1 1 RP-1999-0034 2 3 4 IN THE MATTER OF ss. 19(4), 57, 70 and 78 of the 5 Ontario Energy Board Act, 1998, S.O. 1998, c. 15, 6 Sched. B; 7 8 9 AND IN THE MATTER OF an Ontario Energy Board 10 Staff proposed Electricity Distribution Performance 11 Based Regulation Handbook 12 13 14 Hearing held at: 15 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 16 Toronto, Ontario on Tuesday, September 21, 1999, 17 commencing at 0902 18 19 20 21 22 23 TECHNICAL CONFERENCE 24 25 VOLUME 1 26 27 28 2 1 APPEARANCES 2 JENNIFER LEA/ Board Counsel, Board 3 MIKE LYLE 4 ROBERT WARREN Consumers' Association of 5 Canada 6 ROBERT POWER/ Hydro Mississauga, London 7 SEABRON ADAMS Hydro, Oshawa PUC, Sarnia 8 Hydro, St. Catherines Hydro, 9 Whitby Hydro, Petrolia PUC, 10 St. Thomas PUC, GPU Electric 11 Inc./GPU Services Inc. and 12 Collingwood PUC, ENERConnect 13 JACK GIBBONS Pollution Probe 14 PAUL FERGUSON/ Upper Canada Energy 15 DR. C.K. WOO/ Alliance 16 PETER FAYE/ 17 DAVID WILLS 18 MARK RODGER Toronto Hydro 19 RICHARD STEPHENSON Power Workers Union 20 DAVID POCH Green Energy Coalition 21 ELIZABETH DEMARCO Lindsay Hydro, Flamborough 22 ZIYAAD MIA Coalition of Distribution 23 Utilities 24 ROGER WHITE ECMI 25 TOM ADAMS Energy Probe 26 MAURICE TUCCI MEA 27 STEPHEN CARTWRIGHT Enbridge Consumers Gas 28 BILL HARPER Ontario Hydro Networks 3 1 APPEARANCES (Cont'd) 2 KEVIN BELL Great Lakes Power 3 GERRY DUPONT Nepean Hydro 4 RICHARD BATTISTA Union Gas Limited 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 1 Toronto, Ontario 2 --- Upon commencing on Tuesday, September 21, 1999 3 at 0902 4 MS LEA: Good morning. I wonder if 5 we could begin please. 6 I would like to welcome you to the 7 technical conference in the Board's RP-1999-0034 8 proceeding. 9 This is the technical conference to 10 consider the proposed Electric Distribution Rate 11 Handbook that has been put forward by Board staff and 12 its consultant. 13 My name is Jennifer Lea. I'm counsel 14 here at the Board and I will be chairing the conference 15 with Mike Lyle, who is our newest Board solicitor. I 16 don't know if he is in the room, but in any event you 17 will see him later on. 18 The purpose of this conference is to 19 allow parties to further explain their own written 20 submissions and to get further clarification also on 21 the draft rate handbook. Some parties are choosing to 22 make expert presentations. 23 It is also to allow other 24 participants to question presenters about their written 25 submissions and the expert presentations that we will 26 hear over the next few days. Participants do not have 27 to be represented by counsel to participate or to ask 28 questions. 5 1 The technical conference will be 2 recorded on transcript and will form part of the 3 Board's record for consideration in this proceeding. 4 These transcripts, I understand, will be posted on the 5 Board's Web site on the day following transcription, 6 but if you wish to have a copy for yourself or you find 7 a hard copy easier to work with, please talk to the 8 reporters directly and they will be happy to help you 9 there. 10 There is a proposed agenda for this 11 conference which was faxed out yesterday. If anyone 12 hasn't yet received it there are copies on the table by 13 the window there, that is the agenda, which lists the 14 order of presenters and the approximate times. 15 We have tried to accommodate 16 everybody's schedule in setting the agenda, but there 17 will no doubt be some changes to it. Also, of course, 18 you cannot predict how long a presentation and the 19 questions following it will take, so the agenda is a 20 guide but the times are not fixed. 21 A couple more administrative matters. 22 Intervenors in this proceeding will 23 have received the Board's Procedural Order No. 4, which 24 sets out the dates for the final oral and written 25 submissions in this matter. Again, if you are not an 26 intervenor and you wish a copy or you didn't get a copy 27 there are additional copies available on the table 28 there. 6 1 Both phases, as I understand it, of 2 the final stage of this proceeding are voluntary. You 3 don't have to make oral or written submissions or you 4 can do both. 5 A motion has also been filed with the 6 Board by Mr. Power for his client group and no date has 7 yet been set for hearing of that motion. As soon as I 8 am aware of any date I will let you know, and I'm sure 9 the Board will let parties know also. 10 The reason that I mention it is that 11 the motion requests a second phase technical conference 12 to consider issues related to base productivity factor. 13 As the motion has not yet been heard or any decision 14 reached on it, I suggest that parties proceed for now 15 as if it hadn't been filed and cover all the topics 16 that they wish to cover to the extent that they want to 17 at this technical conference, because this technical 18 conference will proceed. 19 I think then what I will do next is 20 request appearances from everybody and ask you to 21 indicate whether or not you are going to be asking 22 questions at this technical conference. 23 We will begin with the gentlemen to 24 my right here, Mr. Warren. 25 MR. WARREN: Robert Warren for the 26 Consumers Association of Canada. I may have questions 27 for the first panel, Jennifer, but they won't be 28 extensive. 7 1 Thank you. 2 MS LEA: Thank you. 3 MR. POWER: Hi. Rob Power for a 4 large group of clients as has been alluded to earlier. 5 I will have questions, but I would 6 ask that my questions be held down until after lunch 7 because we are waiting for one person to get here. 8 MS LEA: I have no problem with any 9 particular order of questioning, so unless anybody else 10 objects that is fine with me. 11 Mr. Gibbons. 12 MR. GIBBONS: Jack Gibbons for 13 Pollution Probe. Yes, I will have questions and I am 14 ready to go now. 15 MS LEA: Thank you. 16 We will put you near the front, 17 Mr. Gibbons. 18 MR. FERGUSON: Paul Ferguson and Dr. 19 C.K. Woo for the Upper Canada Energy Alliance. We will 20 have questions. I'm not sure how extensive at this 21 point. 22 Thank you. 23 MS LEA: Thank you. 24 Mr. Rodger. 25 MR. RODGER: Good morning, Ms Lea. 26 Mark Rodger, counsel for Toronto 27 Hydro Electric System Limited. I will have a few 28 questions. 8 1 MS LEA: Thank you. 2 MR. STEPHENSON: Good morning. 3 Richard Stephenson, counsel for the 4 Power Workers Union. I will have some questions. 5 MR. POCH: David Poch, counsel for 6 the Green Energy Coalition. I have some questions. 7 MS LEA: Thank you. 8 MS DEMARCO: Elizabeth Demarco, 9 counsel for Lindsay Hydro, Flamborough Hydro, Nova 10 Scotia Power Holdings Inc., CanEnerco and Sunoco. I 11 may have questions for this panel. 12 MS LEA: Thank you. 13 MR. MIA: Ziyaad Mia, counsel for 14 Coalition of Distribution Utilities, which are listed. 15 I may have questions. 16 MS LEA: All right. 17 Are there any counsel whose names we 18 need spellings for or do you have them down? 19 All right. Thank you. 20 Are there any other people who wish 21 to register an appearance at this time and indicate 22 their intention in terms of questioning? 23 MR. WHITE: Roger White. I'm with 24 ECMI and I will have questions. 25 MS LEA: Thank you, Mr. White. 26 MR. ADAMS: Tom Adams on behalf of 27 Energy Probe. I will have questions. 28 MS LEA: You will have questions, 9 1 Mr. Adams. 2 There are free seats in this front 3 row and also to my right, if you wish to take seats at 4 the tables here. 5 MR. TUCCI: Maurice Tucci with the 6 MEA. We may have questions. 7 MS LEA: Okay. Could you spell your 8 last name, please, Mr. Tucci. 9 MR. TUCCI: T-U-C-C-I. 10 MS LEA: T-U-C-C-I. Thank you. 11 MR. CARTWRIGHT: Stephen Cartwright 12 from Enbridge. I may have questions. 13 MS LEA: Mr. Cartwright, could you 14 spell your last name for the record. 15 MR. CARTWRIGHT: C-A-R-T-W-R-I-G-H-T. 16 MS LEA: Thank you. 17 MR. HARPER: Bill Harper with the 18 Ontario Hydro Networks Company. I will have a few 19 questions. 20 MS LEA: Mr. Harper, how do you spell 21 your last name? 22 MR. HARPER: H-A-R-P-E-R. 23 MS LEA: Thank you. 24 MR. BELL: Kevin Bell with Great 25 Lakes Power Limited. I may have a few questions. 26 MS LEA: Okay. Mr. Bell, B-E-L-L? 27 MR. BELL: Yes. 28 MS LEA: Thank you. 10 1 MR. DUPONT: Gerry Dupont, Nepean 2 Hydro. We may have some questions. 3 MS LEA: Mr. Dupont, D-U-P-O-N-T? 4 MR. DUPONT: That's right. 5 MS LEA: Thank you. 6 MR. BATTISTA: Richard Battista, 7 B-A-T-T-I-S-T-A, Union Gas Limited, and we likely won't 8 have any questions. 9 MS LEA: Thank you. 10 Anyone else? 11 Thank you. 12 Having a look at the agenda, then, 13 which is a tentative schedule of appearances, we see 14 that today has been set aside for hearing a 15 presentation and questioning of the OEB witnesses as 16 they are listed here. 17 If there are no further questions or 18 appearances, I would like to proceed with hearing their 19 presentations. 20 All right. Thank you very much. 21 Taking their place on the dias 22 temporarily today are three of the OEB witnesses. 23 Starting with the lady on your right, Judy Kwik is a 24 member of the Ontario Energy Board's technical staff. 25 Next to her is Mr. Frank Cronin -- oh, pardon me. How 26 can I ever get that mixed up. 27 --- Laughter 28 MS LEA: Perhaps you had better 11 1 introduce yourself. 2 MR. KING: Mike King, Senior 3 Vice-President, PHB Hagler and Bailly. 4 MS LEA: That shows you how much I 5 know. Right. I'm sorry. 6 Frank. 7 MR. CRONIN: Frank Cronin, Senior 8 Advisor to Hagler and Bailly and Professor of 9 Economics. 10 MS LEA: Pardon me. 11 Now, there are exhibits that these 12 witnesses are going to be using. Copies are available 13 on the table there, and also their resumes are attached 14 if you are not familiar with them, as I am obviously 15 not. 16 Ms Kwik and gentlemen, I understand 17 you have a presentation to make this morning. 18 MS KWIK: Yes. 19 MS LEA: Thank you. 20 JUDY KWIK 21 MIKE KING 22 FRANK CRONIN 23 PRESENTATION 24 MS KWIK: Good morning. Can you hear 25 me? 26 MS LEA: You have to kind of shout or 27 get closer to the microphone. 28 MS KWIK: Okay. 12 OEB Panel 1 The draft rate handbook that is the 2 topic of this technical conference is Board staff's 3 proposal for the rate principles, policies and 4 procedures to be used in the establishment and 5 adjustment of electric distribution rates in the 6 Province of Ontario for a first performance-based 7 regulation term or PBR term. 8 Board staff would like to acknowledge 9 and express its sincere appreciation for the tremendous 10 efforts of the task forces. Without the advice, 11 efforts, and substantial work products of these task 12 forces, Board staff would have been disadvantaged in 13 understanding the issues confronting the industry and 14 on crafting a rate handbook that balances the various 15 stakeholder interests. 16 It is important to consider the 17 context which affect our decisions regarding the PBR 18 framework. Among these factors are: 19 (1) that there are over 250 electric 20 distributors; 21 (2) that 200 of the MEUs have fewer 22 than 10,000 customers, of which 100 distributors have 23 fewer than 1,000 customers, as illustrated in 24 Exhibit 1; 25 (3) the lack of a fully consistent, 26 historical set of data among all distributors; 27 (4) the lack of data available to 28 fully describe the differences in circumstance among 13 OEB Panel 1 the electric distributors. 2 Stakeholders identified over 25 3 factors that might describe these differences, but no 4 complete data set could be assembled because many 5 distributors did not have the data. 6 (5) the desire to avoid creating a 7 huge bureaucracy at the OEB; 8 (6) and the time constraints of 9 implementing electric distribution rate regulation 10 scheme in time for market restructuring and opening. 11 With the increased understanding 12 gained on the extent and magnitude of challenges faced 13 by electric distributors in dealing with industry 14 restructuring, we came to the following conclusions: 15 The first PBR term should all 16 involved to gain experience with PBR while minimizing 17 the potential for undesirable outcomes; as such, the 18 plan should be of relatively short duration with a 19 simple rate adjustment mechanism and safeguards for 20 both customers and utilities. 21 The first generation plant uncouples 22 an individual distributor's price from cost in that the 23 second- and third-year prices are just adjusted 24 according to performance based price cap formula; as 25 such, the proposal moves the industry away from a cost 26 based approach. 27 The PBR rate regulation scheme needs 28 to be administratively simple; hence, the regulatory 14 OEB Panel 1 scheme should establish proper incentives that allow 2 regulation to be light-handed with considerably less 3 regulatory oversight than in traditional cost of 4 service models. 5 While there may be other regulatory 6 mechanisms that hold great promise, they cannot be 7 implemented at this time, due to lack of consistent 8 data, insufficient time or insufficient resources; 9 therefore, the approach of a first-generation PBR is 10 intended to establish a base for future regulatory 11 initiatives. 12 A mid-term review will be held to 13 design the next generation of PBR. It is intended that 14 the database established during the first generation 15 will allow for the consideration of a yardstick 16 approach for the majority, if not all, of the 17 distributors, for second-generation PBR. 18 For that review, it is intended that 19 the Board will have available detailed research into 20 PBR methods and performance standards adopted in other 21 jurisdictions, as well as in other industries. 22 With regard to why a yardstick scheme 23 for first-generation PBR, initially Board staff thought 24 that a yardstick scheme for the medium and small 25 utilities might be the preferred regulatory mechanism. 26 Consultations with stakeholders in all workshops held 27 last fall confirmed that a yardstick scheme was worthy 28 of investigation. 15 OEB Panel 1 Consistent with these observations, a 2 task force was formed to explore the application of 3 yardstick regulation. However, it became apparent that 4 inconsistencies in recording data, as well as the 5 unavailability of suitable utility characteristics, 6 would not allow for the definitive determination of 7 whether differences in cost and performance were due to 8 circumstance or management. 9 Under these circumstances, it was 10 likely that a yardstick scheme could result in 11 arguments from the 250-plus participants over 12 credibility, adjusted cost, benchmarking, or their 13 placement in a peer group. Such a scheme would have 14 resulted in substantial debate over methodology and 15 results, and it is unlikely that the issues would be 16 successfully resolved in a timely manner to meet the 17 schedule for unbundling rates and introducing a rate 18 regulation scheme for the distribution industry. 19 The task force ultimately recommended 20 that a yardstick scheme must be pursued in the first 21 generation of PBR or that it should be considered for 22 subsequent generations of PBR. 23 Board staff recognized that it was 24 not practical or feasible to implement a yardstick 25 scheme for first-generation PBR, although a yardstick 26 scheme may be the preferred regulatory tool for 27 second-generation PBR. 28 In terms of factors affecting the 16 OEB Panel 1 design of the rate adjustment mechanism, while the 2 yardstick mechanism task force ultimately rejected the 3 application of yardstick regulation in the first 4 generation of PBR, they recommended that the uniform 5 system of accounts be implemented in such a manner that 6 data to support specific yardstick metrics will be 7 collected on a consistent basis for a sufficient period 8 of time to provide accurate comparisons among 9 distributors. 10 As noted, the task forces and Board 11 staff came to the conclusion that a cap mechanism, as 12 opposed to a yardstick mechanism, for all distribution 13 utilities was the feasible and practical approach to 14 launching PBR for electric distributors in Ontario. 15 In developing the price cap 16 mechanism, it was considered important that the 17 mechanism be unbiased, reflect the experience of 18 utilities in the province and be understandable to all 19 participants. 20 In addition, it was considered 21 desirable to incorporate certain aspects of yardstick 22 competition in the rate adjustment mechanism. 23 Thus, the framework is input price 24 index minus productivity factor, or IPI minus PF. 25 Utilities compete on their procurement performance 26 through the IPI and under productivity against the base 27 productivity factor, PF. 28 The use of an input price index to 17 OEB Panel 1 measure the cost pressures which Ontario utilities face 2 more closely reflects their experience than the use of 3 an index which measures the final cost of consumer 4 goods, such as the CPI, or the consumer price index. 5 As explained in earlier staff 6 documents, in the input price index best represents the 7 inflation experienced by Ontario distributors. 8 Further, as was documented in the 9 staff productivity report, the relationship between CPI 10 and the IPI is not constant over time. 11 Explorations of the changes in input 12 prices for Ontario electric distributors point out the 13 importance of the cost of capital in determining the 14 total change in input prices, as indicated in updated 15 exhibits on our Web site. 16 Over the past 10 years, input prices 17 have moved dramatically largely due to the changes in 18 the cost of capital. The CPI does not include cost of 19 capital. 20 Selecting an inflation index that 21 does not accurately portray the mix of inputs that a 22 distribution utility employs is likely to result in 23 either ratepayers or shareholders experiencing windfall 24 gains or losses. 25 Some parties have questioned this 26 ability of IPI; however, the IPI reflects the aggregate 27 change in the cost of inputs to the industry. 28 Appropriate market signals will be 18 OEB Panel 1 given if end users face the actual cost changes 2 associated with the IPI -- adjusted for productivity, 3 of course. However, the decision of whether to adjust 4 rates to reflect increases in the formula is left with 5 the utility. 6 Updated productivity exhibits on our 7 Web site and in Exhibit 2 present calculations of 8 historic total factor productivity, TFP, for the past 9 five and 10 years. 10 Over the past 10 years, the mean 11 growth in productivity for the 48 utility sample was 12 .86 per cent; however, the median is 1.14 per cent -- 13 that is, half of the utilities in the sample 14 experienced productivity growth above 1.14 per cent per 15 annum. 16 More recent performance has shown 17 greater TFP growth. Over the past five years, during 18 the Ontario Hydro wholesale rate freeze, the mean 19 productivity growth of Ontario MEUs was 1.97 per cent, 20 with the median of 2.05 per cent; that is, half of the 21 utilities experienced productivity growth in excess of 22 2.05 per cent per annum. 23 Given performance of the utilities 24 over both the five- and ten-year period, the base 25 productivity factory of 1.25 per cent per annum as 26 proposed seems reasonable. 27 In terms of establishing initial 28 rates, the rate handbook covers the establishment of 19 OEB Panel 1 initial rates, including the calculation of a market 2 based rate of return at an approach to unbundling of 3 existing rates into distribution and commodity 4 components. 5 In the market based rate of return 6 calculation example, an illustrative target return on 7 equity of 9.75 per cent was used. Board staff proposes 8 the use of the Board's established method employed in 9 determining the ROE for gas distributors to determine 10 their ROE for electric distributors. 11 While a deemed capital structure is 12 used in the determination of the market based rate of 13 return, the distribution utility is free to choose 14 whatever capital structure is best for its circumstance 15 within limitations that may be imposed by the Board. 16 The reconciliation of the individual 17 class of cost of power with the utility's total system 18 cost of power, while not illustrated in the draft rate 19 handbook, is an integral part of the process that 20 ensures the recovery of revenue required for the cost 21 of power. As such, a utility will need to reconcile 22 the revenue required for cost of the power by 23 allocating the shortfall or surplus to the classes 24 proportionately according to class total revenues. 25 The class distribution revenue would 26 then be adjusted appropriately to ensure class revenue 27 neutrality. An illustration of this reconciliation 28 will be included in the final rate handbook. 20 OEB Panel 1 Other considerations that the rate 2 handbook needs to address that have been pointed out to 3 us by stakeholders includes a minimum bill provision as 4 well as the rate application policies that are inherent 5 in the application of the existing rates. 6 Minimum bill provisions will need to 7 be included and pertinent sections of the standard 8 application of rates will be incorporated into the 9 final rate handbook. In addition, all previously 10 approved utility specific conditions associated with 11 existing rates that remain pertinent will stay in 12 effect for now. This will also be reflected in the 13 final rate handbook. 14 In terms of pricing flexibility, the 15 proposed rate handbook allows pricing flexibility 16 between rate class baskets. This flexibility is 17 present for two purposes. The introduction of 18 competition in the generation and retailing segments of 19 the industry may have competitive effects on the fringe 20 of monopoly distribution services. 21 Pricing flexibility provides the 22 tools that the distributors may need to deal with these 23 impacts. Such threats might come from bypass of the 24 distribution system by large customers. 25 Second, Board staff recognizes that 26 the cost allocation based on unbundling process may not 27 correctly reflect a distributor's cost associated with 28 each rate class. Pricing flexibility provides a tool 21 OEB Panel 1 that the distributor can use to adjust cost allocation 2 over the term of the plan to be more in line with 3 better estimates of the distributor's cost to serve. 4 Since the proposal requires 5 distributors to complete cost allocation studies within 6 the first generation plan, the use of the pricing 7 flexibility mechanism could result in reduced rate 8 impacts as the cost allocation studies are used to 9 establish rates in the second generation of PBR. 10 In terms of other policy issues, an 11 issue raised in the task force consultation process and 12 by several of the intervenors has been the need for 13 incentive mechanisms to promote energy efficiency and 14 demand side management. 15 The current electric industry is in a 16 state of flux. Many of the distribution utilities have 17 stated the intent to answer the competitive energy 18 retailing business. Such mixtures of competitive 19 retailing businesses, even when separated through an 20 affiliate code and subsidized DSM services delivered 21 through a monopoly distribution business, raise 22 substantial issues over potentially unfair advantage, 23 illegal tying arrangements, discriminatory access to 24 monopoly services and fairness in retailing. 25 These issues of monopoly provided DSM 26 programs for the benefit of unregulated entities have 27 arisen in other jurisdictions, notably Norway and New 28 Zealand. 22 OEB Panel 1 Further, the issue of the role of the 2 distribution sector, particularly when many of the 3 players are of such small scale in delivery of DSM 4 services, has not been examined by the Board. For 5 these reasons, the issue of DSM is considered to be 6 beyond the scope of the first generation PBR process. 7 In summary, Board staff considers 8 that the proposed rate handbook represents a reasonable 9 proposal for first generation PBR. Due to some of the 10 limitations encountered in developing and implementing 11 the PBR proposal, a relatively short term is proposed 12 for the plan. Hence, it is recommended that the plan 13 apply for the period of 2000 to 2002 with a mid-term 14 review that will develop the plan for second generation 15 PBR. 16 That's our statement. 17 MS LEA: Thank you very much. 18 Mr. Warren, are you prepared to 19 proceed? 20 MR. WARREN: No, but Mr. Gibbons is 21 really keyed. 22 MS LEA: Mr. Gibbons, you indicated 23 you are ready to go. Can you proceed at this time? 24 MR. GIBBONS: Yes. Thank you, 25 Jennifer. 26 MS LEA: Thank you. 27 MR. GIBBONS: Panel, you are aware 28 that one of the objectives of the Ontario Energy Board 23 OEB Panel 1 Act is to facilitate promotion of energy efficiency. 2 MS KWIK: Yes. 3 MR. GIBBONS: In the Board staff's 4 handbook, you are proposing a price cap form of PBR 5 regulation and under price cap PBR regulation, 6 everything else being equal, a utility's profits rise 7 when it sells more electricity. 8 MR. KING: Not necessarily true, 9 Jack, because, or Mr. Gibbons -- 10 MR. GIBBONS: Jack. 11 MR. KING: The suggested structure of 12 the rate structure is basically a two-part structure 13 where the last block is priced at the incremental 14 distribution costs. If the incremental distribution 15 cost truly reflects the additional incremental cost the 16 utility will incur from additional sales of kilowatt 17 hours, then there really is no incentive for the firm 18 to expand sales. 19 MR. GIBBONS: But you mentioned there 20 was a caveat, whether that incremental rate will cover 21 just costs, I believe. 22 MR. KING: No. Whether the tail 23 block is priced at the incremental distribution cost . 24 MR. GIBBONS: True. 25 MR. KING: If it truly reflects 26 incremental distribution costs, the firm is indifferent 27 to selling additional kilowatt hours because any 28 additional kilowatt hour causes a cost rise at the same 24 OEB Panel 1 rate that revenue rises. Therefore, the firm really 2 has no incentive to increase sales. 3 MR. GIBBONS: Yes. That was under 4 the caveat that the rate does just equal the 5 incremental cost. 6 MR. KING: That's correct. 7 MR. GIBBONS: And you think that's a 8 reasonable assumption. 9 MR. KING: Well, it's the intent of 10 the rate design. There clearly are issues about 11 whether or not we have the right incremental 12 distribution costs, but that is one of the reasons why 13 we have suggested that if utilities have better 14 estimates of their incremental distribution costs, then 15 the number that has been put forward in the rate 16 handbook, that they should use them. 17 MR. GIBBONS: And when does that tail 18 step rate start, at what kilowatt level? 19 MS KWIK: I think it depends on the 20 utility, the rate. It's done in the rate unbundling. 21 The proportion of revenue taken in through the monthly 22 service charge and the super charge could vary. 23 The example we had, I think, was 24 about 70/30. 25 MS LEA: I'm sorry, I didn't hear 26 that last -- 27 MS KWIK: The illustration we had for 28 residential class, it comes to about 70 per cent, 30 25 OEB Panel 1 per cent, 70 per cent for the monthly service charge 2 and 30 for the incremental distribution costs. 3 MR. KING: Mr. Gibbons, basically the 4 way it works is you take for the rate class, let's say 5 we are dealing with a residential rate class, you would 6 take the total kilowatt hours that were sold in the 7 previous period and multiply them by that incremental 8 distribution cost. That would give you the total 9 revenue to be calculated through the throughput related 10 charge and the residual would then go into a fixed 11 rate. That is the proposal. That's basically the way 12 it works. 13 MR. GIBBONS: But are you saying the 14 distribution rate is the same set in terms of cents per 15 kilowatt hours for all volumes, so the residential 16 customer pays the same distribution rate, variable 17 distribution rate, at all levels of consumption? 18 MR. KING: Yes. 19 MR. GIBBONS: But with price cap 20 regulation, there is also an incentive for the utility 21 to cut its costs, is there not, everything else being 22 equal? The lower its costs, the higher its profits. 23 MR. KING: That is one of the 24 incidents we are trying to achieve, but basically we 25 are trying to give the utility the proper signals about 26 how to manage its costs, not just to cut costs. But 27 certainly that is one effect, is to look at ways that 28 you can reduce costs. 26 OEB Panel 1 MR. GIBBONS: Right. So if a utility 2 spent money on DSM programs that would increase its 3 costs and lower its profits, everything else being 4 equal? 5 MR. KING: Not necessarily, 6 Mr. Gibbons, because if the firm is looking at its cost 7 structure actually rising because of increasing volumes 8 in its system so that it is facing incremental 9 investment that is above the incremental distribution 10 costs, it might actually prefer to engage in a DSM 11 program to more effectively manage its cost structure 12 than to incur the investment. 13 And, in fact, there were specific 14 examples in the U.K. prior to the review of energy 15 efficiency, that was conducted by OFFER in 1994, where 16 MANWENHA did experience a specific example of that. 17 There was an island off of the coast of Wales that had 18 an interconnector that was extremely expensive for it 19 to reconduct, and as a result they decided that even 20 under their price cap scheme that it made more sense to 21 invest in an aggressive DSM program on that island to 22 reduce the need for expanding that system. 23 Of course, they did receive quite a 24 bit of a subsidy from the EU as one of the first pilots 25 of a mass scale DSM program. But it could be the case 26 that within the province folks would see similar sorts 27 of circumstances and would find it in their benefit to 28 invest dollars in a DSM program to avoid system 27 OEB Panel 1 expansion even without the traditional shareholder 2 incentive mechanisms that have been part of DSM 3 programs elsewhere in North America. 4 MR. GIBBONS: Well, Mr. King, I 5 certainly believe there are special cases under price 6 cap regulation where you can show that it is in the 7 utility's self interest to promote DSM, and you 8 suggested this in the case of this island off Wales. 9 But would you agree with me that is 10 generally a special case and generally municipal 11 electric utilities believe they have declining marginal 12 costs and generally it will not be in their interest to 13 do DSM if it raises their costs under your proposed 14 form of regulation? 15 MR. CRONIN: I am not sure that we 16 analyzed that question that you are -- or that we 17 looked at the hypothesis that you are submitting. 18 MR. GIBBONS: Maybe you didn't 19 analyze it, but sir, you have many years of experience 20 in this business. Isn't it generally conceded that 21 distribution utilities have declining marginal costs? 22 MR. KING: Well, I think in the short 23 run, Mr. Gibbons, that may be the case that they have 24 short-run declining costs, but as the capacity of the 25 system is exhausted then it may no longer be the case 26 that in the long run they have declining marginal 27 costs. 28 But I think that the question that 28 OEB Panel 1 you are trying to raise doesn't really depend so much 2 on the issue of what shape the short run versus long 3 run marginal costs curves are. The issue is in large 4 part that there may be other issues that are associated 5 with the incentives for a demand side management 6 program. 7 For example, there is no doubt that 8 the price cap scheme as envisioned simply provides the 9 incentive to the utility or to the distributor to make 10 investments of demand side on the demand side to the 11 extent that the cost and profit performance of the 12 distributor is enhanced. It doesn't consider any 13 benefits to society as a whole that might accrue from 14 demand side expenditures nor to other parts of the 15 electric industry such as in the avoidance of the new 16 generation capacity. 17 But personally, as we have suggested 18 in the opening statement, the issues of how to bring 19 these investments on a holistic basis for the province 20 as a whole, or for Canada as a whole, or for the global 21 cosmos as a whole, really is an issue that is larger 22 than dealing with the distribution sector as a whole, 23 which is what our remit was for, was for dealing with 24 the distribution sector as a whole. 25 These larger issues, we think, need 26 to be addressed through some other initiative of the 27 Board or government. 28 MS KWIK: Mr. Gibbons, can I go back 29 OEB Panel 1 to the question you had before me? 2 Thank you for trusting my math. It 3 was quite wrong. I said a ratio of 50 to 30 for 4 monthly service charge versus the KWH charge. It 5 should be 70 to 30. 6 MR. GIBBONS: Okay. Thank you. 7 Panel, are you aware that the Board 8 has approved a PBR DSM incentive mechanism for Enbridge 9 Consumers Gas that financially will reward that company 10 for aggressively and cost effectively reducing its 11 customer's bills? 12 MS KWIK: Yes. 13 MR. GIBBONS: Are you aware that at 14 the time the Board approved that PBR mechanism Enbridge 15 Consumers Gas had an unregulated affiliate company that 16 was in the competitive gas market selling gas in this 17 province? 18 MS KWIK: Yes. 19 MR. GIBBONS: Thank you. 20 Are you aware that Enbridge Consumers 21 Gas is a member of the City of Toronto's Better 22 Building Partnership? 23 MS KWIK: Yes. 24 MR. GIBBONS: Do you realize that the 25 city's Better Building Partnership's goal is to reduce 26 the energy billings of commercial buildings in the City 27 of Toronto including this building? 28 MS KWIK: I did know it included this 30 OEB Panel 1 building, yes. 2 MR. GIBBONS: Are you aware that 3 given the incentive mechanism that the Board has 4 established for Enbridge Consumers Gas for DSM, but the 5 extent that Enbridge Consumers Gas reduces energy bills 6 in large buildings in Toronto, Enbridge Consumers Gas 7 will be financially rewarded for that through the PBR 8 mechanism? 9 MS KWIK: I wasn't aware that was 10 through a PBR mechanism. 11 MR. GIBBONS: There is a PBR 12 mechanism for DSM, so the more energy, the larger the 13 bill savings Enbridge achieves for its customers, the 14 larger its incentive is. One of its programs for 15 achieving bill reductions is working with the City of 16 Toronto with its Better Buildings Partnership? 17 MR. KING: That may be true, 18 Mr. Gibbons, but again there is a big difference 19 between Enbridge Consumers Gas, which is a utility of 20 some scale, and the distribution sector in Ontario as a 21 whole where 200 of these utilities are relatively small 22 and have few staff resources to be able to implement 23 demand side activities on a larger scale basis. 24 So to provide a DSM mechanism or a 25 shareholder-incentive mechanism or the various 26 components of a demand side management incentive 27 mechanism that is applicable to a handful of utilities, 28 we felt was somewhat outside of our remit when the 31 OEB Panel 1 issues of how to deal with energy efficiency on a 2 broader scale basis for the electric industry as a 3 whole had not been addressed. 4 MR. GIBBONS: Sir, are you aware that 5 Toronto Hydro is one of the largest electrical 6 utilities in the country? 7 MR. KING: Yes. 8 MR. GIBBONS: Are you aware that 9 Toronto Hydro is a member of the City of Toronto's 10 Better Buildings Partnership? 11 MR. KING: I was not aware of that. 12 MR. GIBBONS: Would you take it 13 subject to check? 14 MR. KING: Sure. 15 MR. GIBBONS: Therefore, under the 16 Board's staff proposal, to the extent that Toronto 17 Hydro is able to help the Better Buildings Partnership, 18 reduce bills in the City of Toronto, and incurs 19 increased costs as a result, Toronto Hydro will be 20 financially penalized; its profits will go down? 21 MR. KING: To the extent that the 22 costs savings that Toronto Hydro receives from the DSM 23 investment are less than it expends on the DSM program, 24 I would agree with you. To the extent that the cost 25 savings are greater through various O&M initiatives or 26 capital reductions, it is possible that Toronto Hydro 27 would still see incentives to pursue DSM even without 28 specific lost revenue and shareholder incentive 32 OEB Panel 1 mechanisms. 2 MR. GIBBONS: Well, sir, it is 3 certainly possible. Do you think it is generally the 4 case and do you think, for example, in this area of 5 Toronto, Toronto Hydro faces capacity shortages with 6 respect to transformers or their distribution system? 7 MR. KING: I am certain there are 8 portions of Toronto Hydro's system that are under 9 stress as Dr. Woo, sitting to your right, has done 10 extensive analysis throughout North America and found 11 that distribution systems -- that often times there are 12 portions of it that are under stress. 13 MR. GIBBONS: Sir, you are absolutely 14 correct, sir. I believe there are portions of Toronto 15 Hydro systems that are under stress and will be under 16 stress in the near future. But do you think that is 17 generally the case that the Toronto Hydro system is 18 generally under stress in most of the areas of service? 19 MR. KING: I would not have any 20 specific knowledge of the extent to which it is under 21 stress. 22 MR. GIBBONS: All right. Thank you. 23 So if we assume that on the whole the 24 Toronto Hydro system is not under stress, in terms of 25 it doesn't have a shortage of capacity throughout its 26 system, do you think it -- 27 MR. CRONIN: Mr. Gibbons, I think 28 Mr. King just replied that we don't have any firsthand 33 OEB Panel 1 information about what the conditions -- 2 MR. GIBBONS: Yes. I'm going to 3 posit the hypothesis that generally speaking Toronto 4 Hydro is not capacity constrained throughout its whole 5 distribution area, the City of Toronto. We will just 6 say that as a starting hypothesis, since you don't know 7 the facts. 8 If we take that as a starting 9 hypothesis, then to the extent that Enbridge Consumers 10 Gas works to the Better Buildings Partnership and 11 reduces its customers' bills, its profit goes up. To 12 the extent that Toronto Hydro does it in parts of its 13 area which isn't capacity constrained, Toronto Hydro's 14 profits go down. 15 It's the same buildings, the same 16 customers. The gas utility gets rewarded, the electric 17 utility gets penalized. Is that fair? Does that make 18 sense? 19 MR. KING: Well, you are asking me to 20 respond to a hypothetical question, but let's just 21 presume the hypothetical question is correct. 22 There is a potential asymmetry which 23 you have pointed out, and yes, that is true. One of 24 the objectives that we started with in designing and 25 developing the PBR mechanism was to try to avoid 26 asymmetries to the extent possible. But over time it 27 is impossible to eliminate all asymmetries at the 28 beginning, given that we have had active dockets before 34 OEB Panel 1 us -- before the Board, not before us, before the Board 2 in the case of Enbridge Consumers Gas and in the case 3 of possibly Union Gas -- and it is not possible to 4 align all these things initially at the outset. 5 But we would hope that over time the 6 issue of energy efficiency will be dealt with on a 7 broader scale to consider the entire gas and electric 8 sector and that a scheme will be put in place that is 9 consistent and policy throughout the sector. 