 MR. PERDUE: So it would be up, then, 11 to the utility or the affiliate, whomever you signed 12 the contract with, to in fact sell that power on the 13 secondary market if those customers under SSS decided 14 to go to a private retailer. Have I got it correct? 15 MR. JENKINS: That is the way it is 16 contemplated today. But, again, what you are doing is, 17 you are walking down a number of commercial 18 alternatives that are available. But certainly from 19 the perspective we have taken so far, the output of the 20 plant is intended to be committed to two customers. 21 MS WOOLF: If I can help here, I 22 think that the -- 23 MR. PERDUE: I'm sorry, I don't think 24 I am allowed to ask you a question, but please -- 25 --- Laughter 26 MS WOOLF: I think the mechanics are 27 such that the person obligated to serve SSS customers 28 is the LDC or, as I have been articulating, through a 925 WOOLF/JENKINS/CEKSTERS 1 third party or retailer, and it is with the SSS 2 provider that you would be looking to contract. 3 I think that Seabron Adamson may have 4 touched on this, but the risk of flight of customers 5 from SSS to retail is something that can be managed. 6 MR. PERDUE: I didn't realize there 7 was a middle man, then, between yourself, Mr. Jenkins, 8 and the SSS supplier, whomever that might be. There is 9 another -- 10 MS WOOLF: No, no, no, sorry. He is 11 contracting with the SSS supplier, not the SSS 12 customer, which is I think where your questions were 13 going. 14 MR. PERDUE: The SSS customer was 15 Mrs. Jones I thought. 16 MS WOOLF: Yes. 17 MR. PERDUE: I understand. He is not 18 contracting with Mrs. Jones -- 19 MS WOOLF: Okay. Sorry. 20 MR. PERDUE: -- you are contracting 21 with the affiliate or the LDC, whomever is supplying 22 Mrs. Jones. 23 MR. JENKINS: That's right, and that 24 hasn't been determined yet -- 25 MR. PERDUE: No, I understand that. 26 MR. JENKINS: -- because they are 27 still setting up their structures. 28 MR. PERDUE: What I am saying is, if 926 WOOLF/JENKINS/CEKSTERS 1 you don't have displacement provisions so that if, for 2 example, a lot of Mrs. Joneses decided to go to a 3 retailer, then presumably the corporation with whom you 4 have a contract, that is, either the LDC or the 5 affiliate, or a third party, the person supplying the 6 SSS, would be responsible for getting rid of that extra 7 load. Is that correct? I mean, it is not your 8 responsibility, it would be theirs. 9 MR. JENKINS: That would be correct. 10 Keep this in mind. The approach that 11 we are taking follows, coincidentally, because we 12 certainly haven't had a prior discussion with 13 Mr. Adamson -- the approach we are taking is a 14 portfolio approach. So the supply coming from, say, 15 the plant that is under discussion here is only one 16 portion of a larger load. So that displacement 17 provision is a broader issue than one specific contract 18 or supplier -- 19 MR. PERDUE: And the spot price 20 wasn't displaceable. Obviously, if you are buying from 21 the IMO on the spot you would be able to displace that 22 on a daily basis. 23 MR. JENKINS: That's correct. 24 MR. PERDUE: But still, ultimately, 25 it gets down to the point where you want a firm 26 contract for the sale of so many megawatts, so much 27 power, to the body which is going to supply the 28 standard service offering, whomever that might be. And 927 WOOLF/JENKINS/CEKSTERS 1 it would be a firm contract. There would be no method 2 of -- there would be no escape clause, for example. If 3 the customers leave they would be responsible for 4 selling that power to someone else, presumably, and 5 then have to make up the money to you. 6 MR. JENKINS: That's right. 7 MS WOOLF: But, of course, I think 8 Seabron would say that that customer went somewhere 9 else within the province, didn't disappear off the face 10 of the earth, and therefore there would always be a 11 market for the SSS provider to sell -- 12 MR. PERDUE: Oh, yes, but I am 13 supposing that if that customer went to a retailer and 14 the retailer has an arrangement with some generator of 15 a similar -- maybe TransCanada Power or 16 whatever -- they may therefore look to TransCanada 17 Power to supply Mrs. Jones. 18 MS WOOLF: I think his view would be 19 that there would be so much contract covering the 20 market and that the contract cover would probably move 21 around with the customers, if you will. 22 MR. PERDUE: Yes. And I don't mean 23 to just be simply talking about Mrs. Jones as one 24 customer, I am talking about a large number of 25 customers that would -- 26 MS WOOLF: Yes, well, that -- 27 MR. PERDUE: Nonetheless, I think, 28 Mr. Jenkins, you would agree with me that there would 928 WOOLF/JENKINS/CEKSTERS 1 be a firm contract with the LDC or the supplier of the 2 SSS? 3 MR. JENKINS: I agree with that. 4 MR. PERDUE: Mr. Jenkins, those are 5 the only questions I have for you, sir. I thank you 6 very much. 7 I have a couple of questions for 8 yourself, Mr. Ceksters, if I could, please. 9 The fundamental objection to the 10 utility itself supplying the SSS -- you have a 11 fundamental objection to that, and I wonder if you 12 could just tell me what it is. 13 I know that you are allowed to do it 14 by an affiliate or a third party. I am not asking 15 that. I am asking why the utility itself decided not 16 to do it. 17 MR. CEKSTERS: Well, the fundamental 18 objection that Hydro Mississauga has to the SSS as it's 19 presently written is that it is spot priced, not fixed. 20 MR. PERDUE: What objection is that 21 to the regulated wires company? Why do they care? 22 MR. CEKSTERS: Well, as an example, 23 we could decide -- it hasn't been decided yet, but we 24 may decide to move that function over to an affiliate. 25 MR. PERDUE: Well, I appreciate that. 26 I am asking you: Other than for the prospect of making 27 money in your affiliate and therefore increasing 28 shareholder value, the actual utility itself could 929 WOOLF/JENKINS/CEKSTERS 1 perform this function perfectly well on a spot service. 2 Could it not? 3 And it would neither make nor lose 4 any money. 5 MR. CEKSTERS: It could. But the 6 market the way it is shown in the draft code, in our 7 minds, will not work properly. It won't create the 8 generation competition, the things in the White Paper 9 that the government would like to achieve. 10 MR. PERDUE: What you are saying, 11 then, is that what you would like to do is move it over 12 for the reasons that you want to create competition. 13 Is that one of your reasons for moving it over? 14 MR. CEKSTERS: Allow competition to 15 work in the marketplace, yes. 16 MR. PERDUE: You want to create 17 competition or allow -- 18 MR. CEKSTERS: By whatever means it 19 happens, yes, have competition in the marketplace. 20 MR. PERDUE: All right. What you are 21 suggesting, therefore, sir, is that there is no 22 competition in the marketplace. 23 MR. CEKSTERS: Well, the competition 24 is very much reduced with the spot price pass-through, 25 yes. 26 MR. PERDUE: And it is reduced why? 27 MR. CEKSTERS: The dominant player 28 will be the primary supplier. 930 WOOLF/JENKINS/CEKSTERS 1 MR. PERDUE: That's Ontario Hydro, 2 you mean. 3 MR. CEKSTERS: Correct. 4 MR. PERDUE: But the spot price 5 itself does not prevent a retailer from having a 6 bilateral contract to supply any customers that 7 retailer may have. 8 And you could do the same thing. Am 9 I correct? 10 MR. CEKSTERS: You could, yes. 11 MR. PERDUE: Therefore, why would 12 that prevent competition from arising? Are you 13 concerned that competition in fact will not arise in 14 Mississauga? 15 MR. CEKSTERS: In the way that the 16 draft code is put together, yes, we are concerned. And 17 it is evident by our participation in Lakeview, as an 18 example. 19 Right now, we are like deer frozen in 20 the headlights. We can't move forward with the codes 21 as they are presently drafted. We cannot. 22 MR. PERDUE: So it isn't a question 23 of attempting to increase shareholder value; it's a 24 question of bringing competition to the marketplace? 25 MR. CEKSTERS: Both. 26 MR. PERDUE: Both. I didn't see 27 shareholder value mentioned. I just wondered if that 28 was considered at all. It wasn't clear. 