1 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Tuesday, July 13, 1999, commencing 26 at 9:35 a.m. 27 28 VOLUME 1 2 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Society 18 and Producers Society of 19 Ontario, IPPSO. 20 ELIZABETH DEMARCO Various interested parties 21 BRIAN McKERLIE Municipality of Chatham-Kent 22 ROBERT WARREN Consumers Association of 23 Canada. 24 DICK PERDUE Direct Energy and Enershare 25 Technology 26 DAVID POCH Green Energy Coalition, GEC 27 ZIYAAD MIA Coalition of Distribution 28 Utilities et al 3 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 RICK GROULX 11 MARK RONAYNE Competition Bureau 12 KEITH RAWSON TransCanada Power 13 ANDREW BARRETT Ontario Power Generation 14 Inc. 15 RICHARD BATTISTA Union Gas Limited 16 BARBARA BODNER Enbridge Inc. 17 AMIR SHALABY Ontario IMO 18 DAN PASTORIC Energy Advantage 19 JIM RICHARDSON/ Upper Canada Energy Alliance 20 PAUL FERGUSON 21 22 23 24 25 26 27 28 4 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 5 4 Presentation by Professor Dewees 54 5 Luncheon recess at 12:32 p.m. 113 6 Upon resuming at 1:45 p.m. 113 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 1 Toronto, Ontario 2 --- Upon commencing on Tuesday, July 13, 1999 3 at 9:35 a.m. 4 MS LEA: Good morning. Welcome to 5 the Ontario Energy Board's 25th floor hearing room. I 6 see we have sold a lot of tickets for the proceedings 7 this morning. 8 Welcome. Find a seat where you can. 9 There is a seat up at this table for anyone who is 10 actively participating in this proceedings this 11 morning. There is an empty chair up here if you need 12 it. 13 We are here to have a technical 14 conference on the SSS Code, which has been given the 15 Procedural No. RP-1999-0040. The Board is holding a 16 proceeding to allow further submissions to the Board on 17 the matter of the Standard Supply Service Code. In 18 particular, as you know from reading the procedural 19 orders, the Board identified the issues of pricing, 20 procurement, market restrictions and billing as those 21 topics which it felt that it needed further submissions 22 and advice on. 23 The purpose of the technical 24 conference today is to provide an opportunity for 25 intervenors to ask clarifying questions of the various 26 parties that will be making presentations here. The 27 presentations are related to the issues that have been 28 identified by the Board. 6 1 The Board has issued two procedural 2 orders in this matter. The latest one, I think late 3 last week, was Procedural Order No. 2. That procedural 4 order confirmed the issues list and also clarified some 5 of the submissions on the issues list or the Board's 6 ruling on the submissions on the issues list that were 7 made to it. 8 So the intent of the technical 9 conference for the next few days is to allow 10 intervenors a reasonable opportunity to seek 11 clarification of the proposals being presented. It is 12 not intended to be an opportunity to cross-examine in 13 detail a presenter on their presentation. Technical 14 conferences are generally an attempt to understand the 15 presentation rather than challenge it. The goal of the 16 technical conference is to ensure parties have a 17 sufficient understanding of each option to enable them 18 to make their submissions to the Board at the 19 proceeding in August on the appropriate resolution of 20 the issues. 21 So, as I understand the Board's 22 intention here, it is to get clarification. You may 23 well disagree with the presenter, and you have every 24 right to disagree. But I think that this is the place 25 to get an understanding, not to argue with a presenter. 26 The Board and all parties will have 27 access to transcripts of each day of this technical 28 conference. There are two ways you can get 7 1 transcripts: first, using the Board's Web site. That 2 Web site address is www.oeb.gov.on.ca. You can also 3 purchase a hard copy of the transcript from the court 4 reporters. If you want to do that, please speak to 5 them directly. 6 Staff have prepared a proposed agenda 7 for the technical conference setting out approximate 8 times for parties to give their presentations. We have 9 already had one person approach us to indicate that he 10 is not available to make a presentation on the 11 afternoon of Friday, July 16th. 12 I would request any party who is 13 making a presentation on the morning of the 16th to see 14 if he can switch with Mr. Keith Rawson, who is not able 15 to make his presentation at 2:00 p.m. He is requesting 16 a morning slot, so if anyone can accommodate him, we 17 would be pleased. 18 MR. GIBBONS: Where are copies of 19 this agenda? 20 MS LEA: They have been circulated. 21 Is there anyone else who does not have a copy? 22 All right. It is just this table 23 that has obviously been ignored. We will pass them out 24 to you. 25 By the way, my name is Jennifer Lea. 26 I am counsel to Board staff, and, with my colleagues 27 Brian Hewson and Una O'Riley, I will be helping them 28 chair the technical conference. 8 1 I would like to begin, if that is 2 agreeable with everyone, by getting everyone to 3 introduce themselves. We will start with the table 4 across from me, and we will just go around the room. 5 When you introduce yourselves, could 6 you indicate whether you will be taking an active part 7 in the proceedings. If you are merely observing, you 8 are very welcome of course to attend, but we would ask 9 that you not use a seat with a microphone unless you 10 are taking an active part in the proceedings because 11 there are obviously more speakers than we have 12 microphones. 13 So if we could begin, then, with the 14 gentleman across from me. 15 MR. GIBBONS: I am Jack Gibbons from 16 Pollution Probe. I will be taking an active part in 17 the proceeding. 18 MS LEA: Thank you. 19 MR. ADAMS: Tom Adams on behalf of 20 Energy Probe. With me is Mark Mattson. 21 MS LEA: You will be taking an active 22 role in the proceedings? 23 MR. MATTSON: Yes, we will. We don't 24 have an alternative position paper, but we should let 25 people know that we support the Board's standard 26 service position paper and we will be -- 27 MS LEA: The Board's staff paper? 28 MR. MATTSON: The Board's staff 9 1 paper. 2 MS LEA: I think we want to make it 3 clear, first of all, that this paper is not the voice 4 of the Board; it is the voice of Board staff. The 5 Board may say that they hate it all, as they have on 6 occasion with other submissions we have made. This is 7 a staff paper. 8 Thank you very much, Mr. Mattson. 9 MR. STEPHENSON: My name is Richard 10 Stephenson. I am counsel to the Power Workers Union, 11 and we intend to take an active role in the proceeding. 12 MR. BUDD: My name is Peter Budd. I 13 am sitting in for my partner, Robert Power. We act for 14 a number of intervenors in the proceeding, which are 15 listed in our July 7, 1999 letter to Peter O'Dell. 16 We intend to be very active 17 throughout the course of the proceeding. I will only 18 be here for the morning until Mr. Power gets here. He 19 is in court this morning. 20 MS LEA: Thank you very much. 21 I should have said earlier when I 22 asked people to introduce themselves, I wonder if you 23 could spell your last name for the reporters as we go 24 around. 25 MR. GRIEVE: My name is Alexander 26 Grieve, G-R-I-E-V-E. I am here with Power/Budd, as 27 well. 28 --- Pause 10 1 MR. MacODRUM: My name is Bruce 2 MacOdrum, M-a-c-O-D-R-U-M, and together with Mr. Mark 3 Rodger, R-O-D-G-E-R, we represent Toronto Hydro 4 Electric System Limited. 5 We will be taking an active part in 6 the proceeding. 7 MS LEA: Thank you. 8 MR. MARK: Alan Mark, M-A-R-K, 9 representing the Municipal Electric Association. We 10 will take an active part in the proceeding. 11 MR. BRETT: Tom Brett, B-R-E-T-T. I 12 represent the Independent Power Society and Producers 13 Society of Ontario, IPPSO. 14 We will take an active part in the 15 proceeding. 16 MS LEA: Thank you. 17 MS DeMARCO: Elizabeth DeMarco, 18 D-e-M-A-R-C-O, with Donahue and Partners. We represent 19 a number of clients who wish to remain nameless at this 20 point. 21 --- Laughter 22 MS LEA: I see. Ms DeMarco, these 23 nameless clients, will you be taking an active role on 24 their behalf in the proceeding? 25 MS DeMARCO: The level of activity 26 remains to be determined. 27 --- Laughter 28 MS LEA: All right. 11 1 MR. McKERLIE: Brian McKerlie, 2 M-c-K-E-R-L-I-E. I am with the Municipality of 3 Chatham-Kent. I expect to have some action during this 4 proceeding. 5 MR. WARREN: Robert Warren, 6 W-A-R-R-E-N, for the Consumers Association of Canada. 7 Our client will be active in the proceeding. 8 MR. PERDUE: Dick Perdue. I 9 represent Direct Energy and Enershare Technology. Yes, 10 we expect to be active. 11 MR. POCH: David Poch, P-O-C-H, for 12 the Green Energy Coalition, or the GEC. We expect to 13 be active. 14 MR. MIA: Ziyaad Mia. I will spell 15 both of those. Z-I-Y-A-A-D; last name, Mia, M-I-A. 16 I represent the Coalition of 17 Distribution Utilities: Brampton Hydro, Cambridge and 18 North Dumfries Hydro, Guelph Hydro, Niagara Falls 19 Hydro, Oakville Hydro, Pickering Hydro, Richmond Hill 20 Hydro, and Waterloo North Hydro. 21 I expect to be taking part in the 22 hearing. 23 MR. DADSON: I am Aleck Dadson. I 24 will spell both my names as well. The first name is 25 spelled A-L-E-C-K, and the last name is D-A-D-S-O-N. 26 I act for Enron Capital & Trade, and 27 I expect to be active. 28 MS LEA: Anyone who is at the back, 12 1 then, and also expects to take an active part, please 2 step forward. As I say, there is one seat over at this 3 table, if you wish to take it, or you can move to the 4 microphone when your turn comes. Thank you. 5 Mr. Mondrow. 6 MR. MONDROW: Thank you, Ms Lea. 7 My name is Ian Mondrow, 8 M-O-N-D-R-O-W, counsel for the HVAC Coalition. That is 9 the Heating, Ventilation and Air Conditioning 10 Contractors Coalition Inc. 11 HVAC Coalition has a relatively 12 narrow interest in the proceedings, but will be active 13 in the various phases on that interest. 14 MS LEA: Thank you. 15 MR. REGHELINI: My name is Marcel 16 Reghelini, R-E-G-H-E-L-I-N-I, and I represent the 17 Ontario Hydro Services Company. We will be taking an 18 active role. 19 MS LEA: Thank you. 20 MR. WHITE: I am Roger White, 21 W-H-I-T-E, and I am with Energy Cost Management. 22 Either myself or Rick Groulx, G-R-O-U-L-X, will be 23 taking an active role in the proceedings. We represent 24 a number of municipal electric utilities. 25 MS LEA: Thank you. 26 MR. RONAYNE: I am Mark Ronayne, with 27 the federal Competition Bureau. We may have some 28 questions to put to the various presenters as well. 13 1 MS LEA: Thank you. 2 MR. RAWSON: I am Keith Rawson, 3 R-A-W-S-O-N, TransCanada. I expect to take an active 4 role. 5 MS LEA: Thank you. 6 MR. BARRETT: I am Andrew Barrett, 7 B-A-R-R-E-T-T, with Ontario Power Generation Inc. We 8 will be something more than observers and something 9 less than an active participant. 10 MS LEA: Another mystery man. 11 MR. BATTISTA: I am Richard Battista, 12 B-A-T-T-I-S-T-A, Union Gas Limited. We may have some 13 questions throughout the proceedings. 14 MS LEA: Thank you. 15 MS BODNAR: I am Barbara Bodnar, 16 B-O-D-N-A-R, for Enbridge Inc. We do not expect to be 17 active in the technical conference. 18 MS LEA: Thank you. 19 Is there anyone else who is going to 20 be active in this proceeding? 21 Yes, sir? 22 MR. SHALABY: I am Amir Shalaby, 23 S-H-A-L-A-B-Y. I am with the Ontario IMO. We expect 24 to be seeking questions of clarification during the 25 proceedings. 26 MS LEA: Thank you very much. Is 27 there anyone else, then, who plans to be active in 28 these proceedings that we haven't yet heard from? 14 1 There appears to be no response. 2 By reference to your schedule, you 3 will see that the first presenter scheduled is 4 Professor Don Dewees; that is spelled D-E-W-E-E-S. He 5 is intended to be the first presenter here. 6 I haven't yet seen him this morning. 7 While we are waiting for him to appear -- I believe he 8 was told to be here by us, so we are responsible for 9 the fact he is not here yet -- are there any questions 10 with respect to anything related to this particular 11 technical conference? 12 MR. MacODRUM: Yes. I have just one 13 request, Madam Chair, and that is that in examining 14 Dr. Dewees' submission I noticed that of all the 15 commenters on the Standard Supply Code he singled out 16 Toronto Hydro for particular comments. I would 17 appreciate the opportunity of asking some clarification 18 questions of Professor Dewees first, since we have been 19 particularly singled out for comments in this paper 20 that has been tendered. 21 MS LEA: Okay. 22 With respect to the order of 23 questioning, I had assumed that we would do as we 24 frequently do at this Board, that is, start and go 25 around in order of appearances. I don't have any 26 problem with people setting up their own order, however 27 it is. 28 Does anyone have a problem with 15 1 Mr. MacOdrum's request that he go first with respect 2 to -- it is just Professor Dewees', I think, your -- 3 MR. MacODRUM: That's right. My 4 request is limited to Professor Dewees, and it is only 5 because we are particularly singled out in his report. 6 MS LEA: I don't have a problem with 7 that. Does anyone else have a problem with that? 8 MR. BUDD: I may not have a problem 9 with that, with respect to Toronto going first on that, 10 but I would like to see the Board staff go first in 11 terms of questioning. I will give you my reasons why. 12 MS LEA: Okay. Do we have any 13 questions? 14 --- Laughter 15 MR. BUDD: Sure. While we are 16 waiting for him, in any event. 17 Just on that note alone, and I will 18 have some other submissions afterwards, I think staff 19 should go first because they really are taking a role, 20 as they historically did as Board staff, by putting 21 forward a presenter. You are very familiar with the 22 Board procedures the way they used to be, in terms of 23 staff taking an active role and behaving effectively 24 like an intervenor. 