855 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 Monday, September 27, 1999, 17 commencing at 0902 18 19 20 21 22 23 TECHNICAL CONFERENCE 24 25 VOLUME 5 26 27 28 856 1 APPEARANCES 2 JENNIFER LEA/ Board Counsel, Board 3 MIKE LYLE 4 STEPHEN MOTLUK Board Technical Staff 5 ROBERT WARREN Consumers' Association of 6 Canada 7 ROBERT POWER/ Hydro Mississauga, London 8 SEABRON ADAMSON/ Hydro, Oshawa PUC, Sarnia 9 ALEXANDER GRIEVE Hydro, St. Catharines Hydro, 10 Whitby Hydro, Petrolia PUC, 11 St. Thomas PUC, GPU Electric 12 Inc./GPU Services Inc. and 13 Collingwood PUC, ENERConnect 14 JACK GIBBONS Pollution Probe 15 PAUL FERGUSON/ Upper Canada Energy 16 DR. C.K. WOO/ Alliance 17 PETER FAYE/ 18 DAVID WILLS 19 MARK RODGER Toronto Hydro 20 RICHARD STEPHENSON Power Workers Union 21 DAVID POCH Green Energy Coalition 22 ELISABETH DEMARCO Lindsay Hydro, Flamborough 23 ZIYAAD MIA Coalition of Distribution 24 Utilities 25 ROGER WHITE ECMI 26 TOM ADAMS Energy Probe 27 MAURICE TUCCI MEA 28 STEPHEN CARTWRIGHT Enbridge Consumers Gas 857 1 APPEARANCES (Cont'd) 2 BILL HARPER Ontario Hydro Networks 3 KEVIN BELL Great Lakes Power 4 GERRY DUPONT Nepean Hydro 5 RICHARD BATTISTA Union Gas Limited 6 BRIAN McKERLIE Municipality of Chatham-Kent 7 MICHAEL JANIGAN Vulnerable Energy Consumers 8 Coalition 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 858 1 Toronto, Ontario 2 --- Upon resuming on Monday, September 27, 1999 3 at 0902 4 MS LEA: Good morning. 5 Welcome to the fifth and final day, I 6 trust, of the Technical Conference into the 7 Performance-Based Regulation Proposed Handbook for 8 Electric Distribution Utilities. 9 With us we have this morning Mr. John 10 Todd, who is appearing, I believe, for the Vulnerable 11 Energy Consumers Coalition. 12 JOHN TODD 13 MS LEA: Mr. Janigan, do you want to 14 take it away, please? 15 MR. JANIGAN: Yes. 16 First of all, Mr. Todd, are there any 17 corrections to the materials that are set out that have 18 been filed in this matter under the title of Comments 19 Submitted on Behalf of the Vulnerable Energy Consumers 20 Coalition, August 24, 1999? 21 MR. TODD: Aside from a couple of 22 typos there is just one correction that I have seen 23 that is of significance, and that is in Table B, 24 Productivity Thresholds for Variable Earnings Sharing. 25 The final column, Minimum Productivity -- 26 MR. JANIGAN: What page does that 27 appear upon? 28 MR. TODD: Page 21 of the faxed 859 VECC Panel 1 version, maybe thereabouts on others. 2 MR. JANIGAN: Okay. 3 MR. TODD: The numbers in the column, 4 1.5, 3.5, 6.0. The last number is not .5, as is fairly 5 transparent and as indicated in the paragraph below, 6 but actually 6.5. 7 MR. JANIGAN: So under selection Y, 8 minimum productivity would be 6.0? 9 MR. TODD: Under selection Z. 10 MR. JANIGAN: Okay. But you said 6.0 11 for what? 12 MR. TODD: It is 5.0 for Y and 13 6.5 for Z. 14 MR. JANIGAN: Thank you. 15 MR. TODD: That is indicated in the 16 text below. 17 MR. JANIGAN: Are there any other 18 corrections, amendments or deletions? 19 MR. TODD: No, just typos. A couple 20 of typos, but not worth mentioning. 21 MR. JANIGAN: Do you have any 22 additional comments to add this morning with respect to 23 the submission? 24 MR. TODD: I just noticed that we 25 didn't -- it's a good thing we weren't selling tickets 26 today, we wouldn't be making much money on this. 27 Given the parties here, is there 28 actually a need to summarize the evidence or have 860 VECC Panel 1 people had an adequate time to read it? I mean, I can 2 walk through and highlight what is there or we can just 3 go straight to questioning, whichever you prefer. 4 MR. JANIGAN: Our cost award is 5 adjusted by the relative draw. 6 MS LEA: Oh no, certainly not. 7 MR. JANIGAN: If that is 8 satisfactory, if we could just proceed to questions. 9 MS LEA: Yes. No, absolutely. 10 However you wish to proceed is fine with us. 11 All right. If anybody -- 12 MR. TODD: If anybody wants to ask 13 the question: "Please summarize your evidence", feel 14 free to. 15 MS LEA: All right. 16 Who has questions for Mr. Todd? 17 Mr. Grieve? 18 MR. GRIEVE: I do, but I was hoping 19 to hang on for a minute to go through my notes. 20 MS LEA: I will tell you what then, 21 Mr. Todd, why don't you go ahead and summarize your 22 evidence. 23 MR. STEPHENSON: Actually, I am ready 24 to go, if you want. 25 MR. GRIEVE: Great. 26 MS LEA: All right. Mr. Stephenson. 27 MR. STEPHENSON: Good morning, 28 Mr. Todd. 861 VECC Panel 1 Thank you for summarizing your 2 evidence so succinctly. 3 I would like to focus for a moment on 4 system reliability and service quality. 5 Can you assist us as to your views as 6 to the necessity of (a) tracking those numbers and 7 (b) reporting those numbers to the Board throughout the 8 first generation of PBR? 9 MR. TODD: I think the issue is -- 10 there are two aspects to the issue. What would be 11 desirable to be done and what can be done, particularly 12 when you are focusing on the first phase. 13 One of the significant concerns for 14 customers of any PBR regime is that there is an 15 incentive to cut costs by reducing quality standards, 16 service, reliability, and so on, and therefore 17 monitoring and having mechanisms to ensure that that is 18 not done is extremely important. 19 The first step of that, of course, is 20 tracking and that does require not only keeping 21 statistical information but reporting it or having 22 audits, reporting it and having it reviewed. 23 Any reporting is imperfect. In 24 particular, some of the problems are long-term issues, 25 not short term, so if you are looking at reliability 26 and trying to measure the impact of cost reductions in 27 maintenance it may not show up for many years, but 28 nevertheless there does have to be best effort to 862 VECC Panel 1 effectively monitor and enforce various types of 2 service standards. 3 Unfortunately, in the first 4 generation PBR a lot of utilities, as we understand it, 5 don't really have the systems in place for doing that. 6 So the focus here has been that those who are able to 7 should be reporting the standards, the Board should be 8 collecting and reviewing them, and there should be a 9 mechanism of incentives to maintain service and 10 reliability standards. 