931 WOOLF/JENKINS/CEKSTERS 1 You are saying that that is a 2 concern. 3 MR. CEKSTERS: It is a consideration. 4 It has to be now, with the changes to the marketplace. 5 MR. PERDUE: If there is shown to be 6 enough competition in the market, will that deter your 7 entry at all? 8 MR. CEKSTERS: No. 9 MR. PERDUE: What you want to do is 10 supply the SSS through an affiliate, and at the same 11 time that affiliate would also provide retail 12 non-regulated offerings. 13 MR. CEKSTERS: Correct. 14 MR. PERDUE: And would there be a 15 code of conduct in that affiliate? 16 MR. CEKSTERS: I would presume so. 17 MR. PERDUE: There is no such code of 18 conduct currently contemplated, is there? 19 MR. CEKSTERS: I have not seen it. 20 MR. PERDUE: So you would anticipate 21 a code of conduct there where half the retail affiliate 22 was in fact regulated? 23 MS WOOLF: I think the code of 24 conduct actually is already in place in both the ARC 25 and the SSSC. 26 MR. PERDUE: Again, I am not allowed 27 to ask you questions, ma'am. 28 But I think the code of conduct is 932 WOOLF/JENKINS/CEKSTERS 1 between the regulated LDC and the affiliate, not 2 between the regulated part of the affiliate and the 3 unregulated part of the affiliate. 4 MS WOOLF: Well, I think that the -- 5 if I may answer the question? 6 I think that the SSS -- 7 MR. PERDUE: I will ask these 8 questions of you when I get my turn, if that's 9 acceptable. I just wanted to ask the questions, and I 10 felt that an officer of Mississauga Hydro may be the 11 right person to do that. 12 But if you would rather I wait, I'll 13 give you -- 14 What do you say, Ms O'Riley? 15 MS O'RILEY: I think I should defend 16 myself here. 17 I'm sorry, I didn't ask 18 Mr. Stephenson to bow down from his questioning. I 19 just meant that if there were questions for Mr. Jenkins 20 and Mr. Ceksters, we are aware that we only had them 21 for the rest of the day. 22 So I apologize for the confusion. 23 You are allowed to ask questions, but it was -- 24 MR. PERDUE: Just a second. 25 MS O'RILEY: But there is a real time 26 constraint on the time for those two gentlemen, just so 27 we are aware of that. 28 MR. PERDUE: I don't mind asking my 933 WOOLF/JENKINS/CEKSTERS 1 questions -- instead of asking them of yourself, 2 Mr. Ceksters, I will ask the same questions of 3 Ms Woolf. I don't mind. I just want to ask the 4 questions. 5 MR. POWER: Mr. Perdue, they are here 6 to help you and the Board as best they can. 7 MR. PERDUE: There we are! 8 MR. POWER: You have the advantage of 9 three very bright minds up there. I think you should 10 enjoy it to the best you can. 11 MR. PERDUE: I have imposed on 12 Mr. Stephenson. Why don't we just leave it. 13 Ms Woolf, I will carry on the 14 conversation -- this is not a cross-examination, of 15 course -- when my turn comes up, if that is acceptable. 16 Ms O'Riley, thank you very much. 17 MR. RONAYNE: I am Mark Ronayne, from 18 the Competition Bureau. I just want to try to square a 19 circle here. Maybe I am getting confused about 20 something. 21 Is the problem for you or for the 22 distribution utility that there are going to be too 23 many competitors in the marketplace, making it 24 difficult? 25 How does that square with what we 26 have been hearing from Seabron Adamson and others that, 27 really, consumers are going to be very immobile off of 28 whatever they start off with in the marketplace? 934 WOOLF/JENKINS/CEKSTERS 1 MR. CEKSTERS: Well, the way that we 2 see the Code, you have just taken 260 competitors out 3 of the market, the way it is drafted. 4 MR. RONAYNE: So if you can't set up 5 an independent affiliate to sell in the retail market, 6 then that's prohibited? 7 I didn't understand that to be the 8 Code. 9 MR. CEKSTERS: No, it's not 10 prohibited. But you have to set up a second one if you 11 want to have a third party take care of your SSS 12 obligations, which will create inherent cost 13 impediments. 14 It's a low margin business. 15 Electricity retail will be very low margin. So you 16 want to have anything that will make it efficient. We 17 run our businesses to make it efficient by training 18 people to be able to do multiple jobs. 19 If you have to have multiple 20 affiliates, I have to go and take those people and get 21 two or three others to do the same thing. That is 22 inefficient. That will kill competition. 23 MR. RONAYNE: Did I hear a projection 24 about how many people are going to be on Standard 25 Supply Service Code of something like 75 per cent from 26 somebody? 27 MR. JENKINS: No. What I was saying 28 was that earlier in the proceedings the customers who 935 WOOLF/JENKINS/CEKSTERS 1 would be eligible, I suppose, by some measure -- in 2 other words, those served by the MEUs today -- range to 3 be about 75 per cent of the customers in the province. 4 What I said was that that would be 5 the start point. On day one, every one of those 6 customers, I would assume, will be on default supply. 7 The intention of the competitive market is that, over 8 time, you will migrate to whatever their choice gets to 9 be. 10 So it was really just building on 11 what we had heard earlier in the proceeding, and saying 12 that that is the start point. If you recall, it was 13 used to address another point, and that is that this 14 issue is eliminating, from our perspective as a 15 generator, 75 per cent of the market from us, so that 16 we end up -- 17 MR. RONAYNE: If I can ask: There is 18 a presumption there that everybody starts off on 19 Standard Supply Service Code, so that there won't be 20 any marketing -- actually, before the market opens. 21 MR. JENKINS: The intention was 22 simply a broad brush presumption. There will be some 23 marketing in advance, I am sure. We are looking at 24 trying to start this market in the year 2000. By my 25 calendar, that's not very far away. There is a lot of 26 customer education. 27 I think Mr. Adamson and others have 28 talked about the experience in California where the 936 WOOLF/JENKINS/CEKSTERS 1 migration of customers initially was very -- and 2 perhaps Fiona could add to that. 3 The initial migration, in my 4 understanding, is rather slow regardless of the 5 education. People will sit and wait. It was as simple 6 as that. It wasn't intended to draw any specific 7 measures as to who was going to do what and when. It 8 was a broad approach. 9 MR. RONAYNE: I guess the plan, then, 10 is that those immobile customers you would have, then, 11 also combined in an affiliate, which would also be 12 involved in unregulated retail market activities? 13 MR. JENKINS: Who are you addressing 14 that to? 15 MR. RONAYNE: Well, I guess either -- 16 anybody on the panel. 17 Is that the idea, that if you 18 combine -- let's say you start off with 75 per cent of 19 the customers. They are going to be -- those are the 20 ones that are on standard supply service. If you 21 combine that standard supply service in one company 22 with the unregulated retail activity of the LDC, then 23 they are going to start off with all those 75 per cent 24 from day one? 25 MR. CEKSTERS: Yes. 26 MR. RONAYNE: Will anybody else -- 27 well, no, nobody else can start off with that many 28 customers. Okay. 937 WOOLF/JENKINS/CEKSTERS 1 Those are my questions. Thank you. 2 MS O'RILEY: Mr. White? 3 MR. WHITE: I am Roger White. ECMI. 4 I am working with a number of municipal electric 5 utilities. 6 Some of the economies that you were 7 talking about being able to achieve from the retailing 8 affiliate that might have SSS obligations or 9 opportunities in a reconfigured system, where would 10 those economies come from? 11 MR. CEKSTERS: Well, the economies 12 come from using one person to do one function rather 13 than have two affiliates, two people, to do the same 14 function that would be necessary, as an example. 15 MR. WHITE: Would billing hardware or 16 information technology equipment be able to serve two 17 masters? 18 MR. CEKSTERS: It could. It could be 19 outsourced. 20 I'm talking more of the human 21 resources. 22 MR. WHITE: I continued to search for 23 someone who has thought about whether or not the SSS, 24 the way it is currently crafted, can be implemented for 25 non-interval metered customers with different meter 26 reading dates within a given utility. 