25 I think you identified that today at 26 the outset, that this is not a Board paper that 27 Mr. Dewees is bringing forward, this is Board staff's 28 paper that Board staff is calling, and so we know what 16 1 it is that we are dealing with, I would like to hear 2 any questions that you may have, just as we go through 3 the order of questioning. I think that is appropriate. 4 MS LEA: Sure. Mr. Budd, I am not 5 sure that Mr. Dewees is really a staff presenter. I 6 hadn't understood that to be true. I don't have any 7 questions prepared for him. 8 Just one moment. 9 MR. MARK: Who is bringing him 10 forward, then? Who invited him? 11 MS LEA: Let me find that out. One 12 moment, please. 13 --- Pause 14 MS LEA: I think that he is coming 15 forward to present because the staff paper did draw on 16 the MDC report. So I guess if he is anybody's 17 presenter, he is our presenter. I understand that he 18 is here to talk about the relationship of the MDC 19 report to the staff paper and whether it matches, 20 whether it doesn't, that kind of thing. So if he is 21 anybody's presenter, he is ours, if anybody owns him at 22 all. 23 MR. MARK: Just following up on that, 24 Ms Lea, I have a couple of questions of clarification 25 for procedure. 26 The first one is, there seems to be 27 some issue, at least until now, about how Mr. Dewees 28 gets here and who is sponsoring him, if anybody, which 17 1 raises the issue of the role of Board staff in this 2 proceeding. It is not clear to me what that position 3 is. I don't think Board staff is on the list of 4 intervenors. Does Board staff intend to make 5 submissions to the Board in this proceeding and, if so, 6 under what rule or authority? 7 MS LEA: No, I don't think we are 8 going -- 9 We are not making submissions, are 10 we? 11 No, I don't think so. Let me defer 12 to Mr. Hewson, who has more knowledge about the history 13 of this matter. 14 MR. HEWSON: Board staff's paper was 15 put forward based on the MDC's proposals and 16 recommendations to the government. There was urgency 17 set out during initial consultations with municipal 18 utilities and stakeholders that some draft of a 19 standard supply service be provided. The only 20 alternative that was out there at that time was the MDC 21 proposal. Staff put forward a paper, a straw man for 22 want of a better phrase, that was there to raise issues 23 and seek input from people. 24 The comments that came back suggested 25 that there needed to be a further proceeding, which we 26 are now in. 27 In order to ensure that that proposal 28 was brought forward -- the MDC, which no longer exists, 18 1 that proposal was brought forward -- Board staff, in 2 consultation with the Board, got approval to provide 3 some funds to Dr. Dewees to come forward as a 4 representative from the MDC who could speak to the 5 reports of the MDC and the proposals put forward by the 6 MDC. 7 It is not staff's view and it is not 8 the Board's view that staff is here presenting 9 Dr. Dewees. Dr. Dewees, as anyone, was permitted to 10 come forward and present an alternative. You do not 11 have to be an intervenor. You do not have to be party 12 to the process. You could be someone who just came 13 forward and said, "Here is an alternative", and all of 14 the intervenors in the room would have the opportunity 15 to question that party presenting that alternative. 16 That party does not have to then present the 17 alternative to the Board. It is there as information 18 for the parties in the process. 19 Staff is taking the role, as it 20 currently does under the rules of the Board, as a Board 21 adviser, and it is here to seek clarification if there 22 are issues that are left unclear and to ensure that the 23 record is complete enough for the Board to be able to 24 understand the alternatives put forward so that when 25 people make their submissions on August 9 and following 26 the Board will have a better understanding of the 27 alternatives put forward. 28 MR. MARK: Is Board staff a 19 1 proponent -- 2 MR. HEWSON: No. 3 MR. MARK: -- of the proposal which 4 is the subject of discussion? 5 MR. HEWSON: No. 6 MR. MARK: So Board staff will not be 7 making a submission -- 8 MR. HEWSON: No. 9 MR. MARK: -- in support of that 10 proposal? 11 MR. HEWSON: No. It was simply a 12 discussion paper, Alan, put forward by Board staff in 13 order to establish some alternative for the Standard 14 Supply Code, which is now being discussed in more 15 depth. That was the intention of the comment paper 16 that was put out on February 29. It was never intended 17 to be seen as Board staff's decision on where they 18 expect standard supply to go. It is a proposal paper. 19 MR. MARK: If I could follow up on 20 another issue which you raised before. When will we 21 have the opportunity to cross-examine? 22 MR. HEWSON: You will not. The Board 23 has determined that following the technical conference 24 it only wishes to hear submissions from parties on 25 their alternative that they would propose to answer the 26 issues that the Board has raised. 27 MR. MARK: If there is no, if you 28 will, proposed code, so it's tabular, as lawyers would 20 1 say, what is the impact of the Board having restricted 2 the issues list? What is the Board going to do with 3 the myriad of issues which it has determined it doesn't 4 want to hear from people on, but yet there is no 5 proposal that the Board is advancing? 6 MR. HEWSON: I think, Alan, in 7 response to that, the Board has the original comments 8 of all parties on the balance of the Code. What the 9 Board did itself is look at those comments from the 10 original Code and determine that the only issues it 11 felt it needed to have a further airing of or further 12 information or testing of was -- 13 MS LEA: At least in an oral 14 proceeding. 15 MR. HEWSON: -- in an oral proceeding 16 was the issues it has identified on the issues list. 17 All other issues that were raised in 18 the comments are still being considered by the Board. 19 They are there. They are thinking of them. They feel 20 they have sufficient evidence from those original 21 comments to complete the Code other than on the issues 22 they have identified. 23 MR. MARK: In other words, we are not 24 having a hearing on this? 25 MR. HEWSON: No. 26 MR. MARK: Let me say that that 27 causes, I think, some concern on behalf of the 28 Municipal Electric Association and I think some other 21 1 intervenors as well. Let me tell you why, because I, 2 frankly, think this is an issue we have to deal with up 3 front and get some clarification on. 4 My concerns were heightened on 5 receiving Procedural Order No. 2, which came across my 6 desk as late as yesterday, where it became clear that 7 the Board was, indeed, going to be severely restricting 8 the issues list and was also firm in its position not 9 to consider section 2.5.7 of the Affiliates 10 Relationship Code despite what I believe is the 11 Minister's direction that the Board do so. 12 All of that raises for my client the 13 question of the procedures which are being invoked in 14 this proceeding and indeed the fundamental question of 15 what is the nature and jurisdiction of this proceeding. 16 It's an issue which I think troubles many people. 17 The MEA is anxious and desirous that 18 a consultative process proceed and proceed 19 expeditiously, but it is not anxious that that process 20 proceed if it is not accompanied by the rules and 21 safeguards which traditionally accompany a hearing 22 because, frankly, we think that is what we ought to 23 have. 24 The issue of the rates under 25 section 29 of the Electricity Act is an issue of 26 fundamental concern, a very fundamental concern not 27 only to the consumers but to the municipal utilities 28 and all participants in the market. There is a real 22 1 concern that the process of consideration of those 2 rates must be an open, complete and fair process, and 3 unanswered are a number of questions about these 4 proceedings. 5 It certainly was not clear to us what 6 the status of the Board's proposal was or the role of 7 Board staff. It now appears that there will be no 8 evidence. It appears there will be no opportunity to 9 test the positions of various parties through 10 cross-examination or any similar procedure, which has 11 led us to question and examine what, indeed, are the 12 legislative foundations for this proceeding. We raise 13 this in part because we are concerned about the process 14 and in part because it's imperative to deal with this 15 issue early rather than later so the process doesn't 16 get derailed by objections when it's further along. 17 I take it from staff's response to 18 some of my questions, as well as a review of the 19 procedural orders in this matter, that the Board is 20 proceeding to deal with matters under sections 57 21 and 70 of the Ontario Energy Board Act, which, if you 22 look at the title of proceedings, are the sections 23 which are referenced by the Board. That is sections 57 24 and 70. 25 Section 57 -- 26 MS LEA: Do you want a copy, sir, or 27 do you have one? 28 MR. MARK: Section 57 is the 23 1 provision of the Energy Board Act which requires that 2 anyone wanting to transmit, distribute, retail, et 3 cetera, be licensed by the Board. Section 70 is the 4 provision of the Act which sets out the Board's precise 5 powers with respect to licensing and indicates that the 6 Board may attach conditions to the licence. If you 7 look at 70(d), it authorizes the Board to require a 8 licensee to observe codes. 9 It's clear from the Board's 10 correspondence with parties, the public and the 11 procedural order that what is happening here is that 12 the Board is considering a code which will be attached 13 as a condition to a distributor's licence. I don't 14 think that is an issue; the correspondence is quite 15 clear. I see Mr. Hewson acknowledging that. 16 We are concerned whether the Board is 17 well advised in this regard and our particular concern 18 is this. The rates to be applied pursuant to 19 section 29 of the Electricity Act, which is what we are 20 here considering, are not established pursuant to 21 section 70 of the OEB Act but, rather, pursuant to 22 section 78. If you look at section 78 of the Energy 23 Board Act, it is very clear that the Board is given an 24 express and mandatory jurisdiction to make an order 25 fixing rates for the retailing of electricity under 26 section 29. In particular, subsection (3) says: 27 "The Board may make orders 28 approving or fixing just and 24 1 reasonable rates for the 2 transmitting or distributing of 3 electricity and for the 4 retailing of electricity in 5 order to meet a distributor's 6 obligation under section 29 of 7 the Electricity Act." (As read) 8 Over in the following section, under 9 subsection (5), "Duty of the Board": 10 "In approving or fixing just and 11 reasonable rates, the Board 12 shall, unless the applicant 13 consents otherwise, apply the 14 method or technique for fixing 15 the applicant's rates set out in 16 the applicant's licence if such 17 a method or technique is set 18 out." (As read) 19 It's clear from section 78 that the 20 Board is required to consider the question of rates and 21 make an order with respect to section 29 rates under 22 section 78, not under section 70. The Board's only 23 jurisdiction comes under section 78. If you look at 24 78(2) it specifically provides that: 25 "No distributor shall distribute 26 electricity or meet its 27 obligations under section 29 of 28 the Electricity Act except in 25 1 accordance with an order of the 2 Board." (As read) 3 So the Board is required to make an 4 order. 5 If the Board is required to make an 6 order, then the Board is required to hold a hearing. 7 That comes from section 21(2) of the Energy Board Act, 8 which says that: 9 "Subject to any provision to the 10 contrary in this or any other 11 Act, the Board shall not make an 12 order under this or any other 13 Act until it has held a hearing 14 after giving notice in such a 15 manner and to such persons as 16 the Board may direct." 17 (As read) 18 While there are certainly provisions 19 in the OEB Act to permit the Board to start the hearing 20 process towards making an order, even without an 21 application from an applicant -- there are various 22 sections that authorize the Board to do that -- 23 nonetheless, they are still hearing procedures. The 24 Board can only deal with these rates by an order which 25 under section 21(2) requires a hearing and, 26 respectfully, trying to dress up what is being proposed 27 here as a code not accompanied by a hearing obligation 28 is not consistent with the legislation, at least in our 26 1 view. 2 As indicated before, the MEA is not 3 anxious to derail this process. We are anxious that 4 the issues before the Board be aired and resolved in a 5 timely fashion and we are prepared to proceed on a 6 consensual basis. But before we do, we require 7 agreement on a procedure which satisfies the 8 intervenors that the interested parties have the same 9 rights, safeguards and protections that they have in a 10 hearing and that the Board is subject to the 11 requirements of fairness and due process that they are 12 in a hearing environment. 13 So we would like to see agreement on 14 issues such as filing of evidence, cross-examination, 15 onus of proof, rules for adequate opportunity to make 16 submissions and for agreement that the Board will 17 dispose of this matter by giving considered reasons for 18 its decision, which are essential on a matter so 19 fundamental to the public interest and the interest of 20 the participants in the marketplace. 21 Ms Lea, before we go further in the 22 process, I would respectfully suggest that we ought to 23 deal with these process issues and come to some common 24 understanding about precisely what it is that we are 25 doing here and how we are going to proceed because 26 obviously the later that issue is left to be dealt 27 with, the more resources we are all wasting and a 28 greater uncertainty we are all creating. 27 1 So I would be pleased to hear if 2 Board staff has considered this issue, if the Board has 3 considered this issue, and perhaps what other 4 intervenors have got to say about it. 5 MS LEA: Thank you very much, 6 Mr. Mark. I appreciate you taking the time to give us 7 these submissions. 