11 But for those who do not have the 12 capacity, the first generation should be a period when 13 they are bringing into play the mechanism so that they 14 can be reporting the information in the second 15 generation PBR so that at least down the road there 16 will be effective enforcement. 17 In addition, to the extent that Board 18 signals or indicates in its decision at this time that 19 there will be a serious monitoring process in the 20 second generation on an ongoing basis, that should 21 provide some incentive to the companies to not ignore 22 maintenance and quality standards over the first 23 generation. 24 A short-term saving could be a 25 long-term cost. 26 MR. STEPHENSON: You propose the 27 tracking of an additional indicator in your paper above 28 and beyond the ones identified in the draft handbook, 863 VECC Panel 1 and that is the MAIFI standard. 2 MR. TODD: Yes, momentary average -- 3 MS LEA: Could you please give that 4 acronym? 5 MR. TODD: The standard is MAIFI, 6 which stands for momentary average interruption 7 frequency index. 8 MR. STEPHENSON: Can you assist us, 9 perhaps by explaining what that is, but why it would be 10 of importance or significance that that index be 11 tracked? 12 MR. TODD: In the good old days 13 before desktop PCs momentary outages were relatively 14 unimportant. When I was a kid our clocks were 15 mechanical and if a light flickered or went out 16 momentarily and came back on or if the refrigerator 17 went out for a few seconds or less it didn't really 18 matter. 19 But nowadays, unless I remember to 20 replace the batteries in the clocks I frequently over 21 the last -- over the summer for example, walked through 22 the house and all my clocks were flashing and I didn't 23 know what time it was, which is not a tragedy but an 24 inconvenience except when I have to get up for an 25 important meeting and am relying on my alarm. 26 More importantly, computers obviously 27 are sensitive to momentary outages, unless you have a 28 portable with a battery built in that is plugged in. 864 VECC Panel 1 So I think that while traditionally 2 the momentary average interruption frequency index may 3 not have been considered an important standard to 4 monitor in the past, I think it is becoming -- it is 5 very important now, and our suggestion is that this is 6 as important as some of the long-term outages in terms 7 of getting a sense of how frequently those 8 interruptions happen. 9 If the frequency of those momentary 10 outages was increasing, that would be an indicator of 11 negative impact on customers and one would hope that 12 that could be improving. 13 MR. STEPHENSON: I'm sure that I 14 understanding. 15 THE COURT REPORTER: Mr. Stephenson, 16 I'm sorry, you are not getting the microphone for some 17 reason. 18 MR. STEPHENSON: Yes. Just to ensure 19 that I understand that, I take it then that there are 20 two separate reasons why tracking of an index like that 21 is important. 22 One is that these kinds of outages in 23 fact are disruptive and have a negative impact on 24 certain elements of the economy. That is number one. 25 MR. TODD: Yes. 26 MR. STEPHENSON: Then number two is 27 that a worsening of an index like that may be 28 indicative of problems in the system that may be caused 865 VECC Panel 1 by inattention to detail or degradation of system 2 quality more generally. Is that fair? 3 MR. TODD: It's an indication of 4 different kinds of problems that are important than the 5 other measures of outages. 6 MR. STEPHENSON: You recommend that 7 as a first generation data collection measure. Is that 8 correct? 9 MR. TODD: I think that, as per my 10 previous comments, where any utilities can report it 11 they should. It should be an expectation to report it. 12 But many cannot and therefore it should be indicated as 13 something that will be tracked and should be -- the 14 capability of tracking that and reporting it should be 15 put in place during the first generation PBR. 16 MR. STEPHENSON: Do you consider it 17 to be appropriate that there be a measure of employee 18 health and safety tracked as a statistical measure 19 dealing with an element of system reliability or system 20 maintenance during first generation or beyond? 21 MR. TODD: Yes. It is a very tricky 22 and sensitive issue, but it is a very important issue. 23 When West Kootenay Power first introduced its PBR 24 mechanism, in the first year -- it is a very small 25 company -- there were two deaths which nobody was 26 prepared to say, you know, was it directly caused by 27 additional pressures or cost cutting as a result of 28 PBR. But the timing was perhaps unfortunate. They had 866 VECC Panel 1 not had a death, even a single death, for many years. 2 But it certainly highlighted the concerns that there 3 can be, shall we say, pressure to be more productive 4 where safety could be compromised. 5 I would hasten to add that there was 6 no suggestion, looking at the events of those 7 particular cases, that there was a direct link between 8 management putting pressure on employees and those 9 events. So I wouldn't be criticizing West Kootenay in 10 that way, but they certainly came back with a very 11 strong response in terms of increasing their safety 12 training and emphasis on safety. 13 You certainly wouldn't want any hint 14 that employee safety was being compromised for the sake 15 of profit under PBR. I think the Board should signal 16 that that is a primary concern. So, yes, although it 17 is not in the evidence, you flag it. That is kind of 18 taken for granted that employee safety is not going to 19 be compromised. That is something that is tracked. 20 You know, unions monitor that. 21 It is whether the Board would have to 22 monitor that in order to make sure there is no 23 compromise on that front. I'm not sure, but certainly 24 it wouldn't hurt. 25 MR. STEPHENSON: Let me just come 26 back to that for a moment. 27 It seems to me that to a very large 28 extent what PBR is trying to imbue in LDCs is a 867 VECC Panel 1 culture, a cultural change towards really all manner of 2 its operations with a keener eye to the bottom line. 3 That is fair, isn't it? 4 MR. TODD: Yes. 5 MR. STEPHENSON: But would you also 6 agree with me that, to some extent, I'm sure you have 7 heard, at utilities and elsewhere, there may either be 8 a culture of safety or not. I mean, have you heard 9 executives talk in those terms about maintaining a 10 safety culture or developing a safety culture? 