10 MR. GIBBONS: Mr. King, it is my 11 recollection that the Implementation Task Force 12 unanimously recommended that municipal electric 13 utilities that want to pursue DSM in their franchise 14 areas would be able to voluntarily apply to the Ontario 15 Energy Board for DSM incentives, in particular for a 16 lost revenue adjustment mechanism, a demand side 17 management variance account and a shared savings 18 mechanism; i.e., all the incentives that the Board has 19 approved for Enbridge Consumers Gas. 20 Is my recollection correct? 21 MR. KING: I'm not sure that the -- 22 my recollection is that they did approve it. I don't 23 recall that there was any unanimity. 24 MR. GIBBONS: You recall dissention? 25 MR. KING: Well, the nature of the 26 task force was that we never took a vote. So to 27 characterize in a recommendation that was made from the 28 task force as being one of unanimity would be not 35 OEB Panel 1 accurate because there was never a showing of hands. 2 There were certainly some who may 3 have had opposing views or may have had not strong 4 views, but to characterize it as "unanimity" I'm not 5 sure would be correct. 6 I think I would accept your statement 7 that it was a recommendation of the task force such as 8 you have described it. 9 MR. GIBBONS: And you don't -- 10 MR. CRONIN: I might add, I think to 11 the extent that there was unanimity, it was in the 12 belief that any individual utility could apply to the 13 Board -- 14 MR. GIBBONS: Absolutely. 15 MR. CRONIN: -- regardless of what 16 the task force had recommended. 17 So I think there was unanimity in 18 that sense, but not necessarily that there be a program 19 put up by the OEB that encompassed the industry. 20 MR. GIBBONS: Oh, absolutely, sir, 21 yes. It was on an exception basis the utilities that 22 wanted to pursue DSM in their franchise areas would 23 have the option of having the same incentive mechanisms 24 as Enbridge Consumers Gas. Totally voluntary. 25 MR. KING: I don't recall that it was 26 the same incentive mechanisms as Enbridge Consumers 27 Gas. There was a recommendation that they could apply 28 for a lost revenue mechanism and a shareholder 36 OEB Panel 1 incentive mechanism. That was the part, but I don't 2 believe it was specifically linked to the same as 3 Enbridge Consumers Gas. 4 MR. GIBBONS: Oh, no, I don't think 5 those words were there, but in fact that's what it -- 6 it was the same. 7 Thank you. 8 Panel, is there any reason in your 9 minds why that recommendation of the Implementation 10 Task Force should not be implemented now? In other 11 words, why the Board staff's PBR Handbook should not be 12 modified to allow that voluntary option for utilities 13 that want to pursue DSM to be able to apply for 14 incentive mechanism so, one, they are not penalized 15 from fulfilling the objectives of the Act and, two, 16 they can be rewarded and encouraged to do that in a 17 cost-effective manner? 18 MR. CRONIN: I think as the 19 discussion in the opening statement alluded to, and 20 some of it subsequent to that, there are many 21 implementation issues facing the MUs going through this 22 restructuring. 23 In addition, we have this issue of 24 difference in scale between the average MEU, which is a 25 couple of thousand customers, versus gas companies, and 26 I think the intent of the filing process, whatever 27 comes out of this, was that a utility could deviate 28 from the handbook if they so chose. 37 OEB Panel 1 I think the consensus of the task 2 force was that that included DSM activities. If an 3 individual utility, either voluntary or wished to apply 4 to the Board in what amounted to a deviation from the 5 rate handbook, they were free to do so, but I believe 6 the consensus in the task force was that there would 7 not be programs instituted as part of the first 8 generation which covered DSM activities. 9 MR. GIBBONS: I don't want to get 10 into a debate with you about what exactly the task 11 force said, if that is going to be a contentious issue. 12 Let's just forget about the task force and let's turn 13 to Pollution Probe's recommendation. 14 Pollution Probe has recommended that 15 the Board Staff's proposal be modified by allowing any 16 electric utility that wishes to promote DSM to come 17 before the Board and request DSM incentive mechanism, a 18 lost revenue adjustment mechanism and/or a DSM variance 19 account and/or a shared savings mechanism. Now, do you 20 see any problems with modifying the Board staff's 21 proposal as it was recommended by Pollution Probe? 22 MR. KING: I believe that any utility 23 has that right anyway under the Board staff's proposal. 24 MR. GIBBONS: Okay. Is there 25 anything wrong with that? Do you think that it would 26 be useful to explicitly point out that option in the 27 PBR Handbook and encourage utilities who believe they 28 can cost-effectively reduce their customers bills by 38 OEB Panel 1 doing DSM from coming forward? 2 MS KWIK: I guess that decision would 3 be the Board's decision. If they direct us to put that 4 in the rate handbook, we would. 5 MR. GIBBONS: Oh, absolutely. I'm 6 just asking you your expert opinion after spending many 7 months on this subject if there is any problem with 8 this proposal. It seems to me that it just makes 9 sense. It is voluntary, how can it possibly do harm, 10 and I just want to know if I'm missing something. 11 MR. KING: I guess, Mr. Gibbons, 12 there is probably where I would differ. 13 I think that is an option that is 14 available to the utilities as a whole, but I don't 15 believe at the moment that it is a good policy to 16 address these issues on a piecemeal basis. I think 17 that is what is being -- what basically putting an 18 encouraging note in the rate handbook would be, is to 19 address these issues on a piecemeal basis for those 20 utilities that desire to do so. 21 I believe that they are more 22 fundamental and broader in scope and should be 23 addressed on a holistic basis for the sector as a 24 whole. 25 MR. GIBBONS: How is that going to 26 happen and when is that going to happen? The OEB Act 27 says that the utilities should facilitate energy 28 efficiency, that the PBR mechanism is going ahead. 39 OEB Panel 1 What other mechanism to do you suggest being put in 2 place at the same time so that the utilities will 3 promote energy efficiency? 4 MR. KING: Well, I think, 5 Mr. Gibbons, there are other options that you have 6 available to you. 7 You could petition the Board for some 8 sort of proceeding to discuss the issues of energy 9 efficiency in the Province of Ontario, or you could 10 approach the ministry for a similar sort of 11 determination. 12 But I don't believe that that Act was 13 specific to electric distributors; it was specific to 14 the electricity industry and the energy industry as a 15 whole. To now align that just with this simple issue 16 here of the rate regulation scheme for distributors, I 17 think is not -- linkage is not clear. 18 MR. GIBBONS: Thank you. Those are 19 my questions. 20 MS LEA: Thank you, Mr. Gibbons. 21 Mr. Ferguson, are you prepared to 22 proceed at this time? 23 MR. FERGUSON: Yes, we are with a few 24 questions. We may have follow-up later. 25 MS LEA: Thank you. 26 MR. FERGUSON: I will ask mine first 27 before the economists get at it here. 28 --- Laughter 40 OEB Panel 1 MR. FERGUSON: In the preamble that 2 was discussed where there are over 250 distributors but 3 a general incomplete dataset, in light of the lack of 4 data I am just wondering about the rationale for PBR at 5 market opening, like where that need is defined. 6 In terms of the number of utilities, 7 we have noticed that there have been announcements 8 about municipal consolidation which may lead to utility 9 amalgamation and also a number of discussions of 10 purchase of municipal utilities by Ontario Hydro 11 Services Company. 12 As a second part to that, has there 13 been any effort made to really try and determine how 14 many utilities there will be upon market opening? Will 15 there indeed be 250 or could we be down around 100? 16 I am wondering if Board staff or the 17 panel has done any investigation into that to try and 18 see really what the number is. I'm having a hard time 19 with 250 and I'm also having a hard time with the 20 rationale for PBR, that it must be there upon market 21 opening. 22 MS KWIK: I can answer the first. 23 I'm not aware of anybody at the Board 24 sort of keeping up or predicting how many utilities 25 there might be at market open. Obviously, we have 26 heard also that there are a lot of activities 27 happening, so presumably there will be less than there 28 are now. But, otherwise, we have not done any 41 OEB Panel 1 estimating of the numbers. 2 MR. FERGUSON: Would that influence 3 your thinking on workload with respect to regulation if 4 there was significantly less? 5 MR. KING: In order to make a dent 6 and significantly list under cost of service regulation 7 we would have to be talking about consolidating the 8 number of electric distributors in the province to 9 something under 10, probably under five. 10 I would just assert to you -- I guess 11 I have had a long history as a forecaster and I suppose 12 that it is possible that we would actually wind up with 13 less than 10 distributors by market opening a year from 14 now, but I would put the probability of that at close 15 to zero. 16 So if we think about what is the 17 incentive here and what are the key issues that one 18 faces and why did we think that PBR was appropriate for 19 market opening, I think there are several reasons for 20 that. 21 One, if you go back into the policy 22 directions that were recommended to government as early 23 as the Macdonald report there were certainly some 24 initiatives and some directions that were provided that 25 PBR should be the scheme by which a regulation might be 26 administered back into the -- I believe it was the 27 Macdonald report -- should be the regulatory mechanism 28 for the electric distribution sector. 42 OEB Panel 1 That is one thing, that there is a 2 series of policy advices that seem to indicate that 3 this is the direction that the OEB should be 4 considering for regulating the industry. But that is 5 not the only issue. 6 If we think about what it takes to do 7 a good job of regulating an industry under a cost of 8 service regulation, one has to go through and be able 9 to determine: Are the costs that are in rates just and 10 reasonable? Are they prudent, are they prudently 11 incurred? To do that on the basis of 270 plus 12 distribution -- or 200 or even 15 or even 20 13 distribution utilities is a relatively massive 14 undertaking. 15 If we were to think back through some 16 of the developments in regulatory economics around 17 these issues, there has been this perceived asymmetry 18 in information where the utility always has better 19 information than the regulator. They know their 20 business better than the regulator is ever going to 21 know their business. They know the regulatory game in 22 terms of representing their costs to the regulator 23 better than the regulator does. They know how to spin 24 things. They know all the reasons that certain things 25 might have been incurred. They know where all the 26 bodies are buried where the regulator may not. 27 I'm suggesting that there are a lot 28 of bodies buried in the utility distribution sector. 43 OEB Panel 1 By and large, Ontario has been a very efficient -- has 2 had a very efficient distribution sector. 3 But because of these asymmetries in 4 information, regulatory economists started to posit 5 that there may be a variety of better games that might 6 be played, which is to basically provide incentives for 7 the firm to reveal their costs as opposed to reporting 8 them through the actions that they take, and a PBR 9 scheme does a good job of doing that. 10 A yardstick scheme is just one of the 11 possible PBR schemes, but both of them provide the 12 utility some sort of reward for making improvements in 13 their efficiency over time. 14 We can see that there are a variety 15 of objectives that we have. One is to achieve some 16 sort of incentives in the regulatory scheme that make 17 this regulatory duty that the OEB has been given the 18 remit for by government as efficient as possible. 19 It is in those lights that I believe 20 the Board came to some conclusion that PBR was probably 21 the best way to think about regulating these utilities, 22 and as a result we have designed a scheme to try and 23 move us down that track. 24 MR. FERGUSON: Okay. 25 I wasn't arguing for cost of service. 26 I appreciate that we have to move into PBR I guess. 27 My thinking was: To what extent do 28 we really need to analyze the situation given there 44 OEB Panel 1 isn't that much data and the number of utilities is 2 shifting significantly at this point? How much good 3 analysis can you do on the dataset and how much of this 4 is just arm waving and saying here is a feel for maybe 5 where we should go in the first couple of years? 6 MR. CRONIN: I think the issue of 7 data comes into play not so much with the approach that 8 we have chosen where we believe that for almost 50 of 9 the utilities we have done as good a job looking at the 10 issue of input prices and productivity as has been done 11 in North America, the issue of data comes into play 12 more particularly when you are trying to come at this 13 from a yardstick perspective and you are trying to make 14 specific technical comparisons among the utilities. 15 So we think that there was sufficient 16 data in the approach that we used but that data would 17 have been problematic had we chosen an alternative 18 path. 19 MR. KING: Just to follow up on that. 20 There are certainly some issues about 21 starting as to how much of the choices that one 22 faces -- you know, and the construct of a price index 23 versus the selection of a specific productivity 24 factor.b 25 We have not specifically said that 26 they are linked to an historic analysis of the 27 industry. The historic analysis of the industry with 28 the 48 utilities that Frank has mentioned was basically 45 OEB Panel 1 to provide some background and some feel that the 2 choices that were being selected were in the range of 3 reasonableness, certainly just as in mutual funds and 4 selection of stocks. 5 You know, a historic performance is 6 not a predictor of future performance, but it does at 7 least provide us with some indication of what has 8 happened and then we can have an intelligent debate 9 about whether a similar sort of performance in the 10 future is likely to be achieved. 11 MR. FERGUSON: I missed the Merrill 12 Lynch disclaimer in the rate handbook. 13 --- Laughter 14 MR. FERGUSON: Maybe it should be in 15 there for the benefit of all. 16 MR. KING: Perhaps. We weren't doing 17 a rating here or, you know, selling stock, although I 18 think some people certainly are quite interested in it 19 from that perspective. 20 MR. FERGUSON: I have no doubt they 21 are. 22 I think the point is, though, that 23 there is -- to some degree this is not a scientific 24 exercise. There has to be an element of feel in the 25 whole thing or judgment I guess you would say, and that 26 is a cause for concern to a degree where, because of a 27 dataset based on 48, all of a sudden we are creating a 28 feel for the entire industry in Ontario. 46 OEB Panel 1 MR. KING: I would agree that is an 2 issue. I will concede your point. But we also did not 3 arrive at these conclusions that are in the rate 4 handbook just simply through the process of sitting 5 around the table and putting something down on paper. 6 We did have a fairly extensive 7 consultation process with stakeholders that included 8 both representatives of the industry and other 9 interested constituents, and Frank can talk about how, 10 in the process of that discussion, we were hearing many 11 things from the participants in the task forces. They 12 corroborated many of the stories that we were seeing 13 out of the analysis itself. 14 In fact, that was one of the more 15 interesting circumstances I can recall sitting around 16 the coffee pot. We often, at our task forces meetings, 17 had a coffee pot and some muffins. Judy and the Board 18 were quite, what we would say -- 19 MS KWIK: Hospitable. 20 MR. KING: Hospitable, yes. 21 -- in providing those sorts of 22 things. But one utility was talking about, gooey, you 23 know, they had this problem with losses; they couldn't 24 seem to find, you know, where they were and they knew 25 they had some issues so they were going to embark upon 26 a major capital investment program to try and get their 27 losses back under control. 28 Lo and behold, when we got to the 47 OEB Panel 1 data analysis, we found that this utility had among the 2 higher proportions of their cost structure weighted to 3 losses and, as a result, their cost performance over 4 the period had been above the average of our sample. 5 So, there were many things that came 6 back out of the task forces, both of utilities whose 7 data we did analyze, as well as utilities who we were 8 not able to analyze their data, that served to inform 9 our judgment about the construct of the rate handling. 10 MR. CRONIN: To follow up on that, as 11 we were processing the data, we looked to compare some 12 of our findings with data, say, from other 13 jurisdictions that we thought might be more comparable 14 than other places. If you look at the Norwegian 15 experience and you look at, for example, the cost 16 structures that the regulator published, they are 17 almost dead on with the cost structures that we 18 produced for the various size classes in the province. 19 So we know that the cost structures 20 that we are looking at are very similar to the 200 21 small utilities in Norway. We made other comparisons 22 along those lines and, in fact, almost inevitably we 23 are surprised, I guess, at the level of consistency 24 when we made those comparisons. 25 The second point is that as we have 26 been looking at the data and, in fact, as more 27 questions have arisen that we produced some new charts 28 for, we see a level of consistency. For example, if 48 OEB Panel 1 you look at the results of the size breakout for 2 productivity, or for the IPI, we don't see 3 significantly different results by small, medium and 4 large. 5 In fact, as we talked about and, I 6 think, as David Wills has pointed out over time, the 7 small utilities have in fact done very well. His 8 statement about one of our tables was that the small 9 utilities had lower costs, better predictability and 10 higher rates of productivity growth. 11 These results, in fact, become even 12 more consistent if you look at the past five years and 13 not the past 10 years. The past five years, where you 14 had this, I guess, implied rate freeze -- I will call 15 it "implied rate freeze" -- have led to results for 16 total factor productivity that are much higher and in 17 fact even more consistent. 18 So, we think that there is a fair 19 amount of consistency. 20 There are still questions. I think 21 one of the issues that we would like to have pursued 22 somewhat more than we did was the fact that we had, I 23 think, 100 per cent coverage of the large MEUs; we had 24 the majority of the medium-sized MEUs; but probably 25 only somewhere around, say, 10 per cent, 8 to 10 per 26 cent, of the smaller MEUs. 27 Now, I think that would have been 28 more of a concern had we seen significantly different 49 OEB Panel 1 performance among the smaller utilities that in fact we 2 saw. We didn't see that. 3 That's not to say that we still 4 wouldn't like to have a larger sample among the small. 5 But we feel comfortable, given the performance 6 demonstrated by the small useful electric utilities 7 that they cannot be showed to be different than the 8 other size classes. 9 MR. FERGUSON: A couple things here. 10 Like, anecdotal evidence of what happened isn't worth 11 the paper it's not written on. 12 MR. CRONIN: I'm sure that 13 researchers would agree with you. It's always useful 14 to test the results against real-world experience. We 15 sat through probably 10,000 hours of discussions with 16 probably, I will say, 30 to 40 utilities that were 17 represented. And as Mike said, we were struck by the 18 number of times someone said something, at task forces 19 meetings or out at the break, which led us to check the 20 implications of that later on and I can't think of an 21 instance when, in fact, we didn't find the statements 22 to be generally supported by the research. 23 So, you know, I think research is a 24 lot about trying to test out what you find with 25 real-world examples. 26 MR. FERGUSON: I just suggested that 27 in some cases people's perception of what happened back 28 then and caused that may be different from what really 50 OEB Panel 1 happened. That's my experience in the utility where I 2 am; that you heard about things that happened in the 3 past, and it caused this or that. You go back and 4 verify it locally at the utility, and sometimes it was 5 significantly different from people's understanding of 6 it today. It boils down to: Is it a first-hand 7 experience or is it a related experience from previous 8 people? 9 The other thing I just wanted to talk 10 about was the productivity growth, where we have the 11 1988 to 1997 figures and, roughly, a 10-year span, and 12 then the five-year span, and there seems to be a 13 linkage, or you are creating a linkage between that 14 five-year span and the rate freeze by Ontario Hydro. 15 Is that correct, that you see a 16 higher productivity gain during that rate freeze by 17 Ontario Hydro? 18 MR. CRONIN: Well, we are making the 19 point that the time periods are coincidental. 20 MR. FERGUSON: Is there any 21 significance to that? 22 MR. CRONIN: Well, if in fact people 23 felt -- if in fact utilities felt that there was an 24 implied rate freeze in the second half of the period, 25 they would have been operating under a quasi price cap 26 with a variable productivity factor. 27 MR. FERGUSON: This would indicate 28 they thought there was a rate decline, would it not? I 51 OEB Panel 1 mean a simple rate freeze on the wholesale rate should 2 freeze right through to the retail side. 3 The other thing I wonder about is: 4 In the 10-year period, 1988 to 1997, and then you look 5 at the 1993 to 1997, was there not a significant 6 recession occurring through that period and was not 7 1993 to 1997 pulling out of that recession? 8 So that second side of your 9 productivity gain, how much of that is simply due to 10 growth in utilities? We have a 10-year and five-year; 11 we could have used a one-year or a three-year or a 12 15-year. 13 MR. CRONIN: Right. That's why we 14 put on the different periods. It's useful to look at 15 this from different perspectives. 16 MR. FERGUSON: I agree. But to look 17 at it in perspectives, it's like the anecdotal evidence 18 and the cost performance. What is truly driving those 19 changes? Are they simply a matter of global economic 20 changes? Or are they, indeed, something specific to 21 Ontario? 22 MR. KING: We don't know. 23 MR. FERGUSON: So, then, what's their 24 significance? 25 MR. CRONIN: They are what they are: 26 utilities -- 27 MR. FERGUSON: I agree. But what's 28 their significance? In the grand scheme of things. 52 OEB Panel 1 Like I could say, all right, .5 per 2 cent looks great, for the last 15 years. 3 MR. KING: But one might also suggest 4 that a 10-year time horizon is generally long enough to 5 level out many of those global economic business 6 cycles -- 7 MR. FERGUSON: Okay. On that regard, 8 then, these are based on today, going back. What we 9 are looking at is tomorrow, going forward. I would 10 suggest that with Bill 35, the playing field, the ball 11 field, if you like, in Ontario, what we face the day 12 after market opening bears no resemblance to where we 13 are today. In that case, then, if we can't even figure 14 out if there was a recession or something in these 15 numbers, how can we forecast productivity in the first 16 two or three years of a brand new market in Ontario? 17 MR. KING: I think that's a very good 18 question, and I think it's one that the Board needs to 19 carefully consider when deciding what to do about the 20 productivity factor. 21 But just a couple of points regarding 22 the question that you have just raised. 23 Yes, Bill 35 is going to cause a 24 massive change in this industry. I have no doubt about 25 that. But that's why, in effect, in the PBR mechanism 26 we have suggested that there needs to be some mechanism 27 to recapture transition costs, and that mechanism is 28 there specific for those costs associated with the 53 OEB Panel 1 transition that are prudent material and -- I'm missing 2 something -- prudent material and something else. 3 MR. CRONIN: Two out of three isn't 4 bad. 5 MR. KING: Two out of three is not 6 bad. 7 But that's only just one component 8 of this. 9 We also have to recognize that going 10 forward with the PBR scheme, and with the forthcoming 11 corporatization of the utilities, with the transfer of 12 title to a shareholder who may choose to either 13 maintain that entity as owned by a municipality or 14 possibly sold to a private investor, that the 15 incentives the utility faces will be much different 16 than they were in the past. 17 Because they are much different, we 18 would suggest that looking at a modest increase in 19 productivity from historical fact when, now, the 20 utility is likely to be under much more pressure to 21 produce a cash flow stream either for its municipal 22 owner or for a private owner is certainly within the 23 realm of reasonableness. 24 Furthermore, in the consultations 25 that we had with the task forces, we asked several 26 times -- and, in fact, it was asserted by certain 27 members of the task force -- that anyone who suggested 28 there were not additional efficiencies that could be 54 OEB Panel 1 wrung out of the distribution utilities, that that was 2 a nonsensical position; that there were substantial 3 efficiencies, yet, that could be wrung out of the 4 utilities, and with the development of the PBR 5 mechanism, the incentives are much stronger than they 6 were in the past to be able to find those. 7 That's not to suggest that the 8 utilities did not have incentives to find those things 9 in the past, and I think the data that describes the 10 performance over the past five and 10 years, which has 11 been presented in the tables, indicates that by and 12 large these utilities have been among the most 13 efficient in North America. 14 But that doesn't suggest that they 15 don't have the opportunity for continuing to find 16 additional efficiencies in the second. 17 MR. CRONIN: I just would like to 18 pick up one. When you started your enquiry, you were, 19 I guess, asserting that there would be many 20 amalgamation that would be following the opening of the 21 market, and clearly I know of at least three areas 22 which are, I guess, considering municipal consolidation 23 and one would then expect utility amalgamation to 24 follow from that. 25 We have noted, in some of the prior 26 amalgamation, that there were cost savings on the order 27 of 10 to 20 per cent. 28 Now, if in fact we have as many 55 OEB Panel 1 possible amalgamation as seem to be on the horizon -- 2 which is certainly far fewer than you were suggesting 3 might be the case -- I think one could easily assert 4 that historical rates of productivity growth that we 5 found over the previous five and 10 years would be 6 underestimates of what you could see going forward. 7 So if, in fact, we see the 8 amalgamation that you seem to be positing and which 9 seem to be accruing to these municipal consolidations, 10 at a minimum, we would think that the utilities would 11 do better than they had over the previous five or ten 12 years. 13 MR. KING: Just to follow up on one 14 bit of a digression on this point, the PBR mechanism as 15 proposed is a one-size-fits-all sort of mechanism. 16 Now, some folks have argued that maybe things are 17 different for small utilities than they are for big 18 utilities. 19 We know that there has been a debate 20 for a number of years, probably at least ten years, as 21 to whether there are economies of scale that can be 22 achieved in the province by consolidating the industry. 23 The design of the PBR mechanism as it 24 now stands is non-dispositive as to whether there are 25 economies of scale or diseconomies of scale. In fact, 26 what one can basically see from the mechanisms is that 27 if there are gains that can be had through amalgamation 28 and achieving economies of scale, the incidents are 56 OEB Panel 1 there for people to exploit them. 2 On the other hand, if there are 3 economies that can be achieved by breaking up certain 4 utilities or reorganizing them because there are 5 diseconomies of scale, the incentives are there to do 6 that as well. In fact, this mechanism provides the 7 ability to find the answer through the actions that the 8 distributors may take in the province. The result will 9 be what the result is. 10 MR. FERGUSON: It always is, the 11 Merrill Lynch disclaimer. 12 MR. CRONIN: As long as they earn 13 money the old fashioned way, or make money the old 14 fashioned way. 15 MR. FERGUSON: I guess the point is 16 with the change in the playing field and the number of 17 changes that the whole industry is facing, okay. I 18 don't argue with efficiency. The Upper Canada Energy 19 Alliance is not an amalgamation of utilities. It's an 20 entity to look at capturing scale economy. 21 I would suggest that your percentage 22 savings is high in a true amalgamation because I agree 23 there are diseconomies in certain areas in 24 amalgamation. The Alliance has done extensive work at 25 looking at those economies of scale. They show up in 26 places that anecdotal evidence say they never would, so 27 it's a very interesting exercise to do amongst the 28 group utilities. 57 OEB Panel 1 It certainly shows -- like we could 2 set a productivity index. I don't argue with saying we 3 need something to carry forward with. The extent to 4 which right now, though, I believe -- compared to the 5 magnitude of the changes, an additional 1 per cent may 6 not be much, but with all these other things, it could 7 prove to be very significant as well. 8 Until you work it through, I don't 9 think any of us can sit here and say 1 per cent or 2 10 per cent or half a per cent is reasonable; the idea 11 being in the PBR though, you do have a price cap there 12 or a cap. That's the safeguard. You know the worst 13 case upset. You have a guarantee through the cap. 14 MS LEA: Mr. Ferguson, thank you. 15 We need to have sort of a question 16 and answer method here. We appreciate certainly that 17 the questions you are asking are extremely interesting. 18 If you could keep your questions fairly short and, 19 gentlemen, you could restrain yourself in the length of 20 your answers also, we might have a hope of getting 21 through all the questioners today. 22 MR. CRONIN: Did you use the plural 23 there? 24 MS LEA: I use -- you two gentlemen, 25 yes; everybody up on the stand. I'm just looking at 26 the time. I understand that this is an extremely 27 important debate. I don't know whether we want to have 28 the debate here, however. 58 OEB Panel 1 Thank you. 2 MR. CRONIN: Would it be okay if I 3 just followed up very briefly on that? 4 MS LEA: Briefly. 5 MR. CRONIN: Okay. Clearly the 6 restructuring is going to be a major event. We did not 7 want to jeopardize anyone's financial liability by 8 imposing what we thought would be onerous hurdles for 9 people to meet. 10 When you look at the data, the data 11 says basically that half of the utilities over the 12 previous ten years and 75 per cent of the utilities, 13 approximately, over the previous five years exceeded 14 the default value of 1.25 per cent. 15 What we are basically saying to the 16 industry is for the duration of the PBR, we are asking 17 you to do about what you did over the ten year period 18 and less on average than you did over the previous five 19 year period. On the other side, you have better 20 incentives, higher rewards and the possibility of 21 amalgamation efficiencies. 22 Taken as a totality, we think that 23 these are reasonable hurdles for the utilities to 24 confront in terms of efficiency gains. 25 MR. FERGUSON: I have been told, so 26 in the interests of time, Dr. Woo had a couple of 27 questions and I am going to let the economist go at it 28 for a minute. The engineers will back up a bit. 59 OEB Panel 1 MS LEA: Thank you very much, Mr. 2 Ferguson. 3 Mr. Woo. 4 DR. WOO: For the panel, that's 5 right. I have got quite a long list of questions, but 6 most of the questions can be answered with "yes" or 7 "no". 8 --- Laughter 9 DR. WOO: For the sake of saving 10 time, I will go ahead, and a simple yes or no answer 11 will be greatly appreciated. 12 Is an objective of PBR mechanism to 13 produce an outcome close to what competition would have 14 done? 15 MR. KING: Closer. You see, I have 16 already violated yes or no. 17 DR. WOO: If that's the case, should 18 the PBR treatment for risk and reward be symmetrical in 19 that if that's a cap for return on equity, there should 20 also be a floor for return on equity, just like 21 competition would compensate a firm for risk taking? 22 MR. KING: Competition does not 23 provide a floor. 24 DR. WOO: It doesn't provide a floor, 25 but it also doesn't impose a cap. 26 Yes or no would be great. 27 MS LEA: I appreciate your attention 28 to brevity, sir. However, we have to let the witnesses 60 OEB Panel 1 have a "yes, but" and "no, but". It's just the way it 2 works here. Everyone will try, I am sure, to restrain 3 themselves. 4 MR. KING: How do we answer this one 5 concisely. The design of the PBR mechanism was done 6 with several objectives. One of the objectives is the 7 issue of risk mitigation. Risk mitigation is composed 8 of two components. 9 One is the risk to the utility in 10 which case we have provided a Z-factor mechanism and a 11 transition cost mechanism to be able to allow recovery 12 of costs that are due to extraordinary circumstances as 13 well as the transition. 14 The other component of risk 15 mitigation is to provide some cover to both the Board 16 and to ratepayers if something goes awry with the 17 mechanism. There is no doubt that one of the results 18 that has occurred in PBR mechanisms throughout the 19 world in their application is that sometimes the 20 mechanisms are not designed correctly. 21 The rewards are not earned the old 22 fashioned way by earning them. They come through an 23 artifact of the design of the mechanism. As a result, 24 there was a desire on our part to provide some cover to 25 the mechanism such that we don't wind up with the 26 mechanism being on the front page of the newspapers and 27 causing a great deal of outcry and unwarranted results. 28 As a result, there is a cap mechanism 61 OEB Panel 1 that is put in place on the ROE. 2 It is not the case, Dr. Woo, that we 3 would suggest that there is a single objective to the 4 PBR which is to result in the competitive market 5 result. It is the balance of the series of objectives 6 that we have attempted to -- that forms the basis of 7 the proposal. 8 DR. WOO: Given your statement, will 9 you still say that the treatment on the return on 10 equity is asymmetric? There is a cap and yet there is 11 no floor. Such a characterization, yes or no. 12 You said symmetric or asymmetric? 13 MR. KING: It's asymmetric. 14 DR. WOO: Thank you. Which 15 jurisdiction in North America has a PBR designed with 16 an ROE cap but not a floor? 17 MR. KING: I don't know of any, 18 Dr. Woo. 19 DR. WOO: In my submission after, I 20 can tell you there is one. What are the jurisdictions 21 that have PBR designs with both ROE cap and floor. 22 MR. KING: We wouldn't have the facts 23 with us, Dr. Woo. 24 DR. WOO: In my submission I will 25 also give you five or six that have adopted PBR, and 26 they all have both cap and floor. 27 MR. KING: Okay. 28 DR. WOO: Now, subject to check, is 62 OEB Panel 1 the handbook design the norm or the exception? 2 MR. CRONIN: I think the handbook is 3 designed to reflect the experiences in the province as 4 determined by the task forces and the Board staff over 5 the previous year. 6 MR. KING: It is not intended to be 7 that we take the average of what has happened 8 elsewhere. This mechanism has been designed 9 specifically for Ontario. 10 DR. WOO: Okay. What makes Ontario 11 so different in terms of the infrastructure relative to 12 let's say the rest of the world? Being government 13 owned or being something else? 14 There must be a reason to explain why 15 the rest of the world, including North America, most 16 jurisdictions would take a cap and floor and yet here 17 we are debating this should be asymmetric. What are 18 the justifying factors for this new conclusion, or at 19 least suggestion? 20 MR. KING: I think we have gone over 21 that, Dr. Woo. I would just point out a couple of 22 things, and I presume we will have the opportunity to 23 ask some questions about why you believe, at some later 24 time, that there may be different -- you are suggesting 25 some other sort of mechanism. But clearly this 26 mechanism has some unique features that differ from the 27 remainder of North America. 28 One, it has transition costs. It has 63 OEB Panel 1 a relatively wide open Z-factor mechanism. As we have 2 suggested, the productivity factor is set well within 3 the experience of historic productivity within the 4 province. So some folk might argue this PBR mechanism 5 works fairly generously to utilities. 6 So to make a linkage that there 7 should be a floor coupled with a cap would just seem to 8 further -- 9 MR. CRONIN: I think one of the 10 things that makes this problematic is the fact that the 11 utilities on average have a huge excess of working 12 capital or cash relative to fixed assets. The average 13 municipal electric utility, at least as of a year or 14 two ago, had cash equivalence equal to 60 per cent of 15 their net fixed assets. Now, that is a figure that is 16 manyfold higher than I think financial analysts would 17 maintain is necessary, nor is it consistent with the 18 rest of the world's experience. 19 Secondly, there have been allusions 20 to the fact that there may in fact be too high a level 21 of capital embedded in the system because the 22 opportunity cost of capital, given the historic 23 regulation, was basically in the 1 or 2 per cent range. 24 Now, we know that working capital 25 greatly exceeds reasonable business standards -- that 26 is, that 60 per cent net fixed assets should more 27 likely be something approaching two, five, six or 28 eight. 64 OEB Panel 1 Secondly, if the hypothesis of 2 excessive capital is borne out and we are taking as 3 part of this first generation plan the belief that 4 costs are appropriately stated, if we were to do that 5 and allow the utility to roll in these working capital 6 funds and have an excessive amount of capital and embed 7 that in the rate system, we could then be guaranteeing 8 absolute levels of profit that are not justified. 9 DR. WOO: Well, since I don't know 10 the detail on the municipal corporate capital 11 structure, I will defer those answers to the Paul. 12 Maybe they can answer those 13 questions. 14 MR. CRONIN: You can take that 15 subject to check. 16 DR. WOO: Yes. 17 Regarding the price cap formula, the 18 price cap formula states that outward price inflation 19 is equal to input price inflation minus productivity 20 gain. 21 Again, subject to check, I can 22 provide a tentative derivation. The derivation of this 23 formula assumes marginal cost pricing. 