8 Just so I understand thoroughly what 9 you have said, I wonder could you just assist me with 10 section 70(2)(e) also, please? Then I will certainly 11 be happy to -- we will all be happy to hear from anyone 12 else who has comments on this issue and then perhaps I 13 can assist parties with what the best way is to resolve 14 this. 15 70(2)(e) indicates that: 16 "The conditions of the licence 17 may contain provisions 18 specifying methods of techniques 19 to be applied in determining the 20 licensee's rate." (As read) 21 I was wondering how that related to 22 section 78, in your view. 23 MR. MARK: Well, it relates two ways. 24 Number one is, as you will hear in due course, that's 25 part of the problem. There is a decided distinction 26 between a "method" or a "technique" and a "rate". 27 The Act in section 78 clearly 28 contemplates the Board making an order to fix a rate. 28 1 I read to you the section that said in conducting a 2 proceeding the Board can consider the method or 3 technique applied, but they are clearly two different 4 things and the Board, with the greatest of respect, 5 cannot get around its section 78 obligation to have a 6 hearing on the question of whether the resulting rates 7 are just and reasonable by relying on section 70 -- 8 MS LEA: 70(2). 9 MR. MARK: -- (2)(e). If you look at 10 section 78, it's clear that the method or technique is 11 something distinct, both in nature and in time, from a 12 rate. 13 If you look at section sub (5) of 78: 14 "In approving or fixing just and 15 reasonable rates, the Board 16 shall, unless the applicant 17 consents otherwise, apply the 18 method or technique for fixing 19 the applicant's rates set out in 20 the applicant's licence if such 21 a method or technique is set 22 out." (As read) 23 In my respectful submission, it's 24 clear that even if the licence sets out a method or 25 technique, there must still be a hearing to consider 26 whether the rates are just and reasonable. You can't 27 get rid of the section 78 obligation in deserting a 28 method or technique in the licence. 29 1 MS LEA: Thank you very much, 2 Mr. Mark. 3 I do have a few comments with respect 4 to that. 5 Does anyone else wish to raise any 6 new issues that Mr. Mark has not touched on at this 7 time with respect to this? 8 Mr. Rodger, yes? 9 MR. RODGER: Thank you, Ms Lea. Just 10 a couple of comments. 11 I believe both you and Mr. Hewson's 12 comments about this process are helpful, particularly 13 the issues that the Board staff is here as an adviser 14 to the Board only, that the goal is for the Board to 15 understand different alternatives, that Board staff is 16 not a proponent, nor will they be making submissions on 17 the draft code to the Board. Toronto Hydro is 18 satisfied to proceed on this basis. 19 Just to respond to a couple of my 20 colleague's, Mr. Mark, comments. 21 Generally, we are in agreement with 22 him concerning section 78(7), the fixing of the rates, 23 but we would also refer to you section 129 of the 24 Ontario Energy Board Act which also I believe will have 25 to be addressed in terms of Mr. Mark's submissions. 26 I will just read the part of the 27 section that we believe is relevant, and that is: 28 "...despite the fact for a 30 1 period of one year from the date 2 this section comes into force 3 the Board may without a 4 hearing:" (As read) 5 And if you refer to subsection (b): 6 "issue an order approving or 7 fixing just and reasonable rates 8 under subsection 78(3);" 9 (As read) 10 We understand that this is the 11 section that the Board has already invoked to issue its 12 rate orders under the interim licences so we believe 13 that the instant technical conference could fall under 14 that category as well. 15 Those are all my additional 16 submissions, Ms Lea. 17 MS LEA: Thank you. 18 Mr. Mattson. 19 MR. MATTSON: Thank you, Ms Lea. 20 We too now have a great deal of 21 concern because our understanding of the process was 22 that it wasn't going to be an adjudicative process; it 23 was going to be a rule-making sort of process within 24 the power that the Board has, which is more 25 characteristic of a legislative process. 26 Therefore, we certainly expected the 27 Board staff's paper was being put forward as a 28 proposal, and that the Board staff was acting like a 31 1 ministerial department, or like the government would 2 act normally, put forward its proposal, and you are now 3 asking for comments, and you weren't going to have a 4 hearing, you weren't going to have cross-examination. 5 You were doing this as part of a rule-making process. 6 Well, you can't replace the 7 adjudicative process with a rule-making process unless 8 you have clear rules. You have to replace them with 9 clear rules that try to emulate the type of fairness 10 and safeguards that the adjudicative process provides. 11 If the Board is really just putting 12 this forward as, as Mr. Hewson says, a straw man, then 13 we don't feel that we have been protected such as that 14 we feel we would have a conquerable ability to put 15 forward our position such as we would have in an 16 adjudicative process. 17 We find ourselves very much in 18 agreement with Mr. Mark that, unless the Board has a 19 clear process in mind with respect to the Standard 20 Service Supply Contract where they see their role 21 clearly to see the role of the Board and they somehow 22 feel that this is more efficient and more 23 cost-effective and just as fair as the adjudicative 24 process that it's replacing, without that I don't think 25 that we feel this process, then, in any way should 26 replace that process that we have all become much more 27 familiar with, which is the adjudicative process. 28 I think Mr. Mark's points are very 32 1 well put. At this point, if the Board is just coming 2 forward and putting forth a straw man proposal and 3 there is no proponent, then certainly we would agree 4 that there seems to be -- we have a great many concerns 5 about the process and we don't see how the ultimate 6 decision of the Board, without a hearing, without 7 cross-examination, without filing of evidence and 8 without a proponent can in any way be determined to be 9 fair at the end of the day, which could ultimately put 10 back -- through a judicial review application, may put 11 back this whole process for years, not months. 12 That is really our concern: Are we 13 trying to put forward rules that are legislative, that 14 are put forward by the government, that are going to 15 govern this market, or are we trying to have a hearing 16 to determine what those rules should be? Are we 17 dealing with policy here or are we trying to have some 18 sort of adjudicative forum? 19 I think the Board has to decide what 20 forum it is choosing before we can begin to decide what 21 rules we are going to put in place. That is sort of 22 where we see ourselves coming from. 23 We certainly did think that the 24 Board's proposal was going to be at least seen 25 as -- the Board's -- what do you call it; it is not a 26 proposal -- whatever -- 27 MS LEA: Staff paper, comment, 28 proposal, whatever. 33 1 MR. MATTSON: -- staff paper would be 2 seen as at least your first attempt at the best 3 possible position that you could come forward with and 4 that you were looking for input. If it's not even 5 that, then we really are in the dark. 6 MS LEA: Okay. Thank you, 7 Mr. Mattson. 8 Any further comments on this issue? 9 MR. BUDD: I have some, Ms Lea. 10 First, I just wanted to say that our 11 13 clients who are acting jointly under one umbrella 12 intervention fully support what Mr. Mark has spoken to 13 this morning, so I won't repeat that, but I would add a 14 few things if I might. 15 First, it's our view that these are 16 incredibly serious and critical issues in terms of the 17 industry restructuring and we take them as seriously as 18 they are. 19 In terms of the history of this Board 20 in dealing with an industry restructuring, this Board 21 very successfully dealt with the gas industry 22 restructuring but held hearings, full-course hearings, 23 some of which lasted weeks, to deal with issues. 24 You will recall those were the 25 contract carriage hearings and the Board ushered in the 26 whole era of deregulation using proper procedures, 27 giving parties the opportunity to fully examine other 28 parties' positions and indeed question them through an 34 1 interrogatory process. Subsequently, the Board has 2 developed an alternate dispute resolution process. 3 But, in any event, the Board is very familiar with what 4 a proper process is. 5 We think that it is critical that the 6 Board on issues like this pursue that kind of process 7 and we have serious reservations about the process that 8 is being proposed. I think you know that. 9 I will have other submissions later 10 on, but I recognize you want to contain this on the 11 transcript at this point. 12 MS LEA: Thank you very much, 13 Mr. Budd. 14 Mr. Dadson. 15 MR. DADSON: Just a few comments. 16 I totally agree with Mr. Mark's 17 remarks. I should point out that I am already on the 18 record in that regard. Mr. Mark has set forth really 19 the arguments that we and our counsel set forth in our 20 initial submissions to the Board back in February in 21 response to the initial submissions from Board staff. 22 MS LEA: Thank you very much. 23 MR. MARK: Could I just respond 24 briefly to the section 129 issue raised by -- 25 MS LEA: Yes. You will have to put 26 your microphone right in front of you, Mr. Mark. 27 MR. MARK: I would just like to make 28 a brief comment with respect to the section 129 issue 35 1 raised by Mr. Rodger. 2 Firstly, of course, there is the fact 3 that the Board has not purported to make this an 4 order-making proceeding under section 129, so unless 5 and until it does it is moot. 6 As well, if you look at 129, it is 7 intended to deal with interim licences for a very short 8 duration. In fact, subsections 5 and 8 clearly provide 9 that once section 60 of the Act comes into force, any 10 rate order made under section 129 ceases to be valid. 11 So I am assuming that the Board has 12 no interest whatsoever in going through a process to 13 come up with a rate which may have a life span of a few 14 months only then to have that order invalidated by the 15 coming into force of the rest of the Act and then be in 16 the situation, whether it is four months, six months or 17 a year from now, of not having an approved rate and 18 then having to do this process afresh. 19 So assuming nobody is interested in 20 that procedure, we should put aside section 129 and get 21 on with the substance of what it is we are required to 22 do under the Act. 23 MS LEA: Thank you, Mr. Mark. 24 Mr. Stephenson, you just wanted to -- 25 MR. STEPHENSON: I just wanted to say 26 that, I must say, I did not understand this proceeding 27 to be a proceeding whereby a rate was to be set under 28 section 78. I understood this to be, as Mr. Mattson 36 1 has indicated, essentially a form of rule-making 2 function. There are many ways to engage in a 3 rulemaking process, including notice and comment, and 4 this is the procedure that I had understood that we 5 were engaging in, was a forum of facilitation of that 6 rulemaking process. 7 I don't think there has been any 8 indication from the Board that the output of this 9 proceeding will be an order setting just and reasonable 10 rates pursuant to section 78. 11 I had understood that of course 12 distributors and others, retailers, will require such 13 orders in order to engage in their section 29 14 obligations pursuant to the Act, but that is going to 15 occur after. There is going to be some other 16 proceeding going on, which is not this proceeding, in 17 which there will be a forum appearing, as prescribed by 18 the Act, in order to provide an order to permit people 19 to engage in their section 29 obligations. But that is 20 not what we are doing here. 21 If I am right about that, then I 22 don't think Mr. Mark's concerns really are -- they may 23 be just premature. 24 It seems to me that they are valid 25 concerns, because to the extent that there is any 26 confusion about what the intended output of this 27 proceeding is, those confusions or concerns should be 28 addressed. But I think, as far as I can tell, those 37 1 concerns are just premature. I don't think anybody, 2 the Board or anyone else, is purporting to make an 3 order as required by section 78, and that, while that 4 must be done, that is going to be done on another day, 5 in another time, in another room. 6 But I certainly think the Board 7 should make it very clear about where it is going. 8 MS LEA: Thank you. Anyone else that 9 we haven't heard from yet? Is there anything further? 10 The gentleman at the back, yes. 11 MR. WHITE: It's Roger White. 12 MS LEA: Yes, Mr. White. 13 MR. WHITE: I would just observe that 14 if the Board or Board staff were dependent upon the 15 language of the initial discussion paper to talk about 16 a direct pass-through of costs to make them fair and 17 equitable, to the extent that there are imperfections 18 in the billing system my clients would be worried about 19 their legal right to apply pass-through algorithms 20 which cannot match perfectly the proposed process that 21 is going forward. 22 MS LEA: Thank you very much. 23 I just have a couple of comments to 24 make with respect to this, then. 25 MR. BUDD: Just before you do, in 26 fact, somebody just a moment ago mentioned about the 27 Board's rule-making powers, and I thought I would just 28 mention that in section 44 of the OEB Act there indeed 38 1 are rule-making powers, but they just relate to gas 2 only, they don't relate to electricity, from what I can 3 read. 4 MS LEA: I took Mr. Stephenson's 5 comments to refer to the general power that a tribunal 6 might have to make small "r" rules as opposed to the 7 Board's official rule-making power under section 44, 8 which applies to gas, and which also involves 9 particular procedures and procedural requirements. 10 MR. MARK: If I may, Ms Lea, just one 11 thing briefly in response to Mr. Stephenson. 12 MS LEA: Could you use your 13 microphone, please. 