11 MR. TODD: Yes. 12 MR. STEPHENSON: Wouldn't it be a 13 fair or appropriate mechanism to ensure that when you 14 were developing this new culture of looking at the 15 bottom line and looking at efficiency from a management 16 culture and an employee culture that you don't lose or 17 at least -- and you certainly attempt to maintain and 18 to better the positive aspects of a culture, namely a 19 safety culture towards the execution of work? 20 MR. TODD: Yes. I think those views 21 I would endorse. 22 MR. STEPHENSON: Moving to second 23 generation issues about the development of compliance 24 with safety standards -- I'm sorry, not safety 25 standards, service and reliability standards, I think 26 just about everybody I have spoken to, Dr. Bauer and 27 Mr. Adamson and indeed the Board consultants, agreed 28 that there is a real merit in the adoption of some kind 868 VECC Panel 1 of an economic penalty system of some design in terms 2 of ensuring that appropriate service quality and 3 reliability standards are maintained. 4 What Mr. Adamson suggested to me was 5 that one of the reasons that that was an appropriate or 6 a desirable way to go was that it internalized into the 7 PBR mechanism itself from an economic incentive 8 perspective the cost benefit analysis in terms of 9 degradation of system quality. It didn't become a 10 separate consideration; it became one in the same 11 consideration when you were looking at obtaining 12 economic improvements in the system. 13 Do you agree with that basic 14 philosophy? 15 MR. TODD: There is a section in part 16 8 of my evidence that discusses penalties and says 17 essentially that. So, yes, I do agree with it. 18 MR. STEPHENSON: Is there anything 19 that can be done positively or negatively in terms of 20 what the Board actually adopt in the first generation 21 which will either facilitate that objective or inhibit 22 the achievement of that objective going into a second 23 generation? 24 What should the Board be attempting 25 to do and what should they be avoiding doing in terms 26 of facilitating that objective in the second 27 generation? 28 MR. TODD: I think it should be 869 VECC Panel 1 establishing the principle that there are financial 2 implications to a failure to meet performance standards 3 in the first generation mechanism. 4 My suggestion has been that, to use 5 the BCUC approach -- that is the British Columbia 6 Utility Commission -- a company should not be in the 7 money unless it maintains acceptable performance 8 standards. So to the extent that there is a sharing 9 mechanism, and that is an item that I have dealt with 10 separately, proposing an alternate sharing mechanism, 11 the sharing mechanism can be -- or the share that the 12 company receives can be contingent upon meeting the 13 baseline performance standards, the "baseline" either 14 being historical standards or standards that are set by 15 the OEB. 16 To the extent that everybody is not 17 tracking and reporting because they don't have that 18 capability upfront, there may be some inequities to, in 19 effect, apply that to companies that are reporting and 20 not to others, but I don't think that is a rationale 21 for not doing it. There should at least be a mechanism 22 that will allow a determination, even where there is 23 not reporting, that there is evidence of failure to 24 maintain standards through, if necessary, a customer 25 service satisfaction survey. 26 You know, some mechanism should be in 27 place for monitoring performance standards and making 28 the receipt of the company's share, which is, in 870 VECC Panel 1 effect, a bonus over the built-in rate of return, make 2 it contingent upon achieving those standards. It can 3 be done on a scale basis where, you know, coming close, 4 not quite making it means that there is a loss of part 5 of the entitlement and a significant failure would lead 6 to a loss of the total entitlement. 7 MR. STEPHENSON: Would a mechanism of 8 that sort be appropriate in the first generation, not 9 with respect to achievement of prescribed standards or 10 targets in the first generation but rather with respect 11 to the maintenance and submission of data which the 12 Board determines that it wishes to see maintained or 13 reported during that phase, that is, using the failure 14 to either maintain the data or to file the data or 15 report the data as some kind of threshold toward 16 entitlement to extra-normal earnings? 17 MR. TODD: I hadn't thought about 18 that twist to the approach, but certainly that could be 19 used as an incentive to make some sort of scaling of 20 the company's share contingent upon, again, meeting 21 objectives with respect to reporting, is what you are 22 saying. That would provide some, shall we say, 23 economic benefit, i.e. you get some of that extra 24 earnings in return for investing in the reporting 25 infrastructure. 26 Clearly, it has got to be designed in 27 a reasonable and equitable way. You may take two or 28 three years to put the mechanisms in place and begin 871 VECC Panel 1 reporting. You wouldn't want to impose penalties in 2 the first year for failing to achieve what essentially 3 might be unachievable in the first year. 4 There could be a gradual 5 implementation. There probably could be something 6 designed that would be fair to the companies and at the 7 same time provide an economic incentive. Certainly 8 doing so would be consistent with the principles of PBR 9 which is an incentive based regulation. 10 MR. STEPHENSON: Thank you, Mr. Todd. 11 Those are my questions. 12 MS LEA: Thank you. 13 Mr. White. 14 MR. WHITE: Thank you very much. 15 Here we go. 16 The MAIFI standard that you suggest 17 be considered, specifically what is it based on when 18 you talk about a momentary interruption? Is it a 19 duration of so many cycles or what are we talking 20 about? I'm not trying to punish you with that 21 question. 22 MR. TODD: Off hand, I'm not sure. I 23 would have to check back. 24 MR. WHITE: Okay. 25 MR. TODD: You know, I would treat it 26 as a concept. I have not proposed a specific measure. 