27 Have you any comment on that? And 28 the answer "no" is acceptable. 938 WOOLF/JENKINS/CEKSTERS 1 MR. CEKSTERS: I'll go with that 2 answer. 3 --- Laughter 4 MR. WHITE: No further questions. 5 Thank you. 6 MS O'RILEY: Mr. Stephenson? 7 MR. STEPHENSON: Thank you. 8 Let me come back to Ms Woolf, 9 first -- and I think this may apply to the other 10 panellists. 11 I just wanted to clarify, coming back 12 to this issue about use of LDC infrastructure at 13 incremental cost by the affiliate, and I think you have 14 clarified that you certainly recognize that other 15 aspects of the ARC deal with the issue of transfer of 16 services and pricing of services and so forth. 17 MS WOOLF: Sure. 18 MR. STEPHENSON: I take it that, on 19 my reading of the paper, you are not particularly 20 concerned about those issues, or at least not 21 sufficiently so that you are recommending that they be 22 changed? 23 MS WOOLF: That is right. The group 24 is prepared to live with the other provisions in the 25 interests of homing in on what is really important to 26 them. 27 MR. STEPHENSON: Okay. 28 I know that the Board will be very 939 WOOLF/JENKINS/CEKSTERS 1 concerned about any issue about cross-subsidization, or 2 the appearance of cross-subsidization. That is one of 3 the things that they are always very sensitive about. 4 Without getting into the detail of 5 the transfer pricing mechanisms that are contemplated, 6 I had understood that, more or less, these were going 7 to be fully allocated costs that were going to be 8 charged for services rendered by the LDC for the 9 affiliate and not on some incremental basis. Am I 10 wrong about that, as a general rule, in terms of 11 transfer pricing? 12 MS WOOLF: I think the Code deals 13 with it on an arm's-length cost basis, yes. 14 MR. STEPHENSON: If I could just turn 15 to Mr. Ceksters, for a moment. 16 In terms of the efficiencies that you 17 are seeking to gain that are crucial for you, I assume 18 that -- in terms of human resources and things like 19 that, I'm assuming that you view that you can gain 20 those efficiencies on the basis of transfer pricing of 21 those resources on an arm's-length basis, some sort of 22 fully allocated cost, as opposed to simply incremental 23 cost of an hour's labour of individual employees? 24 MR. CEKSTERS: I was referring more 25 to the set-up of the affiliates. With separate 26 affiliates, you have separate resource requirements. 27 With one affiliate, we could have one set of resource 28 requirements. 940 WOOLF/JENKINS/CEKSTERS 1 MR. STEPHENSON: I understand that 2 point. I guess the point of the question I have is 3 that, insofar as you are able to share resources, do 4 you feel you can achieve those efficiencies if you have 5 to pay for the shared resources at something 6 approaching the fully allocated cost of those resources 7 on an arm's-length basis? 8 MR. CEKSTERS: Yes. 9 MR. STEPHENSON: Okay. Now, 10 Ms Woolf, at page 14 of your paper, you make the 11 reference -- towards the last full paragraph, in the 12 last sentence of the last full paragraph, you say that: 13 "The SSSC and the ARC appeared 14 to be protecting inefficient 15 competitors by inhibiting market 16 entry by incumbent utilities on 17 the basis of incremental costs 18 which will increase efficient 19 competition at lower prices for 20 the consumer." (As read) 21 Again, there is the incremental cost. 22 I take it you mean that as modified by the ARC itself? 23 MS WOOLF: I'm sorry? I didn't 24 understand the question. 25 MR. STEPHENSON: Well, you say that, 26 you know, you feel that restrictions on the ability of 27 the LDC to compete on the basis of incremental cost is 28 a bad thing. 941 WOOLF/JENKINS/CEKSTERS 1 MS WOOLF: Yes. 2 MR. STEPHENSON: But I take it you 3 accept the restrictions in the ARC, in terms of 4 transfer pricing. So that is not what you are talking 5 about? 6 MS WOOLF: Yes. That is between 7 affiliates. 8 MR. STEPHENSON: Now, you make the 9 reference to it protecting inefficient competitors. 10 Who are you talking about here? Who 11 are the inefficient competitors that are being 12 protected? 13 MS WOOLF: If you bias the level 14 playing field against the incumbent utilities, it is a 15 bit like giving some sort of subsidy to everybody else 16 to participate, if you like, so, in a sense, they 17 are -- in, I suppose, economic terms, Seabron would say 18 they are less efficient. I am just repeating the point 19 he made this morning which is that it is not 20 appropriate -- indeed, it would be laughable -- to 21 subsidize people to compete. 22 MR. STEPHENSON: What kinds of 23 entities are we talking about? Who are these 24 inefficient competitors? What sort of entities are we 25 referring to? Are they other LDCs? Are they 26 electricity marketers? Is it Enron we are talking 27 about? Is it Sears? 28 MS WOOLF: We are talking about any 942 WOOLF/JENKINS/CEKSTERS 1 other competitor who is advantaged, if you will, by the 2 disadvantage that is placed on the LDCs. 3 If they already have their own 4 advantages and their own efficiencies, because they can 5 utilize their own existing resources and, therefore, in 6 a sense, they are already economically efficient so 7 that the perceived market advantage which you are 8 trying to take away from the LDCs, by not allowing them 9 to use their customer lists, is something where you are 10 trying to give that market advantage to somebody else 11 because you are taking it away from them. 12 So that is essentially what Khan is 13 getting at when he says that you should not try to 14 protect people who are more efficient, in other words, 15 who can enter at incremental cost, by handicapping them 16 from using that. So it doesn't necessarily imply that 17 the other competitors are economically inefficient, 18 it's just that if you are taking something away from 19 somebody, by implication you are giving it to somebody 20 else. 21 I'm sorry if it was not apparent from 22 the words in the paper. 23 MR. STEPHENSON: You are not saying 24 that these people are inefficient per se, that they are 25 otherwise inefficient. 26 MS WOOLF: Yes. 27 MR. STEPHENSON: So we could read it 28 equally well just by taking the word "inefficient" out. 943 WOOLF/JENKINS/CEKSTERS 1 You are protecting competitors. 2 MS WOOLF: Other competitors. 3 MR. STEPHENSON: Okay. 4 One of the things that I believe 5 Professor Dewees mentioned was that an LDC's retail 6 affiliate, even under the proposed Code, will have an 7 enormous asset and an enormous competitive advantage, 8 in all likelihood, in the marketplace, and that asset 9 is its affiliation with the known and trusted LDC, that 10 notwithstanding the lack of promotion that an LDC may 11 not be permitted to do, nevertheless it would be known 12 that an affiliate is in fact related in some way to the 13 known and trusted LDC, and that will give them, amongst 14 unsophisticated consumers, at a minimum, a very 15 substantial competitive tool. I'm not going to say 16 "advantage", but a competitive tool. 17 Would you agree with Professor Dewees 18 about that? These affiliates aren't going to be 19 orphans. They will have, in fact, very substantial 20 goodwill in the market. 21 MS WOOLF: Firstly, I think the ARC 22 seeks to deal with that, as most affiliate relationship 23 codes do, by making a clear separation between them. 24 Indeed, there is a restriction, I think, on using the 25 name in the ARC. 26 But the short point in reply to that 27 is, actually everybody else is using the reputation of 28 their parent company. Sears Roebuck has a reputation 944 WOOLF/JENKINS/CEKSTERS 1 for quality. Enron has a reputation for quality. So 2 does the LDC have a reputation for quality. Believe 3 me, they all are in Ontario by comparison to many 4 countries I have worked in. 5 So that's why I think you will find 6 that not only I but Alfred Khan would argue that a 7 restriction on uses of names and reputations in itself 8 is actually not an unfair advantage simply because you 9 happen to be an LDC when everybody else has that 10 reputation that they will be using, and you are not 11 asking Sears Roebuck not to use it. 12 MR. STEPHENSON: One of the 13 criticisms about the use of the spot price as the SSS, 14 as the sole option, is that it forces customers to 15 choose between two things that they both want. They 16 want two things and it forces them to choose between 17 the two. 18 They can choose, on the one hand, to 19 receive power from a known and trusted supplier, namely 20 their LDC, or, on the other hand, they can choose to 21 get power at a fixed price, which is what they prefer. 