24 Since MEUs or the municipal utilities 25 will not apply marginal cost pricing in the true sense 26 of real spot pricing or real time pricing, why is the 27 formula based on an input price index necessarily 28 superior to a very simple one that is based on CPI? 65 OEB Panel 1 Even though you don't have marginal 2 cost pricing, you violated the derivation of the 3 assumption underlying the derivation. Why is it 4 necessarily better? It is a simple issue. 5 MR. KING: Doctor, we would disagree 6 with you. We have marginal cost pricing. That is why 7 the throughput charge is set at the incremental 8 distribution cost. We are talking about the services 9 of a monopoly wires business here, not the competitive 10 retailing of electricity supply. Electricity supply is 11 intended to be handled elsewhere. So we do have 12 marginal cost pricing. 13 Furthermore, in our opening statement 14 and in the rate handbook and in our technical paper we 15 have suggested that there are a variety of reasons why 16 the input price index is superior to a simple mechanism 17 like the CPI. 18 The first has to do with the fact 19 that we wish to have some measure of inflation which 20 reflects the actual inflation that the firm is 21 receiving. To use a simple mechanism like CPI, which 22 is the price increase experienced by consumers, 23 eliminating all business transactions is to use an 24 index which has almost no relevance to the inputs that 25 are experienced by the distribution utility. 26 DR. WOO: I will get back to this 27 issue in the later part of my questioning. 28 Right now, the input price index, the 66 OEB Panel 1 plan is only available from OEB and the Panel. Is that 2 correct? 3 MR. KING: I am not sure, Dr. Woo. 4 Would you restate your question? 5 DR. WOO: You said input price index 6 available from sources other than the OEB or its 7 consultants? 8 MR. CRONIN: We have published the 9 input price index. 10 DR. WOO: How can a municipal utility 11 like Newmarket verify the accuracy? Is there a way for 12 anyone sitting here to check the accuracy of the work? 13 MR. KING: In the appendix to the 14 technical report there is the derivation of the input 15 price index for a single utility. You have all the 16 information necessary to check that one occurrence. 17 As to be able to verify the accuracy 18 of the data or the calculations for all 48, it is true 19 that you have not been provided the data because of the 20 confidentiality concerns to do so. However, there was 21 an offer that was made at the technical conference to 22 allow consultants to be able to access the data which 23 was not accepted by any party. 24 DR. WOO: Okay. 25 MS KWIK: Dr. Woo, are you referring 26 to the input price index that is set at the time of the 27 rate adjustments the second and third year? 28 DR. WOO: No, just whatever has been 67 OEB Panel 1 produced regarding the productivity factor, regarding 2 the input price index has been produced. We tried to 3 make a simple data request like any jurisdictional 4 hearing in the U.S. and I think the request was denied. 5 MS LEA: Dr. Woo, this panel of 6 witnesses of course did not make the decision with 7 respect to that. 8 DR. WOO: No, I have done that. 9 MS LEA: So I don't know that they 10 can help you further with how to get it and why it 11 wasn't provided. 12 DR. WOO: Okay. Then I asked a 13 question regarding if the index is computed by the OEB 14 consultant, isn't there a potential lack of objectivity 15 and impartiality in that the resulting index can be 16 driven by OEB's own preferences? 17 MR. KING: I would suggest, Dr. Woo, 18 that the OEB and the OEB's consultant are the only 19 party who are somewhat impartial to these issues. The 20 rest of you folk, I think, have some embedded economic 21 interest in the result. We, on the other hand, are 22 those who are in the pursuit of truth and justice. 23 --- Laughter 24 MR. CRONIN: It's not the American 25 way. 26 MS LEA: All right. I think perhaps 27 discussion -- 28 MR. POWER: You better rein him in. 68 OEB Panel 1 MS LEA: -- of this nature is not 2 particularly helpful. 3 MR. POWER: What is your billing rate 4 and how much you even get paid and how much of your 5 company's reputation is on the line right now? 6 MS LEA: Mr. Power, you will have an 7 opportunity to ask proper questions of these 8 witnesses -- 9 MR. POWER: Thank you. 10 MS LEA: -- when the time comes. 11 MR. POWER: Okay. 12 MS LEA: Dr. Woo, the discussion of 13 the nature that we have gotten into, both through these 14 witnesses and yourself, both parties, I think is 15 probably not helpful. 16 DR. WOO: Okay. 17 MS LEA: We are attempting to have an 18 understanding of how the handbook was created and get 19 clarification on that. 20 Thank you. 21 DR. WOO: Sure. I will adhere to 22 that. 23 Thank you for that direction. 24 PBR mechanisms based on the CPI 25 guaranteed declining electric rate in real terms, 26 obviously this is attractive to ratepayers. Would the 27 input price index give you the similar kind of results? 28 MR. CRONIN: The reason why so many 69 OEB Panel 1 utilities have experienced massive explosions in 2 earnings with the CPI-driven formula is because in fact 3 it significantly overstates the compensation they 4 need -- 5 MR. KING: Has historically. 6 MR. CRONIN: -- has historically -- 7 may not in the future, but has historically overstated. 8 So you would have the expectation of smaller increases 9 under the IPI than you would under a CPI regime. 10 DR. WOO: I think that is a good 11 point. This is a potential objection to use of CPI. 12 CPI inflation may result in excess profit, but if there 13 is a cap on return on equity how can the excess profit 14 occur in the first place. 15 MR. CRONIN: Well, you can have 16 utilities going from what should have been 10 per cent 17 up to 14 or 15, and even if you are going to cap their 18 returns they may still at the cap decide to make 19 investments and have the result be that consumers pay 20 significantly higher rates under a CPI plan than they 21 would under an IPI. 22 Now, the issue isn't necessarily the 23 higher or lower. What we are concerned about is that 24 people receive the correct signals in the marketplace. 25 Historically the CPI overstated costs 26 for utilities. If the cost of capital were to increase 27 going forward, which is not an unlikely situation, then 28 utilities could be exposed to greater degrees of risk 70 OEB Panel 1 because the CPI does not accurately incorporate the 2 fact that 45 to 50 per cent of the business of a 3 distribution utility is based on capital. So we are 4 basically trying to represent what the costs are. 5 MR. KING: Just to follow up using 6 the Smith-Barney example, we like to hear the utilities 7 make money the old-fashioned way, they earned it, not 8 just through a deviation or an incorrectly designed 9 mechanism. 10 DR. WOO: Okay. That sounds fine on 11 service. 12 Now, the IPI, the input price 13 index-based price cap is determined by the average 14 input prices faced by the industry. Is that correct? 15 MR. CRONIN: Yes. 16 MR. WOO: To the extent that the 17 input prices can be affected by the large bias through 18 contract negotiation or competitive bidding, would an 19 input price index-based price cap cause this incentive 20 to pursue such practice? 21 MR. CRONIN: It might if we had one 22 or two utilities. The fact that we have dozens of 23 utilities, or in fact hundreds of utilities, competing 24 against each other means that it is in each utility's 25 best interest to negotiate the best deal that it can 26 subject to the efficiency of its operations. 27 MR. KING: In fact, this is one 28 element of yardstick competition that comes in through 71 OEB Panel 1 the IPI, that is that if you can do better than the 2 sample as a whole on your procurement process, then you 3 actually keep the results. So it is an element of 4 yardstick competition that is embedded in the price cap 5 plan. 6 DR. WOO: Again that one, I need to 7 myself check and see how many large utilities account 8 for the industry's sales here, how many of the large 9 municipals. If there is -- you know, like just a few 10 municipals -- 11 MR. CRONIN: No. Let me clarify 12 this. 13 We wanted to have a yardstick 14 competition in the IPI. The IPI is an unweighted 15 average. It treats each utility equally. So we have 16 48 utilities, each of which is treated equally in the 17 calculation of the IPI because we wanted the experience 18 of the average utility not dominated by size 19 necessarily represent. This would be similar to what 20 we would do in the yardstick competition. 21 MR. FERGUSON: Does that assume, 22 then, that you have a significant number of utilities 23 and suppliers in the marketplace? 24 MR. CRONIN: It means that we have a 25 sufficient number. 26 MR. FERGUSON: A sufficient. Because 27 what we have to be aware of in Ontario is, due to the 28 uniqueness of some of the systems, for example the 72 OEB Panel 1 44,000 volt system and anything other than wire and 2 insulators, there is a single supplier which covers a 3 significant portion of the province. I don't think 4 that is a sufficient number. 5 MR. CRONIN: In that case, then -- 6 MR. FERGUSON: We do have -- there 7 are odd technical aspects of the distribution in 8 Ontario that means the number of suppliers is 9 significantly limited in a number of areas. 10 MR. CRONIN: While that supplier may 11 be a monopsonist, if each utility is going to face the 12 same price no utility is going to be disadvantaged by 13 that situation. 14 MR. KING: But not only that -- 15 MR. FERGUSON: No, but he might 16 suddenly feel that he can put his prices up and it will 17 just flow through right to the customer, and I would 18 hate to see that happen too. 19 MR. KING: But counterbalancing that 20 is if there are opportunities to diversify away from 21 that supplier and certain utilities do choose to do so 22 they will be advantaged relative to those who do not. 23 So the point of the construct of the 24 IPI and the yardstick mechanism is that it rewards 25 those who make good procurement decisions and it may 26 not advantage those who do not. 27 MR. FERGUSON: I would say the 28 majority of utilities in Ontario have tried to move 73 OEB Panel 1 away from the sole supplier over the last -- I can say 2 10 years of my own experience -- with absolutely no 3 ability to do so, okay. 4 MS LEA: Gentlemen, I have had a 5 request for a break. 6 Do you know how much longer you will 7 be with the panel? 8 DR. WOO: Three more questions. 9 My questions are short, the answers 10 are long. 11 --- Laughter 12 MR. FERGUSON: We can take a break. 13 MS LEA: All right. 14 DR. WOO: My questions are pretty 15 short. 16 MS LEA: Let's try to finish your 17 questions, then, sir, if we can -- 18 DR. WOO: Yes. 19 MS LEA: -- but I will have to 20 interrupt you in another five minutes because it is 21 getting time for a break. 22 DR. WOO: Sure. 23 In the handbook the rate design uses 24 the customer charge to collect the bulk of the fixed 25 costs, and this customer charge does not vary in size. 26 That is the proposal. 27 Shouldn't the customer charge be size 28 dependent in the sense of like related to connected 74 OEB Panel 1 load or parts consumption to reflect some rate equity? 2 MR. KING: In my professional opinion 3 the answer is yes, however in this circumstance we 4 chose the design we did on the consultations and advice 5 of the task forces and their belief that it was not 6 possible to design such a scheme. 7 DR. WOO: If you hire me, I will show 8 you. 9 --- Laughter 10 MR. KING: I am certain, Dr. Woo, you 11 will have the opportunity to market your skills at the 12 break. 13 DR. WOO: Yes. 14 --- Laughter 15 MS LEA: Gentlemen, please. 16 DR. WOO: Just one more quick 17 question. That is the end of this. 18 The handbook indicates that going 19 forward the contributed capital would not earn a rate 20 of return. Now, if an MEU has an obligation to 21 maintain and operate their assets, then how does that 22 cost get collected? I mean, they might not, you know, 23 earn a return, but at the very least if they have to 24 operate and maintain reliability of those so-called 25 contributed assets, shouldn't there be a provision for 26 that? 27 MR. KING: Well, O&M is included. 28 The O&M on contributed capital is included in the 75 OEB Panel 1 provision, it's just that going forward no additional 2 contributed capital -- contributed capital will not 3 affect the rate level in terms of the capital itself -- 4 MR. CRONIN: The rate of return. 5 MR. KING: -- the rate of return, it 6 is just simply the O&M would continue to be -- you 7 know, would be collected on that. 8 DR. WOO: Okay. Let's think through 9 an example, let's say like take the specific case of 10 street lighting. Someone pays for the post and an MEU 11 maintains the post and puts in a light bulb. So are 12 you suggesting that there should be an additional 13 separate tariff for that situation? 14 MR. CRONIN: They recover the O&M as 15 normal O&M expenses. 16 I think there are three issues with 17 respect to contributed capital. What do you do with 18 O&M with contributed capital? What do you do with the 19 depreciation of the asset? And do you or don't you 20 recover a return on the capital? 21 I think the rate handbook says quite 22 clearly that the rate of return would be at the 23 historic rate of the individual utility -- 24 MR. KING: For historic contributed 25 capital. 26 MR. CRONIN: -- for historic 27 contributed capital. You will continue to recover O&M 28 expenses on both kinds of capital -- 76 OEB Panel 1 MR. KING: And future contributed 2 capital. 3 MR. CRONIN: -- and future 4 contributed capital will also recover O&M. 5 MR. FERGUSON: Just a clarification. 6 What is the treatment that you see as 7 the depreciation of the contributed capital? 8 MS KWIK: Yes. For the contributed 9 capital that is in existing rate base you continue to 10 charge the expenses associated with the appreciation. 11 By going forward it would not be 12 treated that way. It would be treated the same way 13 as -- 14 MS LEA: I'm sorry, Ms Kwik, your 15 voice is fading. Can you back up, please, before going 16 forward? 17 MS KWIK: Okay. 18 For the future, it would be the same 19 as it is currently for gas, so you would not be able to 20 charge the depreciation expenses on the contributed 21 capital. 22 --- Pause 23 MS LEA: Thank you, gentlemen. 24 MR. FERGUSON: A third Alliance 25 member would like a couple of questions, but probably 26 after a break. He will be very brief. 27 MS LEA: Thank you. 28 We will take a 15-minute break, 77 OEB Panel 1 returning at five past 11:00 promptly, please. 2 --- Upon recessing at 1050 3 --- Upon resuming at 1109 4 MS LEA: Thank you. 5 I understand that there are -- I have 6 been promised a couple of brief questions from the 7 Upper Canada Energy Alliance to follow. 8 I'm sorry, I don't know the name of 9 the questioner. 10 MR. FERGUSON: Jennifer, there will 11 be Peter Faye from -- 12 MS LEA: Can you spell the last name, 13 please, for the record. 14 MR. FERGUSON: F-A-Y-E. 15 MS LEA: Thank you. 16 MR. FERGUSON: And David Wills, 17 W-I-L-L-S, asking a couple of questions. 18 We will start with Peter. 19 MR. FAYE: I would like to inquire 20 into the derivation of why capital contributions are 21 treated differently than rate finance capital. Could 22 you elaborate on that? 23 --- Pause 24 MR. KING: I think there are several 25 reasons why contributed capital is treated differently. 26 One would first say that these issues 27 are not easy, and obviously the Board is receiving a 28 great deal and I think rightfully should receive a 78 OEB Panel 1 great deal of input from the various stakeholders about 2 the appropriate treatment of contributed capital. 3 However, it is the case that 4 contributed capital, broadly speaking, was not financed 5 by the utility and, as a result, from a regulatory 6 balance sort of perspective, to ask the consumer to pay 7 twice -- once, in the form of actually contributing the 8 capital and, secondly, in terms of a return on that 9 capital -- seems somewhat unfair. 10 That being said, I think that is why 11 the Board has reached its long-standing policy in gas 12 where customer contributions did not receive rate base 13 treatment. 14 In the task forces, we recognize this 15 is a very important issue to many of the distribution 16 utilities and they pointed out that the regulator, that 17 being Ontario Hydro, at the time, in -- was it 1994, 18 Frank? 19 MR. CRONIN: I think so. 20 MR. KING: -- made a change and did 21 allow contributions to be included in the rate base for 22 the purposes of the calculation of rates. 23 Some argued that this expectation 24 that had been created by the regulator influenced the 25 decision making that utility management made with 26 regards to the use of contributed capital. I think 27 that is the rationale behind the proposal, that 28 historic contributed capital should receive the average 79 OEB Panel 1 rate of return that the utility experienced over that 2 time frame, 1994 to the date at which -- the date 3 certainly at which an historic contributed capital 4 would no longer qualify for -- excuse me -- contributed 5 capital would no longer qualify for that rate treatment 6 to reflect the actual decision that management was 7 making with regards to contributed capital. 8 That is that the historic rate of 9 return -- since the utility was making decisions about 10 what level of rate of return to achieve, those are 11 appropriate to bring into the rate treatment of 12 contributed capital that was historically incurred. 13 MR. FAYE: Thank you. 14 You suggested that the main reason 15 why contributed capital would not be included in the 16 rate base is that it was not financed by the utility. 17 Are you suggesting that all other forms of capital that 18 the utility owns were financed by the utility? 19 MR. KING: Yes. Through rates they 20 were. 21 MS LEA: I'm sorry, I didn't hear the 22 answer. 23 MR. KING: Yes. Through rates they 24 were. 25 MS LEA: Thank you. 26 MR. FAYE: So that, in effect, it is 27 ratepayer finance capital we are talking about. Is 28 that so? 80 OEB Panel 1 MR. KING: Yes. I think that is 2 appropriate. 3 MR. FAYE: Would you agree that 4 contributed capital has also been contributed by that 5 same ratepayer? 6 MR. KING: We don't know that that is 7 the case. 8 MR. FAYE: Would you suggest two -- 9 MR. KING: It could be a subsegment 10 of ratepayers, yes, but it is not necessarily the same 11 ratepayer. 12 The other capital was contributed by 13 all the ratepayers. The contributed capital was by a 14 specific segment of ratepayers. 15 MR. FAYE: So that this might -- 16 MR. KING: Or possibly not even that 17 ratepayer at all. It could be, you know, a third 18 party, a developer or someone like that. 19 MR. FAYE: I will address the first 20 issue first. 21 The fact that a certain segment of 22 ratepayers contributed something that other parts of 23 the rate base did not contribute, or ratepayers, does 24 this not reduce to a problem of identifying who would 25 be disadvantaged in ensuring that an appropriate 26 mechanism was in place so that it wouldn't be 27 disadvantaged, that is, not charged twice? 28 MR. KING: If I'm to be testifying on 81 OEB Panel 1 my own personal opinion as opposed to the proposal, it 2 seems to me that there are many arguments that can be 3 made about contributed capital. I don't think that 4 this is specifically an area where economic theory, 5 given the mixture of sources of funding these -- the 6 political considerations of historic promises that were 7 made by the regulator, all these sorts of things -- 8 this is just a quagmire and I think we ought to 9 recognize it as such, as being a quagmire, and the 10 proposal for treatment of contributed capital seemed to 11 us to be a reasonable one that tried to weigh the 12 various pieces. 13 Certainly, there are many other 14 perspectives that one can take about alternative 15 constructs that certain parties may find more 16 beneficial than others. 17 MR. FAYE: Thank you. 18 On the subject of historic rate of 19 return, did you do an analysis of the rates of return 20 that would have applied for various utilities with 21 contributed capital? 22 MR. KING: Not before the policy was 23 designed. 24 MR. FAYE: Would you say that most 25 utilities have very consistent rates of return between 26 them or that they are widely varying? 27 MR. CRONIN: There is a high degree 28 of variance. 82 OEB Panel 1 MR. FAYE: Given that high degree of 2 variance and the importance of contributed capital, 3 would you say that the treatment proposed by the rate 4 handbook disadvantages some utilities with respect to 5 others? 6 MR. CRONIN: In the task force, we 7 actually had offered up a compromise which was to apply 8 one rate to contributed capital for all utilities, and 9 various numbers were thrown out varying from some 10 fraction of the current market-based rate of return, 11 say half, to the rate of return allowed by Ontario 12 Hydro over this period, which I understand was 13 approximately in the eight plus range. 14 There are certainly implementation 15 issues surrounding the application of hundreds of 16 prices of capital. Essentially, what we are doing is 17 creating hundreds of prices of capital for any utility 18 that has contributed capital and whose going to be 19 subjected to its own individual rate of return. 20 MR. FAYE: Could you identify why 21 that was not accepted, that is, the suggestion that 22 there be one rate of return applied to all contributed 23 capital rather than the varying ones? 24 MR. CRONIN: Actually, I think it was 25 some of the utilities who had high degrees of 26 contributed capital who rejected the compromise of 27 having a consistent rate of return if that rate of 28 return was going to be anything less than the future 83 OEB Panel 1 market-based rate of return. 2 MR. FAYE: Are you suggesting that 3 they would prefer their individual rates of return over 4 the 8 per cent that you previously mentioned? 5 MR. CRONIN: Well, no, I'm saying the 6 8 per cent was discussed. 7 I think the discussion in the task 8 force was actually around some fraction of -- there 9 was, in essence, not a vote so much as "can we reach a 10 consensus on this issue" in the task force, and the 11 consensus that we were trying to reach at that time, 12 which was one of the last meetings of the task force, 13 was: Would the utilities and other stakeholders around 14 the table come to a consensus that something like half 15 of the market based rate of return be that which is 16 applied to contributed capital, to historic contributed 17 capital going forward. 18 MR. FAYE: In your capacity as 19 advisors to the Board, would you recommend that this 20 proposed treatment is fair to utilities? 21 MR. KING: I think that -- if you are 22 asking the question specifically of Dr. Cronin and 23 myself, I think we would suggest an alternative 24 position to the one that's in the rate handbook. 25 Something that treats utilities more 26 equivalently across the broad cross section and doesn't 27 have the impact of causing many utilities to receive no 28 return on distributed capital while others receive a 84 OEB Panel 1 small one. 2 MR. CRONIN: Just to pick up on that. 3 There are a couple of problems, from an implementation 4 perspective, as well as from, say, an economic 5 perspective. 6 It is less than perfect, when you 7 have multiple prices, for a similar commodity or input 8 in a market -- and what we are talking about here is 9 having hundreds of prices. 10 The second issue is that we are 11 talking about applying -- I think you were talking 12 about variance across the utilities, historically. 13 The other factor that one would want 14 to consider was what actually were the typical rates of 15 return, and they were much lower than, say, the .5 16 market based rate of return going forward. They might 17 have been negative, they might have been zero, one or 18 two. 19 So, we are talking about creating 20 hundreds of prices and that those prices create a 21 bifurcated capital market where the prices of capital 22 are highly dissimilar. 23 MR. FAYE: You mentioned that if it 24 was up to PHB to recommend a solution to this problem 25 that you would have done so. 26 Could you describe what that solution 27 would be? 28 MR. CRONIN: I think the first issue 85 OEB Panel 1 was we probably would have recommended that there be 2 one price for contributed capital if you were going to 3 create two classes of capital; that it would have been 4 easier, from an implementation perspective, to have two 5 prices, so that you would have the market based rate of 6 return and then a second consistent price of capital. 7 How similar those two prices are -- 8 that is, how similar do you make the price of capital 9 for non-contributed versus contributed -- I think is 10 still an issue because there are political realities 11 and consensus issues from other stakeholders who 12 basically feel that contributed capital should not 13 receive a market based rate of return. 14 I guess we would have suggested that 15 there be no more than two prices of capital and that 16 the second price for contributed capital be 17 significantly more in line with the market based rate 18 of return. 19 MR. FAYE: You prefaced that answer 20 with the clause "if there were to be two classes of 21 capital here". Do I take that to mean that PHB would 22 not recommend two classes of capital if you were making 23 the recommendation? 24 MR. KING: I think that in reality 25 these issues are largely issues of policy that we would 26 not take a stance on whether -- exactly how it should 27 be treated. It's largely an issue of what the 28 appropriate agreements that can be negotiated by the 86 OEB Panel 1 various stakeholders can receive. 2 That being said, I think if there are 3 to be two classes of capital, we would like to 4 see -- our recommendation would be they have similar 5 treatment across all utilities. 6 MR. FAYE: Thank you. That's all the 7 questions I have on that subject. 8 MS KWIK: At the stakeholder 9 meetings -- 10 MS LEA: Please speak up, Ms Kwik. I 11 can't hear you. You are going to have to lean forward 12 and shout. 13 MS KWIK: At the stakeholder 14 meetings, the task force meetings, the participants 15 could not reach a consensus on the treatment of 16 contributed capital that was in their existing rate 17 base. The proposal that we have come up is one which 18 we thought would not leave both the distributor and its 19 customers worse off than they were under the previous 20 regulatory regime. That is the approach that was taken 21 on this proposal. 22 MR. FAYE: And would Board staff 23 still hold to that opinion in light of all the debate 24 that has gone on since that time? 25 MS KWIK: That's the proposal that 26 Board staff thought was fair. 27 MR. FAYE: Yes. I am asking do you 28 still think it's fair? 87 OEB Panel 1 MS KWIK: Yes, I do. 2 MR. FAYE: Thank you. 3 MR. WILLS: I have a quick question, 4 if you can hear me. 5 In appendix A of the report 6 "Productivity and Price Performance for Electric 7 Distributors in Ontario", you choose to use the example 8 of one utility. That utility you have a fair bit of 9 data for it. None of the data has been contentious so 10 far. 11 Do you have any explanation of the 16 12 per cent increase in productivity from the year 1988 to 13 1989? Did that strike you as being unusual? 14 MR. CRONIN: Well, I was told by the 15 utility that it was the best year they had in recorded 16 memory. It had substantial increases in both value 17 metric sales as well as number of connections, 18 increases in numbers of residential customers as well 19 as large use customers. 20 MR. WILLS: Okay. You list the 21 number of customers for that year as 33,599. Would it 22 surprise you to find that the actual number was 34,797? 23 MR. CRONIN: Yes. I actually was 24 told this morning that there were corrections that the 25 utility would make in that database. 26 MR. WILLS: So how many other errors 27 are in the data? 28 MR. COHEN: Well, the issue is: Are 88 OEB Panel 1 errors consistently in one direction and do they make a 2 difference? We never said the data was absolutely 3 perfect. It's unlikely that the corrections they have 4 offered up would make substantial differences in the 5 results for that one utility. 6 MR. WILLS: That's all the questions 7 I have. 8 MS LEA: Thank you very much, 9 gentlemen. 10 Mr. Tucci, do you have questions? 11 MR. TUCCI: I have some questions now 12 and maybe some follow-up questions later. 13 MS LEA: I think the idea is that you 14 really get one shot. If you don't want to go now, 15 that's fine. There is somebody else that's ready. 16 It's up to you, sir, whether you go now or later. 17 MR. TUCCI: I could go now, I guess. 18 MS LEA: Whatever you think. I don't 19 mind. 20 MR. TUCCI: Paul asked for a 21 follow-up. 22 MS LEA: I didn't say yea or nay to 23 him, but if it is going to become a common practice I 24 think the idea is you get one go and you can take that 25 whenever you like. 26 MR. TUCCI: Okay. Just for 27 clarification -- and you alluded to it a little bit 28 earlier -- can you explain again your rationale for 89 OEB Panel 1 using these options for productivity. 2 You have options A to F, and each 3 option has its own cap. Can you explain the rationale 4 behind that and what options there are for utilities to 5 move from one option to another during the PBR period? 6 MR. CRONIN: One of the 7 characteristics that we had to deal with in the task 8 force is constantly when managing around with this 9 issue of differences in circumstances, one of the 10 discussions around that lead us to the conclusion -- 11 and this was actually a proposal that was offered up by 12 one of the members of the implementation committee, and 13 I think it's actually documented in one of the 14 appendices of that report -- that there be a selection 15 of options for productivity tied to rate of return. 16 We wanted the utilities to be able to 17 choose what circumstance with respect to the PBR best 18 meshed with their own circumstance. We also wanted to 19 encourage where it was economically viable to induce 20 utilities to think about further amalgamation. So we 21 offered higher PF targets with higher rates of return 22 associated with that. 23 The table is largely based on 24 experiences that we have had in terms of productivity 25 in other jurisdictions as well as the research that we 26 conducted within the industries here. 27 MR. TUCCI: Did you estimate what 28 kind of productivity factors were required to achieve 90 OEB Panel 1 the ceilings under each option? 2 MR. KING: We did do a fair amount of 3 modelling to look at these issues. One of the key 4 pieces that's necessary in order to do that is to have 5 realistic views of the capital structure of the 6 distribution utility. 7 One of the pieces that became 8 apparent to us after we had submitted the proposals was 9 that there does tend to be a fair amount of cash in the 10 distribution utilities themselves. As a result, if one 11 were to look at the issues of capital structure, there 12 may be some low hanging fruit to be had by perhaps more 13 appropriately altering the capital structure of the 14 entity to set the circumstances going forward. 15 While it is the case that for many of 16 the utilities it is difficult for them to increase 17 their return to hit some of the numbers in the higher 18 portions of the table, that may be less true when one 19 starts to think about the ways that one can 20 recapitalize the venture to reflect, you know, a more 21 appropriate circumstance to the venture going forward. 22 MR. TUCCI: Did you want to elaborate 23 on whether a utility, let's say, chose one option and 24 then through circumstances it reached its cap and 25 wanted the option of moving up to a higher option? 26 MR. CRONIN: Right now the proposal 27 is that a utility chooses its options and would stay 28 with that for the duration of the PBR unless they were 91 OEB Panel 1 being amalgamated at which point the amalgamation of 2 the utilities would have the right to choose a new PF. 3 The issue that you are raising might 4 be less problematic if in fact some of the discussions 5 around looking at a three-year ROE were considered so 6 that you would not necessarily have year by year 7 constraints but constraints over the three-year period. 8 MR. KING: Just to follow up on that. 9 Some folks have suggested that maybe the cap be applied 10 on a three-year basis. I guess what Frank is 11 suggesting is that we have really have not -- the team, 12 Judy, Frank and I and the others of the staff who are 13 involved, did not really think of the option of 14 averaging these things over three years. 15 That is an interesting idea and I 16 think it is something that we ought to discuss during 17 the technical conference and see if it has merit or a 18 mechanism that might go forward. 19 We have had some discussion earlier 20 about the changing responsibilities of utilities in 21 this brand new environment that utilities are moving 22 into, and we have looked historically at costs and 23 productivity. 24 Given that a significant portion of 25 the business is changing, these new responsibilities on 26 retail settlement, probably on billing and many other 27 things, and you have indicated those would be 28 transition costs, have you considered the problems of 92 OEB Panel 1 the transition actually occurring more than one year? 2 How would that factor in and how do you address that 3 with productivity? 4 MR. KING: I guess on the one hand 5 you are asking the link between transition costs and 6 productivity and on the other you are asking the 7 question of whether these transition costs are 8 recurring. 9 To answer the latter one first, the 10 transition cost mechanism is intended to be in place 11 over the term of the plan. Because we are looking at 12 historically incurred cost, at the time that a utility 13 incurs the costs, at the time of their next annual 14 submission, they would be able to submit a claim for 15 transition costs. 16 So it is not just a one time at the 17 beginning sort of deal. We recognize some of these may 18 occur over time, some of them may be recurring, and 19 there is the opportunity to make a claim in subsequent 20 years for those pieces. 21 Now, as regards the issue of the 22 linkage between transition costs and productivity, I 23 think we have had a discussion before. We think that 24 given the transition there is no doubt that a certain 25 amount of utility management time is going to be 26 thinking about these other issues: restructuring the 27 business, implementing new processes to support the 28 opening of the market, potentially the issues of what 93 OEB Panel 1 affiliates might do. Those things are a given. There 2 is no doubt that they are there. 3 But we also have stronger incentives 4 in place in terms of the reward mechanisms or the 5 rewards that are potentially available through PBR to 6 perhaps sharpen -- not that people would know, but to 7 sharpen the incentives that bind efficiencies within 8 the distribution utility itself and to be able to 9 achieve levels of productivity that are in line with 10 what utilities have experienced over the last five 11 years. As a result, I think we are relatively 12 confident that folks will be able to find ways to be 13 able to perform under this PBR mechanism. 14 MR. TUCCI: Another issue that has 15 come up I guess in previous discussions were how 16 significant capital expenditures would be dealt with, 17 the lumpy investments that come up once in a while and 18 whether they would be just considered Z-factors or 19 whether the utility would be responsible for managing 20 these capital investments and not deal with them 21 through a Z-factor. 22 MR. CRONIN: We have looked at 40 23 years of capital data that is embedded in our analysis 24 and 10 years of operating data. So we think that we 25 have captured -- and those productivity numbers that we 26 have calculated reflect that experience. So in terms 27 of the vast majority of situations we think that that 28 is reflected in the data. 94 OEB Panel 1 The other issue that I think we have 2 to think about is going forward with the 3 newly-incorporated utilities and a different capital 4 structure. You know, they will not be expensing the 5 investment in one year. They will basically be 6 spreading that investment over many years. So you have 7 to look at the end result of that activity relative to 8 what is going on now. 9 I mean, one would think that the same 10 thing would be true now, that their rates reflect prior 11 lumpy investments made in the past. 12 MR. TUCCI: I know, but we are 13 talking about a three-year period. 14 Is it likely that you could be 15 incenting utilities to delay, let's say, in building a 16 brand new TS that would normally be built but because 17 it is under a three-year period they would decide to 18 defer it? 19 MR. CRONIN: One thing that I 20 think -- and we have talked about this -- utilities 21 have to contemplate is there seems to be an even 22 greater groundswell now to go to yardstick after the 23 first generation. If one went to yardstick you would 24 not be benchmarking utilities on percentage changes in 25 cost. You would be comparing utilities on the basis of 26 their cost structure, however you choose the point on 27 that distribution. 28 Utilities would be highly 95 OEB Panel 1 insentivized, if that were the case, to become as 2 efficient as they could for the second generation. So 3 delaying improvements beyond the first generation may 4 have greater consequences on them. 5 MR. TUCCI: Have you done any kind of 6 simulations to see the impacts on customers with 7 respect to unbundling, including the market-based rate 8 of return and the taxes? Have you tried a test to see 9 whether the outcomes are reasonable and acceptable to 10 customers? 11 MR. KING: We have done some 12 calculations of what the rate impacts might be of 13 incorporating a market-based rate of return. We have 14 not done any work to determine whether or not that is 15 acceptable to consumers through direct solicitation of 16 consumers' input, other than those who chose to 17 participate in the task force. 18 I would just point out that the 19 implementation of a market-based rate of return is at 20 the discretion of the utility and its shareholder. We 21 are not suggesting that one has to adjust rates to 22 incorporate market-based rate of return. However, if a 23 utility does do so or does desire to do so it does have 24 the opportunity to do so. 25 So the issue of the decision to 26 implement a market-based rate of return still resides 27 in the hands of the management and shareholder of the 28 distribution utility, not in the hands of the Board. 96 OEB Panel 1 MS KWIK: Now, having said that, the 2 rate handbook does point out that utilities should take 3 into account customer rate impact. 4 MR. TUCCI: I know you are saying 5 utilities should take this into account. I guess some 6 utilities have done some preliminary work on this and 7 they have found that they don't know how all the pieces 8 will come together in the end when the market finally 9 opens because we don't know how wholesale prices will 10 be set and we don't know what the customers final bills 11 are. 12 But clearly there is an indication 13 that smaller-sized customers in each class would see, 14 because of the customer charge aspect of the rate 15 design methodology, that there is a significant cost 16 upfront for every customer and small customers in each 17 class would have significant rate impacts. 