14 MR. MARK: Briefly in response to 15 Mr. Stephenson, let's all recognize reality here that 16 if the proposal before the Board, for example, that has 17 been put by Board staff -- which I had understood was 18 the starting point for the discussion, if you will -- 19 is accepted, there is no further role for the Board to 20 play in establishing just and reasonable rates. What 21 is being proposed under that model is the setting of 22 the rate. With the greatest of respect to 23 Mr. Stephenson, it's sophistry to suggest that there is 24 another step in the process. This is it. 25 If you are looking at the substance 26 of it, when or where will the participants in the 27 marketplace get the opportunity to have a hearing on 28 what are just and reasonable rates, this is it, because 39 1 if what is proposed before the Board is adopted -- the 2 section 78 procedure, if it is adopted at all, will be 3 a rubber stamping. 4 You will hear my submissions at 5 another time that this whole idea of this method or 6 technique without a fixed rate is misguided and not 7 justified by the legislation. 8 But from a procedural point of view, 9 Mr. Stephenson's suggestion that there will be another 10 proceeding in which there will be an opportunity for 11 meaningful input on the question of what is just and 12 reasonable is simply wrong. 13 MS LEA: Thank you, Mr. Mark. I 14 think I understood your submission, indeed, to be that 15 even if the Board is not explicitly working under 16 section 78 now it is acting in a manner which would 17 preclude further consideration under the section. Is 18 that your submission? 19 MR. MARK: Yes. 20 MS LEA: Thank you. 21 My comments are as follows. 22 My understanding of this procedure -- 23 and I don't have as much history as other folk in the 24 room with it, but I will do my best to put forward my 25 understanding -- is that it is not a proceeding under 26 section 78. The Board is not exercising any statutory 27 power of decision. The Board is not acting under its 28 rule-making power under section 44. The Board is 40 1 acting under section 70(2)(d) to create a code, which 2 would be approved by the Board, which would become a 3 condition of licences. 4 Section 70(2)(e) may also be related, 5 that is, setting a method or technique for calculating 6 the rate. The method or technique can be included in 7 the licence. 8 As I understand the Board's intention 9 here, it is not intending to make any order arising out 10 of this proceeding, nor is it intending to render what 11 I would call a capital "d" decision in the sense that 12 we have come to be used to decisions from the Board 13 following lengthy hearing proceedings. 14 It is attempting to approve a code, 15 and in attempting to approve that code it is seeking 16 the assistance of parties in making the best approval 17 it can, that is, your wisdom on this issue is valued, 18 we need it in order to understand what the best code is 19 that we can put in place and make a condition of the 20 licence. 21 I have heard several people say here 22 that they do not want to derail this proceeding, 23 although they have significant concerns about the way 24 that the procedure has been set out, and I hear those 25 concerns. 26 I am not in a position today, of 27 course, and, pending any change in my status, I am 28 never going to be in a position to make a ruling on 41 1 this matter. I cannot give you procedural rights that 2 the Board has not given you by way of procedural 3 orders. So I don't think there is much point in 4 discussing what procedural rights should be given 5 today, but I will make a suggestion as to how we can 6 resolve this matter. 7 May I suggest that we proceed with 8 the technical conference as set out, with whatever 9 faults you may think it has. I think it will still be 10 a useful proceeding because we will get a clarification 11 of the presenters and their proposals as we plan to do. 12 The Board staff paper is used as a 13 starting point for discussion in this proceeding. 14 If you are concerned about the 15 procedures that have been followed, you need to get a 16 ruling from the Board on that, not from me and not from 17 staff. Our agreement doesn't help you. You need to 18 make a motion to the Board to seek clarification on the 19 procedures to be followed in creating this code. 20 In that motion document you could 21 argue that what the Board is in fact doing, without 22 saying so, is making a ruling on a section 78. You 23 could make that argument there, but I can't rule on it 24 today. 25 So I suggest that we proceed as 26 planned, and those who have significant concerns about 27 process seek a ruling from the Board. 28 MR. WARREN: Ms Lea, before you go 42 1 any further, I would like to take instructions on the 2 point about whether or not to proceed as you have 3 suggested, so could we take a break at some point to 4 take instructions on that point? 5 MS LEA: Certainly. We will 6 certainly take a break to do that. 7 I would encourage parties to proceed. 8 This technical conference will be useful. If the Board 9 rules that this is the only time you will have to 10 question presenters, let's not waste that opportunity, 11 I would suggest. 12 One moment, please. 13 --- Pause 14 MS LEA: Thanks. Then we will 15 take -- 16 MR. BUDD: I just have a few other 17 concerns that I would like to register, if you want to 18 hear them now. 19 MS LEA: On the procedural matter 20 that we have been dealing with? 21 MR. BUDD: No, some additional 22 concerns. Some of them may involve process, but I just 23 want to be sure that you are aware of the concerns. 24 MS LEA: If you think it's a good 25 time, fire away. 26 MR. BUDD: Let's do it and hear it 27 now. 28 With respect to the issues list, 43 1 which we only received yesterday, we have some 2 substantial concerns with that. They go to the root of 3 the Minister's letter dated March 31, 1999 and 4 assurances that in fact at least section 2.5.7 of the 5 Affiliate Relationships Code was going to be a part of 6 this proceeding. 7 I think that letter as been filed as 8 Exhibit D -- Appendix D, pardon me, to the -- I was 9 going to call it the prefiled evidence, but I will call 10 it the -- 11 MS LEA: Submission? 12 MR. BUDD: The submission by Fiona 13 Woolf, Cameron McKenna and Seabron Adamson, dated 14 July 2, 1999. 15 In that letter, on page 2, from the 16 Minister, the Minister indicates -- and I am just going 17 to read it into the record: 18 "Given the direct relationship 19 between customer transfers and 20 the broader issues regarding the 21 discharge of default supply 22 obligation, I expect that the 23 Board will defer section 2.5.7 24 of the Code pending the outcome 25 of your continued consultations 26 on the Standard Supply Service 27 Code." (As read) 28 I submit to you, even though I know 44 1 you are not the Board, maybe you can take it upstairs, 2 that in fact if you look at the chronology of this, 3 what is being said is that, as of the March 31/April 1 4 time frame when the Affiliate Relationships Code was 5 coming into effect, the Standard Supply Service Code 6 was being dealt with -- which is what is proposed for 7 these proceedings -- precisely that section of the ARC 8 was to be dealt with. 9 That is certainly my understanding 10 and that of our clients. So I don't know what proposed 11 methodology you have for us to deal with that now, 12 because I understand in the next four days the Board is 13 not going to be sitting here unless we bring a motion 14 this afternoon to adjourn the proceedings and have the 15 Board come and sit and determine this procedural issue. 16 But this is absolutely fundamental to our clients that 17 this be included. 18 We are unaware, other than through 19 the procedural order, of what the Board's thoughts are 20 on it, and we have not been able to put it to any Board 21 member. That is one issue. 22 MS LEA: All right. Just one moment. 23 Okay. Go ahead. Thank you. 24 MR. BUDD: The second one is just 25 more of an administrative matter with respect to 26 filings. 27 I am not sure that we have received 28 all the filings from all the parties. A number of them 45 1 drifted in fairly late. But we certainly are trusting 2 that there will be no new substantial evidence or 3 submissions filed after this date. 4 If there are some exhibits or 5 something through the course of the four days that are 6 being proposed, that might be acceptable, depending on 7 what they are, but there wouldn't be anything of any 8 substance to which we would have to react at this 9 point, and certainly nothing after the submission 10 stage, or after this is concluded, that is new prior to 11 the proposed August 9th date. 12 If there is any different 13 understanding on the part of the Board staff, I am sure 14 you will let us know. 15 On the issue of questioning, we are 16 trusting that during whatever process is ultimately 17 adopted, parties are not going to be unreasonably 18 limited in terms of asking their questions. They will 19 be able to appropriately probe. I share Mr. Mark's 20 concerns very much with respect to the issue of 21 cross-examination. That is the way to test parties' 22 submissions, and it's difficult without that right to 23 do so. 24 With respect to the presentations, we 25 again have another serious concern that on these kinds 26 of issues parties are limited to 30 minutes. In our 27 case, for example -- and we would ask you to take this 28 back upstairs -- we are acting for 13 parties. If each 46 1 one of those parties had come in individually, which 2 would have otherwise been allowed even though 3 interventions are encouraged to be grouped, there would 4 have been hours put forward. 5 Limiting the presentation to 30 6 minutes in that case of a group intervention, we 7 respectfully submit doesn't make a lot of sense, and we 8 are asking that the Board would consider expanding that 9 time frame to something more reasonable. So we put 10 that forward to you. 11 Then finally, on the issue of costs, 12 I haven't seen anything emanate out of the Board on 13 costs for this process, but I would like to register a 14 substantial concern if there is going to be a cost. 15 I notice that the Board staff is 16 funding Dr. Dewees coming to be the cornerstone of the 17 process. 18 In any event, I am interesting in 19 knowing what the Board staff can offer parties at this 20 stage, upfront, in the way of advice on costs. What is 21 it that you are saying we can -- 22 MS LEA: Personally, sir? 23 MR. BUDD: Here is the concern. I 24 will tell you. 25 MS LEA: On our salary? 26 --- Laughter 27 MR. BUDD: Our Municipal Electric 28 clients, there is a rumour floating around they are 47 1 going to be asked to pay twice: once because they have 2 put together a substantial intervention here to bring 3 forward evidence and experts to assist the Board; and 4 secondly, if the costs of the proceedings are then 5 collected from the MEUs, we would end up paying twice. 6 I am wondering if you can comment on 7 that or come back to us at a later time? 8 MS LEA: Yes. 9 Mr. Budd, I will help you to the 10 extent that I can, within the extent of my knowledge. 11 I cannot really help you on two of the issues. One is 12 the cost issue. That is something that the Board will 13 be making a determination on. I am not aware of what 14 is going on there. 15 I will see if there is any new 16 information. I will investigate that to see if there 17 is any new information that has come forward. 18 With respect to the 30-minute 19 limitation, this, I gather, applies to the submissions 20 to be made at the hearing in August. I think that you 21 had better put that request to the Board at that time. 22 I obviously can't help you with that. 23 With respect to cross-examination, my 24 understanding is that it is the intent here, at this 25 technical conference, not to enter into what I would 26 term aggressive cross-examination, but certainly we 27 will want to understand the parties' submissions 28 thoroughly. So I guess we will all have to exercise 48 1 our best judgment as to what limits to put on that. It 2 is partly constrained I think by the time we have for 3 this proceeding also. 4 With respect to the most substantive 5 issue which you have raised, which is that of the 6 issues list and section 2.5.7 of the Affiliate Code, I 7 understand your concerns with respect to that. 8 The way that I read Procedural Order 9 No. 2 -- and I do not have any direct pipeline to the 10 Board other than what is manifested in the documents 11 that it set out -- on page 2, paragraph 2 of that 12 procedural order, the Board indicated: 13 "This proceedings is being held 14 to assist the Board in its 15 consideration of provisions of 16 the Standard Supply Service 17 Code. The Board will not 18 consider amendments to other 19 codes through this proceeding." 20 (As read) 21 I read that as being: This is not 22 the place to make submissions with respect to the 23 Affiliate Code. That is how I read it and I expect 24 that is how you read it, too. 25 The Minister's letter, which you have 26 referred to, I understood suggested that the Board 27 defer its consideration of that section of the 28 Affiliate Code until after this proceeding, until the 49 1 outcome -- defer the implementation -- well, in any 2 event, something about deferring it -- perhaps you can 3 quote it to me, that would be helpful -- until the 4 outcome of its proceeding on standard supply service. 5 Could you read me that sentence again, please? I don't 6 have it in front of me. 7 MR. BUDD: Sure. 8 "Given the direct relationship 9 between customer transfers and 10 the broader issues regarding the 11 discharge of default supply 12 obligations, I expect that the 13 Board will defer section 2-5-7 14 of the Code pending the outcome 15 of your continued consultations 16 on the Standard Supply Service 17 Code." (As read) 18 So I think Mr. Hewson is correct, the 19 Minister was saying as of March 31, when the code was 20 going to come into effect April 1, do not implement 21 section 2.5.7 because you have got continued 22 consultations on the Standard Supply Service Code. I 23 am submitting to you, and ultimately to the Board, if 24 they are listening upstairs, that it is only sensible 25 to deal with those issues simultaneously, as was 26 anticipated by the Minister. That is certainly my 27 understanding of what this is about. 