22 But they can't have both. 23 Are you aware of that criticism? A 24 number of the proposals have pointed it out, that that 25 is a problem with the spot market as SSS. 26 MS WOOLF: I'm sorry. I'm not sure 27 what your question is. 28 MR. STEPHENSON: The criticism is 945 WOOLF/JENKINS/CEKSTERS 1 that customers shouldn't be forced to be put to this 2 choice, I guess, between choosing their known supplier 3 and fixed price. 4 MS WOOLF: Obviously, the White Paper 5 says very clearly that customers should not be forced 6 to make a choice. The criticism of the spot price 7 pass-through mechanism is the obvious one, that it puts 8 the risk of volatility on them by passing it through. 9 They are not going to like that. 10 MR. STEPHENSON: Well, let me just -- 11 MS WOOLF: Having said that, of 12 course, if you take Seabron Adamson's point further, on 13 the one hand it appears that it is actually an 14 attractive option that they are, in a sense, being 15 given a rotten price and are therefore being forced to 16 make a choice. 17 I would argue that regulators have 18 been extremely unsuccessful in forcing inert customers 19 to choose, even in Pennsylvania where they bribed them 20 to do it -- those are my words and not the words of the 21 PUC in Pennsylvania -- but that, on the other hand, the 22 customer is a loser anyway because, if you remember in 23 his presentation, there is a hump, a transaction cost 24 and information hump that they have to get over. 25 So they are losing out both ways. 26 MR. STEPHENSON: I guess where I was 27 going was this is that if in fact we go to a spot 28 market priced SSS and you have a situation where an LDC 946 WOOLF/JENKINS/CEKSTERS 1 sets up an affiliate and it is able to offer fixed 2 price, as all competitive retailers would be able to 3 offer fixed price, wouldn't that give the LDC's 4 competitive retail affiliate enormous advantage in the 5 retail market because it permits the very next best 6 thing, I guess, to what they would ideally want? 7 It gives them both the fixed price, 8 on the one hand, and while it doesn't give them power 9 from the known and trusted LDC it gets it at least from 10 the LDC's affiliate, which they would, somehow in their 11 own mind, subconsciously or consciously, relate back to 12 the LDC. 13 Wouldn't that scenario create, in 14 fact, an enormous competitive advantage for LDC 15 affiliates in the competitive retail market? 16 MS WOOLF: By "customer" are you 17 talking about the standard supply service customer or 18 are you talking about the retail customer? Because it 19 seems to me that there is something of a confusion 20 actually. 21 MR. STEPHENSON: I'm sorry. No, not 22 at all. Not at all. 23 My premise was that SSS must be on 24 spot, okay, and so we have this situation where, as 25 some people have said, the customer is forced to choose 26 between two things that it wants, either take it 27 getting fixed price or getting power from the LDC. It 28 can't have both. 947 WOOLF/JENKINS/CEKSTERS 1 What I am suggesting to you is that 2 because the LDC would be permitted to set up a 3 competitive retail affiliate which could offer fixed 4 price, that fact would give the LDC competitive retail 5 affiliate an enormous advantage over all other 6 competitive retail affiliates because it comes very 7 close, it is the next best thing to what these 8 customers absolutely want. 9 MS WOOLF: That is going back to the 10 point you raised before about using the name and 11 reputation of the parent company. 12 MR. STEPHENSON: They clearly are 13 permitted to do that. 14 MS WOOLF: That is the next best -- a 15 fixed price from Sears Roebuck is, you know, the next 16 best thing to heaven as well. 17 People will choose on price, and if 18 they get a cheaper price overall from Hydro 19 Mississauga's retail affiliate, or they get a cheaper 20 price from Sears Roebuck, they will think they are in 21 heaven. 22 The problem I have with it, as 23 Seabron did -- and I put in my paper, and it was 24 actually Seabron's thought, to give him his due -- is 25 actually, how on earth will the poor customer actually 26 be able to compare whether what is on offer from Hydro 27 Mississauga's retail affiliate is going to be cheaper 28 on a fixed price when it has to compare a weighted 948 WOOLF/JENKINS/CEKSTERS 1 average spot price pass-through that is appearing in 2 his bill every so often and he thinks that maybe with a 3 bit of luck, you know, all the plants will be back on 4 next month in the wholesale market, if he understands 5 the wholesale market, and that maybe the spot price 6 actually next month could be really low. 7 MR. STEPHENSON: I am taking way too 8 much time. Thank you. 9 MS O'RILEY: I thought we could take 10 a short 10-minute break and come back at quarter after 11 4:00. 12 --- Upon recessing at 4:05 p.m. 13 --- Upon resuming at 4:17 p.m. 14 MS O'RILEY: Mr. Jennings? 15 MR. JENNINGS: I think I can be brief 16 in the interest of hot afternoons. I just want to 17 clarify or touch on a couple of the issues that have 18 come up already. 19 On the issue of symmetry of gas and 20 electricity, I believe, Ms Woolf, you are quite 21 familiar with Bill 35, and it's our view that there are 22 some significant differences between the treatment of 23 gas and the treatment of electricity, which we presume 24 are intentional. Would you see it the same way? Do 25 you have any comments about how the Act sees symmetry? 26 MS WOOLF: They are certainly written 27 very differently. Obviously, the Electricity Act only 28 deals with electricity. The regulatory regime for gas 949 WOOLF/JENKINS/CEKSTERS 1 is written differently even though the Code represents 2 some degree of symmetry in the issue that we are 3 already talked about this morning, and I am obliged to 4 Brian for that. 5 One thing that I am not clear on is 6 actually whether there is a public service obligation 7 on gas companies in quite the way that is cast in 8 section 29 and whether the whole standard service 9 supply regime is the same. 10 MR. JENNINGS: I think that's a good 11 point. There doesn't appear to be anything that's the 12 equivalent of section 29, as it is laid out. 13 Are you aware of the Board decision 14 allowing Union Gas to transfer its water heater 15 customers and all of their records to its retail 16 affiliate? 17 MS WOOLF: No, I am not. 18 MR. JENNINGS: Would you presume that 19 that was a reasonable action? 20 MS WOOLF: I am sure that the Board 21 had excellent reasons for doing it. 22 MR. JENNINGS: Okay. They did and it 23 would seem to set a precedent, albeit it was not all 24 customers, it was a significant group. 25 In your discussion earlier on, on a 26 third point, on the issue of level playing field and 27 the question of whether customers would move, absent a 28 specific policy direction to do so, is it appropriate 950 WOOLF/JENKINS/CEKSTERS 1 for a regulator, in your view, to be trying to 2 encourage customers to move to another supplier? 3 MS WOOLF: Very few regulators have 4 attempted to do it. Those that have attempted to do it 5 have been singularly unsuccessful, even those who have 6 actually paid customers to do it, like Pennsylvania. I 7 think that the answer here goes back to the White 8 Paper. The White Paper says that in fact customers 9 will not be forced to choose, so I don't think that a 10 regulator in Ontario has a mandate to do that. 11 MR. JENNINGS: Thank you. 12 MS O'RILEY: Mr. Brett? 13 Thank you, Mr. Jennings. 14 MR. BRETT: Thank you. 15 I just have one area of questioning 16 for you, Ms Woolf. 17 I would just like to read you a 18 passage from the White Paper. It's contained on 19 page 18, at the bottom. 