18 I know you have indicated that 19 utilities can do different approaches and they could 20 submit different alternative methodologies and the 21 Board would consider it. But as it stands right now, 22 if most utilities just accept the rates approach that 23 is in the appendix, there could be different rate 24 impacts on smaller customers. We are just wondering if 25 it is acceptable if utilities just follow through with 26 what is proposed. 27 I mean, you leave the onus on the 28 utility to come up with something different if they 97 OEB Panel 1 want to, but if they don't pursue it they would just 2 follow the rate guidelines as they are right now. I 3 think there are concerns about significant impacts on 4 customers. 5 Is there a process or some method to 6 refine the rate guidelines in the appendix subsequently 7 and actually make some things maybe mandatory rather 8 than leaving it all up to the utility? 9 MS KWIK: First of all, in the 10 Appendix A of the rate handbook right now we didn't 11 take into account -- 12 MS LEA: Ms Kwik, we can't hear you, 13 I'm sorry. Lean forward. Shout. 14 Thank you. 15 MS KWIK: In the current version of 16 Appendix A we hadn't really put in the consideration 17 for rate impact, but we intend to do that for the final 18 version. So the utility should go through assessing 19 the rate impact of their customers. 20 If there is significant rate impact, 21 as you would do at any time that you introduce a new 22 rate structure, there is always the option of phasing 23 in. 24 MR. KING: But I guess one caveat I 25 would make to all of this is there may be impacts on 26 the rate structure that cause different levels of rate 27 impact on different segments of the customer base. 28 There is no doubt about that. 98 OEB Panel 1 But there is also the circumstance 2 that incorporation of a market-based rate of return is 3 likely to have a rate impact on most every customer. 4 However, in moving forward to the new scheme, which has 5 been foisted upon us -- I shouldn't say "foisted"; it 6 has been designed or put in place by government 7 legislation -- the Board is required to ensure that 8 rates are just and reasonable. 9 How can one presume that rates are 10 just and reasonable if you do not allow the utility to 11 obtain a market-based rate of return or the opportunity 12 to earn a market-based rate of return on the capital it 13 deploys? 14 I just don't see how one can come to 15 that conclusion, unless you are allowed the opportunity 16 to earn a market-based rate of return. 17 That doesn't mean that the utility 18 must claim a market-based rate of return; there may be 19 other reasons it chooses to operate. I think that 20 there have been various folks in government who have 21 argued that if the shareholder desires to have the 22 distribution utility operate under the historic concept 23 of power at cost, it has the opportunity to do so. 24 But to suggest an environment where 25 some of the utilities are likely to be sold and placed 26 in private hands and private capital markets require 27 some earning of a market-based rate of return in order 28 to compensate for the provision of capital, that does 99 OEB Panel 1 need to be a feature of the rate proposal going 2 forward, that there is at least the opportunity to do 3 so. 4 MR. TUCCI: Can you just, off the top 5 of your head, indicate what kind of rate impacts were 6 estimated for, let's say, residential customers from 7 incorporating a market based rate of return? 8 MS KWIK: We presented a table of 9 min/max average. I think it was in the Implementation 10 Task Force Report. Unfortunately, I don't have it with 11 me. 12 MS LEA: You are still fading, 13 Ms Kwik. 14 MS KWIK: We had included a summary 15 table in the Implementation Task Force Report -- no, 16 I'm sorry, it was the Distribution Rates Task Force 17 report -- that summarizes the impact on average of 18 introducing market-based rate of return. I don't, 19 unfortunately, have that report with me so I can't give 20 it to you right now. 21 MR. TUCCI: Nothing since then has 22 been done I take it? 23 MS KWIK: No. 24 MR. TUCCI: I guess one other issue 25 that you raised earlier was what kind of productivity 26 that utilities have been experiencing over the last few 27 years. You said utilities in Ontario have -- how do 28 they compare with other jurisdictions? You said 100 OEB Panel 1 something like they are better performers than most 2 utilities in North America that you have looked at? 3 MR. CRONIN: We said that since so 4 many utilities were vertically integrated it is 5 difficult coming up with a lot of comparisons. 6 The .9 10-year mean is, I think, 7 actually what was found for at least one of the 8 utilities in California. The two previous five years 9 may be a bit higher than what others had experienced. 10 But again, because you don't have unbundling or 11 divestiture happening until recently it is tough to get 12 a very large dataset. 13 MR. TUCCI: Have you compared them to 14 the Norwegian utilities? 15 MR. CRONIN: Well, we looked at the 16 cost structure that was published by the Norwegians. 17 The Norwegians did not publish much in terms of 18 research. 19 MR. TUCCI: There was some discussion 20 about the incremental distribution cost, the fact that 21 a number that is actually dated and, to some degree, I 22 guess there were questions about whether it is actually 23 reflecting marginal costs. But my understanding is 24 that it is what has presently been used in rates; 25 correct? 26 So we can assume that one of the 27 reasons why we have opted for this IDC number is that 28 it would at least phase in rate impacts to some degree? 101 OEB Panel 1 MR. KING: I'm not sure that that was 2 a specific consideration, Mr. Tucci, but if -- 3 MR. TUCCI: Or is it just the only 4 number available? Is that your answer? 5 MR. KING: But if you wish to make 6 the argument that that is one of the reasons why we 7 picked it, then sure. 8 MR. TUCCI: One of the problems with 9 using the IDC is that included losses. The proposal is 10 that you would subtract the utility-specific average 11 losses. 12 Doesn't that raise the issue that if 13 the IDC was based on an average utility, but now you 14 are subtracting your own losses, that the number that 15 remains is not necessarily something that is -- there 16 is some inconsistency there using an average utility 17 for the incremental number and using a specific utility 18 to subtract losses? 19 MR. KING: I wouldn't know the exact 20 composition of how the IDC was calculated, but 21 presumably if it includes losses, and since it is 22 defined as IDC, incremental distribution costs, I 23 would -- if that impact is the impact on losses, so it 24 is incremental losses, then I think it is appropriate 25 to have it in the IDC. 26 MR. TUCCI: Oh, it is. I guess the 27 question I am raising is: Shouldn't it be the average 28 losses that were initially used in the IDC estimate 102 OEB Panel 1 that should be subtracted, given that the average 2 utility out there, let's say, had an average loss of 3 3 per cent and out come this -- and that was 4 incorporated in the IDC. Now if a utility is 5 subtracting its own loss of 4 per cent, the remainder 6 number is much smaller and it is not necessarily 7 representing incremental costs of the distribution 8 system without losses. 9 MR. KING: I didn't follow that, 10 Mr. Tucci. Do you want to run through it again? 11 MR. TUCCI: If we developed a 12 methodology that said we will calculate the IDC with 13 and without losses, and with losses it was 6, without 14 losses it was 5, shouldn't that be the number that 15 should be used, if the average without losses is 5, 16 rather than using a specific utility's loss that could 17 be higher or lower and then leaves -- the remainder 18 number is incorrect, I guess, for its circumstance? 19 MR. KING: I think we can take that 20 under consideration. 21 I guess what I would suggest is that, 22 you know, ideally we would have an IDC, incremental 23 distribution cost, which is specific to each of the 24 distribution utilities. That is not what we have. We 25 have one that has several caveats to it. 26 One is, as you suggested earlier, it 27 is the only one that is available that we know of. 28 Two, it was developed a long time 103 OEB Panel 1 ago. 2 Three, it was for an average utility 3 as opposed to a specific utility, so there are 4 certainly some limitations with the number that we 5 have. 6 Consequently, we have suggested that 7 if folks have a better number that is specific to their 8 utility, that they should feel free to use it. 9 MR. TUCCI: Yes, I know. 10 My understanding is to calculate one 11 specific to a utility would require some considerable 12 effort. It does depend on what methodology is used. 13 Maybe in the future we would work out something to 14 figure out what it should be. 15 One other question or issue I guess I 16 have is initially the task force on rates suggested 17 that rates should be set for the general service class 18 based on subclasses. They proposed dividing the 19 general service class into I think three groups: under 20 50 kilowatts, 50 to 1,000 kilowatts, and over 1,000; 21 and then a large general service class. 22 Can you explain the rationale why you 23 decided to just put all the general service class in 24 one group rather than pursue what the task force 25 proposed? 26 MS KWIK: I remember having a 27 discussion, but it seemed that in every case where we 28 wanted to deviate sort of from the class structures 104 OEB Panel 1 that we have right now there were problems gathering 2 data and having justification for the split. 3 MR. TUCCI: Well, that could be 4 addressed. If a utility actually had data for the 5 subclasses, could it then pursue that? 6 MS KWIK: Yes. If the utility can 7 provide justification for that split. 8 MR. TUCCI: Okay. 9 Some utilities have attempted to do 10 this. One awkward thing that they have come across is 11 this issue about the discontinuity between the classes. 12 Because of this sort of customer charge aspect of the 13 rate design, in theory, depending on how you group the 14 classes, you have customers that are around the 15 boundary of the classes who, depending on which -- you 16 know, whether they are above or below the division, 17 could have significant rate impacts and it is just that 18 this rate structure leads itself to that. 19 For example, just in theory, let's 20 say you have a customer charge that is $60 for a small 21 general service and you have over 50, the general 22 service charge, customer charge, could go up to $200, 23 $300, $400. You can imagine the concern of a customer. 24 You know, his final bill could jump up 20, 30, 40 per 25 cent, from being under 50 to over 50. It is just a 26 function of the way the rates are set, the structure 27 with these customer charges that leads to this. 28 In the past we have always sort of 105 OEB Panel 1 had these smooth transitions as the customers got 2 larger. 3 So I'm just raising this issue 4 because I think not a lot of thought has been put 5 forward in this area about how to deal with customers. 6 If we had them all under one class, 7 we don't have this issue, but there are concerns about 8 tracking costs within the class. If we divide the 9 classes up we have problems with customers moving from 10 one group to another. I think more work is required to 11 figure out how this would work. 12 MR. KING: Is there a question in 13 there? 14 MR. TUCCI: I am just asking you 15 to -- you understand the problem. Do you agree that 16 maybe there is some further work that is required, some 17 further thought about how this would work? The 18 customer charge and the single demand charge that would 19 work for all customers, it has some problems in terms 20 of the way it works. 21 MR. KING: I would submit that any 22 rate scheme has some problems in the similar way that 23 you have indicated and none is without issues of what 24 happens on the fringe of the rate class definition. 25 MR. TUCCI: In the past we have 26 always dealt with these through -- we worked it out to 27 make sure that we don't have these significant problems 28 at the fringes. 106 OEB Panel 1 MR. KING: I'm not sure that that is 2 necessarily true. You still had issues at the fringes, 3 but you understood what they were. You did that in a 4 bundled world as opposed to in an unbundled world. 5 We are now looking at not the issue 6 of how we price the combined local distribution plus 7 commodity, but instead we are trying to figure out how 8 we price the local distribution component of rates. 9 What is appropriate in that circumstance is perhaps 10 different than the circumstances of a previously 11 integrated retail and local distribution entity. 12 MR. TUCCI: I agree. It is just that 13 in the past a customer moving from one size to another 14 size had always a smooth transition. This is what they 15 have been accustomed to. Now we actually have the 16 potential of rates increasing every time a customer 17 moves up and increases his load. 18 The increases are dramatic right at 19 the division point. Because of that we are going to 20 have problems dealing with customers and them accepting 21 to be put into a higher group. 22 What I perceive is that the problem 23 with the customer that is right at 50 will say "I don't 24 want to be put into the over 50 class", and the 25 customer at 55 will start arguing to be put under -- 26 you know, he will be putting in things and trying to 27 control his demands just to stay under the 50 because 28 of the rate impact. 107 OEB Panel 1 So I'm just raising this as an issue 2 because I think it requires more work. 3 MR. KING: I guess what I would 4 suggest is that these issues are local in scale and a 5 utility will need to look at these issues as it thinks 6 about implementing or designing the rates for its 7 specific circumstance. If there are these issues, then 8 they should address them in the form of their 9 application. 10 MR. TUCCI: Okay. Those are all my 11 questions. 12 MS LEA: Thank you very much, 13 Mr. Tucci. 14 Mr. Warren. 15 MR. WARREN: Thank you. 16 Panel, I have questions just in two 17 areas. The first area is derived from some questions 18 that Mr. Tucci just asked you about. It is the 19 calculation of the residential rate. 20 Perhaps if you could turn up page 10 21 of the appendix to your report. 22 In discussing with Mr. Tucci the 23 derivation of the IDC, you indicated that there were 24 some caveats around the number. One was its age; the 25 other was that it was the only one available. 26 I'm wondering, was any effort made to 27 come up with a newer number? 28 MS KWIK: Not in the time frame of 108 OEB Panel 1 our task force meeting. 2 MR. WARREN: In light of those 3 caveats, is that number a concern to you? 4 MS KWIK: In the discussions we had 5 at the task force meetings we realized we were using a 6 lot of old data, but in the absence of anything newer a 7 lot of the thinking was that the data we did have 8 didn't leave the customers any worse off than staying 9 with the current model which also used a lot of that 10 data. 11 MR. WARREN: The suggestion, as I 12 understand it, in response to Mr. Tucci's question was 13 that if an individual utility had what it believed to 14 be a more accurate number it could use it. 15 MS KWIK: Yes. 16 MR. WARREN: If the utility proposes 17 to do that, is there any mechanism for checking the 18 accuracy of that number and, if so, what is it? 19 MS KWIK: We haven't really developed 20 those guidelines yet, but from the feedback we have 21 been getting it sounds like some utilities may in fact 22 come up with the justification that we will have to set 23 out guidelines for. 24 MR. WARREN: I guess, Ms Kwik, the 25 question is: Will a justification be required for 26 utilities able to use it? 27 MS KWIK: Yes, justification will be 28 required. 109 OEB Panel 1 MR. KING: I would presume also that 2 back-up on the calculation procedures, the derivation 3 of the number would also need to be supplied. 4 MR. WARREN: And those guidelines 5 will form part of the -- may I presume those guidelines 6 will form part of the PBR handbook and the regime 7 before it is in place? 8 MS KWIK: Yes. 9 MR. WARREN: Okay. 10 Just finally on that point, panel: 11 Dr. Bauer, who has prefiled some material for my 12 client, the CAC, makes an observation that the formula 13 which we have just been discussing. This appears at 14 page 22 of the material. I don't think you need to 15 turn it up. 16 His observation -- and I just want 17 your response to his observation -- is that compared to 18 the status quo ante this formula will likely shift a 19 higher share of the fixed cost to customers with a low 20 usage. 21 My question is: Do you agree with 22 that concern and I guess if not why not; and, if so, 23 what can be done about it? 24 MR. KING: Can you give me a page 25 cite again? 26 MR. WARREN: It's on page 22 of my 27 version, but there may be a second version floating 28 around where it's on page 21, I'm not sure, depending 110 OEB Panel 1 on the print run. 2 It's under the heading "Rate Design 3 and Basket Structure". It's Point 7. It's in the 4 first full paragraph, about six lines down. 5 MR. KING: I guess I would suggest 6 that we don't have the data to determine exactly what 7 the potential impacts are but it is likely that the 8 cases that -- it is likely that the case suggested by 9 Dr. Bauer is likely to be the result. 10 MR. WARREN: Okay. Have you 11 considered the means, if any, of mitigating that 12 impact? 13 MR. KING: Yes, we did. In fact, 14 that's why we went with the two-part rate mechanism, to 15 attempt to mitigate some of those impacts. 16 In fact, I think if it was left to 17 Dr. Cronin and my preferences, we would have the scheme 18 constructed entirely of fixed connection charges to the 19 network. Because what we are attempting to do is to 20 recover the cost of the network, some sort of fixed 21 connection scheme seems to be more appropriate from 22 that. 23 Now, there were various alternatives 24 that were considered, with a fixed network connection 25 scheme, that might be able to mitigate some of those 26 impacts where, perhaps the rate design would vary by 27 the size of the connected load of the -- or the size of 28 the service. However, those schemes were suggested by 111 OEB Panel 1 the rate task force as not being possible to be 2 implemented. As a consequence, we did arrive at the 3 two-part scheme that is suggested here. 4 MR. WARREN: Thanks for that. 5 I want to then move to the second 6 category of my questions; and it is on this issue of 7 information, its completeness and its accuracy. 8 I understood, from some 9 observations -- let me put the observations to you that 10 I heard from you, at various points, this morning. 11 The one observation was one from 12 Ms Kwik, in her opening statement, that the lack of 13 sufficient historical data was a constraint. 14 The other observation I heard from 15 you, panel, this morning -- and I don't remember to 16 whose question it was a response -- but I thought I 17 heard you say that the information you had from the 18 group of 48 utilities was sufficient for you to 19 conclude to be satisfied that the productivity analysis 20 you have come up with is a solid one. 21 Have I understood that second point 22 correctly, that you are satisfied that the information 23 you have from the 48 utilities is sufficient for you to 24 rely on your productivity number? 25 MR. CRONIN: Yes. 26 MR. WARREN: The broader question, 27 then, is there would appear to be a concern -- that is 28 probably understating what Mr. Power is going to say 112 OEB Panel 1 later on. I may be the only one in the room to ever 2 understate what Mr. Power is going to say. 3 --- Laughter 4 MR. WARREN: There appears to be a 5 concern, panel, about what I would describe as a lack 6 of transparency, in that all of the data that is relied 7 on is not available -- and I don't, with you, want to 8 get into any argument about confidentiality and all of 9 those issues. I want to address it, if you wish, as a 10 PBR-regime design level. 11 How important is transparency in the 12 design of a PBR regime? 13 MR. CRONIN: Well, let me start with 14 two characteristics -- and then I'm sure we will expand 15 the discussion. 16 One has to do with whether or not 17 people understand what it is you are proposing; is it 18 transparent enough? And we have laid out a methodology 19 and said "this is what we are doing" and it's a fairly 20 mainstream methodology. 21 The second level of transparency, I 22 guess -- well, I think there's no doubt that, in an 23 ideal world, an ideal world, we would want to have the 24 calculations that we have constructed with the IPI, and 25 the productivity factor, the TFP numbers, to be from a 26 dataset that's a full end view of all the participants 27 so that they can critique it, debate what the -- you 28 know, whether the constructs are appropriate and done 113 OEB Panel 1 correctly. They can see all the calculations that we 2 have done and maybe posit alternatives. 3 However, that's not the circumstance 4 in which we are. 5 At the time that the data were 6 collected, the Board had no authority to compel the 7 production of data from the utilities. As a result, we 8 had to make certain representations to the utilities, 9 chiefly amongst those was confidentiality, and it had 10 to be repeated several times -- 11 MR. WARREN: Let me just interrupt 12 you. I wasn't asking you for an explanation of the 13 rationale. I was asking at a policy level, from your 14 perspective, whether or not in the design of the PBR 15 mechanism transparency, in the sense of making all of 16 the data available, is the more appropriate approach. 17 That is all I was asking for. 18 I don't want to engage you in the 19 debate about confidential -- about why it was kept; 20 that's for another day and another time. 21 But just at a policy level, do you 22 agree with the proposition or not agree with the 23 proposition that transparency is, in terms of making 24 all of the data available to everybody -- 25 MR. KING: I can't make that 26 determination without it being in the context in which 27 we are discussing. 28 If you want me to put it into a 114 OEB Panel 1 hypothetical situation that says that I have complete 2 data available and I can obtain it and put it into the 3 public domain, then I agree with your assertion. 4 On the other hand, if I'm in the 5 circumstance where we are, which is that the only way 6 we could obtain data was to receive it was to promise 7 confidentiality, then we have tried to make some 8 accommodations to allow everyone to have access to the 9 data in a way that would provide them with the results 10 being transparent. 11 But I believe this is the subject of 12 a motion that's before the Board and -- 13 MR. WARREN: And I didn't want to get 14 into that motion. 15 Let me ask you just this final 16 question. Dr. Bauer, in his analysis, has suggested 17 that the information deficiencies, some of which 18 Ms Kwik alluded to in her opening observations, are 19 such that the introduction of the PBR regime ought to 20 be delayed with the existing rate structure left in 21 place for, he suggests, a period of a year. 22 Now, I understand the constraints 23 that you are under, and everybody feels they are under, 24 with the government's timetable. Leaving aside those 25 constraints, do you believe that we would be better off 26 delaying the introduction of PBR and correcting -- 27 allowing for the correction of the information 28 deficiencies that Ms Kwik referred to? 115 OEB Panel 1 MR. CRONIN: No, no. And if you look 2 at the -- 3 MR. WARREN: I'm sorry. "No"? 4 MR. CRONIN: No, no. One year delay 5 will hardly make a difference in producing more 6 complete data or better data. 7 What do we need? We have talked 8 about the incremental distribution charge. We have 9 talked about cost allocation studies. There have been 10 allusions to cost of service studies. The USLA won't 11 go into effect until the year 2000, so we won't have 12 those results until 2001. 13 If we wanted to postpone the PBR, I 14 don't think the issue is, "Let's postpone for a year 15 and have a substantially different or better PBR". We 16 wouldn't have much more data then than we have now. 17 MR. KING: I think there is a further 18 clarification that I wish to make. 19 Having a more complete dataset would 20 allow us to do certain things in PBR; most 21 specifically, to look at the issue as a yardstick 22 regulation -- which I think we said in our opening 23 statement was our preference and our desire to be able 24 to think about a yardstick scheme. More complete data 25 would allow us to do so. 26 I think we have more than adequate 27 data available to today and we have constructed it for 28 48 utilities to allow us to believe that we have some 116 OEB Panel 1 confidence of going forward with the price cap scheme 2 that we have proposed. 3 We don't need more sufficient data to 4 be able to justify the scheme that's there. We think 5 we have more than ample evidence that this scheme is 6 appropriate for the province and for the distributors 7 in the province. 8 MR. WARREN: Thank you very much, 9 panel. That's very helpful. 10 MS LEA: Thank you, Mr. Warren. I 11 was planning to take the lunch break at 12:30. Is 12 there anyone who is anxious to complete before lunch 13 and has about 20 minutes of questions? 14 All right. No volunteers. 15 Mr. White, are you prepared to 16 proceed at this time or do you prefer to stand down? 17 MR. WHITE: I prefer to stand down. 18 MS LEA: All right. Mr. Rodger...? 19 MR. RODGER: Thank you, Ms Lea. 20 Good morning, panel. I have a few 21 clarifying questions. I will pick up on some of the 22 themes that have been raised earlier with respect to 23 establishing initial rates and particularly the 24 estimates of the IDC. 25 You have answered questions a couple 26 of times along the lines of referring to Appendix A 27 that for the initial rates for the first generation PBR 28 plan, the utility has the option of doing its own cost 117 OEB Panel 1 of service study or to use this number, the old MEU 2 cost of service model which you have been reviewing. 3 It's clear they do have that choice. Is that correct? 4 MS KWIK: Yes. 5 MR. RODGER: I believe it was 6 Mr. Tucci who indicated that there are more than one 7 approaches or different methodologies that a utility 8 could use in coming up with this IDC number. Would you 9 agree with that? 10 MS KWIK: What we said is it was the 11 intent, the value to be used for such a default. If 12 the utility has their own information and they can 13 justify their own numbers, they can do so. 14 MR. RODGER: And the methodology to 15 come up with that number, there is more than one 16 approach that a utility could follow. Is that correct? 17 MS KWIK: I haven't really given 18 thought to whether that should be a consistent 19 approach, but I would assume that if it was a 20 reasonable approach, it would be accepted as 21 justification for the resolve. 22 MR. RODGER: If I could give you one 23 example of two approaches that I am aware of, I 24 understand that a utility may be able to take what's 25 known as a minimum system approach or another approach 26 could be the existing system. 27 Are you familiar with those two 28 approaches? 118 OEB Panel 1 MS KWIK: Yes. 2 MR. RODGER: Would it be fair to say 3 that under your proposal where a utility could do its 4 own cost of service study, it's up to the discretion of 5 that utility which particular methodology they choose? 6 For example, it could be either this minimum system 7 approach or the existing system approach. 8 MS KWIK: I think I would have 9 trouble if there was too much inconsistency in the way 10 that utilities devised values. Unfortunately, we 11 haven't set guidelines yet for cost of service 12 methodology, but I believe there is something going on 13 between the MEA and the Board that is looking into 14 various methodologies, and hopefully that guide book 15 will come out in time for utilities to determine what 16 method should be used. 17 MR. RODGER: Because this is a -- 18 MR. KING: I think it would be fair 19 to say that you could propose whatever you wish. The 20 Board would make a determination as to whether or not 21 it was reasonable. 22 MR. RODGER: Toronto Hydro is 23 considering this issue at the moment, the cost of 24 service study. That's why I ask. There did seem to be 25 a gap that was in there. It's unclear whether we do 26 have that discretion to pursue different methodology or 27 there is only one approach that the Board will restrict 28 utilities to. 119 OEB Panel 1 I hear your answer. I just offer 2 that it would be very helpful at the earliest 3 convenience if the Board has a position on this one way 4 or the other to make that clear to the parties. That 5 would be appreciated. 6 You have also described generally 7 throughout the morning the work of various task forces 8 that looked into different approaches for PBR and the 9 conclusion that at least for the first generation that 10 yardstick would not be appropriate. 11 I'm wondering if you could, for the 12 record, give us a summary of the process that was in 13 place, who the stakeholders were involved in that 14 process and the reasons for that conclusion. 15 MR. CRONIN: You can go back to last 16 fall, that is the fall of 1998. We had undertaken a 17 fairly substantial outreach effort both through a 18 written questionnaire as well as through a series of in 19 person meetings with stakeholders. 20 It was pretty clear based on the 21 discussions that the yardstick approach was one that 22 might prove very useful to consider. In fact, in the 23 Staff Report that was produced late in 1998, either 24 November or December, we basically stated that we were 25 going to consider that. That issue as well as a number 26 of other issues were going to be examined in a series 27 of task forces that the Board would form with 28 interested stakeholders. 120 OEB Panel 1 We had announced a formation of a 2 yardstick task force which commenced meeting with the 3 other task forces somewhere in the mid January period. 4 In the early meetings we had decided to break up most 5 of the task forces into subcommittees. I believe we 6 had decided to break up the stakeholders in that task 7 force into two subcommittees, one looking at the whole 8 issue of peer group determination and the second group 9 looking at the whole issue of the practicality of 10 implementing the yardstick approach. 11 I think there was a fair amount of 12 agreement within that task force over the course of, 13 say, ten to twelve weeks that this was an idea that had 14 a lot of potential. But as we discussed the issues 15 that were bearing on the implementation of this idea -- 16 that is, were the accounting systems consistent, did 17 people treat different activities differently from an 18 accounting perspective, things like capitalization or 19 netting other revenue against expenses, a whole long 20 list of issues -- it was clear that accounting 21 procedures varied. 22 It's clear that what the utilities 23 were actually doing varied; for example, billing cycle, 24 frequency of billing. It's clear that circumstances of 25 the utilities also varied. 26 We were left with long discussions 27 over the practicality of trying to overcome these 28 differences of accounting practices and circumstances 121 OEB Panel 1 across roughly 240 utilities. 2 Layered on top of that was the fact 3 that we were at that point -- after we engaged in 4 trying to gather the information from the utilities, we 5 were having a great deal of difficulty, for example, 6 among many of the smaller utilities who just did not 7 have the records, for example, on things like capital 8 to supply the Board such that we had the data to pursue 9 that activity. 10 We had as part of one of the 11 questionnaires -- and this was again based on many of 12 the discussions from the fall, where we had had lengthy 13 written responses and oral exchanges with utilities 14 about factors that affected their operations: things 15 like the substrata; what was the geology in the region; 16 whether or not the service territory had unusual 17 spacial features, for example, was not contiguous; the 18 number of underground miles; the number of different 19 voltage systems; the distances and remoteness around 20 the operations. 21 We heard from one utility, the 22 Northwest. They had to helicopter crews in; the 23 equipment was completely inaccessible. I think we 24 ultimately got over two dozen factors identified which 25 could affect the operations, and this is strictly from 26 a circumstantial perspective. We in fact were not 27 being that successful -- and again, I am talking about 28 the 200-plus utilities who had to fall under this 122 OEB Panel 1 framework as well. 2 We were not being that successful at 3 acquiring the information that we would need from those 4 utilities. 5 So I would hypothesize that somewhere 6 in the March time frame the participants, I think 7 pretty consistently within the Yardstick Task Force, 8 discussed again the issues of the potential for 9 yardstick, the variances among the utilities that had 10 to be taken into consideration and the practicality of 11 doing this, and concluded that for the first generation 12 we could not overcome all of these differences that 13 would have to be controlled for if we were to go 14 forward with the yardstick. 15 I think both subcommittees basically 16 said that the application of yardstick in the first 17 generation would lead to such implementation and 18 credibility problems and it would probably -- probably 19 derail PBR. 20 I can't think of anyone in those task 21 force meetings who didn't think that yardstick 22 applications had great potential. We had hours of 23 discussions about how one could design those which I 24 think got reflected into the task force reports. I 25 believe the task force reports -- if you go back and 26 read the comments that were submitted by the three 27 committee Chair, those thoughts that I have just 28 articulated are evidenced in that. 123 OEB Panel 1 So what we have done is to basically 2 design a program that we think will have fairly strong 3 incentives going into the first generation, but one of 4 whose main objectives is to collect the information 5 around the economic practice, accounting and 6 circumstantial aspects of the industry which can be 7 used to formulate a yardstick regime, potentially in 8 the second generation, which more of the stakeholders 9 will believe is based on a credible representation of 10 what actually is there. 11 MR. RODGER: Particularly for the 12 Yardstick Task Force, who were the kinds of 13 participants on that body? 14 MR. CRONIN: There were 30 or 40 -- I 15 will say roughly 30 participants. In fact we could 16 supply -- I mean, I don't want to name names, but I see 17 some of the right people in the room. 18 I would say we had a very strong 19 representation from the medium utilities in that task 20 force as well as a number of stakeholder groups and we 21 also had a few large utilities represented. 22 MS LEA: I think also the 23 participants are listed in the task force report, 24 Mr. Rodger. I mean, I wasn't there. I don't know 25 whether this list accurate. I just presumed it was, 26 seeing it in the front of the report. 27 MR. RODGER: I will certainly check 28 that. Thank you, Ms Lea. 124 OEB Panel 1 In addition to municipal electric 2 utilities, can you just generally describe who else was 3 involved in that process? 4 MR. CRONIN: Well, I don't recall 5 specifically, but in general in the task forces we had 6 representation from consumer groups, from industrial 7 groups, from the government, from the association, as 8 well as the utilities. 9 MR. RODGER: You had some questions 10 earlier in the morning, Dr. Cronin, about whether there 11 was consensus for certain decisions and in some cases 12 there wasn't recommendations. Is the Yardstick Task 13 Force where the conclusions that yardstick was not 14 appropriate for first generation -- was that something 15 you would say there was consensus with, or was it ever 16 put -- 17 MR. KING: No, I would not say that. 18 I think there were some of the task 19 force members who still felt that there might be some 20 merit to pursuing some piece of a yardstick scheme, but 21 for the most part the body of the task force saw the 22 challenges that were confronting constructing a 23 yardstick scheme and I think it was the general 24 conclusion that that would be the case. 25 MR. CRONIN: Let just elaborate and 26 clarify one thing. 27 I think there was, if not a totality 28 of a consensus an overwhelming majority that the 125 OEB Panel 1 problems that I enumerated were in fact there, that we 2 had these variances. 3 A few of the representatives still 4 felt, even given the problems of accounting, the 5 problems of practices, of circumstances, that a 6 yardstick approach should still be used, but I don't 7 think anybody disagreed with the enumeration of the 8 problems of implementing yardstick, and in fact based 9 on some of that thinking we designed, as we talked 10 earlier, yardstick features into the capped mechanism. 11 MR. RODGER: When this committee, the 12 Yardstick Task Force, proceeded on it work, was the 13 input restricted to the 30 participants directly 14 involved or were there opportunities for other 15 stakeholders or other interested parties to provide 16 input? 17 MR. CRONIN: We had posted the 18 minutes and any of the product of the task forces, and 19 in fact invited any and all to participate and 20 circulated the subcommittee reports outside of the task 21 force. 22 MR. KING: That being said, we did 23 try that outreach but we did not have as much 24 outreach -- or as much participation as we had hoped 25 for from those outside of the task forces. 26 It is very difficult to be able to 27 obtain that within -- it was very difficult to try to 28 obtain that within the schedule that we had. With two 126 OEB Panel 1 task force meetings a week it just was -- it was 2 difficult, I think, for many people to keep abreast of 3 what was happening and to participate to the extent 4 that we would have liked to see outside of that, 5 although we did make certain efforts to try to obtain 6 participation beyond the task force. 7 MR. RODGER: Ms Lea, I probably have 8 perhaps another half an hour of questions. Did you 9 want to have the lunch break? 10 MS LEA: Thank you, yes, if is 11 agreeable to you to break now. 12 MR. RODGER: Fine. 13 MS LEA: Let's break now, please, and 14 if we can return at 1:30, please. 15 --- Luncheon recess at 1230 16 --- Upon resuming at 1330 17 MS LEA: Good afternoon. 18 Mr. Rodger, I think we were hearing 19 questions from you. 20 MR. RODGER: Thank you, Ms Lea. 21 I believe that it was Ms Kwik's 22 comments from this morning that the SAR, the standard 23 application of a rates document, created by Ontario 24 Hydro would form part of the final PBR handbook. Is 25 that correct? 26 MS KWIK: Yes. The pertinent points. 27 MR. RODGER: I'm sorry? 28 MS KWIK: The pertinent parts of the 127 OEB Panel 1 policies would have to be brought over to continue with 2 the existing rates. 3 MR. RODGER: Do you know which 4 version of SAR will be incorporated into the handbook? 