28 MS LEA: Thank you, Mr. Budd. I 50 1 didn't interpret the letter as suggesting that 2 simultaneous consideration was required, but certainly 3 that the final implementation or decision on 2.5.7 4 should be deferred pending our continuing consultation 5 on the SSS Code. 6 I did not read the Board as saying 7 that it will never reconsider 2.5.7, only that it 8 wasn't going to make a ruling on that or decide on that 9 code in this proceeding. 10 So as far as I am concerned, in terms 11 of our chairmanship of this technical conference, I 12 think that what we are proposing with respect to that 13 issue is as follows. 14 The Board may not be making any 15 finding with respect to the -- it sounds like it won't 16 be making any finding with regard to the Affiliate 17 Relationships Code as a result of this proceeding. But 18 for your presentations in this technical conference, I 19 don't have a problem with submissions being made about 20 that section. 21 MR. BUDD: Yes. In fact that forms a 22 substantial part, I think, or component of the 23 submission that has been put forward by Ms Wells. 24 MS LEA: I think what we are aiming 25 to do here, though, is to keep focused on the Standard 26 Supply Service Code, and as those policy matters relate 27 to the Standard Supply Service Code we want to hear 28 about them in this proceeding, but I would suggest that 51 1 I don't think the Board is going to deal with the 2 Affiliate Relationships Code as part of this 3 proceeding. That is how I read the procedural order. 4 So I think if we could now take a 5 15-minute break for those who -- 6 I'm sorry, Mr. Mattson. 7 MR. MATTSON: Ms Lea, is the Board 8 staff -- are you going to clear up, though, exactly 9 what then your position paper is? We know we have 10 alternatives. Mr. Mark calls it a starting point. 11 MS LEA: Mr. Mattson, can I ask that 12 I have 15 minutes also to take instructions on that? 13 MR. MATTSON: Okay. 14 MS LEA: Thanks. 15 MR. MATTSON: I would just like to 16 know what the Board's paper is. 17 MS LEA: That's fine. Perhaps we can 18 talk to you also to understand how your concerns 19 precisely relates to these things. 20 Let's take 15 minutes, please, and we 21 will fire up again at exactly 10 to 11:00. 22 --- Upon recessing at 10:35 a.m. 23 --- Upon resuming at 10:50 a.m. 24 MS LEA: I wonder if we could 25 reconvene, please. 26 One matter that I was speaking to 27 immediately before the break had to do with the issue 28 of costs. Unfortunately, I can't give parties any 52 1 further information with respect to the cost issue. I 2 also was aware that -- 3 MR. HEWSON: Order, please. 4 MS LEA: Thank you. 5 As I was saying, I don't have any 6 further information to offer on the issue of costs. I 7 also had heard what Mr. Budd had put forward, that 8 there was a possibility that the Municipal Electric 9 Utilities would be asked to fund the proceeding, but I 10 don't know that that has been confirmed. I don't have 11 any further information on that. Any rulings on costs, 12 of course, will come from the Board. 13 Are there any parties here present 14 now who were not present at the outset of these 15 proceedings and wish to put their names forward as 16 active participants? 17 Yes, sir. 18 MR. PASTORIC: My name is Dan 19 Pastoric. 20 MS LEA: Could you spell your last 21 name, please? 22 MR. PASTORIC: P-A-S-T-O-R-I-C. The 23 company is called Energy Advantage. We represent 60 24 large commercial and industrial users in this province 25 and we will be active in the proceedings. 26 MS LEA: Thank you. Are there any 27 other participants now coming forward? 28 Yes, sir? 53 1 MR. RICHARDSON: My name is Jim 2 Richardson, along with Paul Ferguson. We represent the 3 Upper Canada Energy Alliance, which represents 10 LDCs 4 in the province. 5 MS LEA: Thank you very much. 6 I believe our first presenter is at 7 the front of the room and ready to begin. Professor 8 Dewees is with us. I understand he has a presentation 9 to make and after that we will begin with questions for 10 Mr. Dewees. 11 MR. MARK: Ms Lea, if I could just 12 put it on the record that our further participation in 13 this technical conference is not to be taken as any 14 acquiesence in the propriety of the process and it is 15 with reservation of our full rights to object to the 16 procedures. 17 MS LEA: Thanks very much, Mr. Mark. 18 I am glad you decided to stay. 19 MR. MARK: If we participate. 20 MS LEA: If you participate. All 21 right. So you are not sure either. That's fine. I 22 will look forward to whatever level of participation 23 you present. 24 Mr. Budd? 25 MR. BUDD: And we are likewise. 26 I just wanted to reiterate as well 27 for the record that Mr. Power will be joining us 28 shortly, as soon as he is out of court, and he will be 54 1 having questions for Dr. Dewees. 2 MS LEA: Thank you. 3 MR. WARREN: I'm sorry, Jennifer. I 4 apologize. I was late getting into the room. What is 5 the status of the issues which were raised by Mr. Mark 6 beforehand? 7 MS LEA: There has been no change in 8 the status. I think what I said was that we will 9 proceed with the technical conference and use it as an 10 opportunity to get clarification on the presentations. 11 Those parties who feel they are aggrieved by the 12 procedure in the formation of this code should bring 13 the matter to the Board by way of a motion. 14 MR. WARREN: Okay. Thanks. 15 MS LEA: Professor Dewees is with us. 16 Professor Dewees is going to be using slides. I 17 believe he has some copies of those available for 18 active participants, and we can make more as the need 19 arises. Perhaps I will help to pass those out while 20 Professor Dewees begins his presentation. 21 Thank you. 22 PRESENTATION 23 PROFESSOR DEWEES: Thank you, Ms Lea. 24 My name is Don Dewees. I am a 25 Professor of Economics and Professor of Law at the 26 University of Toronto. I served as a vice-chair of the 27 Market Design Committee through its life from February 28 1998 through February 1999. I was asked by the Board 55 DEWEES, presentation 1 to make a submission and to appear at this technical 2 conference, providing some background on the Market 3 Design Committee's recommendations and deliberations as 4 they relate to the draft Standard Supply Service Code, 5 and I have made a submission, which went into the Board 6 on the 5th of July. 7 For today I prepared a set of slides 8 which is a more compact form of that submission. In a 9 couple of places in the slides I respond to some of the 10 other submissions that were made which I have seen 11 between July 5 and now, so I will have a few comments 12 of my own on that. 13 Let me begin by outlining what I 14 propose to talk about. 15 I will say a few words about the 16 Market Design Committee and the way in which we work. 17 I want to give a brief overview of the retail design 18 that the Market Design Committee came up with, and then 19 I will move to the four issues that were specifically 20 raised by the Board for consideration at this technical 21 conference: the piping mechanism, procurement, 22 limitations on third parties, and billing. 23 The Market Design Committee began its 24 work in February of 1998 and worked through February of 25 1999. The committee consisted of 14 stakeholders. 26 They were the members of the committee, representing a 27 wide variety of interests in the electricity industry 28 and in energy retailing more generally. There was a 56 DEWEES, presentation 1 four-person executive: the chair, two vice-chairs, and 2 the director of research. There was a consultant. 3 Putnam, Hayes & Bartlett was retained by the Market 4 Design Committee as the lead consultant and they put in 5 an enormous amount of time working with the committee 6 over the course of that year, bringing their experience 7 in other electricity restructurings to Ontario. 8 By the middle of the year, by July, 9 we began to set up technical panels to begin to work 10 out some of the details to implement the overall market 11 design, the high level market design that the committee 12 had developed. We had over 100 people working on those 13 technical panels by late in the year. 14 The Market Design Committee 15 recommended rules for wholesale and retail markets for 16 licences. We made recommendations regarding most 17 aspects of electricity restructuring in Ontario. 18 We were guided by the White Paper of 19 November 1997. Part of our mandate was to follow the 20 White Paper as our terms of reference, and we looked 21 there, among other things, for goals. One of the 22 goals, one of the number that are identified in the 23 White Paper, is moving from monopoly to competition, 24 driving price to the lowest level. That was one of the 25 elements that the Market Design Committee considered in 26 its work. 27 In the second quarter report, our 28 second interim report -- I will refer to those reports 57 DEWEES, presentation 1 as Q2, Q3 and Q4, for the four quarters -- in our 2 second quarterly report we identified one goal of 3 retail competition as providing the best combination of 4 price and service for customers in Ontario. That is on 5 page 4-1 of the second interim report. 6 Our retail recommendations are 7 contained predominately in the second, third and fourth 8 quarter reports, most of them in Q2. 9 Additional goals that we identified 10 were avoiding cross-subsidy and creating a level 11 playing field, trying to create conditions under which 12 competition would be fair and free from cross-subsidy. 13 The Market Design Committee spent an 14 enormous amount of time on retail issues. We began in 15 March or April and they consumed many meetings of the 16 Market Design Committee as a whole and of its retail 17 subcommittee, of which I was the chair, which turned 18 out to have all of the members of the committee on 19 it -- nobody wanted to miss retail -- and in its retail 20 technical panel. 21 We had extensive deliberations on 22 what we called default supply, which is now called 23 standard supply service. Excuse me if, during the 24 course of this morning or today, I kind of switch back 25 and forth between the old terminology and the new 26 terminology, but we gave this a great deal of attention 27 for reasons that you will see as I go through the 28 presentation. 58 DEWEES, presentation 1 Of course, once we wound up at the 2 end of January, beginning of February of this year, 3 further market design was passed to the independent 4 market operator for refinement of the market rules and 5 to the Ontario Energy Board for the wide variety of 6 matters that are within the OEB's purview. 7 At a general level, the design that 8 the Market Design Committee came up with for retail 9 competition was there will be a distributor that is 10 regulated and performs only regulated functions. The 11 primary duty of the distributor is to operate the 12 wires, it passes through the spot price and is 13 responsible for billing. 14 The design minimizes risk-taking by 15 this regulated wires company and provides that 16 risk-taking and competitive activities would be 17 performed either in a separate affiliate, if that 18 municipal council wants to be engaged in those 19 activities, or by third parties, who could be anybody 20 else interested in those activities. 21 The MDC recommended that the default 22 supply or SSS, if I can use that abbreviation, would be 23 a smoothed spot price. It said that the SSS would be 24 the responsibility of the distributor, that is, it is 25 the responsibility of the distributor to offer SSS to 26 its customers, but this could be offered directly or 27 through a third party, including an affiliate. That is 28 also what is provided in the legislation. 59 DEWEES, presentation 1 The MDC said that customers should be 2 free to leave SSS for competitive retailers at any 3 time, that is, in order to encourage competition, 4 customers should not be locked into the standard supply 5 service for any substantial period of time. 6 What is retail competition? Let's 7 step back for a moment. 8 Under the wholesale market design 9 that the MDC developed, the independent market operator 10 will dispatch generation sufficient to satisfy all 11 those within the Province of Ontario. This is like 12 what Ontario Hydro has done in the past. In doing 13 that, it will establish a market-clearing price which 14 provides sufficient generation, the electricity will 15 flow through the wires, as it always has, according to 16 the laws of physics, to all customers. 17 So retail competition isn't about 18 getting the electricity to the customer -- that is the 19 responsibility of the IMO and its dispatch and of the 20 transmission and distribution companies keeping the 21 wires up and operating effectively -- retail 22 competition is about the price and other terms and 23 conditions under which the retail customer pays for 24 that electric power. 25 The pricing mechanism recommended by 26 the Market Design Committee was a smoothed spot price. 27 We said that the distributor should pass through to all 28 customers who are on default standard supply service, 60 DEWEES, presentation 1 the wholesale spot price subject to some smoothing 2 mechanism. In our report, in the second quarter 3 report, we looked at several smoothing mechanisms, but 4 made no recommendation -- I'm sorry, I think it was the 5 third quarterly report where we talked about smoothing. 6 We made no recommendation with regard to the specific 7 smoothing mechanism. 8 We talked about several, but then 9 said it would be up to the OEB to determine what was 10 the appropriate mechanism of smoothing. We talked 11 about possibly smoothing over the period of a year, 12 maybe a quarterly rolling average, but we left the 13 choice of that to the discretion of the OEB. 14 The draft code proposes smoothing 15 over the billing period. The billing period is 16 typically one, two or three months and by charging the 17 price over that period, you are effectively averaging 18 out variations in the spot price over the one, two or 19 three-month period. That is certainly consistent with 20 the MDC's suggestion that there be a smoothed spot 21 price and that it's up to the OEB to determine the 22 specific mechanism. 