27 I'm saying momentary. That's not my expertise per se 28 and I would be open to saying whether it's a number of 872 VECC Panel 1 cycles or milliseconds or whatever. 2 MR. WHITE: Let me explain to you why 3 I was asking the question. Like yourself, I'm much 4 more dependent upon the power system today than I 5 probably was even a few years ago. From a computer 6 perspective, most computers operate on a DC supply 7 within the computer. What they do is they rectify the 8 alternating current. 9 I have even been in the situation 10 where I watched the lights go down in my office and saw 11 absolutely no impact on my computer which I was 12 incredibly grateful for because I was well into one of 13 those infamous spreadsheets. That's something that was 14 visible to me. 15 MR. TODD: Yes. 16 MR. WHITE: First, I think somebody 17 might have a chance of capturing, but there are 18 hundreds of momentary interruptions a day throughout 19 the power system, maybe even thousands, resulting from 20 switching outages that are a few cycles long below what 21 used to be described as the flicker threshold 22 established in the Distribution Standards Handbook, the 23 Westinghouse Distribution Standards Handbook. 24 If it's below the threshold of 25 visibility, the odds are that your alarm clock or some 26 of your alarm clocks in the house might pick it up, but 27 some of them might not. 28 If we are talking a few cycles, I 873 VECC Panel 1 would suggest that the cost of putting that kind of a 2 monitoring system in place would be hugely expensive 3 because you really have to monitor -- if you are 4 monitoring cycles, you really have to monitor with 5 oscillograms and stuff that triggers on loss of 6 frequency. I am just trying to get a handle on whether 7 that level of investment is warranted. 8 MR. TODD: What I'm suggesting is a 9 concept. If the concept were accepted by the Board, 10 then the next step would be for the engineers that 11 specialize in this stuff -- and while I do have an 12 electrical engineering degree, it's getting on to be 30 13 years old almost, 25 years old -- would define by 14 looking at the standards that are out there what is an 15 appropriate measure of momentary outages. 16 I agree with you that computer 17 equipment because of the existence of the momentary 18 outages have improved significantly. You used to have 19 to buy external equipment to protect your computer. 20 Now, depending who you buy it from, it can handle those 21 momentary outages better than the clocks on my stove 22 and microwave and clock. 23 That whole concept is not being 24 measured at the present time. Therefore, you know, 25 even if the measure is only, you know, one second -- I 26 don't know what it is, but all I'm saying is that those 27 matter now and they should be measured. 28 I agree with you entirely that, you 874 VECC Panel 1 know, there may be a number of cycles which are 2 acceptable and are normal for the system and are not 3 disruptive that we don't want to capture. 4 MR. WHITE: In a former life I used 5 to answer questions like how reliable is the 60 hertz 6 on the transmission system and the response I used to 7 give is it's very reliable if it's there because the 8 momentary interruptions are very, very frequent on the 9 system. When they transfer those from one station to 10 another, it happens. You get a breaker opening and 11 another breaker closing. Probably less than half a 12 second. 13 I think maybe what you are looking 14 for is something closer to a flicker standard, 15 something where it hits a level of perception. 16 MR. TODD: It's not just perception, 17 it's disruption that is the issue. My understanding is 18 that the MAIFI is used in some places, so that was 19 using an existing standard. If the flicker standard is 20 getting into the same concept, I'm not going to quibble 21 with you. 22 In addition, the statement that there 23 is a standard doesn't speak to what that standard would 24 be. I think we need more information. Yes, there is, 25 as within any other standard, a reasonable and 26 acceptable level that would be tolerated by the system. 27 What we are trying to identify is in 28 looking at it is, number one, from an engineering 875 VECC Panel 1 perspective, is it actually reasonable that we should 2 be improving on that standard given the technology of 3 the day. Whatever the answer to that is, we should be 4 monitoring to ensure that there aren't some standard 5 areas or a decline in those standards as a result of 6 PBR. 7 We need to look more closely because 8 we are in a situation where there is clearly an 9 economic incentive to cut corners. If we are managing 10 expenses in a way to protect against declines in SAIDI 11 and SAIFI, you end up with a situation where you have 12 declines in SAIFI because it's not being measured. You 13 want to maintain quality in all aspects of the system 14 on a balanced basis. 15 The danger of having any sort of 16 service quality measures is that you incent people to 17 focus on those and ignore what isn't the measures. 18 MR. WHITE: One of the things that I 19 have questioned the Board and Board staff and Board 20 consultants about on the standards that they seem to 21 have accepted is the notion of causality. I would 22 suggest that in most cases it's almost impossible to 23 identify the cause of a momentary interruption because 24 it is so transient in nature. 25 I am wondering how you would address 26 that as to whether it's a distributor or a transmission 27 system or something like that so that the right party 28 gets to wear the junk. 876 VECC Panel 1 MR. TODD: It is difficult to measure 2 and attribute. However, I would expect that by 3 monitoring at different levels, like at the MEU 4 level -- in fact, it may be necessary, particularly for 5 larger ones, to do it for areas within a utility. 6 Also, and I am stretching beyond my 7 true expertise here, but I will do it anyway, also at 8 the transmission level, you know, what you are looking 9 for are patterns. In setting standards, there clearly 10 are thresholds. 