20 I will read it out slowly for you. 21 It says: 22 "Provincial and local wires 23 companies would be permitted to 24 own a small amount of generation 25 as necessary for technical and 26 efficiency reasons. The Ontario 27 Energy Board would be empowered 28 to approve generation 951 WOOLF/JENKINS/CEKSTERS 1 investments beyond these levels 2 if they are consistent with the 3 fair and efficient operation of 4 the market. Distribution 5 utilities that presently own 6 generation assets would be 7 allowed to keep them." 8 (As read) 9 My clients, the independent 10 generators, are of the view that to promote a level 11 playing field the municipal distributors should be 12 restricted to some degree with respect to how much of 13 their default supply they purchase from generation 14 which they own or will own in the future. Do you have 15 a view on that? Do you concur that there would be some 16 need for safeguards in that respect? 17 MS WOOLF: I think I am fairly 18 agnostic on the subject. I can echo what Seabron 19 Adamson said this morning, that in other jurisdictions 20 there has been a limit placed on the amount of 21 generation that LDCs can -- 22 MR. BRETT: Can own? 23 MS WOOLF: -- own to deal with what 24 Seabron described as a self-dealing. 25 I think that probably at different 26 times in the development of competition, perhaps 27 different levels, if you will, would apply. I think 28 that when you are looking at getting wholesale and 952 WOOLF/JENKINS/CEKSTERS 1 retail markets up and running, the view has been taken 2 elsewhere that in order to avoid, if you like, 3 self-dealing and re-integration of the industry on day 4 one, it's appropriate to impose these restrictions. 5 As competition develops, then perhaps 6 these restrictions are less justified and, indeed, 7 generators in a truly competitive market may well 8 look -- sorry, distributors in a competitive retail 9 market may, with some justification, look to own some 10 generation to hedge their risks. It's a bit of sort of 11 the reverse of the coin of generators looking to 12 acquire distributors with customer lists. To hedge 13 their risks, you begin to see a pattern developing 14 where, if you like, the top and the bottom of the 15 industry have a relationship, but it's the transmission 16 and the distribution wires that are kept separate 17 ultimately. 18 MR. BRETT: Just following up on your 19 point about ownership guidelines, are those in place in 20 jurisdictions that you are aware of, such as, for 21 example -- well, do any specific instances come to 22 mind? 23 MS WOOLF: They vary, I think, 24 initially from zero on day one to 15 per cent I think 25 was the percentage that Seabron Adamson was looking at 26 in England and Wales in the RECs. Twenty-five per cent 27 is a figure that is somewhere out there as well. In 28 other places, of course, competition has been put in 953 WOOLF/JENKINS/CEKSTERS 1 place without forcing a separation at all. 2 MR. BRETT: So it could be an issue 3 where you might have some restrictions initially, but 4 they would be phased out as the market gained strength 5 and the competitive market gained -- 6 MS WOOLF: Yes. Usually, the 7 regulator is given some discretion as to relaxing or, I 8 suppose, tightening, depending on how competition is 9 developing. 10 MR. BRETT: Thanks very much. That 11 is all I have. 12 MS O'RILEY: Mr. Perdue. 13 Thank you, Mr. Brett. 14 MR. PERDUE: If I didn't introduce 15 myself before, my name is Perdue and I act for the gas 16 marketers, who probably will be entering the 17 electricity marketing field as well. They currently 18 serve non-utility gas customers in Ontario. 19 I wonder if you could just imagine 20 for me the scenario if the Code demanded that the 21 regulated LDC, within the regulated bounds of the wires 22 company, provide the SSS. Can you imagine that 23 scenario, that the LDC is providing the SSS? 24 MS WOOLF: You mean it is not given 25 the choice that it is currently given? 26 MR. PERDUE: No, ma'am. It's not 27 given the choice. 28 MS WOOLF: It's a public service 954 WOOLF/JENKINS/CEKSTERS 1 obligation on the LDC. 2 MR. PERDUE: Yes, ma'am. Now, if 3 that is the case and the shareholders of the LDC want 4 to set up an affiliate -- or, excuse me, want to market 5 electricity privately, fixed term contracts, would it 6 seem reasonable to you that they would have to do that 7 through an affiliate, or would you say that it would be 8 reasonable that they could do that through their 9 regulated utility? 10 MS WOOLF: I think, actually, this 11 goes back to the point that you were dealing with 12 earlier. 13 I think that you could do it either 14 way, and I think that the way the Code is set up at the 15 moment has the machinery in place for that. 16 But, sorry, I am obviously not 17 answering the question that you -- 18 MR. PERDUE: I'm not saying you can 19 ignore the codes, I am simply asking as a hypothetical 20 example, where this is the case, would you find it 21 offensive if they were required, for example, to do it 22 through an affiliate, or would you find it acceptable 23 if they could provide that private service through the 24 regulated utility itself? 25 MS WOOLF: My immediate reaction was 26 that you could do it either way. I have seen it done 27 either way. 28 MR. PERDUE: Throughout your paper 955 WOOLF/JENKINS/CEKSTERS 1 you assumed -- and you talked about this -- that the 2 SSS is not profitable. Where did you get the idea that 3 it had to be profitable? 4 MS WOOLF: I think I did not imply 5 that it had to be profitable -- 6 MR. PERDUE: No, you said it wasn't. 7 MS WOOLF: I said it wasn't, yes. If 8 it is a public service obligation, which obviously it 9 is, then normally there would be a full cost recovery 10 at the very minimum, which is not entirely clear on the 11 language of the Code. There would at least be some 12 return on investment on the infrastructure employed in 13 providing that public service, because without that the 14 quality of the service might well deteriorate, which 15 would not obviously be in the government's interest 16 because it is, after all, a public service obligation. 17 MR. PERDUE: I agree with that. So 18 if we go back to the original example, if the SSS is 19 actually supplied through the regulated utility, via 20 the regulated utility, there would be that return on 21 infrastructure, there would be that cost-based rate, 22 there would be recovery of all of those costs. That is 23 the normal rule for rate of return regulation. Am I 24 correct? 25 MS WOOLF: If normal rate of return 26 regulation -- if that was the scenario that you are 27 postulating at the moment. But it is not apparent that 28 it is the scenario that is coming out of 2.5 of the 956 WOOLF/JENKINS/CEKSTERS 1 Code. 2 The overall point is that I wouldn't 3 like you to feel that the notion, somehow or another, 4 is that the MEUs should be allowed to make a profit out 5 of the standard supply service. I think that the point 6 is that they should be given the choice which is 7 offered to them under the distribution licence to 8 utilize an affiliate to do this. 9 MR. PERDUE: I don't have any 10 objection to that, but surely the rules should be the 11 same if they decide to perform the function by an 12 affiliate, or whether or not they decide to leave it 13 within the regulated utility. Why should the rule be 14 different one from the other? It is still a public 15 service, is it not? 16 MS WOOLF: In what way do you think 17 that the cost recovery issue would be any different 18 within a retail affiliate or if it was within the LDC? 19 Because that is the way I read the Code -- 20 MR. PERDUE: It wouldn't be any 21 different. It wouldn't be any different, would it? 22 MS WOOLF: It wouldn't be any 23 different, no. 24 MR. PERDUE: So what we have done is, 25 we have created a second regulated company. The 26 affiliate is now regulated. 27 MS WOOLF: No, it is the service 28 which is regulated. 957 WOOLF/JENKINS/CEKSTERS 1 MR. PERDUE: Well, ma'am, that means 2 that the charges are regulated. 3 MS WOOLF: And absolutely right, so 4 they should be. These customers are, in effect, 5 captive. 