5 My understanding is that there is a 1991 version and a 6 1996 version that I think is posted on the OEB Web 7 site. 8 Are you able to tell us which one it 9 is? 10 MS KWIK: I think the 1996 version 11 was never taken beyond a draft. The earlier one was 12 the last sort of final version of the SAR. 13 MR. RODGER: So we should assume it 14 is the 1991 version, then? 15 MS KWIK: Yes. 16 MR. RODGER: Okay. Thank you. 17 I just have a couple of questions 18 regarding the rate adjustment flexibility that was 19 again highlighted this morning. I want to just confirm 20 the approach so that I understand it correctly. 21 The first issue is that I understand 22 that although a specific utility may be able to earn a 23 rate of return and the placer that you have used for 24 the draft handbook is 9.75 per cent, although that is 25 an upper limit, MEUs would have the discretion to make 26 a return lower than that ceiling. Is that correct? 27 MR. KING: Yes. 28 MR. RODGER: Am I correct that an 128 OEB Panel 1 individual LDC would not have to come back to the 2 Energy Board after its initial rate filing was approved 3 in order, for example, to earn a 7 per cent rate of 4 return? That is that once you get the rate order 5 approval from the Energy Board, after that the 6 individual utility has the discretion to fix the rate 7 of return anywhere up to that cap. It doesn't require 8 a special rate order to fix a lower amount. 9 MS KWIK: When the utility files 10 their evidence they would have to specify the return 11 that they are earning through the rates that they are 12 setting, because the Board would have to issue a rate 13 or that approved specific rate to start off with, the 14 initial rate. 15 MR. RODGER: I see. So there is not 16 that discretion of, for example, filing your rate 17 application based on a maximum rate of return allowed 18 by the OEB and then after you get the order on day one, 19 on day two saying: Well, I think this year we are just 20 going to only earn a 7 per cent. That 7 per cent 21 return would have to be actually in the rate filing. 22 MS KWIK: It would I guess depend on 23 your cost side as well. 24 MR. RODGER: I'm sorry? 25 MS KWIK: That rate of return would 26 change with your cost side as well. I mean, the 27 initial level of your rate may be at what you have 28 filed, but your rate of return could still change 129 OEB Panel 1 depending on what your costs are so that your initial 2 rates are fixed -- 3 MR. RODGER: Can the panel help for a 4 second? 5 --- Pause 6 MR. KING: I believe the intent that 7 we had was that you could do what you suggest that you 8 could do. 9 Obviously, this is a matter of some 10 issue as to how this Board actually puts these things 11 in place and those determinations have not been made. 12 They have to be made by the Board. 13 For example, if the Board actually -- 14 when they accept your evidence are they accepting -- 15 you know: Is a rate adjustment mechanism to be filed 16 as part of the tariff and then you have the flexibility 17 to change your rates within that, or do you have to 18 file a specific rate that you then work off of and that 19 the Board has to explicitly approve that? 20 Those details have to be determined 21 by the Board and have not been determined by the Board. 22 But I think the intent that we had 23 was that you could do what you suggest, that you would 24 file on the basis of the maximum rate and then as long 25 as you price below it, then that was fine. That was 26 the intent of the proposal that was put there, but it 27 is an implementation detail yet to be ordered by the 28 Board. 130 OEB Panel 1 MR. RODGER: Yes. I think the 2 context where this arises is that under the legislation 3 it is only the Energy Board that can set just and 4 reasonable rates. So if that upper amount represented 5 the just and reasonable rate approved by the Board, 6 then whatever you want to charge under that is up to 7 the utility's own discretion. 8 But I think it would be helpful if 9 the Board is expecting a specific rate of return that 10 the utility intends to work within, if that is your 11 expectation to advise us of that would be extremely 12 helpful. 13 On a similar theme I had one question 14 concerning the ability to vary rates of up to 5 per 15 cent per year. If I can just give you an example of 16 how that may be applied with respect to my 17 understanding, and perhaps you could tell me whether 18 I'm correct or not. 19 A utility may take the approach that 20 it wants to lower commercial end-use rates so it has 21 made the policy decision to reduce commercial rates by 22 5 per cent and to increase industrial rates by 5 per 23 cent. Is that the type of scenario that you see being 24 within the scope of this price adjustment mechanism 25 that you have described in the draft handbook? 26 MR. CRONIN: Yes. 27 MR. RODGER: So if at the end of, for 28 example, three years, if you go through with my 131 OEB Panel 1 hypothetical, you could have commercial rates being 15 2 per cent lower overall and industrial rates being 15 3 per cent higher? 4 MR. CRONIN: I think there are only 5 two adjustments before we get to the next generation. 6 MR. RODGER: That's fair enough. 7 Again, I would just ask your 8 clarification whether the Ontario Energy Board prior 9 approval is needed before the utility makes that 5 per 10 cent adjustment or, again, whether that is entirely 11 within the discretion of the utility once the rate 12 application has been approved. 13 MR. KING: The intent is that it is 14 within your discretion. 15 MR. RODGER: Thank you. 16 MR. KING: Just to follow up. You 17 know, there may be some who wonder whether this 18 provides a mechanism for you to cross-subsidize certain 19 rate classes and to increase the amount of 20 cross-subsidy. 21 There is no doubt that a rate 22 flexibility mechanism such as what is proposed would 23 provide the distribution utility with the ability to do 24 that. However, tempering that is the requirement for 25 the distribution utilities to conduct cost allocation 26 studies which will be used in the establishment of 27 rates for the second generation PBR. 28 So if you were actually increasing 132 OEB Panel 1 the amount of cross-subsidy, you would then be facing 2 two years hence basically a need to radically rejigger 3 the rates and that has some potentially pretty 4 significant issues of rate impact and your actual 5 ability to do it. But we think that some of those 6 incentives are tempered by the pieces that are likely 7 to be present in the second generation of PBR. 8 MR. RODGER: This pricing flexibility 9 that we have just been talking about, that option would 10 be available to utilities for year one of the PBR plan, 11 that is, for the year 2000? 12 MS KWIK: It was intended in the rate 13 guide, the way it has been written right now, it was 14 intended for the end of the first year, so start of the 15 second and start of the third year. 16 MR. RODGER: So 2001? 17 MS KWIK: Yes. 18 MR. CRONIN: Again, maybe to 19 elaborate on that, although it wasn't explicitly tied 20 into that discussion, the whole issue of trying to 21 develop the best rate structure going in would suggest 22 that if you had evidence that the rates were currently 23 not in alignment with cost, you know, those issues 24 should be dealt with going in as well. 25 MR. RODGER: Just one clarification 26 question, with respect to line losses. The draft 27 handbook describes a 1 per cent line loss figure for 28 large users, although distributors, if they have better 133 OEB Panel 1 information, can use that better information for their 2 application. Is that correct? 3 MS KWIK: Yes. 4 Mr. RODGER: Okay. I have two 5 questions concerning the PBR formula and debt rates. 6 The first is, when we worked through 7 the proposed formula to ultimately achieve at a market 8 base rate of return, you establish a total revenue 9 requirement for the utilities, you subtract the cost of 10 power, and that gives you a revenue requirement. That 11 revenue requirement, presumably, contains any existing 12 debt servicing charges that the utility currently 13 faces. Then there are a further series of adjustments 14 from your formula and there is also taken into account 15 a new debt servicing charges that utilities face from 16 recapitalization. 17 Can you confirm to me that the debt 18 servicing charges are not double counted; that is, that 19 they have been removed from that initial revenue 20 requirement and all captured within the debt servicing 21 charges that worked their way out in the other parts of 22 the formula? 23 MR. KING: In the supplement that was 24 filed -- what date was this put up -- August 12th of 25 1998, there is an Equation 1-2 where there is a further 26 final adjustment to calculate the additional revenue 27 requirement, which nets from Equation 1.1 the 1999 rate 28 base times the return on capital, in 1999. That return 134 OEB Panel 1 on capital consists of both the actual return on equity 2 and the debt payments. 3 So I believe that through Equation 4 1-2 the netting of those debt payments has occurred. 5 That's the intent of Equation 1.2 -- 6 MR. RODGER: Thank you. 7 MR. KING: -- is to adjust for that. 8 Plus the actual ROE that occurred. 9 MR. RODGER: Now, the other question 10 had to do with the specific debt rate that a utility 11 may face. 12 Is it the intent of the handbook and 13 the formula that the debt rate which utilities face 14 will actually track the real-life situation that 15 utility is facing? For example, if the debt rate 16 increases over the term of the PBR regime, the debt 17 rate in the formula will change accordingly? 18 So, for example, if, at the beginning 19 of the plan, the debt rate is 7 per cent and interest 20 rates increase to 8-1/2 per cent, the formula will 21 reflect that increase? 22 MR. KING: Yes. Yes, it will -- 23 well, no, let's be careful. This formula does not 24 track that, over the term of the plan, but a component 25 of the IPI includes the cost of capital, and that 26 component would then track the changes in the cost of 27 capital for similarly situated firms. 28 MR. RODGER: So it comes from the IPI 135 OEB Panel 1 rather than -- 2 MR. KING: It comes in through the 3 IPI rather than this formula. 4 This formula is only used to 5 determine an adjustment to rates at the beginning of 6 the plan. Once that adjustment to rates has occurred, 7 the formula goes away. It's no longer used over the 8 term of the plan. It really just establishes that 9 maximum level to incorporate a market based rate of 10 return into the revenue requirements of the 11 distribution utility. 12 MR. RODGER: Okay. That's helpful. 13 Thank you. 14 One question regarding the historical 15 IPI work that you have done; and this really stems from 16 the last technical workshop we had earlier in the 17 month. It was noted by several parties that historical 18 IPI had a fairly wide range, from over plus 6 per cent 19 to minus 2.5 per cent. 20 I'm wondering, do you have any 21 further information from that technical workshop that 22 may explain that wide range in historical IPI? 23 MR. CRONIN: Yes. A lot of the 24 variance in the IPI, historically, was based on either 25 the increases in the price of power, which went up, in 26 some years, 7 to 9 per cent. But over the course of 27 the 10 years, the price of capital and the changes in 28 that had a big impact on movements in the IPI. Over 136 OEB Panel 1 that time, we saw periods with the price of capital 2 declining, as well as increasing. And since capital 3 represents about 45 per cent of the cost of an electric 4 distribution utility, if you have changes, for example, 5 in the Canadian long bond rate of say 100 basis points 6 in one year -- so, say it might go from 7 per cent to 6 7 per cent -- well, you have had, basically, a 15 per 8 cent decrease in the price of capital. So, the IPI is 9 going to be sensitive to the changes in the cost of 10 capital because that, obviously, fluctuates freely in 11 the marketplace. 12 MR. RODGER: At the technical 13 workshop, there was a theme around this variation raise 14 that perhaps -- it suggested that the IPI may not be 15 appropriate because of these wide variations. 16 Given this information that you have 17 relayed to us, how would you respond to that criticism? 18 MR. CRONIN: Well, again, on average, 19 the IPI goes up about 1 per cent, excluding line 20 losses. The CPI goes up 2.7 per cent. So, the 21 difference between the IPI and the CPI is the IPI goes 22 up and it goes down, and it goes up about 1 per cent a 23 year, the CPI, typically, only increases. If you look 24 at the years at the beginning of the period, you see 25 fairly robust changes in the CPI. 26 The intent of the -- we are talking 27 quality inflation factor, which is really a misnomer 28 because we are really trying to capture changes in 137 OEB Panel 1 input prices. But the intent of the inflation factor 2 is to represent the changes in the prices that the 3 electric distribution utilities are facing. 4 So, if, in fact, those prices are 5 fluctuating like that, our feeling is that end users 6 should be exposed to the same changes. We want to 7 basically have the markets in alignment. So, we feel 8 that, in fact, the IPI would be doing its job if it 9 represents what, in fact, is happening within the 10 market for input prices -- and it is. 11 MR. KING: Not to do so would be to 12 create a windfall gain or loss for either ratepayers or 13 the shareholder. And, you know, while it has certainly 14 been the case over the past 10 years that capital 15 markets and the price of capital has radically 16 decreased, there's no reason to believe that that 17 experience will be represented over the next three 18 years. In fact, we can see movements in the economy, 19 today, where perhaps the expectation is interest rates 20 are more likely to increase than they are to decrease. 21 So, if you were not to have an index 22 that represented the costs, the issue is that, most 23 likely, the utility would be facing a circumstance 24 where their input prices could rise considerably faster 25 than some other index that would otherwise be used, 26 like the CPI, and that would be an unfortunate 27 circumstance for the shareholder and a great windfall 28 for the ratepayers. 138 OEB Panel 1 But we would like to see these 2 circumstances, as we have said a couple of times. We 3 like to see money made the old-fashioned way: that the 4 utility earns it. 5 MR. CRONIN: We did note, I guess, 6 that there was a fair amount of discussion, or some 7 discussion around this issue of volatility. 8 Now, what does "volatility" mean? If 9 I'm a customer and you tell me that, as the utility, 10 you are concerned that the prices that I would pay 11 might go up one year and might go down the next but, 12 historically, had only risen at 1 per cent and I could 13 have the choice between up one year, down the next, 14 but, historically, 1 per cent, versus an index which 15 had gone up consistently -- gone up consistently -- and 16 averaged 2.6 per cent, as a customer, I don't think it 17 would take me very long to figure out which index I 18 would probably opt for. 19 In fact, when I go to the gasoline 20 pump, I spend 20 bucks a week for my car and I never 21 know what the price is going to be until I get there. 22 It's just like I don't for a lot of other things like 23 food. I mean, markets work now. Those costs have to 24 be passed on to customers and I think customers would 25 feel better if they knew that the basis for the costs 26 that they were being charged reflected what the 27 experience of the utility was. 28 What we proposed was to do that, but 139 OEB Panel 1 to cover the exposure to risk. You know, Mike says 2 interest rates are probably likely to go up. You know, 3 you could get ten economists or ten financial analysts 4 from the TV all in a row talking about interests. You 5 would probably get five on one side and five on the 6 other. 7 If we knew what they were going to 8 do, we could design a mechanism to guarantee that. 9 Since we don't, we basically designed a mechanism to 10 say whatever they do is going to be built into the 11 mechanism and we are going to basically try to remove 12 the risk from either side, either the customers or the 13 shareholders. 14 MR. RODGER: Is there any concern at 15 all that if on a go forward basis for whatever reason 16 we have similar fluctuations that there may be an 17 adverse impact on rates in terms of rate instability? 18 MR. CRONIN: You know, a utility does 19 not have to raise its rates. The utility has the 20 option of not passing through those price increases. 21 In fact, if the utility says "Oh, 22 gee, you know, we just had a 200 basis point increase 23 in the bond rate, but we don't want to pass that along 24 to the customers", that's fine. They can do that. 25 MR. KING: I would also just point 26 out that in the province, I believe on the gas side, 27 there is an annual cost of capital, sort of a mechanism 28 where the cost of capital is adjusted based upon the 140 OEB Panel 1 current existing interest rates. Is that not right, 2 Judy? 3 In many circumstances there are these 4 automated mechanisms and they do lead to variations in 5 prices. Certainly that's why we had the advent of fuel 6 adjustment clauses in the gas sector and in the power 7 generation sector. It's not as if we ever really in 8 recent history, since the advent of the oil price 9 shocks of the seventies and the inflationary period 10 that existed thereafter, that we did not for the most 11 part and in general have some sort of mechanism to 12 allow rates to just vary as certain elements of cost 13 varied. 14 In the case of the distribution 15 sector where roughly 50 per cent of the cost is in 16 capital, having a mechanism that tracks the actual 17 costs of capital is just a continuation of some of 18 those thoughts. 19 MR. RODGER: Now, once the PBR 20 handbook is finalized, will it contain the information 21 required so utilities can calculate their own IPI? 22 MR. CRONIN: No. There's actually 23 information there right now in the staff productivity 24 report for a utility to calculate its own IPI. No 25 utility will have to calculate an IPI. The Board will 26 do that in toto at the end of the year and then issue 27 that, but if the utility chose to do it, the 28 information would be there. 141 OEB Panel 1 MR. RODGER: Thank you. One issue I 2 would put to you to get your response, particularly 3 from Dr. Cronin and Mr. King. That is the issue of 4 whether the return on equity ceiling could perhaps 5 reflect a three year average rather than a single year 6 maximum. 7 One reason in support of this could 8 be, for example, that issues like annual energy losses 9 calculations can be very imprecise. Rather than have a 10 strict year by year cap, have an annual or have a three 11 year average that may take account of any shortfalls or 12 overages. What would your view be on the acceptability 13 of that for the first generation PBR regime? 14 MR. CRONIN: I think we would agree 15 that the Board should consider that in reviewing the 16 handbook. Obviously submissions might want to include 17 that recommendation. 18 MR. RODGER: Then, Ms Kwik, does the 19 Board have a position on this issue at this time? 20 MS KWIK: No, it does not. 21 MR. KING: We don't speak for the 22 Board. I think Judy was answering for Board staff, is 23 that right? 24 MS KWIK: That's right. 25 MR. RODGER: I appreciate that. 26 Thank you. In terms of the actual form of price cap, 27 is it a dollar per customer unit? Is that the unit 28 that we will be dealing with in the final handbook? 142 OEB Panel 1 MR. CRONIN: Yes. 2 MR. RODGER: Another question of 3 clarification. At the technical workshop, I believe 4 there was the suggestion that utilities may have some 5 discretion over depreciation rights. Are you able to 6 clarify at all on that issue? 7 MR. KING: I don't believe that the 8 panel that's here has the information to be able to 9 comment upon that. It's our understanding that the 10 USOA, the Uniform System of Accounts, does allow for 11 the utility to use differing depreciation rates, but we 12 are not currently aware of exactly where that sits. 13 MR. RODGER: Would that be the type 14 of issue, Ms Kwik, that you would expect individual 15 applicants to deal with in their rate application to 16 the Board, that question? 17 MS KWIK: I think in the absence of 18 any guidelines coming out from the Board, it's 19 something that an individual -- 20 MR. RODGER: Thank you. 21 THE COURT REPORTER: I'm sorry. The 22 question was missed. 23 MS LEA: The question was missed, 24 Ms Kwik. Have you got the answer? 25 --- Off the record discussion 26 MS KWIK: In the absence of any 27 guidelines. 28 MS LEA: It may be also, Mr. Rogers, 143 OEB Panel 1 that some of the implementation issues, that is exactly 2 how these things are dealt with in applications, may be 3 considered under implementation and also by the actual 4 rate staff that may have to analyze these filings. I 5 think we just don't know yet. 6 MR. RODGER: Thank you, Ms Lea. 7 One question again to Dr. Cronin and 8 Mr. King on the issue of rebasing options. I would be 9 very interested in your view about whether efficiency 10 gains from the first generation PBR could be carried 11 over to subsequent generations of PBR under some kind 12 of sharing approach between the utility and the 13 customer as opposed to in the second generation PBR 14 starting from a new square one again. 15 Could you comment on whether such a 16 sharing approach may be appropriate? 17 MR. KING: I believe this is a 18 discussion that will have to be had between the 19 individual parties in that mechanism. I would just 20 point out that we had talked in the rate handbook about 21 a portion of the savings being recaptured for 22 ratepayers, a portion of the efficiency gains being 23 recaptured for ratepayers. 24 That's intentionally to indicate that 25 it's not 100 per cent nor zero, but there is probably 26 something that is appropriate that is in between. I 27 think as Frontier Economics has pointed out in their 28 submittal, which I think both Dr. Cronin and I agree 144 OEB Panel 1 with, there is an issue of providing long term 2 incentives to the distribution utility to be able to go 3 and try and find various efficiencies in their business 4 and to be able to make investments that are long/wide 5 than have long strains of savings that then must accrue 6 to repay the initial investment. 7 I think, at least for myself, I would 8 not think that it would be appropriate to establish the 9 rebasing at 100 per cent of any efficiency gains being 10 rebated to the ratepayers in the form of rebased rates. 11 It would be something less than 100 per cent, but more 12 than nothing. 13 MR. RODGER: I take it you would 14 agree, then, that while it may be a subject in issue we 15 deal with on a later date, certainly the idea of 16 sharing should not be one that is thrown out? 17 MR. KING: Yes, that's correct. That 18 would be my recommendation and Frank is nodding his 19 head. 20 MR. CRONIN: Yes. I mean, we would 21 like to convey one decision to the utilities, that we 22 believe that some portion of those savings should 23 remain with the utilities, but obviously it is subject 24 to the review and design going into second generation 25 to determine what exactly that split would be, subject 26 to Board approval. 27 MR. RODGER: Just a couple of more 28 questions. 145 OEB Panel 1 The handbook also describes the 2 possibility of deferral accounts that may be one way of 3 modifying or adjusting rate impacts. I'm wondering if 4 you could maybe explain further perhaps the scope of 5 activities that you would see encompassed by these 6 deferral accounts? 7 --- Pause 8 MR. KING: I think the concept is 9 that one might be able to book a certain portion of the 10 rate increase that otherwise would accrue into the 11 deferral account and it would spread out over the term 12 of the plan the recapture of that amount. So basically 13 one would be able to smooth out some of the rate 14 transition. 15 Now, one also has to recognize that 16 that probably means at some point you have to pay the 17 piper, right, and rates will be actually higher than 18 they otherwise would have been and then would have to 19 come back down as that deferral amount was worked off. 20 MR. RODGER: So the concept could be 21 wide enough to work both ways. If, for example, a 22 utility didn't make it's full return on equity in one 23 year, could that shortfall, for example, be carried 24 over and recaptured in a subsequent year through a 25 deferral account? 26 MR. KING: It's not a deferral 27 account of the actual rate of return; this is a 28 deferral of the amount that would be otherwise booked 146 OEB Panel 1 for the market based rate of return. 2 So one couldn't net the fact that you 3 design the -- let's try it this way: If you go through 4 the market based rate of return calculation and it 5 suggests a revenue requirement of X, you establish your 6 rates on the basis of that, it is consistent with the 7 9.75 per cent for whatever the target ROE is in that 8 year and then, somehow or another, costs get out of 9 control, you actually earn 6 per cent, you can't take 10 the difference and then book it into the deferral 11 account. That is not what is intended. 12 What would be intended is that under 13 the PBR proposal you would have the opportunity and the 14 right to adjust your rates to capture that target ROE 15 at the outset, but instead you might, for whatever 16 political reason or business reason, decide that you 17 are going to instead establish your rates, as you 18 suggested earlier, at 7 per cent. Then the amount that 19 is the difference between what you would accrue at 20 7 per cent and at the target ROE, that amount is the 21 amount that would then be booked to the deferral 22 account and worked out over time. 23 MR. RODGER: Just one final question. 24 I know as we have moved through the 25 summer there was a view that perhaps the final PBR 26 Handbook may be completed and issued by the end of 27 October. I'm wondering if you could assist us in terms 28 of when a possible target date might be now for the 147 OEB Panel 1 final PBR Handbook. That is asked particularly in the 2 context of when utilities may start filing their first 3 rates application under that handbook? 4 MS KWIK: That is a very difficult 5 question to answer. 6 We still have to go through, I guess, 7 the Board making its decision, and once the Board makes 8 its decision it will give instructions to the Board 9 staff as to what changes are to be made to the draft 10 rate handbook. 11 As much as we would like to meet, at 12 least at the latest, sort of end December, I think 13 there are a lot of factors that are not really in our 14 control as far as the proceeding is concerned. 15 MR. RODGER: But it may be a 16 reasonable conclusion, then, that we are really looking 17 into the early part of the new year before we may 18 receive the final handbook? 19 MS KWIK: I think it depends on when 20 the proceedings can conclude. 21 MR. RODGER: Thank you very much, 22 panel. 23 Those are all my questions. 24 MS LEA: Thank you, Mr. Rodger. 25 Mr. Stephenson. 26 MR. STEPHENSON: Thank you. 27 Looking at the first generation PBR 28 proposal contained in the rate handbook, can you agree 148 OEB Panel 1 with me: As I see it there are two sort of fundamental 2 objectives which are sought to be fulfilled with the 3 first generation proposal. 4 The first objective is to instill at 5 some level the economic drivers towards achieving 6 efficiencies that are intrinsic in the notion of a PBR 7 plan. That is one objective. 8 The second objective is to commence 9 the collection of various forms of data on a 10 systematized basis in order to facilitate second 11 generation PBR. 12 Would you agree, generally speaking, 13 that those are the two primary objectives, given the 14 various constraints that you were under, in coming up 15 with this plan? 16 MR. CRONIN: I think they are 17 certainly two of the most important. I don't know if 18 we have come up with a list, but those are two very 19 important. 20 MR. STEPHENSON: Sure. There are 21 other things like a manageable regulatory burden and 22 all those sort of things, meeting your time lines, 23 et cetera. 24 Focussing on the two that I started 25 with, would you agree with me that they are really of 26 equal importance in terms of assessing or guaranteeing 27 the long-term success of the implementation of these 28 programs? 149 OEB Panel 1 MR. CRONIN: Inculcating a culture of 2 efficiency considerations, we would incorporate within 3 that basically the appropriate price signals being sent 4 from the factor input markets to the end users. We 5 think that that is critical for the first generation 6 and the precedents it would establish for the second 7 generation. Longer term, to have a successful second 8 generation you certainly have to have the data to 9 develop and assess that period. 10 MR. STEPHENSON: But you would agree 11 with me that if two years hence you wound up feeling 12 you have essentially the same limitations because of 13 data limitations as you have today, you would view the 14 first generation as a failure. Is that fair? 15 MR. CRONIN: View that aspect -- 16 MR. KING: That aspect as a failure, 17 but I wouldn't say that necessarily condemns the whole 18 exercise to being a failure. 19 Certainly we would feel that we had 20 not achieved everything that we were hoping to achieve 21 in the first phase. 22 MR. STEPHENSON: But it would be a 23 significant concern? 24 MR. KING: It would be a concern, 25 yes. 26 MR. STEPHENSON: Okay. 27 You mentioned that one of the items 28 that you felt constrained about by virtue of data 150 OEB Panel 1 problems was the issue of implementation of yardstick, 2 or consideration at a detailed level of yardstick 3 scheme in first generation. 4 Another issue I take it that you felt 5 some degree of constraint by virtue of data limitations 6 was on the development of a fully fledged system of 7 monitoring and policing system reliability issues and 8 system quality issues. There was a data problem there 9 too. Is that right? 10 MR. KING: There is a data problem 11 associated with the establishment of appropriate 12 minimum levels of service and an enforcement mechanism 13 that goes along with it. I would agree with that. 14 It's not just data though. It's also 15 being able to appropriately define what the appropriate 16 expectations are for service quality amongst the 17 various different circumstances of distribution 18 utilities in the province, in that what is appropriate 19 in the greater Toronto area may not be appropriate in 20 Northwestern Ontario. 21 MR. STEPHENSON: Fair enough. 22 I take it that you weren't even able 23 to begin the commencement of that process, in part at 24 least, because you didn't have the data to figure out 25 what the characteristics of all of the relevant kinds 26 of utilities were, given their geography and service 27 characteristics and so forth. That requires a data 28 input as well that you didn't have. 151 OEB Panel 1 MR. CRONIN: We did not have complete 2 data for the utilities on all of those characteristics. 3 MR. KING: Although I would also 4 suggest that there is one other important caveat that 5 should be there in terms of these minimum quality of 6 service metrics, which is the input of the customer. 7 Certainly one can also suggest that that is a data 8 limitation, but it is also perhaps important in the 9 design of these minimum standards that customers be 10 polled or at least queried as to what their 11 expectations of the minimum level of service are. 12 I would say that at the moment we do 13 not fully understand what is important to customers in 14 the form of service quality let alone have some way of 15 deriving a numerical standard which utilities in 16 various circumstances must achieve. 17 MR. STEPHENSON: There is reference 18 in the draft handbook about the possibility at least 19 that the Board might itself initiate some form of 20 customer survey to be conducted presumably sometime 21 during the first term. 22 Do you have any views as to the 23 relative merits of having the Board initiate that on 24 some form of an independent basis, that they go and 25 commission somebody, versus having the LDCs essentially 26 required to engage on a survey on a local basis? 27 MR. KING: I haven't given it a great 28 deal of consideration. There are a few things that 152 OEB Panel 1 come to mind immediately about the appropriate way to 2 do it. 3 The first of those is, given the wide 4 diversity and the size and resources of the utilities 5 in the province, requiring each utility to undergo some 6 sort of customer satisfaction survey may not be the 7 best way of being able to deal with the circumstances 8 as a whole. 9 I think there are a couple of 10 specific points, though, I would like to make regarding 11 this need for survey research. I don't think that what 12 the Board should be engaging in is solely an issue of 13 how satisfied are you with your distribution company 14 the service that you receive. 15 Instead, in part, what I think Frank 16 and I would advocate, and Judy, what we would advocate 17 in terms of thinking about these research objectives is 18 to think about polling customers for what is important 19 to them: how important is timely customer service 20 response versus being able to get someone on the 21 telephone to respond to a billing inquiry, or all the 22 dimensions of quality and service that define what is 23 important to customers. It probably depends upon the 24 specific type of customer. 25 There are even some customers at 26 distribution utilities who may not be what most folks 27 think of as a traditional customer, for example, 28 contractors. Contractors make use of distribution 153 OEB Panel 1 services such as cable locates and service connections 2 and those sorts of things, but they are not the 3 ultimate final consumer of the distribution utility's 4 product. 5 So some customer research into what 6 is important to consumers in different parts of the 7 province I think is really necessary to define, for the 8 next generation of PBR, what are the appropriate 9 service quality standards that make sense to ensure 10 that we have an appropriate level of service provided 11 by distribution utilities in the province. 12 MR. STEPHENSON: If I could just get 13 you to confirm something which I think underlies this 14 whole discussion about the purpose and the need for 15 tracking and measurement of service quality of course 16 is that the danger and intrinsic concern with the 17 implementation of economic incentives is that there 18 will be undue, unreasonable cutting of resources 19 devoted to maintenance of the system and service to the 20 customers. That is the underlying concern that 21 militates in favour of this kind of an exercise of 22 tracking these items. Is that correct? 23 MR. KING: I think, as we, the panel, 24 have said, in many of the task forces that is the 25 issue. You have the economic incentive mechanism which 26 may set up incentives to go beyond the minimum level of 27 service and therefore there needs to be some standards 28 to temper the pursuit of economic efficiency beyond 154 OEB Panel 1 some point. 2 MR. STEPHENSON: Moving forward to 3 deal with the potential of a second generation issue, 4 obviously one of the regulatory options that is up for 5 consideration in a second generation system in terms of 6 enforcement of service and reliability standards is 7 some form of an economic penalty scheme, more or less. 8 Is that consistent with your understanding of how these 9 things might roll out in the future? 10 MR. KING: Certainly that is one 11 option. There are issues associated with the construct 12 of appropriate incentives in that mechanism. 13 MR. STEPHENSON: But you would expect 14 that to be part of the debate next time around? 15 MR. KING: Yes, that's true. 16 MR. STEPHENSON: Okay. 17 Are you satisfied that the 18 information gathering and information reporting 19 requirement that you have instilled in this generation 20 will provide the Board with a sufficient platform, 21 informational platform, in looking at the second 22 generation to enable it to implement that kind of a 23 scheme if it thought that is the way it wanted to go? 24 --- Pause 25 MR. CRONIN: That is an interesting 26 question. 27 I think if we were to rank levels of 28 confidence, I think we would have a very high 155 OEB Panel 1 confidence of the economic and characteristics data, 2 financial operations-related data. 3 I guess it is still somewhat of an 4 open question about how good the data would be on 5 reliability. I think that is one reason why we 6 scheduled a mid-term review. 7 MR. STEPHENSON: Can you identify 8 that -- 9 MS KWIK: In terms of the service 10 quality indicators, we are very reliant on the members 11 of the task force, the implementation task force, to 12 give us the input for the proposal. 13 MR. STEPHENSON: Can you identify at 14 this point in time the categories of information that 15 are not being requested as part of this plan, the 16 current plan, that you think would be either essential 17 or very helpful for the Board to use next tim in order 18 to fully and fairly assess going the penalty route? 19 Is it possible to identify those 20 categories of information that would facilitate that 21 task? 22 --- Pause 23 MR. KING: A very good question. 24 I think that for the metrics of 25 service quality that we have identified with the 26 benefit of the task force we have a reasonable dataset, 27 or the data that should be submitted will be reasonably 28 comprehensive and able to engage in that. 156 OEB Panel 1 But just returning to some of the 2 points that I made earlier, I'm not convinced that we 3 have a complete view of what is important to consumers 4 in the form of service quality. Clearly, the elements 5 of service quality that have not been examined by the 6 task force -- the task force use their own judgment in 7 defining what is important and what is not, if 8 customers tell us something different we will have no 9 data from the utilities that will have been collected 10 through this mechanism on where they currently stand. 11 So part of the process of developing 12 the next generation of PBR and being able to put in 13 place some sort of a mechanism to enforce certain 14 minimum quality standards, that being both customer 15 service and reliability, in my estimation, would have 16 to entail soliciting from customers what is important 17 to them, defining appropriate benchmarks and collecting 18 data from the utilities through some other mechanism to 19 be able to assess where the appropriate level or the 20 standard should be set. 21 It's not going to come through the 22 pieces of the Electric Distribution Rate Handbook that 23 has been proposed. It would have to come through that 24 separate process. 25 MR. STEPHENSON: Is it fair to say, 26 though, that, at this point in time, you would 27 recommend to the Board -- leaving aside the actual 28 content of the current rate handbook, you would leave 157 OEB Panel 1 as a recommendation for the Board that, in the interim 2 period, at some point in time, perhaps in conjunction 3 with a mid-term review, that it in fact mandates a 4 survey of the nature that you have described? Is that 5 fair? 6 MR. KING: That is fair. That would 7 be my recommendation. 