11 With these sorts of standards, for 12 PBR purposes, it is common to use a multi-year 13 averaging to get around some of the events in a 14 particular year that are uncontrollable, that make a 15 particular year bad. So you are trying to pick up 16 trends. And if you are identifying trends that are 17 happening in particular MEUs and not in others or 18 that's happening system-wide, that may give you a 19 different message. So, to some extent, whenever there 20 is a financial consequence to a standard, there should 21 also be an appeal process. 22 The key issue is what is, as you say, 23 the default assumption about the financial consequences 24 where there's a standard. 25 In my view, it should not be that 26 customers can complain and have a -- you know, if they 27 are successful -- have a financial penalty imposed but, 28 rather, should be, if you fail to meet the standards, 877 VECC Panel 1 then the presumption is that there's a problem and the 2 financial consequences are imposed, unless the company 3 can bring forward convincing evidence that there's a 4 special situation, it's not us, whatever. It's a 5 burden of proof issue. 6 MR. WHITE: Many of my clients have 7 tried to get information from Ontario Hydro, regarding 8 the transmission system or the distribution system 9 ahead of the delivery point to the utility and they 10 have been less than successful in getting the level of 11 information that -- let me not go too far down that 12 road. But it's been difficult. 13 My suggestion is if MAIFI were to 14 measure the Ontario Hydro distribution system in 15 aggregate, as opposed to, you know, requirement for a 16 measure that allowed the utilities and was transparent 17 enough information to allow the utilities to correlate 18 and maybe identify the source of the problem as to 19 whether it's the utility or the supply point, the risk 20 is that we have two people, sitting in a room, pointing 21 fingers at each other and I would say that's neither 22 cost effective nor what you are really after. 23 I think if we go down that road, we 24 are going to have to make sure that the transparency of 25 the process is there to make it work. 26 MR. TODD: Yes, unfortunately, now 27 that Ontario Hydro, all aspects are regulated, our 28 colleagues across the room are going to make sure that 878 VECC Panel 1 problem goes away. Right? 2 MR. WHITE: Wouldn't that be nice. 3 --- Laughter 4 MR. TODD: I'm sensitive to your 5 concerned, but we do have a regular system and 6 everybody is under it and those are issues that, I 7 agree, need to be addressed. You cannot monitor if you 8 only have part of the information. Absolutely. 9 MR. WHITE: With respect to pricing, 10 have you looked at the likely implications of the price 11 unbundling proposed in the PBR manual, yourself, at 12 all? 13 MR. TODD: The initial unbundling of 14 what will -- the initial rate fee? 15 MR. WHITE: Yes. 16 MR. TODD: I haven't done -- I 17 haven't looked at the numbers the way I have with, as 18 you saw in the evidence on the sharing mechanism. 19 MR. WHITE: I notice a group here 20 representing and I'm wondering if you have thought 21 about percentage impacts and bills that might be 22 acceptable or if there's a dollar threshold that would 23 be considered to be not material, in terms of an 24 adverse price adjustment flowing from the new pricing 25 regime? 26 MR. TODD: I expect the clients 27 themselves, through counsel, may have some specific 28 views to express on that, from the expert perspective. 879 VECC Panel 1 It's a little bit of what falls out of the system, 2 clearly, but the design of the system, the principles, 3 really, that have been handed to the OEB in coming up 4 with this mechanism, clearly, create a discontinuity 5 with the past and create a scenario of price increases. 6 I flagged that on a number of occasions and indicated 7 there's, certainly, concern about backlash if MEUs 8 actually take the extent of increases that they appear 9 to be entitled to within the legislation. 10 As an expert, I certainly have made 11 some comments about where there are things that can be 12 done that will mitigate those impacts. They should be. 13 But some of the key drivers, the recognition, the 14 corporatization, taxes, or taxes in lieu, the 15 market-based rate of return, those key drivers are -- I 16 haven't really looked at or gone into detail because 17 they seem to be givens. 18 I have made the suggestion that the 19 Board may consider capping increases, in terms of 20 movement to those maximums. But there are certainly 21 some legal issues there which counsel for my clients 22 and others may debate on what the Board actually can 23 do, in terms of constraining those increases. It could 24 be significant as I have indicated in my evidence. 25 MR. WHITE: If I were to suggest to 26 you that, even without the tax implications or the 27 market value rate of return implications, that the 28 shift in revenue responsibility, even under the old 880 VECC Panel 1 regime of -- if you were introducing a service charge, 2 the analysis done within Ontario Hydro indicated that 3 minimum-bill relatively low-use customers, probably 4 somewhere 70 and 120 kilowatt hours a month, would 5 experience increases between 70 and 120 per cent in 6 their bill level and at a level in excess of sort of 7 $5.00. 8 With the regime suggested by the 9 Board staff in the PBR Rate Handbook, and their 10 consultants, I would suggest that these percentages and 11 dollar figures, for those customers, might go to 200 to 12 300 per cent for those same customers. 13 Assuming -- that's a nice economic 14 term, I'm starting to learn -- assuming that those kind 15 of things could flow from the rules in the PBR 16 Handbook, would you like to comment? 17 Your choice. 18 MR. TODD: First of all, I cannot, 19 obviously, give any comment on the numbers themselves. 20 I have flagged a concern, with respect to the pricing 21 flexibility, which, go through my evidence, that it 22 will lead to -- given the incentives, it may lead to 23 inequitable price adjustments. 24 I think you are referring to: there 25 may be some restructuring of rates that would have 26 significant impact on customers within classes and, 27 yes, whenever rates are restructured -- I have seen it 28 in many other jurisdictions and other settings -- it 881 VECC Panel 1 can lead to very high impacts on individual customers. 