6 MR. PERDUE: But in order to 7 regulate -- What did you call it? The service charge? 8 Whatever. You spoke about a small whatever. I have 9 forgotten what you referred to it as, but do you know 10 what I mean by -- 11 MS WOOLF: The administrative charge. 12 MR. PERDUE: Administrative charge. 13 Good enough. 14 MS WOOLF: Administrative fee, I 15 think, is the terminology. 16 MR. PERDUE: How is the Board going 17 to set that on any other basis than it sets any other 18 such rate in a regulated company? It would be 19 cost-based. 20 MS WOOLF: Yes. 21 MR. PERDUE: That would mean that 22 they have to look at the cost, which means they have to 23 regulate the company. 24 MS WOOLF: But they are going to have 25 to do that anyway, the way that they have set up 2.5. 26 MR. PERDUE: Yes, they will. I am 27 just pointing out -- 28 MS WOOLF: That is, I think, the 958 WOOLF/JENKINS/CEKSTERS 1 greatest protection. You don't have to re-write 2.5 in 2 order, in effect, to ring-fence the provision of 3 standard supply service and retail service within the 4 same retail affiliate, because if there were any, if 5 you like, cross-subsidization, which is probably what 6 you are worried about, and legitimately so because this 7 is a regulated business within a retail affiliate, it 8 is in fact because the price to the end consumer is 9 regulated. There is only one price that can be 10 charged, and the Board would regulate that in the 11 normal way that any regulator would because it is a 12 regulated service. 13 As currently drafted, you have the 14 spot price pass-through mechanism, plus an 15 administrative fee. 16 Now, if the Board felt that the 17 administrative fee was too high because, somehow or 18 another, the retail affiliate was gold-plating its 19 entire infrastructure and it was using the 20 administrative fee to fund that, because in a sense it 21 would be a cross-subsidy to the retail side, then the 22 Board would look at that administrative fee, because it 23 has power to regulate it under 2.5, and it would say, 24 "My goodness me, this looks rather high per capita by 25 comparison to all of the other people who are providing 26 SSS", and they could see in a nanosecond, with minimal 27 regulatory burden, that there was some degree of 28 gold-plating cross-subsidy going on here and it would 959 WOOLF/JENKINS/CEKSTERS 1 doubtless get a pertinent letter or a telephone call 2 saying, "What is going on here?" 3 That is why I didn't think you would 4 need to re-write the Code to deal with running SSS and 5 retail activities. 6 MR. PERDUE: I am not suggesting that 7 you have to re-write the Code. I am not suggesting 8 that. I am just suggesting that what you have done is, 9 you have made another regulated company. 10 MS WOOLF: You have a regulated 11 service within a retail affiliate. 12 MR. PERDUE: Call it what you will, 13 ma'am. That is -- 14 MS WOOLF: And when I started 15 answering this question I said that you can do this 16 either way, and around the world people do it either 17 way. 18 MR. PERDUE: All right. 19 MS WOOLF: The creation of a separate 20 corporate entity is, in a sense, almost a cosmetic 21 issue at the end of the day. 22 MR. PERDUE: If the spot price 23 pass-through prevails, presumably there would be no 24 advantage to the affiliate offering SSS, or am I 25 incorrect? 26 MS WOOLF: If the spot price 27 pass-through mechanism prevails, my analysis of it is 28 that that along with the other restrictions will make 960 WOOLF/JENKINS/CEKSTERS 1 not only the whole thing very unattractive to anybody, 2 including the LDC, who is ultimately left with the 3 section 29 obligation and will have to look after it 4 itself, but it will -- 5 MR. PERDUE: Why is it unattractive 6 to them? 7 MS WOOLF: By definition, it is a 8 public service obligation. 9 MR. PERDUE: They don't make any 10 money on it. 11 MS WOOLF: They don't make any money 12 on it. 13 MR. PERDUE: They never do. 14 MS WOOLF: So what is unattractive -- 15 MR. PERDUE: No, but no gas company 16 in Ontario, or in North America, makes money on 17 commodity. Electric companies don't make money on 18 commodity. 19 MS WOOLF: Well, that's a different 20 question. I mean, you are talking about where they are 21 retailing the commodity the margins are thin. Yes. 22 But this is a public service 23 obligation, and the way that I think that Board staff 24 designed the 2.5 is essentially that it is a cost 25 recovery mechanism. 26 MR. PERDUE: I had understood that 27 the SSS would be -- no matter if it's a fixed charge or 28 whatever, that the person selling is not going to make 961 WOOLF/JENKINS/CEKSTERS 1 any money out of it. They are going to make their 2 money elsewhere. They are going to make their money on 3 rate of return on their investment. 4 But I don't think any rate-of-return 5 utility in North America selling a commodity, either 6 gas or electricity, makes money on it, unless they are 7 marketing it separately from the SSO or the SSS. 8 If it's the standard regulated 9 service, the object is not to make money on it. 10 MS WOOLF: Yes. In the electric 11 power industry, they certainly seem to have simply 12 dealt with it on a cost recovery basis, although most 13 jurisdictions do try to put some incentive to make sure 14 that the infrastructure is kept in a state where 15 investment will be encouraged to meet need but without 16 gold-plating. 17 But you can regulate -- 18 MR. PERDUE: That is a different 19 issue, I think, than the actual commodity. 20 MS WOOLF: Yes. 21 MR. PERDUE: But you are correct, it 22 is a separate issue. 23 Customer lists appear to be a big 24 part of your concern. It has come up several times. 25 From the marketer's point of view, I 26 don't think there would be any objection at all if the 27 suggestion is to give the customer lists out to 28 everybody. I don't think anybody would object to that. 962 WOOLF/JENKINS/CEKSTERS 1 I don't think any one of the marketers would use it. 2 MS WOOLF: I tend to agree with you, 3 because I think that they probably have better customer 4 lists themselves. 5 MR. PERDUE: The essence of the 6 disagreement, I think, between us is that in the 7 affiliate, if you are providing both a public service 8 of the regulated SSS and you are also retailing 9 electricity under the same name, out of the same 10 office, that presents, in our opinion, opportunities 11 for cross-subsidization and unfair competition. 12 MS WOOLF: Well, I have just dealt 13 with the issue of cross-subsidization and explained to 14 you how that would be regulated. 15 MR. PERDUE: Yes. I wasn't asking 16 you the question; I was simply stating a position. 17 MS WOOLF: As far as the name issue 18 is concerned, I have also dealt with that this 19 afternoon. 20 MR. PERDUE: The name that you are 21 talking about is the name of the regulated company. 22 There is no restriction on the name under which they 23 provide the SSS if they provide it under an affiliate. 24 In other words, the name of the LDC is Pembroke Hydro. 25 The name of its affiliate is energy from Pembroke. 26 So they provide the SSS and send out 27 a bill saying energy from Pembroke, and then they turn 28 around and say, "Oh, we also have fixed prices here 963 WOOLF/JENKINS/CEKSTERS 1 competitively with other people", and it's also 2 Pembroke Hydro, whatever it is. 3 There is a problem between the name 4 of the regulated utility and the affiliate, but there 5 is also a problem if the affiliate itself is providing 6 both the public service of the SSS and also marketing 7 under the same name. Do you see my problem? 8 MS WOOLF: Frankly, I don't. I think 9 that it goes back to what I was saying before, that 10 everybody has a name and a reputation that they will be 11 using in the marketplace. 12 MR. PERDUE: Okay. I think that's 13 all. 14 Thank you very much, Ms Woolf; I 15 appreciate that. 16 MS WOOLF: Thank you. 17 MS O'RILEY: Mr. White, I think, is 18 next. 19 MR. WHITE: I am Roger White, and I 20 am with ECMI. We represent a number of municipal 21 electric utilities in the province. 22 Are any of these companies that are 23 created by the municipalities under Bill 35 regulated 24 in any way other than the OBCA in Ontario -- the 25 Ontario Business Corporations Act? 26 MS WOOLF: In relation to what sort 27 of activities? 