8 MR. STEPHENSON: Similarly, you would 9 recommend that there be some process put in place to 10 look at these metrics and baseline data to develop 11 something that the Board could consider and accept or 12 reject, for the purposes of second generation? 13 MR. KING: That's correct. That 14 would be my recommendation. 15 MR. STEPHENSON: Whether or not 16 the -- obviously, you have certain data collection and 17 reporting requirements made a part of the proposed 18 plan. 19 I take it whether or not that is a 20 sufficient body of information for second-generation 21 purposes, it's, at the very least, a necessary part of 22 the information that you require. Is that fair? 23 MR. KING: I believe that is correct. 24 MR. STEPHENSON: One of the issues 25 that concerns my client is, given the importance of 26 that data going forward, how can we have confidence 27 that we are going to have compliance? Not necessarily 28 compliance in achieving the standards or maintaining 158 OEB Panel 1 historic standards but achieving compliance with 2 respect to data collection and data reporting -- which, 3 presumably, is something which is under the control of 4 the LDCs. Regardless of what they have done up to 5 date, there's no reason why they shouldn't be able to 6 do that. Is that fair? 7 MR. KING: Yes, I think that's a very 8 important question, how do we ensure that there is 9 compliance with the reporting requirements. 10 I'm certainly no expert in the 11 mechanisms that are available to the Board, but we 12 have, all along, believed that there needs to be some 13 sort of audit process that will be instituted by the 14 Board to ensure that the data that are being submitted 15 are timely and correct. 16 I think you are taking it to another 17 step; which is, what happens if an entity chooses not 18 to submit the data. 19 MR. STEPHENSON: Did you consider the 20 possibility that somehow the ability that a permissible 21 ROE, for example, of an LDC might be affected if it did 22 not comply with its reporting requirements, that it 23 becomes a threshold -- you cannot earn X amount over 24 the median unless and until you meet your reporting 25 requirements, or something like that -- so that there's 26 an economic incentive to comply with the reporting 27 obligations or data collection obligations? 28 Can you see that that would be a 159 OEB Panel 1 powerful mechanism and one which might be workable in a 2 first-generation scheme? 3 MR. KING: We did, at various points, 4 consider whether there should be an economic, an 5 explicit economic linkage to non-compliance. 6 I think part of the issue that the 7 team had, with regards to making these economic 8 linkages too explicit is that it then encourages people 9 to do the cost-benefit tradeoff -- and Frank can speak 10 to some specific examples that have occurred in 11 telecommunications where the penalty was very apparent 12 what would happen if you did not do X and the reward 13 was quite a bit larger than the penalty and, hence, 14 they did the economically rational thing and they 15 responded to the incentives as they were explicitly 16 stated. 17 So, we have -- 18 MR. STEPHENSON: Sorry. Just to be 19 clear about this, I'm not now talking in terms of 20 compliance with respect to the actual meeting of any 21 objectives, other than collection and reporting. I'm 22 not talking about maintaining a service or a liability 23 standard. I'm talking about: You cannot obtain this 24 extra level of profit unless you fill out the form and 25 get it to us and it's completed accurate. 26 MR. KING: We did not explicitly 27 consider such a mechanism -- 28 MR. STEPHENSON: Is there any reason 160 OEB Panel 1 why it couldn't work? 2 MS KWIK: Well, you know, the 3 implementation task force did a survey, to get feedback 4 from the utilities, on a lot of the customer service 5 indicators, as well as service quality, and the 6 utilities were all over the place, and you can 7 appreciate, with the size of some of these utilities, 8 that they have no regular staff, so I think, you know, 9 for the first generation, you really need to be able to 10 understand what it is that can be supplied. 11 MR. KING: I think it might work. 12 But I think there are a variety of tools that are 13 within the authority of the Board to compel the utility 14 to comply. I would suggest that, as one individual 15 sitting across the table at a task force implied, that 16 if the only tool in your arsenal is the neutron bomb of 17 pulling a licence, it's likely not to be much of a 18 deterrent. 19 Certainly it is one scheme that might 20 be an important part of the Board's arsenal and perhaps 21 that's something that should be submitted to the Board 22 for consideration for possible adoption in the final 23 rate handbook. 24 MR. STEPHENSON: Let me move on to 25 another item. 26 Obviously, in the draft rate handbook 27 you have, shall we say, a disclaimer in there, 28 regarding your intent for revision, which is 161 OEB Panel 1 Section 1.4. 2 A number of parties have suggested 3 that, I don't know, that should go in in bold ink or 4 something, or with flashing lights around it, that 5 there should be no -- no one should be heard to be 6 complaining at the beginning of second generation that 7 they have done something in reliance upon the current 8 scheme and that the Board shall not hear people on such 9 a -- on the basis of such submissions. 10 Do you have any problem with the 11 arguments along those lines, making it perhaps even 12 more explicit than is contained in the draft handbook, 13 that the parties should assume that the second 14 generation will not look like this and that they shall 15 not -- you should not necessarily entrench behaviours 16 other than the expectation that there will be rewards 17 for economically-efficient behaviour and rewards for 18 maintaining whatever the explicit drivers are? 19 MR. KING: With the proviso that we 20 had earlier, which had to do with the issue of what 21 portion of the efficiency gains are captured on behalf 22 of ratepayers. 23 I think the team, the PBR team, did 24 believe that it was important that utilities have some 25 confidence that there would not be a complete taking 26 off the efficiency gains in rebasing but that some 27 portion of them would continue to encourage the sort of 28 behaviour in long-lived investments. 162 OEB Panel 1 But, yes, with that proviso, I would 2 agree with you. 3 MR. STEPHENSON: Let me just, sir, go 4 back quickly to one item that I missed before. Amongst 5 your reporting items for system reliability and 6 quality, did you consider the possibility of putting in 7 a data collection and/or reporting requirement with 8 respect to employee health and safety issues? 9 MR. KING: We did consider the issues 10 of employee health and safety at the beginning of the 11 discussion on the service quality standards. One of 12 the issues that we faced was that we didn't wish to see 13 a bureaucratic creep of the OEB trying to assume 14 certain responsibilities that currently lie elsewhere 15 in government and as a result employee safety and 16 health we believed was being handled by the other body, 17 the Ministry of Health and the Ministry of Labour. I'm 18 not sure exactly what it is. I would have to look back 19 to my records to see what the specific governmental 20 entity is. 21 Through that process, they would be 22 establishing standards and monitoring it and, 23 therefore, the OEB would not necessarily need to do so. 24 MR. POCH: Mr. Stephenson can rest 25 assured that he is in the same wrong room as I am in on 26 a regular basis. 27 MR. STEPHENSON: You would agree with 28 me, however, that at some principal level in terms of 163 OEB Panel 1 economic drivers that insofar as there is a rush to 2 economic efficiency and cost cutting, that is something 3 that might be seen to give as a consequence as well. 4 That's a potential danger. Is that fair? 5 MR. KING: That's fair. 6 MR. STEPHENSON: Lastly, and this is 7 a detailed question perhaps. In your table 6-7, which 8 is on page 6-9, you have a list of PBR related 9 information under various categories, various items. 10 Item No. 3 under category of labour 11 is an item called "change in line crew wage rates". 12 Can you assist me? What is it that you are attempting 13 to track here? What's the value of that information? 14 MR. CRONIN: That actually goes into 15 the input price index. 16 MR. STEPHENSON: Okay. I take it 17 that that is some form of a subset of overall change in 18 labour costs. 19 MR. CRONIN: Yes. 20 MR. STEPHENSON: Why is it of any 21 relevance as a subset? 22 MR. CRONIN: Well, it basically 23 reflects the change in the price of labour. 24 MR. STEPHENSON: It's a very small 25 subset of the price of labour. Is that fair? 26 MR. CRONIN: Salaries? 27 MR. STEPHENSON: Line crew wage 28 rates. 164 OEB Panel 1 MR. CRONIN: I think that a large 2 number of employees are tied to equity pay to those 3 wage rates. I know that half of the employment is tied 4 in some way to those wage rates. 5 MR. STEPHENSON: Well, there are many 6 different forms of corporate organization -- I would 7 assume you would understand that -- amongst the 250-odd 8 municipalities. I take it the Board has no particular 9 interest in micro managing how they set their internal 10 wage rates. 11 MR. CRONIN: This isn't about micro 12 management. Simply we are trying to track the price of 13 labour that goes into the input price index. This was 14 an index that was industry-specific through the 15 province and readily available so that no new data had 16 to be collected. The Board is not going to judge or 17 approve any of the data submitted to them. 18 MR. STEPHENSON: I understand that, 19 but wouldn't a more relevant figure be change in 20 compensation? 21 MR. CRONIN: Change in compensation 22 or compensation rate? 23 MR. STEPHENSON: Yes. 24 MR. CRONIN: That's very difficult to 25 track because as you change the number of employees, 26 for example, if you got rid of lower priced employees, 27 you would see changes in average rates of compensation 28 which have nothing to do with wages or salaries. 165 OEB Panel 1 MR. STEPHENSON: Did you consider 2 using change in General Manager's remuneration? 3 MR. CRONIN: We actually did look at 4 that. 5 MR. STEPHENSON: Or change in CEO's 6 remuneration, including all bonuses? 7 MR. KING: Stock options we might 8 suggest. 9 MR. CRONIN: Well, I think the 10 bonuses and stock options is probably more of a future 11 issue than a past issue. This data was readily 12 available. It was along the lines of what we needed. 13 It was accessible through the Association and could be 14 easily provided in the future by the utilities. 15 MR. STEPHENSON: Do you require 16 reporting of numbers of line persons or reporting of 17 changes in duties of line crews? How do you know you 18 are comparing apples with apples? 19 MR. CRONIN: We are collecting data 20 on employee counts, but we are not looking at 21 subcategories of those. I think the kind of 22 improvements that one could make along the lines of 23 what you are suggesting might not be worth the 24 additional costs if we are simply looking at it from 25 the IPI perspective. 26 MR. STEPHENSON: I have difficulty in 27 understanding why you are tracking it at all at that 28 point, but I will leave that be. Thank you. 166 OEB Panel 1 MS LEA: Thank you, Mr. Stephenson. 2 Mr. Poch. 3 MR. POCH: Thank you. 4 First of all, in terms of rate 5 flexibility, there are I think eight categories of 6 customers listed in Appendix A, page 2. I take it my 7 assumption is correct that a given utility is free to 8 propose other rates. 9 MS KWIK: It's very hard to have a 10 continuing with the existing rate which is based on a 11 cost of service, average cost of service model to plug 12 in new or pull out new rate classes. 13 The utilities that are going to file 14 their own cost of service to base their classes on, 15 it's not a problem, but for utilities that have to 16 depend on the model, it's a bit more problematic. 17 MR. POCH: If a given utility has a 18 proposal, and I can think of a real example where 19 there's a proposal for a co-op within the IDC of 20 customers who are going to own in common a renewable 21 wind generator, there's an argument that they are 22 helping reduce some distribution costs. The utility 23 wants to recognize that or is persuaded to recognize 24 that. 25 How does the utility do that then? 26 MS KWIK: I would assume that any 27 time there are optional rates that are being proposed, 28 it's a matter of providing the Board with justification 167 OEB Panel 1 for those optional rates. 2 MR. POCH: You are not suggesting 3 that you add any new rates. There has to be a complete 4 cost of service study. 5 MS KWIK: In terms of adding rate 6 classes that aren't sort of based on those specific 7 savings to the distribution system, I would say a 8 utility could try putting in a justification seeing 9 what the Board thinks of the evidence. It's hard to 10 sort of use the model that you are using right now and 11 start picking out customer groups from it. 12 MR. POCH: You mentioned in passing 13 this morning -- you made a reference to a minimum bill 14 discussion that would be in the final version. I'm 15 sorry, I missed most of that discussion. Could you 16 just elaborate on that for me. 17 MS KWIK: The utilities currently 18 have a minimum bill provision whereby if a customer 19 buys no energy at all, they still are charged with a 20 certain amount every month because the assets are there 21 in place waiting to serve them. 22 That's the sort of provision that we 23 actually had failed to transpose into the draft rate 24 handbook that we still have to investigate. 25 MR. POCH: Perhaps I misunderstood 26 then. 27 MS KWIK: Sorry, that the Board has 28 to decide on. 168 OEB Panel 1 MR. POCH: Yes. 2 MS KWIK: Board staff would have to 3 sort of investigate how it could be done. 4 MR. POCH: I had just assumed that 5 the minimum bill and the customer charge, the non-IDC, 6 were synonymous, but that is not necessarily so then? 7 MS KWIK: I don't think it is 8 necessarily so. It could be. We still have to do some 9 research on that. 10 MR. POCH: All right. 11 In turning to IDC then, in Appendix A 12 at page 5 you offer up this value of .0062. You are 13 saying it was the only value currently available and it 14 is recommended for use in developing the rates. 15 Mr. King, I think you were asked 16 earlier if you would agree -- I think it was Mr. Tucci 17 who asked if you agreed -- it would be hard for a 18 utility to do a study to come up with its own value. 19 It would be a lot of work. 20 I saw you nod. I'm not sure that got 21 on the transcript. I took that as a yes, that would be 22 a lot of work for an individual utility to do a study 23 supporting a different IDC? 24 MR. KING: Not being an expert in IDC 25 studies I couldn't comment on whether it is a lot or a 26 little. I think for many utilities, many of the 27 smaller utilities, I think it would be difficult for 28 them to do. 169 OEB Panel 1 MR. POCH: Right. 2 MR. KING: However, I'm not sure 3 whether it is a substantial study for one of the larger 4 utilities or not. 5 MR. POCH: Okay. 6 Now, is it reasonable to assume that 7 a municipal utility would generally be happier with a 8 low IDC number being incorporated in this process to 9 the extent that that gives them less exposure? 10 MR. KING: It depends upon the 11 circumstance of the utility. If the utility has 12 substantial portions of their system that are close to 13 capacity and they are facing, you know, a significant 14 expansion in order to accommodate additional 15 demand-related growth, the IDC -- if they had an IDC 16 that was too low then they might not be generating the 17 revenue necessary to expand that system. 18 So, ideally, given the two-part 19 structure you want that IDC to represent the 20 circumstance of the utility in terms of providing 21 additional expansion of the system to meet load growth. 22 MR. POCH: If you have a declining 23 marginal cost you would certainly like to see a low 24 IDC. You could benefit from that. 25 MR. KING: I would suggest that if 26 you are in the circumstance where you don't have a 27 significant portion of your system that is close to 28 capacity that you would want to see as much of this 170 OEB Panel 1 into the fixed charge as possible to provide stability 2 of rates. 3 Now, with one caveat. One can also 4 see the circumstance that if you are in a high growth 5 area and you have plenty of capacity in your network, 6 then you actually want the IDC to be high because then 7 the expansion and sales growth gives you additional 8 margin. Every additional kilowatt hour you sell is 9 above the incremental costs of providing it and, hence, 10 therefore you would want an IDC that was higher 11 MR. POCH: Yes. 12 MR. KING: So it depends upon the 13 risk preferences of the utility. 14 MR. POCH: We can agree to the 15 general statement, then, that for some utilities they 16 are going to favour -- there are going to be incentives 17 for them to want to minimize IDC or to enhance it, 18 depending on the situation they find themselves in? 19 MR. KING: And the risk preferences, 20 yes. 21 MR. POCH: Yes. 22 Now, a lower than justified IDC would 23 tend to hurt small customers. Is that agreed? 24 Assuming that the minimum bill or the customer charges 25 end up reflecting this discussion. 26 MR. KING: Yes, I think that is 27 probably the case. 28 MR. POCH: And a lower than justified 171 OEB Panel 1 IDC would also tend to water down the price signal for 2 customer conservation? If you can't avoid -- 3 MR. KING: That's probably true. 4 MR. POCH: All right. And 5 similarly -- 6 MR. KING: But again, we have to be 7 careful because there is so much averaging going on it 8 is unclear to what extent they are actually receiving 9 that price signal. 10 MR. POCH: Yes. 11 MR. KING: But in general that is 12 probably true. 13 MR. POCH: And what is true for 14 conservation is presumably true for self-generation? 15 MR. KING: I think you are probably 16 right, but I would have to think about it a bit more. 17 MR. POCH: Now, you referred to this 18 1980 study, the only one available for IDC. Did you 19 have an opportunity, or Mr. Cronin have an opportunity 20 to critically examine that study? 21 MR. KING: No. 22 MR. CRONIN: No. 23 MR. POCH: Did you get a chance to 24 read it at all? 25 MR. KING: No. It was never provided 26 to us. 27 MR. POCH: All right. Much to my 28 amazement, Mr. Chernick was able to put his finger on 172 OEB Panel 1 it in about 30 seconds. That is no comment on your 2 capabilities, it is just a quirk of Mr. Chernick's 3 brain and the fact that he had happened to have dealt 4 with that study back in 1989 I think it was and he 5 provided me with a copy. He refers to it in his 6 evidence. 7 Do we have any indication, are we 8 talking about the same study here? 9 MS KWIK: I believe so, yes. 10 MR. POCH: All right. That is the 11 one referenced in Appendix B of Mr. Chernick's evidence 12 which has been filed. 13 So the assumption in the handbook 14 that that study included losses, where did that 15 assumption come from? 16 MS KWIK: When we used that data we 17 actually relied heavily on stakeholder -- some of the 18 members on the task force who had, I guess, copies of 19 the study and that is where we got it from. 20 MR. POCH: All right. Okay. 21 Changing topics a little, there was 22 some discussion earlier today, again just in passing, 23 about price flexibility you would have to deal with in 24 the final rate handbook to deal with issues such as 25 bypass. Did I catch that correctly? 26 MR. KING: Well, that is one of the 27 reasons one may wish to have rate flexibility is to 28 deal with those effects of opening the market and 173 OEB Panel 1 introducing competition in other segments of the 2 industry that may persist on monopoly services at the 3 fringe. Bypass is one of them, yes. 4 MR. POCH: All right. I'm sorry, I 5 didn't then catch: What is the proposal to give that 6 flexibility? Is there one specifically or you are just 7 acknowledging that is a concern? 8 MR. KING: It's a concern and that is 9 one of the reasons, rationale for providing pricing 10 flexibility and the ability to move the balance of 11 rates between the various rate classes based upon the 12 utility. 13 MR. POCH: So the proposal, you are 14 talking about the flexibility between rate classes; you 15 are not talking about the creation of specific new 16 rates or the flexibility, a range rate where the 17 utility can address particular customer concerns? 18 MR. KING: That is correct. We have 19 not incorporated that aspect. The task forces, I 20 believe they did not wish to have such flexibility for 21 a variety of reasons, including creating the potential 22 wedge that various customers might come to the utility 23 and demand a new rate class or a new rate deal. 24 MR. POCH: Okay. 25 Turning to DSM then, Messrs. King and 26 Cronin, I took it from your earlier comments that it 27 wasn't in your remit I think was the phrase you used. 28 Did I catch that? Did I understand correctly? 174 OEB Panel 1 MR. CRONIN: I'm sorry, I missed 2 the -- 3 MR. POCH: Dealing with DSM, 4 incentives for DSM in regulation, regulatory treatment 5 of DSM just wasn't in your mandate? You used the 6 phrase earlier, it wasn't in my remit I think, 7 Mr. King. 8 MR. KING: I was referring to because 9 of the policy issues that are much broader than just 10 the issues associated with establishing the 11 distribution rate framework we came to the conclusion 12 that it couldn't be addressed simply in this arena and, 13 therefore, that was the rationale for stating that it 14 is not in our remit. 15 MR. POCH: When you say "we came to 16 that conclusion", who are you referring to? 17 MR. KING: I am referring to the PBR 18 team with advice or with consultations internal to the 19 Board. It is not just that Dr. Cronin and Mr. King 20 came to that conclusion. 21 MR. POCH: It was Board staff as 22 well, in other words? 23 MR. KING: It was Board staff as 24 well, with consultations internal to the Board, yes. 25 MR. POCH: Well, let me understand 26 that last expression, "consultations internal to the 27 Board". 28 MR. KING: It was basically a series 175 OEB Panel 1 of discussions or a series of meetings with Board 2 staff. 3 MR. POCH: All right. I will come 4 back to that in a minute. 5 I read that OHSC, wearing its 6 transmission hat, has just circulated a notice that it 7 is about to embark on a discussion of PBR. I was 8 intrigued by a reference in their August 30th overview 9 document, which reads -- I will read it to you; it's 10 very short: 11 "Regulators in several 12 countries -- the U.K., 13 Australia, Norway, California -- 14 have approved PBR plans for 15 transmission companies and for 16 companies that offer both 17 transmission and distribution 18 services. In these 19 jurisdictions, revenue cap 20 regulation is the preferred PBR 21 form because of its 22 compatibility with energy 23 efficiency objectives." 24 (As read) 25 Does that reflect your understanding 26 of the situation? 27 MR. CRONIN: Again, I think we are 28 dealing, one, with the issue of scale on the part of 176 OEB Panel 1 the transmission company, which is much larger. 2 The second is there were large 3 discussions in the cap mechanism task force around what 4 kind of mechanism to have, and there was a fair amount 5 of consensus that a price cap was the mechanism to 6 employ. 7 MR. POCH: Okay. You have jumped 8 ahead. 9 First of all, do you agree with the 10 observation that OHSC makes there about these other 11 jurisdictions with transmission or mixed transmission 12 and distribution utilities and their choice? 13 MR. KING: No, I don't think I would 14 agree with that. 15 MR. POCH: Would you elaborate? 16 MR. KING: It may very well be the 17 case that for transmission companies some sort of 18 scheme such as a revenue cap has been considered. But 19 I don't believe that that is necessarily the case, 20 particularly as it relates to Norway and the England 21 and Wales circumstance with regards to the distribution 22 companies. 23 MR. POCH: Do you agree with what is 24 implicit in the statement, though, that a revenue cap 25 is something that is a lot more friendly to 26 conservation DSM efforts than is a price cap regime? 27 MR. KING: Not necessarily. It 28 depends upon what is the price that is capped. If a 177 OEB Panel 1 substantial portion of the price that is being capped 2 is the customer charge, it looks an awful lot like 3 revenue cap regulation. 4 So, you know, I don't think it's 5 quite so simple as to say price cap regulation is less 6 friendly to energy efficiency than revenue cap 7 regulation. 8 Much of that has to do with what is 9 the design of the throughput based charges if there are 10 throughput based charges that are capped. In those 11 throughput based charges, clear the incentives can 12 differ, as you were exploring earlier, by depending 13 upon how they relate to the marginal costs of providing 14 a service. 15 MR. POCH: Let's talk about this 16 marginal cost issue a bit. 17 Is IDC, as assumed in your rate 18 handbook, a short-run marginal cost or a long-run 19 marginal cost? 20 MR. KING: It's intended to be a 21 long-run marginal cost. 22 MR. POCH: All right. 23 You would agree that a short-run 24 marginal cost for distribution utilities tend to be 25 much lower typically? 26 MR. KING: That's true. 27 MR. POCH: Is it your experience that 28 utilities, or at least their accountants, prefer to see 178 OEB Panel 1 DSM as an expenses item because of the intangible 2 nature of the assets? 3 MR. KING: Not only for that purpose, 4 but also because they want it off their books in case 5 regulatory treatment changes. 6 MR. POCH: It better not. 7 --- Laughter 8 MR. POCH: In contrast to say capital 9 expenditure on wires which tends to be amortized 10 obviously. 11 MR. KING: That's correct. Although 12 there are certainly jurisdictions that do capitalize 13 and amortize DSM. 14 MR. POCH: Sure. We have experienced 15 that here in the past. 16 Is it fair to say that corporations 17 especially, privately held corporations, tend to put 18 emphasis on short-term results? 19 MR. KING: Not necessarily. I don't 20 think that is necessarily true. 21 Much of it has to do with whether a 22 corporation is privately held or publicly held. 23 MR. POCH: Right. 24 MR. KING: Certainly, for publicly 25 held corporations, they seem to only be able to see the 26 next quarter ahead. Having been in a public 27 corporation, I know that there are certainly those 28 issues. 179 OEB Panel 1 MR. POCH: Right. 2 MR. KING: But also being in a 3 privately held firm, there are times at which they can 4 take a very long view and we can see plenty of examples 5 of where that is the case. 6 MR. POCH: It is not uncommon for 7 them to have a short-term perspective, but you are 8 saying there are exceptions. I understand that, 9 especially in privately held. 10 What about management incentives? Do 11 they tend to be -- are they typically looking at 12 performance in the year of the corporation? 13 MR. CRONIN: Actually, I think a 14 growing occurrence that management incentives are tied 15 to multi-year payouts based on often times meeting 16 three to five-year goals. 17 MR. POCH: Three to five-year goals. 18 So they are more of a midterm phenomena. 19 Would it not be the case that a price 20 cap would disincent DSM because it is expensed in the 21 year, despite the fact that it needs to be justified on 22 perhaps 15 years of benefits? Price cap is based on a 23 long-run IDC. Wouldn't that mean that -- and assuming 24 that there is a situation where the company with 25 relatively myopic vision, doesn't that all add up to a 26 pretty straightforward situation where you are going to 27 see a reluctance to enter into DSM, which is going to 28 have -- give short-term pain in terms of cash? 180 OEB Panel 1 MR. KING: I think it has nothing to 2 do with whether it's price cap or revenue cap. 3 MR. POCH: Okay. Leave aside price 4 cap or revenue cap. 5 MR. KING: If the net present value 6 of the investment is positive given the investment 7 criteria that the firm specifies, it will undertake the 8 action. 9 MR. POCH: That assumes they are 10 perfectly rational and they don't have this short-term 11 focus. Correct? 12 MR. KING: Well, if they have a 13 short-term focus, it may suggest that they have a 14 higher discount rate. 15 MR. POCH: A higher -- sorry? 16 MR. KING: Discount rate. That 17 doesn't suggest that I only do things that have a 18 one-quarter payout. 19 There are few firms that operate on a 20 one-quarter basis, even given the multiples that are 21 extant in the equity markets today and the demand for 22 quarter performance of publicly-traded firms, most of 23 them still make long, wise investments even if they may 24 expense them. 25 --- Pause 26 MR. POCH: We have a situation with a 27 DSM measure that is -- there are some market barriers, 28 hence we want to do a DSM measure, customers aren't 181 OEB Panel 1 going to -- perhaps there is a mismatch, the benefit to 2 the customer doesn't go to the person being called upon 3 to make the capital decision, for example. This is a 4 measure that passes the total resource cost test 5 perhaps, just marginally. It takes 15 years to pay 6 off. Is it quite possible it could pass the TRC test 7 but fail the utility cost test? Are you familiar with 8 these tests, gentlemen? 9 MR. KING: At one time in my career I 10 was quite familiar with them. 11 MR. POCH: Yes. That sounds like a 12 possible scenario? 13 MR. KING: Yes, it's possible. 14 MR. POCH: In the regime we have 15 proposed here, a utility is not going to have much of 16 an incentive to do that, are they? 17 MR. KING: No. They may not have an 18 incentive to do so. But as I think we have alluded to 19 in our opening statement and in some of the discussion 20 this morning, there is no doubt in my mind that there 21 are market failures, as you assert, that cause perhaps 22 the incorrect level of energy efficiency to be adopted 23 by the market. I will grant you that. Okay? 24 How could I not grant that? I spent 25 greater than 15 years of my life doing that. So sure I 26 grant you there are market failures. 27 However, we are now talking about a 28 new environment where the question still remains to be 182 OEB Panel 1 answered: Given that there are market failures, what 2 is the best way to address market failures? 3 And in the case of the Ontario 4 distribution sector, where we have in excess of 200 of 5 the current extant distribution utilities of quite a 6 modest size, I would find it hard, from a public policy 7 perspective, to suggest that the best way of addressing 8 that scheme is to provide subsidized energy efficiency 9 programs that are administered by a utility 10 distribution sector where it is unclear what 11 comparative advantage a large portion of that 12 distribution sector has in providing those services. 13 So, to address the issues of what's 14 the best way of delivering or addressing energy 15 efficiency and the market failures that may be extant, 16 there are still several policy questions that have to 17 be addressed. 18 Number one: Are the market failures 19 large enough that it justifies some sort of 20 intervention? Number two: If the answer to that is 21 "yes", then the question is, "By whom" and "How should 22 they be implemented?" 23 Certainly, in the case of our remit, 24 which was to look at the issues of the design of the 25 distribution -- electric distribution rate regulation 26 mechanism, I don't think it's possible to address those 27 two issues. 28 MR. POCH: Are you suggesting, then, 183 OEB Panel 1 that a utility which you earlier indicated is free to 2 come to the Board and fill an application and propose 3 something would -- it would be better for us to address 4 those policy questions piecemeal in each application by 5 each individual utility? 6 MR. KING: No; I'm suggesting those 7 policy questions need to be addressed on a broader 8 scale, holistically considering the energy industry, as 9 a whole. 10 MR. POCH: Isn't what you are saying 11 that you are recommending that the Board not entertain 12 applications from individual utilities for DSM to be 13 recognized in their particular PBR? 14 MR. KING: I think that's strong. 15 I'm not -- 16 MR. POCH: Well, didn't you just say 17 that? 18 MR. KING: I'm not actively 19 encouraging people to file such applications. But if 20 they have a desire to offer such a program, they are 21 free to file an application. 22 MR. POCH: You just said, "It's too 23 big for us here, today, with all the utilities in one 24 room, in a public hearing, it's too big for us, there's 25 other parts of the economy or players that need to be 26 involved in this discussion". 27 Isn't that what you just said? 28 MR. KING: First of all, not all the 184 OEB Panel 1 utilities are in this room and, secondly, not in this 2 room are many of the other actors in the energy 3 industry. Specifically, I don't believe there are any 4 ESCOs who are present in the room -- maybe there are, 5 there might be, but I doubt that we have a complete 6 representation of ESCOs, or energy service companies -- 7 I doubt we have a complete representation of 8 independent power generators; I don't believe that we 9 have a representation, necessarily, of Ontario Power 10 Generation Inc. 11 MR. POCH: All right. So, given all 12 that, wouldn't those -- a fortiori, those concerns 13 would apply in the situation of an individual utility 14 coming forward and saying, "Gee, I would like to carry 15 on my little DSM program; I want an incentive"? 16 There would be even fewer people in 17 the room. Isn't that fair? 18 MR. KING: There may be fewer people 19 in the room. 20 MR. POCH: All right. 21 MS LEA: Sorry, Mr. Poch. I should 22 call a break soon. 23 Do you wish to take a break now? How 24 long will you be? Do you want to finish -- 25 MR. POCH: I could finish this little 26 section in a few minutes -- 27 MS LEA: Please. 28 MR. POCH: -- and I have some more 185 OEB Panel 1 questions then. 2 So, let me just close off that point, 3 then. We had the task force group saying they thought 4 it was something that ought to be done sooner or later 5 and, at least sooner, it should be voluntary. 6 You are aware of that? I think 7 that's already on the record today. 8 Were you aware that the OEB itself, 9 the Board, had made mention of distribution in its 10 report on interim distribution rates for OHSC? Did you 11 consider that? 12 MR. KING: No. 13 MR. POCH: I took it from 14 conversation earlier you are not particularly aware 15 what the Board has decided in the gas -- in its 16 regulation of the gas in Ontario, what policy decisions 17 have been made there already? 18 MR. KING: We are aware of the policy 19 decisions that were made there, yes. 20 MR. POCH: All right. And you are 21 aware of the legislation? 22 MR. KING: Yes. 23 MR. POCH: So, given all those 24 signals -- which, I would say, go in one direction but 25 let's not debate it -- you said it's a bigger issue. 26 What, then, are you proposing? How, then, are we to 27 wrestle with this issue? 28 Is there a proposal? 186 OEB Panel 1 MR. KING: I don't believe that we 2 have made a specific proposal. We have suggested that 3 the Board should consider these issues at a later date, 4 in a different forum. Specifically, I think that 5 parties are free to issue a motion to the Board that 6 they hold an inquiry into these issues. Or they can 7 approach the Ministry. 8 MR. POCH: Okay. That's probably a 9 good place to pause. 10 MS LEA: Thank you, Mr. Poch. 11 Just two scheduling items, then, 12 before we break. 13 It seems likely that this panel will 14 continue into tomorrow. If there's anyone who has to 15 ask their questions today because they cannot return 16 tomorrow, perhaps you could let me know during the 17 break. 18 Secondly, we have a number of parties 19 scheduled for tomorrow and if this panel continues into 20 tomorrow, we may not reach them all. 21 I should put on the record, then, 22 that Mr. Gibbons and Mr. White very kindly indicated 23 their flexibility in regards to their appearances. So 24 it may be that they are bounced from their spots 25 tomorrow and as there are two expert witnesses who are 26 attending, one for the Consumers Association of Canada 27 and one for the Vulnerable Energy Consumers Coalition, 28 who can only come tomorrow. 187 OEB Panel 1 Thank you. 2 We will take 15 minutes, please. 3 That will be 25 after three. 4 --- Upon recessing at 1511 5 --- Upon resuming at 1529 6 MS LEA: Thank you. Good afternoon. 7 We will reconvene, please. 8 Ms Demarco. 9 MR. POCH: I still have a few more 10 questions. 11 MS LEA: I'm sorry. I do beg your 12 pardon. No disrespect intended. Please proceed. 13 MR. POCH: All right. I was going to 14 make a quip about being in the wrong room like poor 15 Mr. Stephenson, but I am being told not even to go to 16 another room. I have to create another room here. 17 Ms Kwik, I think it was you in your 18 recital at the outset this morning you referred to one 19 of the concerns with dealing with DSM as being that 20 there was permutation issues that guard against unfair 21 advantages being conferred upon affiliates. Do you 22 recall that? 23 I guess the concern arises whenever 24 there is any kind of potential for a transaction 25 between the regulated monopoly and its affiliate. Is 26 there anything special about DSM here? I am assuming 27 that there is a concern. If, for example, contracts 28 with its affiliates to deliver the DSM services, 188 OEB Panel 1 there's always an issue of whether the transfer price 2 is appropriate and so on or if it discriminated in 3 deciding who it was going to hire to do some DSM 4 measure, just as it could discriminate in any 5 contracting out. 6 Is there something special about DSM 7 here that I have missed? 8 MR. KING: Well, it's more the 9 provision of subsidy dollars to a specific customer on 10 condition of accepting, either retaining on standard 11 supply service or accepting service from an affiliate. 12 MR. POCH: So it's a tied selling. 13 MR. KING: Tied selling. 14 MR. POCH: It would be an example of. 15 All right. 16 MR. KING: Or the use of the DSM 17 dollars to promote certain activities of the affiliate. 18 MR. POCH: We are talking about, you 19 know, near fraudulent activities here that would 20 certainly be contrary to competition policy generally. 21 Correct? 22 MR. KING: Well, that's one of the 23 pieces that may be there. There also are the issues of 24 promoting the brand name under which the affiliate 25 operates or is closely associated with. 26 MR. POCH: Wouldn't all these be 27 issues that should be caught by the codes of conduct? 28 MR. KING: They should be but they 189 OEB Panel 1 are not necessarily caught. Experience has shown that 2 sometimes it's difficult to develop those guidelines in 3 a way that captures all the ways that people become 4 innovative in finding a way around them. 5 There are other ways that one can try 6 and address these issues such as what they have done in 7 Norway which is when the issue became significant and 8 the distributors were tying the DSM dollars to 9 strategic marketing on the part of their retail 10 affiliates. There was then a movement towards regional 11 DSM centres in order to break some of the tie between 12 the actual utility and its affiliate in the use of the 13 dollars. 14 I also happened to overcome some of 15 the other issues that we were talking about earlier 16 such as the issues of scale of some of the distributors 17 in Norway. 