23 The MDC also considered fixed price 24 alternatives to the smoothed spot price pass-through. 25 We did that in the second quarter and in the third 26 quarter and again in the fourth quarter. After great 27 deliberation and a lot of investigation, in each case 28 we returned to the original recommendation of a 61 DEWEES, presentation 1 smoothed spot price pass-through. 2 Some of the reasons that were 3 identified by various MDC members for not choosing the 4 other alternatives that we looked at at the time were 5 the difficulty and costs associated with regulating 6 fixed-price offerings. The absence of a guarantee that 7 all areas would secure reasonable prices -- the 8 smoothed spot price, there is no question that will be 9 available to every MEU in the province, but for a fixed 10 price based on a procurement procedure there is no 11 guarantee. 12 Some members felt that all areas 13 would be able to secure a reasonable price for their 14 customers. Prices might differ significantly among 15 service areas. A fixed-price offering does not 16 eliminate risk. We have seen in the United States in 17 the last year or two cases where price gyrations led to 18 the failure of retailers, that is, those who had made 19 fixed-price commitments were unable to fulfil those 20 commitments and then somebody is left holding the bag. 21 That could be the distributor or it could be the 22 customers. 23 As I recall, one or more of the 24 submissions that were made during this month noted that 25 under a fixed-price offering, were there a failure of 26 that sort, then the spot price would be the back-up. 27 Customers could at least get the spot price if the 28 fixed price became unavailable because of failure. But 62 DEWEES, presentation 1 that was the concern that the MDC had. 2 Finally, there was a feeling that the 3 fixed-price offerings would likely be higher than the 4 expected spot price. The reason for that is if 5 customers are entitled to leave standard supply service 6 at any time, then the supplier of that standard supply 7 service has to promise a price for a requirement's 8 quantity. You can't be guaranteed a quantity because 9 customers may leave, particularly if the spot price 10 falls to a level better than the fixed-price offering. 11 So the supplier is going to have to 12 charge a premium because if the price is low the 13 customers will stay with the -- I'm sorry, will move to 14 the spot price -- if the price is high, they will stay 15 with the fixed price, and so the supplier will lose 16 customers just when it would have been easiest to 17 supply them. This means there is going to have to be 18 some sort of premium charged. 19 The MDC was certainly concerned about 20 the customer response to price variability. We were 21 not insensitive to this matter. We debated at great 22 length what the extent of that variability would be and 23 how customers would respond to it. In the end, the 24 members concluded that at least for the first few years 25 the 3.8 per cent was a new cap on OPG, Ontario Power 26 Generation. It would limit the price risk to 27 consumers. There would be a rebate if the wholesale 28 price drifts above 3.8 cents, and the alternative to 63 DEWEES, presentation 1 variable prices seems to be higher prices. 2 The question is: Do you think 3 consumers are going to prefer a fixed price or a low 4 price? They would like both, but, as between the two, 5 I believe the members of the Market Design Committee 6 were not persuaded that customers were better served by 7 a higher fixed price and so they chose to stay with the 8 spot price pass-through. 9 One way to look at this is that the 10 smoothed spot price pass-through gives every retail 11 customer in the province access to the wholesale market 12 price. Without doing more, everybody has the benefit 13 of wholesale competition simply by staying on standard 14 supply service. None of the other schemes seem to 15 offer that benefit. My conclusion, looking at the 16 draft code, is that it is consistent with the 17 recommendations that were made by the Market Design 18 Committee with respect to the pricing mechanisms. 19 We had some debate at the Market 20 Design Committee about the effect of different standard 21 supply service offerings on competition in Ontario and 22 some submissions both back in February and in July 23 addressed this issue. 24 I wanted here to step back a bit from 25 the MDC and offer what I thought was a useful way to 26 try to understand what is being said on this score. 27 Some comments suggested that 28 retailers will have trouble beating the smoothed spot 64 DEWEES, presentation 1 price, and in fact I quote Toronto Hydro for that 2 proposition in my written submission, that is, Toronto 3 Hydro's submission last February. If that's true -- 4 that is, if most customers elect to stay with the 5 smoothed spot price despite its volatility because it's 6 a good price -- this means that there will not be a lot 7 of retail residential customers anyway interested in 8 switching to retail suppliers, but that leaves retail 9 suppliers with the industrial and commercial customers 10 to focus on, and that's a large market. 11 Actually, I want to show another 12 transparency here. 13 Just over the weekend, I was trying 14 to get a handle on the relative size of the various 15 markets and found the following data. Putting together 16 data from Ontario Hydro, now Servco, and data from the 17 MEUs -- I think this is approximate because the data 18 doesn't quite match up -- I have done this quickly. I 19 haven't been able to reconcile all the numbers, but all 20 we need here is general guidance. 21 Large customers -- that is, customers 22 over 5 megawatts and there are about 250 of them 23 throughout the province -- consume about 25 per cent of 24 total Ontario demand, according to these figures, some 25 of them through MEUs, some of them as Ontario Hydro 26 direct customers. Residential customers consume about 27 27 per cent of total Ontario demand and general service 28 customers smaller than 5 megawatts consume about 48 per 65 DEWEES, presentation 1 cent of total Ontario demand. Those customers of 2 course are the full range, from some who are just a 3 little smaller than 5 megawatts down to some whose 4 consumption is probably no larger than that of a 5 typical household. 6 In response to some of the concerns 7 expressed in some submissions that residential 8 customers may not switch from the standard supply 9 service to retail offerings, even if that is true there 10 is still the 25 per cent of very large customers and 11 some substantial fraction of the general service 12 customers who are still large enough to be 13 sophisticated energy purchasers who could, if they feel 14 it's better for them, make a deal with a retailer or a 15 marketer or even with a generator to secure some 16 alternative to the standard supply service. 17 So, it seems to me that there is a 18 substantial opportunity for retailers to deal with 19 larger customers, even if it should turn out that 20 residential customers are not greatly interested in 21 competitive offerings. 22 With that in mind, if instead of the 23 smoothed spot price we were to move to a standard 24 service offering that was a fixed price, that 25 eliminates one possibly significant motive for 26 customers to switch from SSS to competitive retailers, 27 namely the variability of price. 28 It seems to me that if this fixed 66 DEWEES, presentation 1 price is not so high that it's unattractive -- that is, 2 if you don't price it so high that SSS customers are 3 taken advantage of and have to be allowed, in order to 4 get a good price -- if it's a reasonable fixed price, 5 then it seems to me this necessarily lessens 6 competition because there would be even less incentive 7 for customers to move from a fixed price, from a good 8 fixed price, to retail offerings, and if this offering 9 was made an affiliate of the distributor, an affiliate 10 that has a familiar brand name, it seems to me the 11 possibility for retailers to pry the customers away 12 from SSS offered by the affiliate would be even less. 13 My sense of it is -- this is not 14 something that was set explicitly by the MDC -- is that 15 I think the smoothed spot price would be a good deal 16 for customers and I think that either a fixed price 17 alternative would be such a high price that it's not a 18 good deal for customers and they will have to bail out 19 of that or if it's a good price it will then reduce the 20 opportunity for other competition. 21 I think that the smoothed spot price 22 provides a middle ground. It's not perfect, there is 23 variability, but in a competitive market price, the 24 wholesale market price, if consumers don't like that, 25 I'm sure other retailers will be available to offer 26 them fixed price alternatives. 27 On the issue of procurement, the MDC 28 recommendation for a smoothed spot price as the system 67 DEWEES, presentation 1 standard supply service employs, I believe, no need for 2 the distributor to purchase power in advance. 3 An important qualification, the MDC 4 did not say the distributor may not purchase power in 5 advance, neither did it say explicitly the distributor 6 must purchase from the spot market and only the spot 7 market in order to fulfil the defaults wire SSS 8 offering. The MDC simply said the distributor should 9 pass through the spot price to default customers. 10 Simply passing through the spot price 11 means the distributor pays the IMO for the electricity 12 that flows through its meters into its service 13 territory, it turns around and calculates the smoothed 14 bill according to the smoothing mechanism that is 15 chosen, and then it bills customers for their usage. 16 There is no need, clearly no need for 17 any procure requirement. The electricity will be 18 there. It's going to be dispatched by the IMO. It's 19 going to flow through the wires unless somebody repeals 20 clear cost laws. So the electricity will get to the 21 customer. There is no need for the distributor to 22 procure. 23 The draft code requires the 24 distributor to purchase from the spot market and this, 25 I believe, minimizes the risks for the distributor in 26 offering smoothed spot directly. 27 One of the concerns that the MDC had, 28 as I indicated in my overview of the design, was the 68 DEWEES, presentation 1 distributor should be engaged in low risk activities to 2 regulated operation. High risk stuff belongs in the 3 competitive retailers, whether affiliates or third 4 parties. So the Code, by saying the distributor has to 5 purchase from the spot market, I think is consistent 6 with the MDC recommendation and consistent with the 7 philosophy of minimizing risk to the distributor. 8 If you allow distributors to purchase 9 fixed price power for their SSS customers, one thing 10 that I believe this does is that it may pass the risks 11 inherent in new generation investment to those 12 customers. 13 Some of the submissions suggested 14 that new generation should be financed by allowing the 15 distributor to buy at a fixed price from that new 16 generator and pass that on to the SSS customers. 17 To me, I don't quite follow that 18 mechanism. If the price of the new generation is going 19 to be low, then it seems to me that the new generator 20 should be able to sell that power to the 25 plus per 21 cent of large and medium size industrial and commercial 22 customers in the province. 23 There is a huge market out there, 24 maybe half the final market, that is sophisticated 25 enough to be able to enter fixed price contracts if 26 they feel this is attractive. 27 If you can't sell the power from that 28 new generator to the big sophisticated customers, then 69 DEWEES, presentation 1 why should the standard service customers be required 2 to buy it? It seems to me that one way to look at this 3 would be to say, "If we can't sell it in the 4 competitive market, we will make the SSS customers take 5 it." That strikes me as inconsistent with the White 6 Paper philosophy that we are trying to move from a 7 monopolistic market with some regulation to a 8 competitive market. 9 The White Paper says that one purpose 10 of restructuring is to have more businesslike 11 investment decisions; that means letting investors take 12 the risks associated with those investments. To pass 13 those risks directly on to SSS customers, it seems to 14 me, goes back to where we were before: to make a 15 mistake and the power is too high priced, the SSS 16 customers are stuck with it. 17 Actually, they won't be stuck with it 18 if you follow the MDC recommendation that the customer 19 should be free to switch at any time. So I'm not sure 20 this even helps the generator that wants to make a new 21 investment, because if the contract with the 22 distributor is, "You buy my power at a fixed price 23 unless your customers go away because the price is too 24 high, in which case you won't buy it", I'm not sure the 25 bank is going to say, "This is a terrific contract. We 26 are going to lend you the money." 27 This means a couple of issues. One, 28 what about the MEU that currently owns low cost 70 DEWEES, presentation 1 generation. I believe Sault Ste. Marie made a 2 submission, pointing out that they have a contract with 3 Great Lakes Power that is at a good price and they 4 said, "Why can't we pass this on to our SSS customers?" 5 I think Orillia is in the same 6 position. There may well be other municipal utilities 7 that have their own generation and have access to 8 particularly low cost power. 9 The MDC didn't really address that 10 issue directly. I don't think as you look through the 11 report you will find a clear answer to what to do with 12 that. 13 My own answer, and here I am not 14 speaking for the MDC, this is just my own thought, is 15 that it would keep things simpler to say: SSS is going 16 to be smoothed spot price, but if an MEU has access to 17 existing low cost generation, it should assign that to 18 its retail affiliate and let that affiliate offer low 19 price fixed power to everyone in the service area. 20 My guess is you wouldn't have to 21 spend very much on marketing in Orillia or in Sault 22 Ste. Marie for the affiliate to point out to customers 23 that the same old cheap power that has been available 24 to them before is still available, so I'll just sign up 25 with the retail affiliate. 