28 MR. WHITE: Let me lead you a little 964 WOOLF/JENKINS/CEKSTERS 1 bit, then maybe we can get there. 2 My reading of the statutes indicates 3 that it is not the companies that are regulated; it is 4 the services that they provide and the prices that they 5 charge for those services. 6 MS WOOLF: Yes. "Regulation 101" is 7 regulators regulate prices and quality of service, yes. 8 MR. WHITE: Are you familiar with any 9 electric utility in Ontario that contracts out 10 services -- we will ignore Ontario Hydro Services 11 Company for the time being -- that actually contracts 12 out services, like maintenance or billing, or things 13 like that to "other non-regulated companies"? 14 MS WOOLF: Well, I imagine they might 15 contract out to have their premises cleaned to 16 non-regulated companies. 17 MR. WHITE: I find that to be the 18 case, and I find that even in many cases they farm out 19 linemen work, capital construction, maintenance, all 20 kinds of services which are part of their duties under 21 a regulated tariff. 22 MS WOOLF: And it's a very efficient 23 way of proceeding. 24 MR. WHITE: These companies that are 25 created, what duties do the boards of directors have to 26 the companies under the Ontario Business Corporation 27 Act? Are you familiar with those types of duties? 28 MS WOOLF: I am not an Ontario 965 WOOLF/JENKINS/CEKSTERS 1 lawyer, and I am not entitled to give legal opinions on 2 Ontario law. I could give you the answer under English 3 law. 4 MR. WHITE: Good. Take me there. 5 MS WOOLF: The duties of directors 6 are primarily to the company. 7 What are the duties of the company? 8 They are obviously to add value to the shareholders. 9 I am not quite sure where your 10 question is leading me. 11 MR. WHITE: That sounds to me a 12 little like there is a duty to make profit maybe, as 13 part of enhancing value? 14 MS WOOLF: I don't think company 15 lawyers normally would answer that technically, and 16 maybe you should ask some other people in the room that 17 question. 18 Put it this way: A lot of directors 19 that you talk to at cocktail parties will talk about 20 enhancing shareholder value. Put it that way. 21 MR. WHITE: I guess what I was trying 22 to get at is, seeing how the wires business which has 23 statutory duties, some of which are regulated, is 24 incorporated under the same statute that the 25 competitive businesses are incorporated under in 26 Ontario, the directors would have had similar 27 obligations. 28 What I am trying to get to is that 966 WOOLF/JENKINS/CEKSTERS 1 enhancing shareholder value and profit is not 2 necessarily a dirty word for a regulated company in 3 Ontario. 4 MS WOOLF: I would entirely agree 5 with that, yes. 6 MR. WHITE: If you were trying to 7 differentiate the gas industry regulation in Ontario 8 and the current situation that we are into in terms of 9 the electricity business -- if you were to try and put 10 on a regulatory hat for a minute and say: If I have 11 significant players in the energy sector in a 12 geographic area and one of those players or a group of 13 those players have been in a competitive market, an 14 evolving competitive market, for ten years, as the 15 legislature is crafting a statute that is going to 16 unbundle the electricity business, do you think they 17 might consider giving the latitude or a different set 18 of basic rules to the electricity industry than the 19 already established other energy sector entity in the 20 province that was regulated? 21 MS WOOLF: You raise an interesting 22 thought in my mind as to whether in fact it would be 23 because of the superior skills and know-how of the gas 24 marketers, and just their experience of retailing, that 25 in a sense there is an argument if you go down the 26 handicapping routes that they should be handicapped 27 rather than the infant retailers, if you like, in the 28 infant retail market in electricity, and that somehow 967 WOOLF/JENKINS/CEKSTERS 1 or another the gas marketers have an unfair advantage. 2 But I have to say that I should get 3 back really to my original analysis of the difference 4 of approach between gas and electricity, is that at an 5 earlier stage in the development of competition then 6 you need a different set of regulatory rules to deal 7 with the facilitation of competition. Typically that 8 is what regulators have done. 9 MR. WHITE: Thank you very much. 10 No further questions. 11 MS WOOLF: You are not going to ask 12 me the question that you have asked everybody else, 13 because I was ready with my answer -- 14 MR. WHITE: I'm afraid I couldn't -- 15 MS WOOLF: -- which is no, I do not 16 have any experience of how to fix your problem on 17 different meter readings. 18 I'm disappointed. 19 --- Laughter 20 MR. WHITE: Thank you. 21 MS O'RILEY: Is there anyone else 22 besides Board staff who have questions for this 23 witness? 24 Part of the presentation that you 25 made and that Mr. Adamson made was about the advantages 26 of a fixed price over a spot price. I believe that was 27 part of the argument that was in your pre-filed 28 evidence. So I just wondered if you could -- 968 WOOLF/JENKINS/CEKSTERS 1 MS WOOLF: I'm sorry. What was the 2 question? 3 MS O'RILEY: I was starting it up. 4 I just wondered what it is that based 5 that view on. Why do you think a fixed price is 6 preferable for consumers to a non-fixed price? 7 MS WOOLF: Well, I think it takes you 8 through all the arguments in my paper and which I have 9 articulated today and all the arguments in Seabron's 10 paper, of which there are many, but the most obvious of 11 which are, from a purely regulatory perspective in your 12 role as a regulator, that it creates -- it expressly 13 doesn't protect consumers in the way that the Act 14 contemplates. It would make consumers very -- put them 15 in a very difficult position in making a choice as to 16 whether to take a supply from a retailer anyway. 17 So I think that it doesn't achieve 18 what some people may think it does of essentially 19 encouraging people to switch in order to provide a 20 number of buyers in the retail market. 21 It has a distorting effect on the 22 development of wholesale competition, and it has not 23 much effect on promoting retail competition. 24 So for all the many reasons -- and 25 many of the arguments are highly interactive, it's a 26 matrix of arguments, if you will, a fixed price option 27 is considered a much better solution from the point of 28 view of delivering the objectives of the licences, 969 WOOLF/JENKINS/CEKSTERS 1 Bill 35, and ultimately back to the White Paper. 2 MS O'RILEY: So when you are thinking 3 about a fixed price, I take it, if you agree with 4 Mr. Adamson's paper, that it is not a uniform fixed 5 price across the province. 6 I'm just wondering what exactly you 7 mean by a "fixed price" or what exactly you would see 8 as being a fixed price, whether it is the equivalent of 9 something that is uniform and fixed; if it is an 10 equivalent to, I guess, in the current context of spot 11 market price that this gets passed through with part of 12 it being procured separately by a utility. I'm just 13 not quite sure I understand the mechanics of it. 14 MS WOOLF: Well, I think the 15 mechanics of it would be if you think about how the 16 price is derived is that the standard supply service 17 provider would go out into the market to produce the 18 market-based price, which I referred in the White 19 Paper. 20 The mechanics of that are quite 21 simple and no different, in a way, to any other 22 wholesale market in any commodity. There is a contract 23 market and a spot market on offer in Ontario, and the 24 skill of the provider is to go out and procure a 25 portfolio of contract. To the extent that he doesn't 26 have sufficient power coming in on those contracts, he 27 would buy out of the spot market, he would use 28 financial contracts to hedge the risk in the contract 970 WOOLF/JENKINS/CEKSTERS 1 market. So ultimately what he would have is a 2 portfolio of different sources of supply and different 3 contracts which deliver him power at a price that is 4 becoming as fixed as it can be, and then he is able, 5 obviously, to pass on that fixed price to the end 6 consumer, which is a lot better and a lot simpler for 7 people to manage. 