2 When there's a reallocation of costs recover between 3 classes, the kinds of impacts you are talking about are 4 not unheard of. 5 We have seen some very significant 6 impacts of what the Board has called "rate rebalancing" 7 in the telecom sector, which was an explicit shifting 8 between long distance and local service, which had very 9 different impacts on different customers, depending 10 upon their long-distance usage. 11 When you get into these kinds of 12 scenarios of change, the impacts on individual 13 customers can be very, very significant. And what has 14 typically been done when those impacts were looked at 15 in the past is to actually take the database of 16 customers real world by the utilities and compare rates 17 before and after all the rate restructuring and come up 18 with a distribution of the impacts on customers based 19 on, you know, real-world customers, so that the 20 regulator, in fact, knows the split between customers 21 who are winners and those who are losers and what the 22 worst case scenario is. 23 Frequently there are caps put on what 24 is seen as an acceptable impact on individual customers 25 and the transition is structured in such a way to avoid 26 excessive rate impacts on any classes of customers or 27 types of customers within a class. They are not 28 necessarily a class. They just may be small-volume 882 VECC Panel 1 users versus larger volume within the class and that 2 type of thing. 3 MR. WHITE: Thank you very much, Mr. 4 Todd. 5 MS LEA: Thank you. 6 Mr. Mia. 7 Mr. Grieve. 8 MR. GRIEVE: Thank you. 9 Could we go to page 10 of your 10 submission. At the top of that, I think the last line 11 of the first paragraph, not a full paragraph, you use 12 the phrase "internally generated funds". I wonder if 13 you could define that for us. 14 MR. TODD: Yes. On the fax copy it 15 is the first line of page 10. We recognize that in 16 this day of technology many people have copies that 17 they got in different ways, so there might be slightly 18 different paging. 19 What I was referring to here was I 20 was trying in this section, talking about contributed 21 capital, I was attempting to distinguish it from 22 capital which is contributed by customers as part of 23 the customer contributions to expansions and so on. 24 So, internally generated could be literally contributed 25 capital from the owner equity, but my understanding in 26 municipals is more frequently internally generated is 27 the net income from prior years that has been 28 accumulated over a period of time, but it is intended 883 VECC Panel 1 to be all sources other than customer contributed 2 capital. 3 MR. GRIEVE: So in broad terms this 4 is the same thing as retained earnings? 5 MR. TODD: Well, retained earnings 6 does not include initial equity, but equity in retained 7 earnings. 8 MR. GRIEVE: If we review some of the 9 players in the industry, specifically the MEUs, we find 10 that there are some significant assets on the books and 11 that many of them were not paid for with 12 customer-contributed capital, don't we? 13 MR. TODD: Yes. 14 MR. GRIEVE: Where did the money come 15 from to pay for those assets? 16 MR. TODD: Different companies 17 obtained the money in different ways. Many have been 18 in existence for a long time and their assets have come 19 out of operations over decades. 20 There is also, if you look at the 21 full history of the industry, certainly capital has 22 been paid through debt. There may well have been, if 23 you go back, contributed equity from owners, including 24 municipalities, but I am not sure of the ancient 25 history. My understanding is that recently there 26 haven't been -- 27 MS LEA: I am sorry, Mr. Todd, you 28 are fading. You have to speak into the microphone. 884 VECC Panel 1 MR. TODD: Right. 2 I am not sure that recently there has 3 been contributed equity from the owners. There hasn't 4 been any that I am aware of or much. 5 MR. GRIEVE: So how we might 6 summarize this situation is that most of the capital 7 has either come from customer contributions or from 8 retained earnings. Would that be correct? 9 MR. TODD: Existing capital, yes. 10 MR. GRIEVE: You would agree with -- 11 in a commercial business, such as General Electric or a 12 consulting company, retained earnings from previous 13 years would normally appear on the accounts as capital, 14 wouldn't they? 15 MR. TODD: Yes, they do. 16 MR. GRIEVE: And you would agree that 17 the Act is now pretty clear that the MEUs are to be 18 commercialized and that the municipalities are to 19 become shareholders? 20 MR. TODD: As soon as you say the Act 21 you are getting into a legal definition, so without 22 straying into legal definitions my understanding of it 23 from a policy analyst perspective is yes. 24 MR. GRIEVE: Municipalities are to be 25 the beneficiaries as the shareholders, as in a normal 26 commercial operation, so they will get a market-based 27 return on retained earnings pending the outcome of 28 these hearings. In your language, internally-generated 885 VECC Panel 1 funds, if they choose to set rates to allow those funds 2 to be created that would continue to take place, 3 wouldn't it? 4 MR. TODD: I am sorry, I wasn't clear 5 on your question. If they -- 6 MR. GRIEVE: That the anticipated 7 outcome is that internally-generated funds or retained 8 earnings would continue to be generated for capital 9 purposes? 10 MR. TODD: Yes, they would continue 11 to earn net income which would generate a cash flow. 12 There is really a separation between earnings per se 13 and cash flow. You are really earnings cash flow for 14 investment purposes, which includes not only earnings, 15 but non-cash items like depreciation. 16 MR. GRIEVE: Thank you. 17 MS LEA: Thank you, Mr. Grieve. 18 Mr. Motluk, do you have questions? 19 I wonder if you could begin by 20 spelling your name for the record, please. 