26 It seems to me this is a way to allow 27 the municipality to continue to pass on the benefits of 28 that existing low cost generation to its residents 71 DEWEES, presentation 1 without creating exceptions to the SSS regime and I 2 believe creating more complexity. 3 There was a suggestion in one or more 4 of the submissions regarding the affiliate buying at a 5 fixed price and selling it at spot. I confess I don't 6 understand the commercial motivation for that. I go 7 into that at some length in the written submission. 8 I'm conscious of the time and will 9 try to finish up quickly. 10 The MDC was conscious of time. Right 11 from the first day we met, there was a concern whether 12 we could do our job within a year, whether it was going 13 to be feasible to have a competitive retail market in 14 the year 2000. There were many suggestions that this 15 was not going to be possible and hadn't been done at 16 that pace anywhere else in the world. 17 So, as we look for a retail design, 18 we were looking for something that could be put in 19 place quickly, something that would be simple -- 20 relatively simple, nothing is simple -- something that 21 would be relatively simple and could be implemented 22 fairly quickly. 23 The MDC believed at the time that it 24 made the recommendation that the smoothed spot price 25 pass-through would be simpler for the distributors to 26 implement than any of the alternatives that we had 27 looked at and that was one factor in it making that 28 recommendation. 72 DEWEES, presentation 1 So overall, in my view, the draft 2 code that has been put forward is consistent with the 3 MDC's recommendations with respect to procurement. 4 Limitations on third parties. The 5 Market Design Committee, in more than one place, but 6 explicitly in its fourth quarterly report, acknowledged 7 the language of the OEB Act, section 70(9). The MDC 8 recommended that -- actually, in part of the same 9 report -- if a distributor fulfils its SSS obligation 10 through a third party, the OEB, through codes of 11 conduct or otherwise, should ensure that there is no 12 cross-subsidy of competitive activities, no 13 preferential access to customer data and that SSS 14 customers should remain contestable. 15 These goals have been enunciated by 16 the MDC back in its second quarterly report and the 17 matter of substantial concern was that in order to 18 ensure a level playing field for our competitors you 19 have to guard against cross-subsidy by related 20 companies, affiliates, cross-subsidy of competitive 21 activities by regulated affiliates, and preferential 22 treatment of competitive affiliates vis-…-vis other 23 competitors. That led to the MDC's expression of 24 concern in the fourth quarter and its recommendations 25 in Q-2. 26 As I look at the draft code I think 27 that it accomplishes these goals. It provides separate 28 accounts for SSS. It provides that the price to the 73 DEWEES, presentation 1 customer must be the same whether the SSS is provided 2 directly or through a third party. It says that if the 3 distributor is going to provide directly, it must 4 purchase from the spot market, and a third party 5 provider may only charge the spot price. This ensures 6 that there is no way that the regulated distributor 7 activity can be used to cross-subsidize an affiliate 8 activity. It says the third party provider may not use 9 customer information. We said that in that fourth 10 quarter recommendation. It says the third party 11 provider may not retail in the service area. 12 That goes beyond what the MDC had 13 said explicityely, but it is consistent with our 14 concern, with the MDC's concern, that opportunities for 15 cross-subsidy and preferential treatment be minimized. 16 Certainly some members of the MDC 17 were very concerned as to whether any code of conduct 18 could ensure that prior laws within an organization 19 could prevent the misuse of data or cross-subsidy if 20 those things were put together. 21 I think the probable result of the 22 draft code would be that some distributors will do 23 their own accounting and billing -- that is, they will 24 handle all the functions required to provide SSS 25 internally -- others will contract out, just as some 26 small MEUs currently contract out some of their 27 accounting and billing functions. I don't see any 28 reason why there won't be forums ready and willing to 74 DEWEES, presentation 1 provide that sort of data management services in 2 Ontario for any MEU that needs it. 3 Finally, with respect to billing, the 4 MDC recommended unbundling the customer's bill to 5 display the cost of each service separately, including 6 energy. That's an essential for competition. The 7 customer needs to know what's the cost of various 8 components of this service before the customer can 9 decide whether to choose some competing service. So 10 their unbundling is a central element in providing a 11 competitive retail market. 12 The draft code, it seems to me, is 13 consistent with this recommendation in suggesting a 14 list of things that may be provided in the customer 15 bill. 16 The MDC recommended that an affiliate 17 of the distributor not have preferential access to 18 customer data or markets, I have referred to that 19 already, and the draft code prohibits the distributor 20 from sending promotional material with customer bills. 21 It seems to me that is a reasonable part of trying to 22 avoid preferential access. 23 It's hard to summarize in 30 minutes 24 a very intensive year's work by the Market Design 25 Committee, so I have only hit the high points, but I 26 have tried to summarize the MDC's recommendations with 27 regard to standard supply service and some of the 28 thinking behind those recommendations. 75 DEWEES, presentation 1 In my view, the draft code that is 2 under discussion today is consistent with that set of 3 recommendations. I have to say when I first saw the 4 draft code I was quite pleased because it did seem to 5 me that it was consistent with the MDC recommendations. 6 Thank you. 7 MS LEA: Thank you very much, 8 Professor Dewees. 9 I think you can take a seat. We will 10 put you right up on the bench there. 11 I believe there was a request by 12 Mr. MacOdrum to begin. Unless there is any objection, 13 I think that is probably appropriate. 14 MR. MATTSON: Mr. MacOdrum wants the 15 people who support the position of this paper to go 16 first. You may want that, otherwise -- 17 MR. MacODRUM: No. I would prefer to 18 go first. 19 MR. MATTSON: All right. 20 MS LEA: I think we will just move 21 around the room, unless there is some difficulty. 22 Professor Dewees, could you speak 23 into your microphone briefly to make sure it is 24 working, please. 25 PROFESSOR DEWEES: Testing 1, 2, 26 testing. 27 MS LEA: Thank you. 28 Mr. MacOdrum. 76 1 MR. MacODRUM: Thank you very much, 2 Ms Lea. 3 Professor Dewees, I would like to 4 obtain clarification on four aspects of the Market 5 Design Committee's proposal and on your analysis of the 6 Board staff proposal for standard supply service. 7 The four aspects I would like to 8 discuss with you this morning are: 9 First, what is an appropriate 10 allocation of the risks associated with standard 11 supply? 12 Secondly, what option will best 13 encourage customer choice and promote retail 14 competition? 15 Thirdly, what is the level playing 16 field and what constitutes a participant having an 17 unfair advantage? 18 Fourthly, what kind of standard 19 supply services does the customer want from its local 20 distribution company? 21 Turning to the first point, the 22 question of allocation of risk, I would refer you to 23 page 1 of your written submission in this proceeding, 24 to the third paragraph, in which you say: 25 "Out of these concerns came a 26 retail market design in which 27 the distributors engage only in 28 regulated functions involving 77 1 minimal risk-taking; they 2 operate the distribution system 3 and pass through to consumers 4 the spot price, either directly 5 or smoothed. All risk-taking 6 and competitive activities must 7 be performed in a separate 8 corporation not engaged in 9 regulated functions." 10 Similarly, on page 4-6 of what you 11 call your Q2 report you say -- and this is in the first 12 full paragraph of text: 13 "Second, it is not clear how the 14 LDC could offer a fixed price to 15 its customer without exposing 16 itself to significant financial 17 risks, which seems more 18 appropriate to the competitive 19 side of the industry rather than 20 the regulated side. Such risk 21 taking by a publicly owned 22 entity raises the question of 23 who bears the risk: consumers 24 or ratepayers." (As read) 25 So with those two references and sort 26 of benchmarks, I would like to explore with you just 27 what is the nature of these financial risks. 28 What risks do you see that a 78 1 distributor would bear under the OEB staff proposal? 2 The spot price pass-through? 3 PROFESSOR DEWEES: Under the OEB's 4 proposal the distributor would be left with credit 5 risks -- that is, payment from customers -- something 6 that MEUs have faced all along. I am not sure what 7 risks beyond that. 8 MR. MacODRUM: Given that a large 9 number of the LDCs' customers are not on interval 10 meters, even with the spot price pass-through, will 11 there not be a load forecasting and load profiling 12 risk? 13 PROFESSOR DEWEES: I don't see why 14 that would be. With this new spot price pass-through, 15 the interval metered customers are called according to 16 their interval meters, and the cost of the remaining 17 electricity is divided according to one or more 18 profiles among the remaining customers. 19 It is not clear to me what risk this 20 leaves with the distributor. 21 MR. MacODRUM: I was really 22 questioning about the OEB staff proposal, the direct 23 spot price pass-through. I will get to the smoothed 24 price pass-through. 25 Even with the spot price 26 pass-through, there is a dependency on load forecast 27 and load profiles to properly allocate the cost to the 28 customer. 79 1 PROFESSOR DEWEES: There is a 2 dependency on load profile, that's correct. But it is 3 not clear to me how that creates a risk for the MEO. 4 With respect to forecasting, although 5 I haven't seen any mechanics of how the draft code 6 would be implemented, my understanding is that the bill 7 would be determined based on the actual usage over the 8 course of the billing period. 9 So it is not clear to me the role of 10 forecasting, unless the distributor is going to be 11 offering equal billing as part of its service. 12 MR. MacODRUM: Turning to your own 13 recommendation of the smoothed spot price pass-through, 14 there is a financial risk just created by the smoothing 15 process. 16 PROFESSOR DEWEES: If you smoothed 17 for longer than the billing period the LDC winds up 18 performing essentially a banking function, just as MEUs 19 currently do with equal billing, just as gas companies 20 do with equal billing. 21 The smoothed spot price pass-through, 22 as recommended by the MDC, would require that if a 23 customer left default supply or standard supply 24 service, he would then calculate the actual usage by 25 that customer as at the date they leave, and the 26 average price or the price for the electricity being 27 consumed. So there would be a true-up, which could be 28 either plus or minus depending on how things had been 80 1 going and the customer would then pay for their 2 electricity use in total at that time. That does not 3 leave any risk on the distributor. 4 MR. MacODRUM: What time period did 5 the MDC assume between a meter reading taking place and 6 the LDC obtaining the information, the optical spot 7 price information from the IMO? 8 PROFESSOR DEWEES: Between a reading 9 of the distributor's meter or the customer's meter? 10 MR. MacODRUM: The customer's meter. 11 PROFESSOR DEWEES: I don't recall 12 that the MDC addressed itself to that question in 13 particular. 14 MR. MacODRUM: Would it surprise you 15 if you understood that distributors had been advised 16 that it will take 10 days to get preliminary 17 information and 20 days to get final information from 18 the IMO? 19 PROFESSOR DEWEES: I'm sorry, this is 20 from the IMO regarding what? 21 MR. MacODRUM: What the spot price 22 was on the period that the meter was read. 23 PROFESSOR DEWEES: I had not formed 24 an opinion on when they would do that one way or the 25 other. 26 MR. MacODRUM: If there is that delay 27 in getting the spot price information, doesn't that add 28 an additional financial risk and need for working 81 1 capital? 2 PROFESSOR DEWEES: Because there is 3 delay in the customer's bill and delayed payment by the 4 customer? 5 MR. MacODRUM: That's correct, 6 because you can't send the bill out for 10 to 20 days 7 after the meter is read, where customarily distributors 8 send out the bill the day after the meter is read or 9 perhaps at the most two days after the meter is read. 10 PROFESSOR DEWEES: Sure. The 11 distributor would then have to cover that period of 12 time or else there would have to be an estimate and 13 then a reconciliation, one or the other. 14 MR. MacODRUM: What risks did the MDC 15 assume that distributors take today in their purchase 16 and sale transactions? 17 PROFESSOR DEWEES: We talked about 18 the MDC-discussed credit risk. I don't recall other 19 risks that were discussed by the MDC. 20 MR. MacODRUM: Would it surprise you 21 if I indicated to you that their recent peak day, last 22 Monday, is estimated to have cost Toronto Hydro up to 23 $4.9 million because of the fact that we buy on a 24 demand and commodity basis and sell to a large number 25 of our customers on a strictly commodity basis? 26 PROFESSOR DEWEES: It is interesting. 27 I am not sure I am surprised. 28 MR. MacODRUM: So that in the present 82 1 supply and resale arrangement that the distributors 2 have, there is already a significant financial risk 3 which the distributors are able to handle. 