8 MS O'RILEY: I was interested in the 9 reference to the PBR Handbook, and I agree with you 10 that there is a semi kind of methodology between the 11 approach that is taken in your -- I'm going to call it 12 a joint presentation and in the PBR Handbook. 13 One of the reasons that -- at least 14 in the initial stages of the PBR Handbook, it is also a 15 Board staff draft document -- 16 MS WOOLF: Indeed, I understand. 17 MS O'RILEY: -- says that they are 18 using a price cap mechanism rather than yardstick 19 measures was the difficulty in establishing benchmarks, 20 a lack of, I guess, real good information about the 21 distribution sector and about how it is going to 22 evolve. 23 I'm just wondering whether or not you 24 see a problem in establishing an official benchmark for 25 a regime in terms of generation price going forward? 26 MS WOOLF: It is a little bit unkind 27 of you to ask me questions on Seabron Adamson's paper 28 when he was here for over a day on this. 971 WOOLF/JENKINS/CEKSTERS 1 I can say, though, having read the 2 excellent Distribution Rate Handbook, that the Board 3 has my sympathy in implementing PBR for the first time 4 in Ontario, because it is very hard to get PBR up and 5 running quickly when you have actually never regulated 6 these utilities before, because PBR requires a great 7 deal of information, both on the parts of the regulated 8 utility and on the part of the regulator to make sure 9 that the right choices have been made. 10 So I'm not surprised that you find it 11 difficult in relation to PBR to get any comparatives or 12 yardstick measures going. 13 All I can say is, this is a rather 14 different kettle of fish because it is dealing with an 15 entirely different issue. So I think that whilst your 16 concerns in relation to PBR might be well founded, I 17 think that the work that Seabron said he thought could 18 be done really quite quickly would come up with some 19 yardstick measures which I think would be quite robust. 20 MS O'RILEY: Then we will adjourn 21 until Monday at 9:00 a.m. 22 MR. DADSON: Can I make one 23 administrative point? 24 MS O'RILEY: Sure. 25 MR. DADSON: This is a point that I 26 discussed with you, I guess yesterday, Ms O'Riley. 27 When Don Dewees was speaking, I think 28 on Tuesday or Wednesday of this week, he referred to a 972 WOOLF/JENKINS/CEKSTERS 1 paper which you referred to again filed by Enron during 2 the course of the MDC proceedings regarding the midwest 3 price spikes in the summer of 1998. 4 I would just point out that that 5 paper is on the Web site. My recollection is sort of 6 it does not address the impact of volatility on 7 customers. The topic of the paper is rather what 8 factors account for the price spikes in the summer 9 of 1998. 10 I haven't had time to go back to the 11 office, frankly, and locate the paper to make it 12 available, but I will endeavour to do that over the 13 weekend or on Monday and make copies available for the 14 Board. 15 MR. JENNINGS: If I can, the Web site 16 is the MDC Web site? 17 MR. DADSON: Yes. 18 MR. JENNINGS: It's closed, I 19 believe. 20 MR. DADSON: I will have to find it 21 in my files then. 22 MR. ADAMS: For the purposes of the 23 transcript, can I ask Mr. Power what the status is of 24 his motion? 25 MR. POWER: Yes. That is exactly 26 what I was hoping to address. 27 Unfortunately, due to the timing of 28 the break I didn't get down to finish it off, so what I 973 WOOLF/JENKINS/CEKSTERS 1 will do is have it faxed out Monday morning, at least 2 the Notice, and of course that will give us the weekend 3 to get the materials together. 4 So if that is acceptable to 5 everybody, that would be the timing of it. 6 MR. DADSON: One last thing. 7 Mr. Mia indicates that the MDC Web 8 site has moved to the IMO Web site. 9 MR. JENNINGS: I certainly haven't 10 been able to find most of the background papers at the 11 MDC Web site. It may be there, but I haven't found it 12 yet. 13 MS O'RILEY: I believe that we have 14 it on CD-ROM, so I will endeavour to dig that up. 15 Are there any other administrative 16 matters? 17 Thank you, Ms Woolf. 18 We can adjourn until Monday at 19 9:00 a.m. 20 --- Whereupon the hearing adjourned at 5:00 p.m., 21 to resume on Monday, July 19, 1999 at 9:00 a.m. WPC  9:np#JnN0;%9\3Yg(C1ࡱII*HH/*/)%+(%*&!(%!%!)& &*'(-(-"/*-+'+'"'.*,&!&&$)$(($(*(+.*0-(,*'+*$),&+$%.)/0*14030-0*&*,(-)((,(,,(..)--),*%(0...*/)$**%**%+&"))%+,'/%#+%,*%*-+/+*,-)/(%)*#+1++:6/TPC0-,1-2205&'+'/)$+.*-1032.6)&+.*.1+1'#+.*.+'.2-40.2)',+'/+(.,*1-)1-(1*'.+(.1/7/+3(&.-,1/.5*&-.+33271-21-30-630864<2/6,-456;75>43;43;67=,-5'34:44=,+5.*6($0(%0(&2 +'&.*&2''065>,+30,7,*3'$/)(2/-8(%2.,4)&011734:2/931;2-6117,)320855;10720965>87>64>32;10845=,+5-+5/-80.978@<22;0-82091/:/+62/7,,633:))3/09/.9009*+422<48>57?46?32:1-8.+878?66=01:23:,,5((645=0/:/-933<53>21:22944<23;23=25:78?37=66>56?00<11;21;35>56?<24=88B,-844<99B58@69A;;C35=89B12<34<54=89@78@87?47>8;@23;;D:;B7;?57?98@:9;A57>57=78?79A57=98B;;B:;C9=A;45?45?:79@88A:;?77?;;@99A99@<76<88@64;:9@<=B76<97:;:>78;;9?66:66;76<67<66:96;88=77;86=66<99@10:87>57<005:=?:<@89@;:@97?88>/.534867=119007/2997@*,454<::?58:33988>21954<44:88=54833922956;5293193/9249! +68<13844:+*241866<44;125106//722943;3390/652:47;65;20853;34<219329"%+20431:/-6/.6-+4107008/.711;30:((342:65<0.70.844=45<76=017/.732931:1160-70/7//831:33<10977=87>44;0/7/-731841;20:-,6--645:/1:,*5+(40/944;31;/-864=32;57>1-:019'*2(*2()3009/-822:-*6*'412:-.4%&0 ",*+5,*31/9219+-4&(2)'2*'3/.70/944<019),5+)41/80070/6$&'145:/08 -+(321:,-510940<((4228,-60/:./6/.91-742;34=23:-/6&*0 &+,5(&0.-5-.4/1866;-.8-+5+)3+)3$(%/018,+5!#,)$2.,6%'0'*1//8)+2&(,009++42-7/-0 $("''$($#)&+& #,(+# "$")$('$(+'**'*,(+!#0*0%"%" "-&-,(,)%))&('#'&!(+(*-(.,(+)#+)&*%!&*%)/+0-',+%+.(,,(,0+1.*0*&,($*)$)/*0205*'*# !(%'+%))$)'"')$*('+!(")(%+% %-(,?:5.)/-+/2,2,*.3133052.3&$*+#,306*&-,).-+0+).-(1/+2,(0)%.+(1-*1+)/,*2+)0/+5)&1.+35082/8+'0-*05/:3-93072071.664<44;)%065<97?::@54=78>-18*)065=119()31.7-*2..4'&/ )%%--*3108217-,6+(30/5*)1*'02.9.-5+)321974=64=1081/943<51=/.7.-60.90-9((30+933;41;10956<1/931:.,844>21:77@64<44>32<99@44<10:*+31/:.,732:/0800711:,*620:1.832;22=//9--722;32<1/8-+567@78>56=23943;21:#"1.+711=/2:87?12;0/:54?/.832:01920953<21;11;//944>>>E56?99C:=A8:B13=43>77B35=53<99A45>89A78?36<35<25<34=33=66A14<11<24<58@35=25<:;B12;45<;=B57>9;A;=D22=35<68=67=79@:9A89B79C99A@@F89A67@69?89@03:46>89A;:A<>C9:@56>34;56=46>36<:?F88@77?9;A57>47=9:?55<77>;<@56=89>88>56<69=63=87=65=;:@99=:9<51763987<97=569=;9?43:30775>77=43;99>34=67=97?87?66=22;$&001854::9@57;:9>67=22:53;96@20:57<*-377=229/17106;:A75<35:66;22943975>51:44=439229339349..421887>./721822678<76>67?43<54<63;66>,-6-.5/.61/9--566=43:44<57<8:?68>1392/80.8;8A56=018..7318/,80/943;1191.932;1190.730:32;01940;./70-71/;0-7219,*4'&40.9+(621;45<*)5%'3#'2,-4..846>1080.9.,7*(6-(532:0/9128./8-+6))2+*4++34591/82/;1/9019.-7/08//8*(1&'.,,5.-60/6" )#!,207..7)*2))11,853=33;22;11:44<11;*&3)'4##.,+5.-6,,60/8--7-.4018/29&%/-,622:/.7.1811:..731<**5''///7.-6(&2!!,-+3..7*07-,4'(1'(10/6108)*0%#.+'+*&((#&+'(,*-*&-+&+)&+.(.(!).),1,20+0+%*0,0,(.'!%-)*+(*)#**&(&!%*%('#(("(&"%)&)'#()$*,'.-'-&"),(,'!%& %)$(,'*&')$(,).'!'*$+)$+*'.+)-)&*/+.1-1$!&+&**'+,%-($)$ %0-2407-(0;63630(&+,'.*$+*$**$*,'-.+/.,0&+-*1*%,)'+.+0-+0,+.,).*&/,'0/,4.+3#!+.+2-*2,)2WPC*  ?2aq?GJqe湖jy"Ͽ\0 &dy_Ñ0dsaJ|M|L7T`튽wչՇJCUaɑ1ULv,@w}rˣ^Fw/hFM5nUs )B*ZU3[]~>l8 -#dB #b.Y"Z#`\3sܚxw$Ea` *IM܁\Gu$θSѕa/SUD| w˔5N0$„مpnN=n-C=r\Iz=/¯ h('oxP%wqn x:nـˣ\},,.2!9 eG֍ĜeSHY?gK>;[:ծlf:Ӥ=ޚD󮰐 ,)E{ǖ\#[x< 7Pe"ќɱD ǬO[w ;OݐņiUSXN! vjFH~9f-Qp)UnmIuN9*fsP0hi]S:WPC RFoPWl?2 3ڢ-$CT%{n&o3pXɸ鮚.P_m+y@Hǒ5MKzO,LC~o5WdzOv1![5"I[[m4~6&z 6`D/[-ʷH[ZdpYX++6.r?a:ƠRZ$O^ҏ6DH6er\!Wv=}+giXDFPW!p\DYeᚨ`=WׯHqtݔӸDy5研KQOh߂&T< n `/,B1E rq `[L^tjIRa,VsKq[}T!CN5G`#!4 UNU % 0l 0b nw 0 CJFIFC   WPC/ gY=N#QP*r!M'Gy-Ռy$!u,hHPepj4%fQWPC%E aMN^w,ncoo dN*,5qHeNࡱ1  Certificate Of Appreciation to ABC In Recognition Of Your dedication and contributions to the Electronic Regulatory Filing initiative ____________________________ Floyd G. 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