18 MR. POCH: Okay. Turning to that 19 concern, which was also enumerated at the outset today, 20 especially for small utilities this could be a problem. 21 Could that not be addressed by the use of either 22 groupings of the utilities working together, such as we 23 see emerging on the gas acquisition side, the 24 electricity acquisition side, or by contracting out to 25 experts in DSM who may well be able to aggregate such 26 contracts? 27 MR. KING: Certainly those issues 28 could be addressed through those sorts of mechanisms, 190 OEB Panel 1 but again, it means that you have come to a conclusion 2 as to the second and third issues you are raising. 3 MR. KING: I wasn't asking you to 4 give up your other objections. I was just specifically 5 dealing with that. There is a number of possible 6 remedies to mitigate that concern. 7 MR. KING: That's correct. 8 MR. POCH: Okay. 9 MR. KING: As I think you would 10 concede, that is a discussion that's fairly lengthy and 11 there are many issues to be addressed in that 12 discussion which would suggest that it warrants its own 13 consideration on those issues. 14 MR. POCH: Wouldn't the advantage of 15 an incentive scheme for DSM be precisely that it gets 16 you away from having to discuss all that? You give 17 them the incentive and they will find the most cost 18 effective way to do it? 19 MR. KING: I don't think that's 20 necessarily the case. That's why in fact in California 21 they have moved away from distribution company 22 delivered DSM because there other mechanisms that may 23 be more cost effective as a means of delivery of those 24 services. 25 To basically institute a shareholder 26 incentive scheme in loss margin means that you have 27 already answered the question that the distribution 28 utilities are appropriate to deliver it. 191 OEB Panel 1 MR. POCH: I misunderstood your 2 caveat a moment ago. I thought you meant there needs 3 to be a long discussion about how these utilities could 4 mitigate the concern about scale and so on. You were 5 saying there needs to be first a discussion as to 6 whether this is the sector to deliver the goods. 7 MR. KING: Exactly. 8 MR. POCH: All right. You would 9 agree though that whoever delivers the goods, the LDCs 10 given their fact that at least at the moment they are 11 going to be seen as an entity with a customer 12 relationship, they should be part of the equation. 13 MR. KING: No. I wouldn't 14 necessarily accept that. 15 MR. POCH: Would you agree that we 16 should have a regulatory structure that doesn't make 17 them hostile to conservation? 18 MR. KING: Yes, I would agree with 19 that. 20 MR. POCH: No matter who does it. 21 MR. KING: That would be one of the 22 objectives. 23 MR. POCH: All right. Now, you 24 indicated you had done a lot of work in this area in 25 the past. Was it your experience that generally there 26 was a lot more potential and is generally a lot more 27 potential for cost effective conservation of 28 electricity than there is of, say, natural gas? Here I 192 OEB Panel 1 am not limiting it to just distribution cost savings. 2 I am talking about the whole bundle. 3 MR. KING: I think it depends upon 4 the specific circumstance, but in many cases one 5 can -- let's go with your hypothesis. 6 MR. POCH: All right. Just to get a 7 sense of the scale here. In Ontario the gas utilities 8 currently have programs which they are filing to 9 indicate -- to produce a stream of net benefits on the 10 order of $40 million or $50 million for each year of 11 DSM activity for each of them in their franchises. Any 12 reason to differ with that? 13 MR. KING: I wouldn't have any basis 14 on which to differ from it. 15 MR. POCH: And if they see societal 16 benefits, that is the difference between the FCT and 17 the TRC, as being roughly that much again, does that 18 comport with your experience of what's typical? 19 MR. KING: Again, I would have no 20 basis on which to agree or to deny your statement. 21 MR. POCH: Okay. Well, based on 22 thsoe numbers, I took it in the gas sector we are 23 looking at societal savings of perhaps a couple of 24 hundred million dollars a year and the electricity 25 sector being that much bigger, it would have 26 significantly more potential than that. You don't have 27 any reason to differ with that. I take it you didn't 28 investigate that. 193 OEB Panel 1 MR. KING: That's correct. We did 2 not. 3 MR. POCH: You did put in service 4 standards, for example, for how fast the utilities have 5 to answer their telephones. Is there any reason why 6 you didn't want to put in a service standard for 7 maintaining a level of energy efficiency effort, even 8 at today's level, whatever it may be? 9 MR. KING: Well, circumstances have 10 changed. I think all of us would agree that one of the 11 historic market failures that has been argued as a 12 reason for intervention and promoting energy efficiency 13 has been that price is not equal to marginal cost of 14 the energy. 15 However, we are moving to a market 16 structure where certainly the intent is that the 17 commodity will be subject to much more market pressure 18 and as a result should better reflect at least the 19 private marginal cost to supplying that service. As a 20 result, that aspect of the argument for market failures 21 is probably no longer present. 22 To basically then come back and say 23 "Well, there's all these other market failures that 24 exist and it provides a rationale for intervention", 25 well, we haven't even seen what the impact is of these 26 pricing changes on the market and to what extent 27 competitive retailers choose to offer energy efficiency 28 services as one component of their competition 194 OEB Panel 1 strategy. 2 For us to then go to the argument 3 that there should be subsidized DSM that gets in the 4 way of potentially provided market DSM is to perhaps 5 limit the opportunities for the competitive market to 6 offer these services which I would assert from my 15 7 years of experience in that field that the whims of 8 regulators and politicians for pursuing DSM often get 9 in the way of the market providing it. 10 What we wish is that if we are going 11 to have intervention policies, they be in areas where 12 it doen't displace the market from providing it, 13 because the market is a much more efficient mechanism 14 of delivering those services in the long run than 15 relying upon the vagaries of current policy, politics 16 and government attitudes. 17 MR. POCH: All right. I will stop 18 there. 19 --- Laughter 20 MR. POCH: Thank you very much. 21 MS LEA: Thank you, Mr. Poch. 22 Ms Demarco, you had asked to proceed 23 next. Go ahead, please. 24 MS DEMARCO: Just for the record, to 25 be clear, I am asking questions only on behalf of 26 Lindsay Hydro and Flamborough Hydro, despite the fact 27 that we represent a larger client group or are 28 appearing on behalf of a larger client group. 195 OEB Panel 1 Just to ensure the accuracy of the 2 record as well, Mr. King, in the context of a question 3 posed to you regarding transition costs you indicated 4 that there were three criteria in the assessment. 5 MR. KING: That is correct. 6 MS DEMARCO: If I can refer you to 7 section 3.3.4 of the handbook -- 8 MR KING: Page 3-5? 9 MS DEMARCO: That's right. There 10 appear to be four criteria referenced. Specifically 11 there is a reference to the Z-factor criteria. So am I 12 to take it that the inability of management to control 13 criteria is not applicable to transition costs? 14 MR. KING: No, I would suggest that 15 it still applies. Perhaps there are four. However, it 16 would seem to me that for most transition costs one 17 would -- it is probably the case that management does 18 not have the ability to control it. 19 If they have the ability to control 20 it and they choose not to do so then I think it is 21 probably more an issue of prudence than it is one of 22 ability to control. 23 MS DEMARCO: So there are, in effect, 24 four criteria in assessing transition costs? 25 MR. KING: I believe so. 26 MS DEMARCO: The remainder of my 27 questions -- and there are very few -- just revolve 28 around the participation of small utilities in the 196 OEB Panel 1 process. Specifically, if I can refer you to your 2 Exhibit 1. Is it safe to say that utilities with 3 customers of less than 1,000 and from 1,000 to 10,000 4 customers represent approximately two-thirds of all 5 municipal electric utilities in the province? 6 MR. KING: Subject to check, that 7 seems approximately correct. 8 MS DEMARCO: Actually, if you could 9 attach numbers to the bars on the graph, that would be 10 greatly appreciated. 11 MS LEA: Can you do that, Mr. King? 12 Not at the moment, but in subsequent days? 13 All right. Thank you. 14 We will undertake to do that. 15 Undertaking 16 MS DEMARCO: Can you tell me the 17 number of municipal electric utilities with less than 18 10,000 customers that provided a complete dataset in 19 your request for data? 20 MR. CRONIN: I believe it was 16. 21 MS DEMARCO: That provided a complete 22 dataset, i.e., answered each and every of the question 23 in the survey? 24 MR. CRONIN: Oh, oh. No. I would 25 have to check on that. It was not 16. 26 MS DEMARCO: I wonder if it would be 27 possible to get that information in the context of -- 28 MR. CRONIN: There were a handful of 197 OEB Panel 1 small utilities that made relatively complete 2 submissions. 3 MS DEMARCO: Two issues. Number one: 4 What is "relatively"? Number two: What is a 5 "handful"? 6 I wonder if we could attach some 7 numbers to those? 8 MR. CRONIN: Sure. 9 Undertaking 10 MS DEMARCO: Adjectives, wonderful. 11 In addition, do you know the number 12 of MEUs with less than 1,000 customers that provided a 13 complete dataset? 14 MR. CRONIN: I can get it. 15 Undertaking 16 MS DEMARCO: Wonderful. 17 Can you tell me the numbers of MEUs 18 with less than 10,000 that participated on all or each 19 of the four task forces? 20 --- Pause 21 MR. CRONIN: We could check on that. 22 Undertaking 23 MS DEMARCO: Similarly, the numbers 24 of MEUs with less than 1,000 customers who participated 25 on the task forces? 26 The last question is: Do you know 27 currently the number of MEUs with less than 10,000 28 customers that are participating in this proceeding? 198 OEB Panel 1 MS LEA: You mean intervenors that 2 have sought intervenor status? 3 MS DEMARCO: That's right. 4 MS LEA: I think that reference to 5 the public record could provide that, so even if the 6 witnesses don't have access to that, I do. We can 7 provide it to you in some fashion. 8 Undertaking 9 MS DEMARCO: And, similarly, the 10 number with less than 1,000 customers. 11 MS LEA: Is somebody taking a note of 12 all this? 13 Okay. Good. 14 Ms Demarco, when and in what form do 15 you want this information provided? Will you be 16 returning tomorrow when this panel returns? 17 MS DEMARCO: I will be here for the 18 balance of the week, so any time during the course of 19 the week is fine. 20 That is the end of my questions. 21 MS LEA: Thank you. 22 Mr. Mia, I gathered from what you 23 said that you do not have any questions remaining. Is 24 that right? 25 MR. MIA: No questions. 26 MS LEA: Thank you. 27 Mr. Power. 28 MR. POWER: Thank you. 199 OEB Panel 1 Good afternoon, panel. It is a 2 pleasure to be here with you. 3 MR. KING: I wish I could say the 4 same. 5 MS LEA: Now, let's not start. 6 MR. POWER: Oh, come on. 7 --- Laughter 8 MR. CRONIN: I'm really happy to be 9 here. 10 MR. POWER: That's good. That's 11 good. 12 I would like to start off with some 13 general questions about what you have had an 14 opportunity to do and not do and just by way of a 15 context, when PHB did the work for the MGC they were 16 actually very honest and forthright about the 17 limitations of their study and put some, I think, 18 important caveats so at the end of the day it gave 19 their work both a fair amount of credibility but also 20 identified stuff that was still outstanding. 21 So with that context in mind I was 22 just curious -- we have heard some small revelations 23 today in terms of things that you might disagree with 24 if you had your druthers or things that you didn't have 25 time to do. I just wondered if you could outline in 26 more detail what constraints there would have been on 27 the study period in putting together the draft handbook 28 that are of most concern to you? 200 OEB Panel 1 MR. KING: I think there are a few. 2 As we have said repeatedly over the 3 course of today and also at the technical -- was it a 4 workshop? I get these terms mixed up -- one of the 5 disappointments that I think the team had was that the 6 data and the process was not sufficient to allow us to 7 really go as far as we would have liked in a yardstick 8 scheme. 9 Just by way of discussion, I think 10 that if we were just kind of to recount the history of 11 how we arrived at the circumstance that we find 12 ourselves in today -- you don't mind me waxing eloquent 13 for a few moments, Mr. Power? 14 MR. POWER: Subject to Ms Lea's usual 15 direction on these matters. 16 MR. KING: Okay. 17 MS LEA: Well, it is the first answer 18 you are giving, so I will give you some latitude there. 19 --- Laughter 20 MR. CRONIN: We have all week. 21 MS LEA: Oh, please. 22 MR. POWER: We don't. 23 --- Laughter 24 MS LEA: Other people need to be 25 heard. 26 Please go ahead. 27 MR. KING: Last fall when we 28 undertook the engagement and we went to the initial 201 OEB Panel 1 series of educational workshops and the consultations 2 with the industry, which were five workshops around the 3 province, I think that Dr. Cronin and I came to the 4 process with some thoughts about where it was like to 5 head and one of them was that maybe a price cap plan is 6 really appropriate. 7 I happened to be thinking that with 8 270 distribution utilities that some sort of yardstick 9 might make sense. Frank was at the outset not so sure 10 that that was the best scheme. 11 But after the regional workshops he 12 and I both became particularly enthused with the idea 13 of perhaps implementing yardstick here in Ontario. 14 We thought it was probably the right 15 thing to do. It was the right circumstance, the right 16 collection of utilities, and we really wish to see it 17 work. 18 So, as a consequence, when we went to 19 phase two of the PBR consultation process, which was 20 constructing the task forces and then entering into a 21 series of consultations with the industry and with 22 other stakeholders over the design of the PBR 23 framework, when it became apparent that the data issues 24 were unlikely to be able to allow us to get through 25 this process in a timely manner and to arrive at a 26 result with a yardstick scheme, we were somewhat -- we 27 were not as enthused about the prospect of a price cap 28 plan as we were the yardstick because we feel that 202 OEB Panel 1 there is an awful lot that could be gained in this 2 province by allowing the utilities to compete amongst 3 themselves. 4 So that would be sort of the first 5 area that we think is not as good as we would wish to 6 have. 7 The second area would have to do with 8 the issues of the initial rates, the reasonableness of 9 those rates, and the issues of cost allocation -- and 10 particularly the issues of cost allocation. 11 The issues of the level of the rates 12 can't really be resolved we think with this large 13 number of utilities. Through traditional cost of 14 service studies what really is necessary is either some 15 sort of statistical analysis or some sort of analysis 16 that goes across the comparative performance of the 17 utilities, controlling for environmental conditions, to 18 be able to make those sorts of accommodations going 19 forward. 20 That is why we have suggested at the 21 midterm review, as data are collected out of the 22 sector, that that is one of the very necessary pieces 23 of the rebasing, is to be able to bring into 24 consideration at those times, when we have better data, 25 more consistent, collected from the sector as a whole, 26 we will then have a better information basis on which 27 to make those sorts of determinations. 28 But the issue of cost allocation 203 OEB Panel 1 still remains. Certainly, it has been an historic 2 artifact of the industry that these things were done on 3 a more generic basis for the municipal electric 4 utilities as a whole. The time was simply not 5 available to undertake some sort of a more detailed 6 investigation that would allow us to get to the issues 7 of cost allocation. 8 I think another area that we see some 9 caveats in is in the area of performance standards. 10 Clearly, we would prefer to see performance standards 11 that are perhaps a bit broader with perhaps a better 12 definition of the minimum service quality. But, again, 13 given the differences in circumstance amongst the 14 utilities it was just not possible in the time frame 15 that we have had for a consultation to sort out the 16 issues of what is appropriate in the northwest as 17 opposed to what is appropriate in the greater Toronto 18 area, which really requires quite a bit of customer 19 input as opposed to just simply the advice of the 20 various stakeholders who we had represented. 21 We only had representatives from the 22 large industrial customers. We had no representation 23 of the contracting community, residential consumers or 24 commercial consumers other than through some of the 25 consumer advocates. We didn't have consumers 26 themselves basically on the panel. As a result, I 27 think that would be one of the other areas that we 28 would say that we would have desired in a perfect 204 OEB Panel 1 world, to have a better sort of input from those folks. 2 So I think those are some of the 3 caveats that we would say, that the process could be 4 better if we had been able to have better data and more 5 time to address those sorts of things. But I don't 6 believe that these are necessarily things that can be 7 addressed in the process of an additional six months 8 spent, an additional nine months spent. These are 9 things that are going to take a year or two to sort out 10 as we go through the process. 11 MR. CRONIN: Can I just add -- 12 MR. POWER: Certainly. 13 MR. CRONIN: As my colleague was 14 saying, originally I was more predisposed to some kind 15 of cap mechanism, and having met and spoken with a 16 number of the utilities we became convinced that the 17 issues that the utilities were raising and the Board 18 and the government -- that is, the number of utilities 19 and the diversity -- could in fact be turned around and 20 made the strength of the process by putting in a 21 yardstick regime. We had enough utilities here to have 22 barely robust peer groups if we could overcome these 23 issues that we have subsequently talked more about. 24 The other aspect is that once you 25 have agreed on the yardstick regime, at least as was 26 being discussed in the task force, you tend to remove 27 the regulator and allow the peer group to define the 28 benchmarks over time. 205 OEB Panel 1 So these issues about what kind of 2 external benchmark shall we have and what magnitude 3 should they be become moot issues. 4 The fundamental problems, even if we 5 felt we would have been able to overcome the yardstick, 6 as we saw the prerequisite yardstick deficiencies in 7 the medium and large, was that over the past how ever 8 many months we have been at this now -- six months plus 9 -- we have put together 16 datasets for the small 10 utilities, which is approximately 8 per cent of the 11 small utilities, and we are going to track down that 12 information about how many actually send us data and 13 how many we actually went back and in person kind of 14 pulled out more data. 15 So it was clear that the process of 16 trying to produce this data -- and here we are only 17 talking about the economic performance data -- would 18 have been so time intensive and chronologically so long 19 that we could never have gotten to an end point. 20 MR. POWER: Other areas of concern? 21 Did you have the resources to 22 complete reasonably any analysis that you wanted to 23 complete as part of this process? 24 MR. KING: I think that -- 25 MR. POWER: Were there any analyses 26 that you recommended that your client declined in terms 27 of who said, "No, there is no time" or "You shouldn't 28 do that" or "It's a waste of time or money"? 206 OEB Panel 1 MR. KING: I think we were able to 2 get most of the resources that we needed. 3 The real constraint was primarily the 4 time constraint in that we started trying to acquire 5 the data to do the analysis when we formed the task 6 forces in the second and third week of January, and we 7 didn't really receive useable data from any entity 8 until -- when? Roughly the beginning of April. 9 MR. CRONIN: We may have had a couple 10 of submissions prior to that. But I mean it was 11 basically in the April time frame that we were getting 12 the bulk of the data and going back to the 13 representatives. 14 MR. KING: So we had the issue that 15 before we even had a complete dataset for more than 16 just one or two utilities, we were already starting to 17 bump up against the issue of needing to publish the 18 draft rate handbook or at least our desire to publish 19 it by early June. You know, there just wasn't much 20 time for analysis -- 21 MR. POWER: I'm quite sympathetic to 22 that, actually. 23 MR. KING: -- and development of the 24 proposal itself. 25 MR. POWER: Yes. I think we all 26 appreciate it was a very condensed, compressed 27 schedule -- 28 MR. KING: Right. 207 OEB Panel 1 MR. POWER: -- that was put upon you 2 through no fault of your own. 3 So I take it then that you are, in 4 short, satisfied, before I get into my general 5 question, that you have done every reasonable analysis 6 necessary to check and cross-reference the data and the 7 work that goes into the handbook. 8 MR. KING: Subject to the limitations 9 of the data. If we had had more data available, then 10 we would probably have looked at some alternative 11 analyses, but given a couple of caveats to that: one, 12 it has to be understandable to the industry as a whole, 13 and to the stakeholders as a whole; and, two, it needs 14 to have a reasonable set of data. 15 We feel that the analyses that we 16 have done have been reasonable. 17 One could have done a variety of 18 other analyses that we, as professional economists, 19 might choose to debate, such as some sort of production 20 function, some sort of econometric analysis or assuming 21 whatever functional forms for the production function, 22 or some sort of data development analysis or some sort 23 of statistic frontier analysis. These are all 24 techniques that we have differing levels of experience 25 in, but we certainly have conducted most of those types 26 of analyses. 27 In the context in which we were 28 working, we did not believe that they were particularly 208 OEB Panel 1 useful in the context of where we wound up with 2 limitations of schedule data and times. 3 MR. CRONIN: Also, to the extent that 4 we looked at differences among the utilities, it tended 5 to be focused on size breakouts, because that seemed to 6 be the preoccupation with the industry. 7 We did look at things like rural 8 versus urban or other dimensions that might affect -- I 9 mean, again, this is sort of the yardstick -- 10 MR. POWER: I think your materials 11 are clear on that, that you didn't go into those 12 variables in between utilities. 13 The same concerns that you are 14 echoing about the process I have heard echoed about the 15 consultation process itself by people who participated 16 in it. 17 The yardstick task force, how long 18 did it meet for? A number of weeks? 19 MR. KING: Roughly, I believe, four 20 months. 21 MR. POWER: Would you agree that the 22 majority of people who went into that process had 23 relatively little knowledge or experience about what a 24 yardstick process was when they entered into it? 25 MR. KING: I think we were all trying 26 to feel our way through the process and, certainly -- 27 MS LEA: Mr. King, could you turn the 28 mic just a little bit closer to you. 209 OEB Panel 1 MR. KING: I think we were all trying 2 to feel our way through the process and to figure out 3 how we get to the end. 4 MR. POWER: All right. You would be 5 on a learning curve, in terms of learning the nuances 6 of the Ontario system, and they would be on the 7 learning curve of trying to understand these various 8 methodologies which they never had to deal with before. 9 Right? 10 MR. KING: Absolutely accurate. 11 MR. POWER: All right. So, in fact, 12 we have sort of two groups of people coming together, 13 if I may, in a very compressed period of time, doing 14 the best with what they could in the limited 15 circumstances. I guess that's the fairest way we can 16 characterize it? 17 MR. KING: I think that's accurate. 18 MR. POWER: Thank you. 19 You mentioned earlier that the 20 treatment of contributed capital, in the handbook, is 21 not your preference. 22 Are there other things in the 23 handbook which are not your preference, that if you had 24 your choice on you would have done differently? 25 MR. KING: Rate design. 26 MR. POWER: How's that? 27 MR. CRONIN: Eliminate the volumetric 28 element to it. So it's basically just a fixed charge. 210 OEB Panel 1 MR. KING: And probably have that 2 fixed charge varied by size of service. 3 MR. POWER: Any idea why that was 4 rejected? 5 MR. CRONIN: It was sort of like 6 being at the Alamo. It was about 20-to-1. 7 MR. POWER: Okay. 8 MR. KING: It's true. I mean Frank 9 and I were on one side and the rest were somewhere 10 else. The stakeholders were on the other side. 11 MS KWIK: The utility members on the 12 task forces felt strongly that if you didn't have a 13 throughput form of a charge that there would not be 14 equitability between customers within a service charge 15 and so, they were adamant in having that. 16 MR. POWER: Although, at the 17 conferences that went around the province, you were 18 very fair in saying you would consult with these folks 19 broad and large but, at the end of the day, you took 20 ownership of the document; you said, "It's not their, 21 it's ours. It is our judgment of what is fair and 22 appropriate and based upon sound economic principles". 23 Is that correct? That's my understanding. 24 MR. KING: That's correct. 25 MR. POWER: All right. So, at the 26 end of the day, you would be drafting that which, in 27 your opinion, is the best practice, based upon the 28 soundest methodology, for the Province of Ontario. Is 211 OEB Panel 1 that correct? 2 MR. KING: With the caveat of also 3 considering the acceptability to all the parties 4 involved. So -- 5 MR. POWER: So you would be making 6 decisions about tradeoffs based upon what you heard 7 back from the parties? 8 MR. KING: Definitely. 9 MR. POWER: And those were decisions 10 that you made solely yourself? 11 MR. KING: The PBR team made those 12 decisions, in consultation, again, with other parties 13 in the Board; staff, as well. 14 MR. POWER: I guess that's what I'm 15 getting back. At the end of the day of the 16 consultation process, you had gone away, you heard what 17 you heard and you decided upon a number of tradeoffs, 18 and I presume your client is Board staff? 19 MR. KING: That's correct. 20 MR. POWER: And you would make those 21 proposals to Board staff and Board staff would, 22 ultimately, decide what they thought was the correct 23 thing to put in the final handbook? 24 MR. KING: It was a team effort to 25 make those determinations; it wasn't as if we made 26 recommendations to Board staff and they chose to accept 27 or reject them. We worked as a team in drafting the 28 handbook and, at various times, we sought the counsel 212 OEB Panel 1 of other staff. 2 MR. POWER: That's fine. So you are 3 essentially an integrated decision-making process, I 4 guess? 5 MR. KING: That's right. 6 MR. POWER: Well, I would like to go 7 through, I guess, some of the specifics of this. 8 Contributed capital -- I'm just going 9 to start with that. From my research, most 10 jurisdictions do not rely on contributed capital to the 11 extent that exists in the Province of Ontario. Is that 12 fair, from your research? 13 MR. KING: I think that would be 14 fair, based upon our understanding of the 15 circumstances, yes. 16 MR. POWER: Okay. In evaluating the 17 contributed capital issue, what analysis did you 18 complete, yourself? 19 MR. CRONIN: In what sense? 20 MR. POWER: Well, contributed capital 21 is an important component of a number of things, 22 whether it be return on equity, evaluating the impact 23 upon the stranded debt of the Province of Ontario; 24 there's a number of things that it relates to, in the 25 big picture. I'm just curious, both in terms of 26 economics and the policy tradeoffs that you referred to 27 earlier, what analysis was completed. 28 I mean you said it was a quagmire and 213 OEB Panel 1 there's a number of factors that went into this. I'm 2 just curious what the analysis is. 3 MR. CRONIN: The rate design 4 committee looked at a number of those issues, the rate 5 impacts of including or excluding, the return aspects 6 of including versus excluding. 7 MR. KING: To the degree to which 8 contributed capital was used by utilities in the 9 province, these are all issues that came into the 10 consideration of the proposal that was put there. But 11 at the end of the day, the proposal was drafted and was 12 included in the rate handbook based upon the 13 consideration of all those pieces and it is what it is. 14 MR. POWER: Yes. Your comments 15 earlier were fairly clear on that. 16 I'm curious. Did you know that 17 different utilities use different accounting practices 18 for the treatment of contributed capital, historically? 19 They are not standardized. 20 MR. CRONIN: With respect to -- could 21 you elaborate on the difference? 22 MR. POWER: Yes. My understanding -- 23 I guess others will be talking about shortly -- is just 24 because a utility says, in its official report, that 25 its contributed capital is 100 million, depending upon 26 the accounting practice they used, that may change 27 quite significantly. 28 Did you assess that, at all? 214 OEB Panel 1 MR. KING: I don't believe so. 2 MS KWIK: That was something that 3 came to light through the task force -- 4 MR. POWER: Okay. It's come to light 5 since to myself, I guess I'm telling you, and there's 6 some significant impacts, I have been told, in the 7 nature of tens of millions, if not hundreds of 8 millions, depending upon how you assess it. 9 MR. KING: I presume, Mr. Power, one 10 of your witnesses will be -- or someone will be 11 providing that input to the Board? 12 MR. POWER: Presumably, yes. 13 Oh, there's an interesting question 14 whether you do it here or whether you do it on your 15 rate application, at the end of the day, but I 16 presume -- 17 MR. KING: I would think that from 18 the point of view of trying to pull as much information 19 as possible so that the Board can make the best policy 20 as possible would be quite useful to have it here. 21 MR. POWER: I would agree with that 22 principle completely. I think we should have all the 23 information here and on the table. I would be 24 delighted to see it all. 25 MR. KING: Subject to 26 confidentiality -- 27 MR. POWER: I am just curious. Could 28 you -- Jennifer, we are not going to go that far. 215 OEB Panel 1 Trust me. 2 Did you discuss with Ontario Hydro 3 the historical treatment of contributed capital? I 4 mean they were the regulator, at the time; they had 5 knowledge of these things. 6 MR. CRONIN: We actually had a number 7 of memos that were put out by Ontario Hydro on the 8 decisions they had made, at that time. 9 MR. POWER: So there's a variety of 10 documentation behind this that you have relied on in 11 assessing it? 12 I'm just curious, Ms Lea, because it 13 would have been over a month ago I asked for all the 14 documentation that was relevant to the study here and 15 I'm now hearing that there's other documentation which 16 underlines the study. This would have been helpful a 17 month ago. 18 Is there other documentation floating 19 around? 20 MS LEA: Can you clarify your answer? 21 Is there documentation -- 22 MS KWIK: Some of that documentation 23 is actually in the uniform system for accounts black 24 book, as they call it, that Hydro produced, which your 25 clients would have -- 26 MR. POWER: Yes. 27 MS KWIK: -- in their possession. 28 MR. POWER: You said "some". Is 216 OEB Panel 1 there other documentation" 2 I mean the original Ontario Hydro 3 memos, stuff like that, is obviously -- 4 MS KWIK: No, not -- 5 MR. POWER: -- primary source 6 material -- 7 MS KWIK: No. The memo that we did 8 get through one of the task force members was actually 9 based on that write-up in the uniform system for 10 accounts. 11 MR. POWER: Well, I guess I'm stuck 12 in the position of, not knowing what you had, what was 13 interpreted and what was put into the uniform system 14 accounts. I'm talking about the original 15 documentation. Is that available somewhere that you 16 looked at? 17 MS KWIK: The Ontario Hydro 18 documentation? 19 MR. POWER: Yes. I just asked the 20 question about whether you spoke with Ontario Hydro 21 about the historical treatment of contributed capital. 22 I'm wondering what documentation you received from them 23 and how you used that. 24 I was just told that there was some 25 documentation. 26 MR. CRONIN: I think we are obviously 27 talking about the black book, the accounting policies 28 and procedures -- 217 OEB Panel 1 MR. POWER: The annual book. Sorry. 2 The annual year-end book you mean? 3 MR. CRONIN: No, no, the black book. 4 MS KWIK: The uniform system of 5 accounts -- 6 MR. POWER: Oh, yes. Sorry. 7 And is there anything else? 8 MS KWIK: The documentation that we 9 got from Hydro, actually, we go through one of the task 10 force members. 11 Essentially what it was was the memo 12 that you selected. 13 MR. POWER: Yes. That's not helpful 14 to me, I guess. Ms Lea had provided us with a list of 15 all that was supposed to be the documentation relied 16 upon in the process. I'm twigged at the moment to 17 wondering how much more is floating out there, I guess. 18 MS LEA: My understanding was that 19 the list that I provided was complete or, of course, I 20 wouldn't have provided it. 21 MR. POWER: Right. 22 MS LEA: What we can do is we are 23 looking into some information for Ms Demarco. Why 24 don't we look into that for you also and see if there 25 is something that is either missing from the list or 26 that there is some misunderstanding. 27 Do the witnesses understand what is 28 being asked here so that we have a clear understanding 218 OEB Panel 1 of what documentation is being queried? 2 MS KWIK: We did have -- one of the 3 task force members actually wrote up a history of what 4 has preceded. That is in the distribution rates task 5 force report, I believe. 6 MR. CRONIN: Yes. 7 MR. POWER: Well, if I could get a 8 short summary of what there is so we are clear on what 9 there is, that would be helpful. 10 MS LEA: Certainly if there is 11 anything that is not in the task force which I think 12 was on that list or anything outside of that list, we 13 will find that out. 14 MR. POWER: So getting on with my 15 questions then. I am just curious about contributed 16 capital. My understanding is there is a bit of a 17 difference in the accounting treatment. Do you know 18 whether there is a difference and how it has been 19 levied between utilities? 20 MR. KING: The policy in its 21 application? 22 MR. POWER: Yes, over the years. 23 MR. KING: It's our understanding 24 that there is quite a difference. 25 MR. POWER: Right. I guess within 26 utilities, over 40 years or so, do you know whether the 27 policy has been applied consistently or whether it has 28 changed over time? 219 OEB Panel 1 MR. KING: I don't know specifically 2 as to whether it has been consistent or changed, but I 3 think the presumption that we had was that it likely 4 did change over time. 5 MR. POWER: Did utilities at some 6 point in time ever cost share in this capital? Is all 7 of the contributed capital solely paid for by somebody 8 else, the customer or whether others have contributed 9 historically over the 30, 40 year period? 10 MR. KING: I don't know the answer to 11 that question. 12 MR. POWER: Okay. You said earlier 13 that from your personal perspectives, you disagreed 14 with the treatment of contributed capital in the 15 handbook. What in a nutshell -- I didn't quite catch 16 it -- what was your recommendation as to how it should 17 be treated? 18 MR. KING: In a nutshell, we think 19 that if there is going to be a return on contributed 20 capital, it should be a return that is applied 21 uniformly across all of the utilities in the province, 22 that you should not have the circumstance where one 23 utility who happens to have had a negative return, 24 perhaps because the historic regulator was trying to 25 work off working capital balances, somehow received no 26 return on his working capital while another utility, 27 because -- 28 MR. POWER: Continue. 220 OEB Panel 1 MR. KING: Excuse me. On their 2 contributed capital while another utility, because they 3 did not have a similar circumstance, earns a positive 4 return going forward. It should be uniform. Whatever 5 the return is on contributed capital should be uniform 6 cross-province. 7 MR. POWER: So your approach would be 8 a more reasonable approach to rate making based upon 9 more standard economic principles. 10 MR. CRONIN: I think what we would 11 suggest is that having hundreds of prices for capital 12 probably isn't the most effective way to evaluate 13 factor inputs in this process and getting a smaller 14 number would be preferred. 15 The question then becomes if you got 16 down to two numbers, how similar would they be. 17 MR. POWER: Okay. 18 MR. KING: And as we suggested 19 before, that's really in many cases a political issue 20 or a policy issue here that needs to be resolved by the 21 parties. 22 MR. POWER: What are those policy 23 issues? I mean obviously you bounce them around. Can 24 you articulate them here for us 25 MR. CRONIN: Well, there's a rate 26 impact. 27 MR. POWER: Yes. 28 MR. CRONIN: If you are going to 221 OEB Panel 1 recognize contributed capital as receiving a higher 2 rate of return, you certainly are going to boost the 3 rates for the customers of those utilities. 4 MR. POWER: And the other policy? 5 MR. KING: Well, there's equity 6 obviously. There are some equity issues that are 7 imbedded. There are certainly issues of responding to 8 the signals that the current regulator was providing to 9 the entities the regulator regulated. 10 MR. POWER: Are you talking in the 11 past tense, Ontario Hydro? 12 MR. KING: In the past, yes; Ontario 13 Hydro. Certainly some made certain of those decisions 14 and others made others. 15 MR. CRONIN: You know, we had some 16 participants in the process, I guess, in wonder what 17 would be the consequences of a historical situation 18 where utilities might have been receiving capital in 19 essence gratis and then applying an opportunity cost on 20 that capital that significantly understated the cost of 21 capital and had those parties suggest actually that 22 they wouldn't be unusual if that were the case, to have 23 some utilities which had actually acquired too much 24 capital. 25 That raises the policy question of if 26 utilities had overcapitalized historically, you would 27 be giving a rate of return on that. 28 MR. KING: Sure, that's true, Frank. 