21 MR. MOTLUK: Stephen Motluk. Stephen 22 with a "ph" and the last name is M-O-T-L-U-K. 23 MS LEA: Mr. Motluk is with the 24 Board's Technical Staff also. 25 MR. MOTLUK: I have some quick 26 questions. I don't know if you have had a chance to 27 see the most recent productivity statistics that we 28 have posted on the web and referred to in these 886 VECC Panel 1 proceedings. There is an Exhibit 2 and basically -- 2 MR. TODD: Could I obtain a copy of 3 that? I don't have it with me. 4 MS LEA: Actually, what Mr. Motluk is 5 referring to has been called Exhibit "A" in these 6 proceedings. It's the piece of paper that Board staff 7 filed on the first day of the proceedings. Are there 8 additional copies on the window? 9 MR. MOTLUK: Actually, I believe 10 there is a copy on the windowsill. 11 MS LEA: One moment, please. 12 All right. As part of Exhibit "A" 13 there is a chart, two charts on the front and the 14 second one is referred to on that piece of paper as 15 Exhibit 2. 16 MR. MOTLUK: I am referring to the 17 chart, Exhibit 2. Basically, what the chart does, it 18 looks at, it breaks out the productivity performance of 19 MEUs into 10 year and five-year results. If you look 20 at the 10-year results, you can see that the median 21 productivity growth is 1.14 per cent. 22 If you look at the five-year results, 23 the more recent productivity history, you can see that 24 the median is close to 2 per cent. So there has been a 25 significant increase over the past five years. 26 So in light of the recent 27 productivity performance I guess I have two questions. 28 The first one is in your opinion would the default PF 887 VECC Panel 1 factor in Table 4-1, the 1.25 per cent, would you say 2 that is on the low end for a default value? 3 The second question is that in light 4 of the recent productivity performance do you think 5 that the higher PFRE menu items are more likely 6 achievable by MEUs than if you just looked at the 1 per 7 cent that we were talking about over the 10 years? 8 MR. TODD: Moving into a PBR 9 mechanism there is always the two sides to the debate 10 and without being inside the companies it's impossible 11 to say what is true. The one view is that the recent 12 high productivity indicates that there is less -- it 13 will be harder to achieve productivity gains in the 14 future. That argument essentially says that Ontario 15 Hydro's rates have been frozen for the past few years. 16 That has driven an expectation amongst customers which 17 has affected the performance of municipals in terms of 18 the rate increases that they are prepared to pass 19 through to their customers. 20 The easiest thing is just mark up 21 whatever increase Ontario Hydro has been imposing and 22 that line of thinking suggests that the municipals have 23 been squeezed and have achieved these productivity 24 gains at the -- because of their being squeezed and in 25 fact there is less room for productivity gains now. 26 The other argument, obviously, is 27 that it shows that there are opportunities for gains, 28 they have been exercising it and that should continue. 888 VECC Panel 1 I cannot say which is right or which 2 is wrong, which is why I propose a mechanism which I 3 think is very important, that there be an incentive for 4 utilities to select a higher productivity and, 5 hopefully, have an incentive that is realistic and 6 achievable. 7 Aside from the direct question to 8 your answer which for me was to not answer it, we have 9 a large number of companies in different circumstances. 10 I think the safe thing that we can say is that for some 11 the 1.25 may be a challenge. For others it will be a 12 piece of cake and they will be able to do much better 13 than that and to have a mechanism that allows for some 14 diversity, and that will provide for an equitable 15 sharing between the company and the customer regardless 16 of the starting point of utility that would be 17 desirable. 18 MR. MOTLUK: Okay. Just one more 19 question. 20 In your analysis -- I'm thinking 21 about going forward -- did you take into account, for 22 example, that a lot of the MEUs for a commercial 23 environment tend to be overcapitalized, that they have 24 large amounts of cash-on-hand and that in fact there 25 may be some efficiencies also from potential 26 amalgamations? 27 MR. TODD: Okay. I think we are 28 talking two separate issues. 889 VECC Panel 1 Are they overcapitalized? It is, I 2 guess, the standard to have no debt, which is what you 3 are referring to. 4 The capital structures certainly do 5 not reflect normal corporate capital structures and one 6 would expect that they could -- you know, from a pure 7 economic sense they could capitalize more efficiently 8 if you want. 9 But they have been municipally owned. 10 They are a distinct beast. They have been operating on 11 a basis, more of a cash flow basis than a normal 12 corporate basis because of, partly, the municipal 13 legislation. They steer away from debt, pay as they go, 14 and earn very low returns. 15 So from a pure customer perspective 16 all they care about is rates. They may say, well, what 17 has been done is actually great because it is a way to 18 facilitate low rates and relatively low risks because 19 they don't have fixed capital costs. 20 It is hard to comment on efficiency 21 of capital structure in that context. Certainly from a 22 private market perspective it is not an efficient 23 structure. You would never find a private sector 24 corporation financed in that way. 25 The second part of your question was 26 with respect to potential efficiencies from 27 amalgamation. 28 To the extent that there are 890 VECC Panel 1 economies of scale, given the size of the MEUs at this 2 time clearly there will be efficiencies gained. The 3 amount of economies of scale is not clear, certainly 4 for things like computer systems, you know, dispatch. 5 The tendency is going to much larger average size than 6 we see in Ontario MEUs so one would expect to see 7 significant potential gains from amalgamation. 8 At the time same time there are 9 geographic issues and consistency. You can't always 10 achieve those quickly. There has to be a meshing of 11 the entities and they have their different companies, 12 different geographic areas, different cultures within 13 the corporations. Any time you amalgamate you have to 14 put together organizations and people and that is not 15 as simple as the economics suggest. So there will be 16 challenges to achieving those gains. 