222 OEB Panel 1 But on the other hand, to take the example of if it's 2 true that the industry as a whole was overcapitalized 3 and half of them employed contributed capital and the 4 other half didn't, it's still somewhat unfair to take 5 the half who did take contributed capital and penalize 6 them while taking the other half and perhaps not 7 treating them somewhat equivalently. 8 MR. POWER: What weighting did you 9 employ in balancing these different policy issues 10 separate from the basic economic issues? These are all 11 fairly subjective matters. I presume there is some way 12 that you weighted these important social policy issues. 13 MR. KING: When it comes right down 14 to it, Robert, we had made a suggestion on what was the 15 appropriate way to proceed. The decision then was made 16 more or less without Dr. Cronin's and my involvement 17 and we were unable to influence it after the decision 18 was made. 19 MR. POWER: So who made the decision 20 for you then? 21 MR. KING: Board staff made the 22 decision for us. 23 MS KWIK: As I said earlier, Board 24 staff, frankly, there was a regulatory regime in place 25 before that had sent certain signals out for 26 contributed capital. The majority had made decisions 27 based on those regulations. 28 What we wanted to do was choose an 223 OEB Panel 1 option whereby the customer and the distributor are no 2 worse off than they were under the previous regulator 3 with regard to the contributed capital already in the 4 rate base. 5 MR. POWER: Let me ask some of the 6 same questions to you because obviously Board staff did 7 this. 8 There are a number of policy issues 9 that you must have weighed; correct? So you identified 10 policy issues, social policy issues, and chose to 11 balance them in a different way. 12 Are there any other additional policy 13 issues that you go with beside rate impact, equity 14 issues and responding to signals? 15 MS KWIK: There was a consideration 16 as well. That is a level playing field. In the 17 Board's regulation of natural gas, contributed capital 18 is not included in rate base. 19 MR. POWER: Some of these policy 20 issues are extremely thorny, broad, social policy 21 issues, as we all know. I'm just curious. Is this 22 something that you did in consultation with the 23 Ministry of Energy or the Ministry of Finance? 24 MS KWIK: No. We had tried to work 25 with the task force, the distribution rate task force. 26 They had quite a wide representation in that group. It 27 wasn't anything that that group seemed to be able to 28 come to agreement on. 224 OEB Panel 1 MR. POWER: I understand. Yes. 2 MS LEA: Sorry, Ms Kwik. Your 3 evidence is fading again. I know it's the end of the 4 day. Lean forward and shout when you say anything. I 5 know how it is to be a short person. 6 MS KWIK: So in part then, what we 7 were trying to do was weigh both sides of the argument. 8 What we came up with was essentially that the approach 9 you take was because you talked in French, they told 10 you that you had a certain signal under the previous 11 regulator and in consideration of the possible rate 12 impact on the customer, that we should take the 13 approach that would leave both the distributor and the 14 customers no worse off than they would have been under 15 the regulation of the previous regulator. 16 MR. POWER: So Board staff reached 17 this whole decision of weighing of the policies on 18 their own. Nobody else had any direct input into this, 19 I take it. 20 MS KWIK: It was actually discussed 21 at the task force. 22 MR. POWER: I understood that, but at 23 the end of the day when you were making the final 24 decision, this was Board staff solely. 25 MS KWIK: You know, I do recall there 26 was some agreement on some of the participants at the 27 task forces, but the more aggressive stance falls to 28 the sort of opposite end. 225 OEB Panel 1 MR. POWER: Yes. As Board staff, 2 this would have been a very subjective decision to deal 3 with. I mean whenever you are dealing with public 4 policy matters, they are horrendously subjective. They 5 are dealing with very significant tradeoffs between 6 people's interests. I trust and assume that there was 7 that fair amount of analysis and debate that went on 8 within Board staff on this. 9 MS KWIK: Most of the debate and 10 analysis that occurred was at the task force, within 11 the task force. 12 MR. POWER: So are you suggesting to 13 me that Board staff doesn't have any internal reports 14 or reviews on this issue? 15 MS KWIK: No. Actually, the analysis 16 is actually done by some of the members of the rate 17 staff. 18 MR. POWER: And you did no 19 independent analysis or consideration yourself as Board 20 staff. I'm getting mixed signals here at the moment. 21 At the end of the day, this is your 22 handbook and this particular aspect of the handbook is 23 solely your authorship and responsibility. 24 MS KWIK: Yes. Actually, we did take 25 the analysis of the task force and what we had included 26 in the task force report was sort of the range of 27 impacts and the average impacts. That is all that we 28 considered. 226 OEB Panel 1 MR. POWER: So, in a nutshell, these 2 policy issues obviously weighed more heavily than the 3 economic issues of the advice that you are receiving 4 from your consultants and you made the decision 5 accordingly? Yes, okay. 6 Well, let me touch on a couple of 7 things here. What weighting -- and it sounds like 8 none -- did the stranded debt receive in your analysis 9 of the impact of this treatment of contributed capital? 10 MS KWIK: We actually did not 11 consider stranded debt. 12 MR. POWER: Okay. Well, let me just 13 walk you through a couple of these things. 14 I assume you would agree that the 15 proposed treatment of contributed capital will lower 16 the market value of utilities based upon a market based 17 ROE. Correct? 18 MS KWIK: Well, we had discussed that 19 issue at the task force meeting and there were some 20 members there that represented groups that might have 21 been interested in buying utilities and when one of the 22 utility representatives said, well, you know, "Nobody 23 is going to want to buy us", the other side said "We 24 will buy you". So perhaps -- I'm not sure. 25 MR. POWER: Well, without worrying 26 about those sort of broad comments let's just go 27 through the numbers. 28 If you had a utility which under the 227 OEB Panel 1 old system had $200 million in contributed capital on 2 its books, under this proposal the value of that 3 contributed capital is now effectively zero, as I have 4 been advised by both economists, CFOs and a variety of 5 others in the industry. 6 I take it you don't have a different 7 view of that? 8 MS KWIK: No, I don't. 9 MR. POWER: Okay. So I have just had 10 a utility that has lost $200 million in this scenario 11 off of its book value and it is going to go on the 12 street for sale. Correct? Now, if I take that 13 $200 million -- 14 MR. KING: Actually, I would take an 15 exception to that in that it is unclear whether it 16 actually was worth $200 million before the decision, 17 okay. 18 There is no doubt that there is 19 the -- that the issue of the treatment of contributed 20 capital does impact valuation, but the circumstance 21 before was that these utilities were not clearly owned 22 by -- were not clearly -- 23 MR. POWER: But that is the old 24 debate the government has decided that the 25 municipalities now owned them immediately upon 26 corporatization, correct. Do you know what assumptions 27 that the Ministry of Finance made in terms of its 28 ability to pay down the stranded debt as a result of 228 OEB Panel 1 the sale of municipal electric utilities once they are 2 corporatized? 3 MR. KING: We do not have any 4 information specifically to that point. However, we 5 did try to consult with the Ministry of Finance on a 6 number of these issues and received somewhat murky 7 advice back from the Ministry of Finance. Perhaps they 8 figured that this issue of contributed capital best 9 belongs somewhere else to be treated. 10 MR. POWER: Well, in theory -- 11 MR. KING: Maybe formally at the OEB. 12 MR. POWER: Exactly. And I suspect 13 that 14 But I'm just curious. I just want to 15 walk through this. 16 We have just agreed that if there is 17 $200 million contributed capital on the books in the 18 new world it is worth zero under this proposal. If 19 that utility was to go up for sale under the transfer 20 tax, assuming that Ontario Hydro servco is not buying 21 it, that is the equivalent to $67 million in tax that 22 is now vaporized that would not go towards paying the 23 stranded debt. Is that correct? That is pretty 24 straightforward numbers. 25 MR. KING: Presuming that the 26 historic return on equity was zero that is true. If 27 the historic return on equity was above that, then it 28 would be something less than the impact you have 229 OEB Panel 1 indicated. 2 MR. POWER: Well, the marketplace 3 right now out there for those utilities on the market 4 are viewing, until this handbook came out, that 5 contributed capital is worth the full $200 million. 6 The marketplace has dictated that and this handbook, as 7 you well know, has thrown that up in the air. 8 So taking the marketplace's judgment, 9 which you have told us at great length is the best 10 judgment, they otherwise thought there was $200 million 11 in value. So we have not only wiped $200 million in 12 value off, but on this one utility I have now knocked 13 $67 million that would go to paying down the debt. 14 Now, when I start adding those up 15 across the Province of Ontario my contributed capital I 16 believe is in the billion dollar range so that my money 17 that would otherwise be going to paying down the 18 stranded debt is now into the hundreds of millions of 19 dollars, which we can very easily get into. But that 20 didn't have any weighting at all in your analysis I 21 take it, then, did it, Ms Kwik? 22 --- Pause 23 MR. KING: Mr. Power, I guess just to 24 clarify and make it explicit, there are several 25 assumptions in your question which would lead us to 26 believe that every utility in the province would be 27 sold to an entity that would pay the capital tax. 28 MR. POWER: I will concede that is a 230 OEB Panel 1 potential question, but you would agree with me that 2 the government's stated policy objective is to 3 corporatize every one of those utilities and eventually 4 move them over to a private sector set up. Correct? 5 I mean, that has been on the table 6 now for two years. So that is the government's 7 direction. That is the government's assumption in 8 calculating stranded debt. 9 MR. KING: I'm not aware of that 10 government policy. 11 MR. POWER: Well -- 12 MR. KING: I think they are eager to 13 see private ownership of these entities. I think they 14 are eager to see them operated more as private 15 businesses, but as to whether it is explicitly their 16 policy to see everyone converted into a private 17 ownership, I'm not sure that we have any evidence of 18 that. 19 MR. POWER: I don't have to debate 20 you on there, we are far enough along to understand 21 what we are talking about. 22 MR. KING: Right. 23 MR. POWER: I am just curious in 24 terms of the transparency of the weighting that went 25 into this policy decision that Board staff went 26 through, but I guess I'm getting no help from Ms Kwik 27 here. 28 So I guess these sorts of additional 231 OEB Panel 1 factors weren't considered is the short answer? 2 MS KWIK: I guess I can answer. 3 Perhaps you are expecting a bit deeper thought into 4 this than we had and in fact what we were trying to do 5 was just, and as I said, leave both the distributor and 6 the customer no worse off than they had been under the 7 previous regulator. That is the extent of the 8 consideration that we had. 9 MR. POWER: Is this a policy decision 10 that might more appropriately lay in the lap of the 11 minister or the ministry? 12 MS KWIK: I don't think I can comment 13 on that. 14 MR. POWER: Okay. 15 Was there any valuation of whether it 16 is appropriate for the Ontario Energy Board to be 17 making major policy decisions like that? 18 MS KWIK: Well, it is -- 19 MS LEA: Is that something you can 20 answer, Ms Kwik? 21 MR. POWER: Ah, the defensive counsel 22 running to you. 23 --- Laughter 24 MR. POWER: Here we thought Board 25 counsel was independent. 26 MS LEA: Yes, look out. 27 --- Laughter 28 --- Pause 232 OEB Panel 1 MS KWIK: I'm sorry, I don't know how 2 to answer your question. 3 MR. POWER: That sounds like a very 4 wise answer. 5 --- Laughter 6 MR. POWER: I will understand the 7 circumstances that you are in. 8 Okay. I'm going to move from the 9 methodology of the weighting of these policy issues, or 10 lack of methodology of the weighting because you have 11 essentially told me there is no methodology, Ms Kwik, 12 it was a discussion of staff and that is the essence of 13 it. There are no independent reports, et cetera, 14 et cetera. Correct? Just to summarize all this? 15 I thought this was a staff decision, 16 I didn't realize that the consultants directed this. 17 MR. KING: I'm sorry, Mr. Power. He 18 can't forego an opportunity to consult. 19 --- Laughter 20 MR. POWER: Consult or advise or 21 instruct. 22 MS LEA: Ms Kwik you wouldn't have to 23 ask, definitely not instruct. 24 --- Pause 25 MS KWIK: It has just been suggested 26 to me that I have made it sound like there weren't 27 lengthy discussions on it but there in fact were 28 lengthy discussions on it. 233 OEB Panel 1 MR. POWER: That's it? 2 MR. KING: Over a period of not just 3 a single day but over a period of months these 4 discussions went on internal to the Board and with 5 Board staff. 6 Certainly there was not a formal 7 decision analysis framework that laid all these sorts 8 of things out that came to the final conclusion, but 9 there was a series of discussions over a protracted 10 period of time with much input from the task forces and 11 others to be able to arrive at the -- that staff 12 ultimately arrived at their recommendation. 13 MR. CRONIN: Just to make a brief 14 point. 15 MR. POWER: Yes. 16 MR. CRONIN: You are very 17 articulately representing the views of your clients. 18 In the task forces we had representatives from other 19 stakeholder groups who were just as articulate and just 20 as forceful in maintaining the directly opposite point 21 of view. 22 MR. POWER: But this isn't about the 23 task forces. This is about the transparency of the 24 decision-making process at the end of the day, the lack 25 of verification, the lack of the ability to understand 26 what goes into it, the lack of the factors that were 27 considered, and the exclusion from people from 28 understanding what is involved, which has a dramatic 234 OEB Panel 1 impact on the whole industry. 2 MR. CRONIN: I think we are trying 3 to -- 4 MR. POWER: Right? 5 MR. CRONIN: Well, I think -- 6 --- Laughter 7 MR. CRONIN: -- we are trying to help 8 elucidate. 9 Over a course of four or five months, 10 and we have some of the members here, there were very 11 heated discussions and very in-depth discussions about 12 how to treat contributed capital. At the end of the 13 day, there was no consensus that could be reached among 14 those parties. 15 MR. POWER: I understand that. 16 MR. CRONIN: So I think what Judy is 17 suggesting is that the thinking was that they would try 18 to leave everybody indifferent from their historical 19 perspective, and that was the decision they came to. 20 MR. POWER: Okay. Let me move on 21 to -- 22 MR. KING: In terms of transparency, 23 we now are in the process of trying to collect 24 additional information and differing points of view, 25 and the Board can then weigh those things and make its 26 final determination. 27 MS KWIK: I think also the arguments 28 that were presented to us at the task force meetings 235 OEB Panel 1 provided a lot of substance to us. 2 MR. POWER: Let's go on to the 3 specifics of the contributed capital. I suspect 4 Ms Kwik, this is probably back to the consultants, so I 5 will shift here a little bit. 6 In the TFP study, section 3, if I 7 remember correctly, I believe you attempted to measure 8 the capital deployed by each of the LDCs in your 9 sample. Is that correct? 10 You have to say it on the record, 11 unfortunately. 12 MS KWIK: Yes. 13 MR. POWER: Did this capital measure 14 include or exclude the customer contributed capital? 15 MR. CRONIN: Included. 16 MR. POWER: Why did you use a measure 17 of capital which included the customer contributed 18 capital there? 19 MR. CRONIN: We wanted to get a 20 comprehensive representation of capital input. 21 MR. POWER: Okay. 22 Do you think that all capital, 23 whatever its source, should be included in setting 24 economically efficient rates? 25 MR. CRONIN: I think we have offered 26 up prior statements that one might connect with that 27 question. 28 MR. POWER: For answers. Yes, I 236 OEB Panel 1 know. I'm sorry, I beat that one. I fell back into my 2 written questions. 3 In the TFP study, you define a 4 capital price index: 5 "This index relies on the 6 Canadian Long Bond rate as a 7 measure of the opportunity costs 8 of capital." (As read) 9 Did the historical ROE of each of the 10 LDCs, over the period of 1994 to 1999, equal the 11 Canadian Long Bond rates? 12 MR. CRONIN: No. 13 MR. POWER: I would like to switch 14 now to setting the base productivity factor. 15 In Table 4-1, the base productivity 16 factor is set at the 1.25 per cent, as we have heard. 17 In a nutshell, just very shortly so I understand, what 18 went into this? How was this set? 19 MR. CRONIN: We relied I think partly 20 on the analysis of the MEUs in the province that we had 21 undertaken and also on our experience with other 22 jurisdictions. 23 MR. POWER: Okay. 24 In making that decision, what 25 weighting did you apply to your experience from other 26 jurisdictions? 27 MR. CRONIN: I think the productivity 28 numbers that we came up with we viewed as being 237 OEB Panel 1 reasonable estimates of TFP based on, say, some of the 2 historical analyses that were done for some of the 3 utilities in California, so we were comfortable that 4 historically we had done that reasonably. 5 The question then is: What kind of 6 stretch factor would one impose above that? As it 7 turns out, in fact there isn't much of a stretch factor 8 when you look at the median of the sample as opposed to 9 the mean, or if you look at the past five years the 10 default value, the 1.25, was exceeded by 75 per cent of 11 the utilities. 12 MR. POWER: You mentioned California. 13 Which other jurisdictions did you look at? 14 MR. CRONIN: California actually had 15 estimates of productivity for distribution utilities, 16 Edison to SoCal Gas. Those were actually right in the 17 same ballpark as what we had calculated for the MEUs 18 here. 19 MR. POWER: So you just relied 20 essentially on California, then. 21 MR. CRONIN: No. I didn't say that. 22 But it confirmed our analysis of what -- 23 MR. POWER: Okay. 24 I guess my other question is: What 25 other jurisdictions did you look to? 26 MR. CRONIN: Well, again, the -- 27 MR. POWER: If you didn't look at any 28 others, that's fine. I'm just curious. 238 OEB Panel 1 MR. CRONIN: It's not that we 2 specifically -- we were looking for reasonableness of 3 results. So we looked toward, for example, Norway 4 which had published data on cross-structure, we looked 5 at a couple of California utilities for cross-structure 6 and for productivity results. 7 MR. POWER: I'm not quite certain I 8 got a clear answer on that. 9 The examples you are quoting, were 10 they on an input price index basis or were they on the 11 consumer price index basis? 12 MR. CRONIN: Actually, SDG&E is on 13 the input basis, which had an input price index and a 14 productivity factor of 1.5. So it is actually higher 15 than what we are suggesting here even though the 16 productivity estimates are about the same. 17 MR. POWER: I'm not there yet. I'm 18 just back to the simple question of: Did they rely 19 upon the input price index or the CPI? 20 So that is one that was on the input. 21 Others? 22 MR. CRONIN: Pacific Corp was input 23 price index with a productivity factor in excess of 24 what we had recommended. 25 MR. POWER: All right. Others? 26 These are all California-based again 27 I take it? 28 MR. CRONIN: Yes. SoCal Gas the same 239 OEB Panel 1 thing. 2 MR. POWER: Yes. Okay. 3 Other jurisdictions I guess I'm 4 asking about, not just California. 5 MR. CRONIN: Well, those are the ones 6 I can answer right now. 7 MR. POWER: Okay. 8 In making comparisons across 9 different jurisdictions, have you done any analysis of 10 the starting level efficiency of the Ontario LDCs 11 versus those in the other jurisdictions you have looked 12 at, because they have all obviously started at 13 different levels? 14 MR. CRONIN: Not really, no. 15 MR. KING: Not really. 16 MR. POWER: Okay. 17 MR. CRONIN: We have looked at other 18 studies that have done that, but we didn't do any. 19 MR. POWER: You haven't done it 20 yourself. 21 Would the TFP study or any other 22 analysis you might have performed here have revealed 23 the relative differences in the efficiencies between 24 firms in Ontario and those in other jurisdictions? We 25 have no other way of looking at that, proving that? 26 MR. CRONIN: No. The issue of 27 judging absolute efficiency, particularly across 28 jurisdictions, is quite difficult, and we didn't do it. 240 OEB Panel 1 MR. POWER: I understand. Okay. 2 In assessing the base productivity 3 factor of 1.25 per cent, I take it you were relying on 4 comparisons with other systems, then, without 5 correcting for different levels of starting efficiency 6 between the Ontario LDCs and the utilities for which 7 the other productivity targets were set, in a nutshell? 8 MR. CRONIN: Since we didn't do the 9 study, we didn't -- 10 MR. POWER: Right. Okay. 11 Just as an aside, I think you relied 12 on the Tornqvist index approach. I can never get the 13 pronunciation correct. 14 What economic assumptions have to be 15 satisfied for the correct application of that type of 16 an analysis? 17 MR. CRONIN: I think here basically 18 these indices are the ones that are most extensively 19 used in establishing TFP, and I think within this 20 jurisdiction the cross-minimization assumption. 21 Cross-minimization. 22 MR. KING: They were 23 cross-minimizing. 24 MR. CRONIN: Subject to the 25 constraints of service quality and other 26 considerations. 27 MR. POWER: Right. That was the 28 analysis you used for the TFP approach? 241 OEB Panel 1 MR. KING: That's correct. 2 MS LEA: Can someone give us a 3 spelling of Tornqvist, please? I just need that proper 4 name for the record. 5 MR. ADAMS: T-O-R-N-Q-V-I-S-T is the 6 spelling I normally see. Some Scandinavian languages 7 seem to switch to "V"s after "Q"s occasionally. 8 MS LEA: Thank you. 9 MR. POWER: Just moving along, then. 10 Would the TFP study or anything else 11 have revealed the relative differences in efficiency 12 between the LDCs in Ontario, then, as opposed to 13 between LDCs and utilities out of Ontario -- that have 14 told us anything about the relative efficiencies 15 between LDCs in Ontario? 16 MR. CRONIN: Without collecting the 17 data on the yardstick comparison, no. 18 MR. POWER: Right. And this type of 19 analysis doesn't help us in a nutshell. 20 Are there economic or econometric 21 techniques that could have been employed, in your view, 22 to analyze the relative starting efficiencies of the 23 LDCs? 24 I mean my understanding -- 25 MR. KING: Subject to data 26 availability, yes. 27 MR. POWER: Could you give me some 28 examples. 242 OEB Panel 1 MR. KING: DEA is one. 2 MS LEA: The what? Sorry. 3 MR. KING: DEA. 4 MS LEA: DEA. Thank you. I'm just 5 being -- 6 MR. KING: That means "data 7 envelopment analysis". 8 One might also have attempted some 9 sort of production function estimation and full-time 10 series cross-sectional framework. That might be an 11 alternative way of being able to deal with it. 12 MR. POWER: Anything else? 13 MR. KING: Statistic frontier 14 analysis. 15 MR. POWER: What specific data were 16 you missing to be able to carry out those studies? 17 MR. KING: There were several pieces 18 of data that we were missing. One was a complete set 19 of consistently collected cost data on the firms, which 20 would have consistently recorded factor prices, toll 21 costs, capital stock, et cetera, et cetera, for the 22 entirety of -- for a large sample or the entirety of 23 the distribution utilities in Ontario. That's one 24 piece. 25 Another piece is data that would 26 describe the environmental characteristics; that is, 27 the business circumstances in which each of those 28 entities found themselves. Things such as: the 243 OEB Panel 1 kilometres of line; the kilometres of line that were 2 underground; the kilometres of line that were at 3 specific voltages; the number of transformer stations; 4 the composition of the customer base. There are a 5 variety -- the geography of or geology of the 6 circumstance in which the utilities found themselves. 7 MR. CRONIN: Control rooms. 8 MR. KING: Whether they had control 9 rooms or not; whether they wrapped around the lake or 10 their service area was all contiguous; the topology 11 of -- all these sorts of things have a certain impact 12 on being able to determine whether a cost difference 13 between Utility A and Utility B is truly a cost 14 difference due to management control or whether it's 15 due to the fact that Utility B is remotely located with 16 six different voltages that they service. 17 These are the sorts of environmental 18 data that we wished to have collected and were unable 19 to collect because none of the utilities had -- or few 20 of the utilities actually had these data. 21 I would also just point out, in the 22 process of attempting to collect these data, a number 23 of the task force representatives had suggested that 24 these sorts of exercises had been attempted to be 25 undertaken for a long period of time and no one had 26 been successful in collecting these data. 27 So, I guess it's unfortunate that we 28 found ourselves in the circumstance that we were unable 244 OEB Panel 1 to collect the data. 2 MR. POWER: I hear you. I take it -- 3 just getting back to the earlier point -- that you 4 accept the principle that the LDCs are not starting 5 from the same level of efficiency? 6 MR. KING: I believe that we, in our 7 initial question with you, Mr. Power, indicated that 8 was one of the issues associated with the design of the 9 current PBR mechanism is that we would have liked to 10 make some allowance for the fact they are not starting 11 from the same level of efficiency. 12 MR. POWER: Okay. And I take it that 13 in setting that base productivity target of 1.25, the 14 potential for different efficiency starting points of 15 LDCs couldn't have been a significant factor in your 16 analysis; it just doesn't play in it at all? 17 MR. KING: There are -- it doesn't 18 play a significant part because we are not able to 19 address it. That's one reason. 20 The other reason is that, as we 21 mentioned earlier in the day, there's been a debate 22 that ranged in Ontario for a number of year about 23 whether there are economies to scale or diseconomies to 24 scale. The use of a single productivity factor and a 25 single IPI for the industry as a whole does provide the 26 incentives if there are economies of scale or 27 diseconomies of scale -- 28 MR. POWER: I have heard you on that. 245 OEB Panel 1 You are going off down a different road. 2 In Table 4-1 of the draft handbook, 3 there are also other pairs of productivity targets that 4 are listed in the table. 5 I take it that these are to apply to 6 all LDCs in Ontario, regardless of their initial 7 efficiency level, as well, so it's consistent, in terms 8 of being blind to the relative starting efficiency? 9 MR. KING: That's correct. 10 MR. POWER: And I take it you are 11 familiar with law of diminishing returns? 12 MR. KING: Sure. 13 MR. POWER: Not wanting to be trite. 14 Based on that economic principle, you 15 must agree that an LDC which is already highly 16 efficient will find it more difficult to make cost 17 savings than one which is less efficient? 18 MR. KING: You know, I think you are 19 looking at a static. You are basically postulating 20 that if he has made efficiency improvements, you can't 21 make more efficiency improvements. I think that's an 22 argument that many people would counter. And if you 23 look at General Electric, which is probably the 24 preeminent business in the world, they have probably 25 had the highest rates of productivity growth for the 26 past two decades, yet they continue to outperform all 27 their competitors year in and year out. 28 MR. POWER: But the flip side of that 246 OEB Panel 1 is that there is only so much juice you can get out of 2 that orange if you keep squeezing. Right? 3 MR. KING: No. No. This is not 4 static. There are new processes, there are new 5 procedures, there are new technologies -- 6 MR. POWER: Which evolve over time. 7 MR. KING: -- and there are new 8 incentives that are all going into place -- 9 MR. POWER: But, in the early years, 10 let's be honest, the technology of a wiresco isn't 11 fundamentally changing on a six-month basis. 12 MR. KING: No, that's true, the 13 technology on a wiresco is not changing on a six-month 14 basis, but what is changing is the incentives to 15 exploit technology on behalf of the wiresco. I don't 16 believe that any member of our task forces suggested 17 there were not substantial efficiencies that could 18 still be rendered by the utilities. In part, the PBR 19 mechanism is intended to provide incentives that 20 utility management will have a sharper incentive to try 21 and exploit some of those. 22 MR. CRONIN: You know, we might just 23 mention that this issue was addressed by the 24 Norwegians, in 1997, who were putting in a PBR scheme 25 for 200 distribution utilities who recognized that, in 26 fact, there were different circumstances among those 27 utilities and, for implementation purposes, they 28 assumed that those different circumstances were 247 OEB Panel 1 reflected in their cost and that there were appropriate 2 levels of cost associated with those circumstances and 3 they went with one X-factor for the first generation 4 across all 200 distribution utilities, having agreed 5 that there were differences in starting points. 6 MR. POWER: I guess I'm just looking 7 for a common sense principle to agree with, which is, 8 as we all know, that if somebody has had a fairly 9 efficient basis, it's more difficult in the short term 10 to make significant gains relative to the one that's 11 inefficient. 12 MR. CRONIN: You know, you seem to be 13 suggesting, I think, that there's some utilities who 14 are more efficient and that somehow that happened by 15 happenstance. You know, I would think that if they 16 were more efficient, it was due to not random 17 occurrences but -- 18 MR. POWER: I don't disagree. You 19 and I are on the same wave length there. 20 MR. CRONIN: Therefore, if I had to 21 bet on who would do better, I would bet on the more 22 efficient utility. 23 MR. POWER: So your opinion is that 24 an efficient utility will do better under this process 25 than an inefficient one. 26 MR. CRONIN: Yes. Not only because I 27 think they will do better from an efficiency 28 perspective, but if you look at this rate shock that we 248 OEB Panel 1 have talked about, if you are in fact an efficient 2 utility, and let's just for the moment take two 3 utilities who are equal except for efficiency and one 4 has lower costs. 5 The more efficient utility will have 6 a smaller absolute change in rates to obtain the market 7 based rate of return. They will have less rate shock 8 and potentially less resistance to putting those rates 9 through. 10 I think that the efficient utilities 11 will be the ones who have the highest probability of 12 earning the maximum market based rate of return. 13 MR. POWER: A couple of final 14 questions, and I am going to turn the technical ones 15 over to my friend, Mr. Adamson here. 16 I take it you would agree there is no 17 assurance when this second generation PBR is going to 18 kick in. It's just a plan for the moment. Right? 19 MR. CRONIN: Yes. I think that's 20 true. We can't make any representations for the Board, 21 but we have recommended that it only occurs -- you 22 know, this plan applies for the period of 2000 through 23 2002. 24 MR. POWER: Right. Well, we don't 25 know what's going to come out of that. I accept that. 26 I want to get back to a comment that 27 you made earlier when I believe it was my friend Mr. 28 Warren was asking questions about data and transparency 249 OEB Panel 1 and these sorts of things. 2 He had taken the position that the 3 data couldn't be compelled by the Board, that there are 4 legal grounds for this; that it could not be compelled, 5 and therefore you had to offer confidentiality and that 6 sort of thing. That in a nutshell is what he said this 7 morning. 8 I take it there is some legal advice 9 on that to you or to Board staff about what information 10 was available, what you could get, that sort of thing. 11 MR. KING: Well, some legal advice? 12 MR. POWER: I presume if you are 13 making statements about the law and what you can and 14 can't get, somebody did some analysis. 15 MR. KING: I think the issue is 16 perhaps a little more simplistic than that. Even if 17 the Board had it within its authority to compel the 18 production of data, the Board was not of the mind to 19 compel the production of the data. 20 Even if it were legally within its 21 remit at the time that we were trying to obtain it, 22 which was in January, before much of the authority to 23 my understanding -- I'm not an attorney -- where much 24 of the authority had actually devolved to the Board. 25 It was the case where the Board was 26 unwilling to use its authority, even if it had it, to 27 compel the production of the data. 28 MR. POWER: A simpler question. I 250 OEB Panel 1 trust then that the offer of confidentiality wasn't 2 with respect to information that was already otherwise 3 public. Correct? 4 I mean that would make no sense. For 5 example, year end financial statements, that sort of 6 thing. I can't imagine that you would bind the Board 7 by offering confidentiality on those things. Is that 8 in writing somewhere? 9 MR. KING: I believe that you have 10 the documents that laid out the promise of our pledge. 11 MR. POWER: I'm just asking you the 12 intent of the parties. I can't imagine you would bind 13 the Board with confidentiality on information that is 14 otherwise publicly available. That could not have been 15 intended. 16 MS KWIK: We did not differentiate 17 between the data that was publicly available and -- 18 MS LEA: I'm sorry, I can't hear you. 19 MS KWIK: We did not differentiate 20 between the data that might have been available 21 publicly and that which may not have been available. 22 MR. POWER: Right. But you could 23 now. 24 MR. KING: We could have, but again, 25 our intent was to try and seek the co-operation of the 26 utilities in supplying the data. To the extent that we 27 start trying to split things into those things that we 28 are pledging confidentiality for and those that we 251 OEB Panel 1 aren't makes it much more difficult to obtain the 2 co-operation and acquiescence of the utilities in 3 supplying the data. 4 Sure, I guess, you know, in hindsight 5 maybe we could have done something different. I don't 6 think we understood at that point the issues that were 7 to be raised by our pledge of confidentiality at that 8 point. 9 MR. POWER: Would this pledge of 10 confidentiality go so far as to protect that 11 information from being made available as part of the 12 first rate application? 13 MS LEA: These may be legal 14 questions, sir. 15 MR. POWER: That's a contract 16 question, in my mind, in terms of what did the parties 17 agree to. 18 MS LEA: Yes. If the witnesses are 19 capable of answering these questions, I don't know. 20 I'm not sure that I'm capable of answering these 21 questions with my legal knowledge, so I'm not sure 22 whether they can or not. 23 Is there any further assistance 24 outside, of course, of arguing the motion that has been 25 brought forward and I think everybody has agreed that 26 we are not going to do that here. Is there any further 27 assistance that you can give on this matter? 28 MS KWIK: The reason we did collect 252 OEB Panel 1 it in confidence was to pursue advice by the task force 2 members, that if you wanted the data, we should really 3 give commitment to confidentiality or we probably would 4 not get the data. 5 MR. POWER: I guess, Ms Kwik, sort of 6 a simple question. Is it your belief that as part of 7 the forthcoming rate application process that that 8 information is relevant to rate applications, that they 9 do not have to provide that information? Or, if they 10 do, it is somehow bound in some secrecy so that nobody 11 else can see what is otherwise a public process? I'm 12 not aware of any exemption. 13 MS KWIK: The data they submitted 14 for -- 15 MR. KING: That they submit for a 16 rate application. 17 MR. POWER: It should be a short 18 answer. 19 MS KWIK: It would not be as much as 20 what was filed. 21 MR. CRONIN: I think the answer to 22 your question is information that will be submitted for 23 the rate application would be publicly available, I 24 assume. 25 MR. POWER: Right. 26 MR. CRONIN: Again, that's an 27 implementation issue. 28 MS KWIK: And it would only be a 253 OEB Panel 1 subset of anything that was presented for the 2 calculations. 3 MR. POWER: Okay. Thank you. Those 4 are my questions. 5 My learned colleague here on a more 6 technical level has a few questions. 7 MS LEA: Thank you. 8 Mr. Adamson and Mr. Power, I 9 understand that Mr. Adamson may have constraints about 10 returning tomorrow. However, we do have -- 11 MR. ADAMSON: Tomorrow I am 12 available. I expect to be done by Thursday afternoon. 13 My friend is waiting. I believe I am set to appear on 14 Thursday. 15 MS LEA: The reason I ask you is that 16 we do have witnesses who have been working all day as 17 well as reporters that have been working all day. How 18 long do you think you will be with your questions? 19 MR. POWER: A while. 20 MR. ADAMSON: It depends on the 21 answers, I guess, but probably a good 15 to 20 minutes. 22 That is based on very "yes", "no","yes", "no". 23 Perhaps if we are going to discuss technical issues, it 24 might take longer than that. 25 MS LEA: Okay. Given those caveats, 26 I think that we will close for the day. 27 Are there any other scheduling issues 28 that need to be addressed? 254 OEB Panel 1 Then, this panel will continue 2 tomorrow at 9:00 a.m. 3 Thank you. 4 --- Whereupon the hearing adjourned at 1700, to resume 5 on Wednesday, September 22, 1999, at 0900 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 255 OEB Panel 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 3 4 Presentation by OEB Panel 10 5 Questions by Mr. Gibbons 21 6 Questions by Mr. Ferguson 38 7 Questions by Dr. Woo 58 8 Upon recessing at 1050 76 9 Upon Resuming at 1109 76 10 Questions by Mr. Faye 77 11 Questions by Mr. Wills 86 12 Questions by Mr. Tucci 88 13 Questions by Mr. Warren 107 14 Questions by Mr. Rodger 116 15 Luncheon Recess at 1230 126 16 Upon resuming at 1330 126 17 Questions by Mr. Stephenson 147 18 Questions by Mr. Poch 166 19 Upon recessing at 1511 187 20 Upon resuming at 1529 187 21 Questions by Ms Demarco 194 22 Questions by Mr. Power 198 23 24 25 UNDERTAKINGS 26 27 Undertakings can be found at pages: 196, 197 and 198