17 MR. MOTLUK: Thank you. 18 MS LEA: Thank you. 19 Ms Kwik. 20 MS KWIK: Thank you. 21 You suggested the Z-factor 22 methodology would be more consistent with the 23 principles of PBR if the Board were to introduce a 24 process to benchmark transitional and extraordinary 25 costs on a per-customer basis. 26 How would you suggest that the Board 27 might go about setting such benchmarks? 28 MR. TODD: Actually, what I was 891 VECC Panel 1 drawing on was the yardsticking concept, which of 2 course does not appear in the PBR Handbook but goes 3 back to a lot of the background papers, and so on, 4 where the benchmark is effectively the performance of 5 companies. 6 So what I was contemplating there 7 was, it will be extremely difficult for the Board to 8 judge on a case-by-case basis, say, an expenditure on 9 computer systems, but it may be more appropriate to 10 look at -- if everybody is applying for the same 11 Z-factor cost, a computer system to meet monitoring 12 requirements of the Board for example, if that is 13 converted to a cost-per-customer, with all the 14 applications coming in you could determine what the 15 average is for all the applicants. 16 Clearly there could still be an 17 upward bias in the sense that all the applicants may 18 come in with, as I indicated in my evidence, more 19 functionality rolled into what they are claiming as 20 that Z-factor cost than they really should be, so there 21 would still have to be a review of the specifics. But 22 whatever is approved could then be an approval of the 23 average cost for implementing the monitoring system. 24 Obviously it is not going to be as 25 simple as that since some of them have partial systems 26 in place and others don't, but the concept is that you 27 take a cost-per-customer, spread it across all the 28 companies. When somebody -- and it may be for 40 892 VECC Panel 1 companies that are proposing something similar, and 2 they may be acquiring it from different sources, you 3 would use the average cost per customer as benchmark. 4 That would have two effects. One, it 5 would encourage companies to go to the least-cost 6 vendor because they may not recover all the costs if it 7 is not the least-cost vendor. 8 Secondly, to the extent that it can 9 be done more efficiently on a co-operative basis or 10 through amalgamation, and so on, it may encourage them 11 to find ways to lower the cost per customer of 12 implementing Z-factor costs items. 13 MS KWIK: Thank you. 14 In terms of your concern that pricing 15 flexibility may take utilities away from the cost-based 16 rates, or further away, the suggestion that Board staff 17 had made in its opening remarks is that that 18 flexibility could in fact be used for utilities that 19 have done their cost allocation studies over first 20 generation to bring the rates closer to the utilities 21 own cost allocation circumstances. 22 Do you see any issue with such 23 flexibility being offered? 24 MR. TODD: My issue is that the way 25 that pricing flexibility will be used will be 26 determined by the incentives in the process. The 27 incentives are clear: You shift recovery of costs from 28 less captive customers to more captive customers. 893 VECC Panel 1 While pricing flexibility can be used 2 theoretically in many different ways, and could be used 3 to move toward pure cost-based rates when cost studies 4 are done, it will not be used that way unless that 5 coincides with shifting costs to more captive customers 6 unless the cost or the pricing flexibility is driven by 7 the Board, like if the Board has a rule that says: 8 Okay, you can move your rates in the direction of cost 9 of service but not away from it." 10 But that is more than what is in the 11 PBR Handbook which just says, you know: You do it 12 however you want to and respond to the incentives that 13 you have in your new regulatory world. 14 MS KWIK: Thank you. 15 MS LEA: Thank you. 16 Any other questions for Mr. Todd? 17 Thank you. 18 Mr. Janigan, anything further? 19 MR. JANIGAN: Just that Mr. Todd has 20 with him today copies of his curriculum vitae if any of 21 the parties wish the same. I will put the copies on 22 the window sill. 23 MS LEA: Thank you very much. 24 Do you wish that curriculum vitae 25 made an exhibit in these matters, Mr. Janigan? I think 26 the Board is familiar with Mr. Todd so it's sort of up 27 to you. 28 MR. JANIGAN: It might be useful to 894 VECC Panel 1 make it an exhibit. 2 MS LEA: All right, thank you. 3 We will make it an exhibit. I think 4 we are at F. I think we are at F, yes. Thank you. 5 Exhibit F then. 6 EXHIBIT NO. F: Curriculum vitae 7 of John Todd 8 MS LEA: Any other matters to be 9 dealt with then, today or at the technical conference 10 at all? 11 Seeing no takers, then I would like 12 to thank everyone for their participation in this 13 conference. It has been very successful, informative 14 and useful to the Board. 15 We thank you all for your 16 participation. 17 Thank you particularly, Mr. Todd, for 18 attending to testify today, or to give your 19 presentation today. Thank you for accommodating us in 20 that way. 21 MR. TODD: My pleasure. 22 MR. JANIGAN: Are you setting dates 23 now for the attendance before the Board for the -- 24 MS LEA: What is happening there is 25 that Mr. Ritchie, who you may have seen earlier in this 26 proceeding, is assisting us with that. We have 27 received a couple of messages, some by phone and some 28 by letter, as to when people want to go ahead. 895 1 Can I suggest that you call him or 2 write to him? His number I think is 440-8124. I'm 3 pretty sure. In any event -- 4 MR. JANIGAN: That begins next week, 5 right? 6 MS LEA: It begins October 4 I 7 understand. Yes, Monday, October 4, and is intended to 8 run I guess however long it takes, but probably not in 9 excess of four days. 10 --- Whereupon the hearing adjourned at 1005 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 896 1 INDEX 2 3 PAGE 4 5 JOHN TODD 858 6 Questions by Mr. Janigan 858 7 Questions by Mr. Stephenson 860 8 Questions by Mr. White 871 9 Questions by Mr. Grieve 882 10 Questions by Mr. Motluk 885 11 Questions by Ms Kwik 890 12 Hearing adjourned at 1005 895 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 897 1 EXHIBITS 2 3 4 NO. DESCRIPTION PAGE 5 6 F Curriculum vitae of 894 7 John Todd