4 Is that not correct? 5 PROFESSOR DEWEES: You have suggested 6 that. 7 MR. MacODRUM: Would you agree with 8 that? 9 PROFESSOR DEWEES: I don't have 10 firsthand knowledge about that. 11 MR. MacODRUM: As an economist, would 12 you agree with that? As a lawyer, as an engineer? 13 PROFESSOR DEWEES: As a lawyer, I am 14 sure I wouldn't agree with you. As an economist, I am 15 not familiar with the arrangements you have discussed. 16 If there is a difference between the 17 basis on which you are buying and the basis on which 18 you are selling, then I presume there is some risk 19 involved in that. 20 MR. MacODRUM: I would like to turn 21 to what the MDC might have considered in how an LDC 22 could address the question of its risk of purchasing 23 and reselling if it was reselling on a fixed price 24 basis. 25 Could an LDC not have a portfolio of 26 electricity supply contracts which matched its forecast 27 resale obligation, including appropriate financial 28 instruments, and therefore eliminate or greatly 83 1 mitigate any financial risk from selling at a fixed 2 price? 3 PROFESSOR DEWEES: Certainly the MDC 4 considered precisely that. The concern was on several 5 levels: one, once you establish a portfolio management 6 system, there are inherently some risks in that. If 7 you operate it perfectly you can control those risks. 8 But history is replete with examples of risk management 9 schemes that weren't quite perfect and that means that 10 there is inherently some risk in engaging in portfolio 11 purchase. 12 The SSS -- because the Market Design 13 Committee believed that customers should not be locked 14 in to SSS, there is a volume risk, that is, if there is 15 a fixed price SSS and the spot price drops below that 16 for a significant period of time, customers may decide 17 that they would rather have the spot price than the 18 fixed price, and if they are allowed to switch, then 19 they will leave. 20 So the question is: What sort of 21 contract has the distributor entered into? Is it a 22 requirements-only contract or is it a fixed-quantity 23 contract? 24 If it's fixed quantity, then the 25 distributor is left with having to buy some quantity 26 that is now out of market. It is a higher price than 27 the spot price and that is a substantial risk for the 28 distributor. 84 1 I think the important thing here is 2 that the position of the distributor in offering a 3 fixed price SSS is different from the position of a 4 retailer or the distributor's affiliate in offering 5 fixed price competitive contracts, because in a 6 competitive contract you can lock the customer in, you 7 can sign a one year or a two year -- I don't know how 8 long they go, but you can lock customers in for a 9 period of time -- whereas in order to encourage 10 competition, the MDC's design did not permit locking in 11 customers on SSS. 12 That means that there is a volume 13 risk there which either the distributor avoids by 14 entering into a requirements contract, which means a 15 higher price, or it faces that risk if it has entered 16 into a fixed quantity contract. 17 In any event, with customers coming 18 and going during the course of the year, the 19 distributor has to take back a customer that requests 20 FSS service, and customers may leave at any time. The 21 distributor would be continually having to adjust its 22 portfolio, selling off some power when customers leave 23 and buying more when customers come on. That means it 24 is going to be a regular participant in the energy 25 market, and it seems to me there are inherently some 26 risks associated with managing a portfolio in that 27 fashion. 28 MR. MacODRUM: So it was the MDC's 85 1 conclusion, then, that the local distribution companies 2 really weren't sophisticated enough to handle those 3 risks? 4 PROFESSOR DEWEES: It was the MDC's 5 conclusion that it was neither appropriate nor 6 necessary for the distributors to handle that risk. 7 Some may well be sophisticated, although I don't think 8 anyone with experience has had experience with doing 9 that sort of portfolio assembly in the face of a spot 10 market. The regime we have had in Ontario I believe is 11 quite different from the regime we are going to be 12 entering into. 13 It may be that some distributors have 14 or will have that sophistication. We used to have 270 15 and we used that much. I don't know how many we have 16 now, but it is still close to that number I believe. 17 It seems to me unlikely that all of them would acquire 18 that sophistication at the time of market opening, and 19 it would be irresponsible to require them to do 20 something for which they might be unequipped, whereas 21 passing through spot price would be relatively 22 straightforward by comparison. 23 MR. MacODRUM: You mentioned that you 24 didn't address the issue of LDCs that had their own 25 generation in any depth. Did you look at all, for 26 example, how a company like what used to be Gananoque 27 Light and Power, or Granite as it is now called I 28 believe, manages its risk where it buys from its own 86 1 hydroelectric generation? It has a gas-fired peaking 2 facility, so it has to play off the gas price and also 3 buys electricity from Ontario Hydro. 4 That seems to me like a fairly 5 sophisticated portfolio management operation that they 6 have been doing for a number of years, and they are not 7 really one of the larger distributors in the province. 8 PROFESSOR DEWEES: I am not familiar 9 with Gananoque. In fact, Gananoque was mentioned at 10 some point during our discussions, but not in great 11 detail as I recall, and I have no personal knowledge of 12 the complexity of that operation or of its 13 sophistication. 14 MR. MacODRUM: Did you look at all of 15 the other risks that are inherent in the business of 16 operating a local distribution company? I think of the 17 risks that are inherent in long-term capital programs, 18 having to construct facilities that may not be fully 19 used for 20 to 30 years, and the risks of changing 20 technology, particularly information technology. 21 A local distribution company is not 22 really a risk-free operation, is it? 23 PROFESSOR DEWEES: The advantage the 24 local distribution company has, both today and in the 25 competitive market, is that it is a regulated monopoly. 26 No one has suggested that we will have anything other 27 than one set of wires running down the streets, and the 28 White Paper and the Act recognize that both 87 1 transmission and distribution are going to continue to 2 be monopoly activities and therefore they will have to 3 be regulated. 4 When you have regulation, that 5 mitigates risk for the distributor, that is, the 6 distributor is not in a competitive position where it 7 makes an investment in a transmission line and somebody 8 else drives down the price of distribution, and so it 9 can't recover the cost of that line. I don't know what 10 procedures the OEB will use in regulating distribution 11 tariffs but, in general, if the distributor behaves 12 prudently, I would expect it to recover those costs 13 through their regulated tariffs. 14 MR. MacODRUM: So whatever risks the 15 LDC gets itself into, they can be mitigated by the 16 regulatory treatment of the LDCs? 17 PROFESSOR DEWEES: That is my 18 understanding of the way rate regulation typically 19 works, within reasonable limits. 20 MR. MacODRUM: If it is not 21 appropriate, in your view, for the LDC to bear the 22 risks, I take it that you feel it is, however, 23 appropriate for the customer to take the risks. 24 I would point you to page 4.5 of your 25 Q2 report, at the bottom of the page, where you say, in 26 talking about the spot price pass-through option: 27 "In this option customers take 28 all the risks of price 88 1 fluctuation, unless they turn to 2 a competitive retailer for 3 supply at a contract price as 4 discussed below." (As read) 5 So customers take all the risks. 6 Why are customers, particularly those 7 who are on fixed incomes, better able to take the risks 8 than the local distribution company? 9 PROFESSOR DEWEES: The local 10 distribution company gets all its money from its 11 customers, so its ability to absorb risks, it seems to 12 me, is no greater than that of its customers. If the 13 customers take the risks directly, they at least have 14 the benefit of what the MDC anticipated would be the 15 lower price under the spot price pass-through. It 16 seemed to us that it was not an unreasonable trade-off 17 to have, in general, a lower price and face some of 18 this risk. 19 The MDC didn't reach a conclusion as 20 to what proportion of customers would, under its 21 proposals, elect to choose competitive retailers. If 22 it turns out that customers really don't want to accept 23 the risks of price variation and are prepared to pay 24 the premium requested by retailers in order to avoid 25 those risks, that is what competitive retailing is for. 26 They can move to that. 27 My understanding of the MDC thinking 28 was that customers aren't locked into this forever. If 89 1 it turns out to be something that they don't care for, 2 they can move to competitive retailers, whether an 3 affiliate or otherwise. But particularly in the first 4 few years of the market where OPG is under a 3.8 cent 5 revenue cap I think many members felt that the risks 6 would be pretty small and that the customers would 7 prefer to have a low price in exchange for accepting 8 those risks. 9 MR. MacODRUM: In your analysis of 10 the chart you presented this morning, you really said 11 "Well, I think there will really only be competition 12 with respect to the large over 5 megawatt customers and 13 the general service customers", and that in the first 14 few years, at least, there wasn't really going to be 15 much retail competition with respect to the 27 per cent 16 of the market which you identified as residential. 17 I am just wondering, isn't that the 18 very sector of the market where you have pensioners, 19 people on disability allowances and welfare recipients 20 who are on fixed incomes? How are they going to cope 21 with a spot price pass-through type of system? 22 PROFESSOR DEWEES: I think, actually, 23 in the month that I made I was referring back to 24 Toronto Hydro's suggestion that retailers would have 25 great difficulty beating the spot price. If that is 26 the case, then very few retail customers will move to 27 competitive retailers and then the scenario that I 28 spelled out. 90 1 I would have a strong feeling as to 2 what customers would likely do, and it seems to me one 3 of the merits of the MDC proposals is that the market 4 will decide whether customers wish to face the price 5 variability or to go with competitive retailers for a 6 fixed price option. 7 Customers face variations in all 8 kinds of prices as it is. In fact, today a customer of 9 Toronto Hydro faces bill variability as a result of 10 differences in the quantity of electricity consumed at 11 different times of the year. Many people use more 12 power in the winter than they do in the spring and 13 fall. Certainly my electricity bill is larger in the 14 winter period than it is in spring and fall, and since 15 we don't have much air conditioning it is also pretty 16 low in the summer. 17 If you look at what happens to 18 consumer bills today, they vary significantly from one 19 season to another because of variations in quantity. 20 Many consumers seem to manage that quite 21 satisfactorily. 22 The analysis that was done for the 23 Market Design Committee of price variability suggested 24 that variations in customer bills arising from price 25 fluctuations was likely to be of the same order of 26 magnitude as the variation in customer bills arising 27 from quantity variations. 28 So it is not as if the Market Design 91 1 Committee's proposals impose a new level of risk unlike 2 that faced by consumers of electricity in the past. In 3 fact, from the evidence that was before us, it looked 4 as if the price variation risk was similar in magnitude 5 to quantity variation risk, which consumers currently 6 face. 7 In addition, some MEUs -- and I don't 8 know what proportion -- offer equal billing options for 9 their customers precisely to smooth over those quantity 10 variations, and I see nothing in the draft code that 11 would prevent MEUs from continuing to offer equal 12 billing plans under a spot price pass-through, in which 13 case the customer's bill could be pretty steady 14 throughout the year, as it is today with equal billing. 15 MR. MacODRUM: Is that just a 16 suggestion you are making today or was that a proposal 17 of the MDC that equal billing plans could continue with 18 standard supply service? 19 PROFESSOR DEWEES: As I recall, we 20 looked at equal billing as one of the smoothing 21 mechanisms. We left it to the OEB to decide how 22 smoothing should be done. As I read the draft code, it 23 neither requires nor prohibits equal billing. If I am 24 correct in that reading, it is up to the distributor to 25 decide whether it wishes to offer that service to its 26 customers. 27 MR. MacODRUM: Did the MDC look at 28 the various charges that exist that require an annual 92 1 forecast of electricity prices to be incorporated? I 2 am thinking of commercial and many residential rents 3 that have an electricity component to them, or, for 4 example, certain welfare payments and things like that, 5 that have an electricity component or a utility 6 component to them that require an annual forecast. 7 PROFESSOR DEWEES: No, I don't recall 8 that we looked at that issue specifically. 9 MR. MacODRUM: I would like to touch 10 upon something you just mentioned a little while ago, 11 and you refer to it again. 12 On page 8 of your submission, in the 13 first full paragraph, you say: 14 "In summary, the MDC concluded 15 that ... [standard supply] 16 customers would be best served 17 by a ... spot price, which would 18 give every household in Ontario 19 the full benefits of wholesale 20 competition." 21 What are the full benefits of 22 wholesale competition? 23 PROFESSOR DEWEES: I think one of the 24 principles underlying the entire restructuring exercise 25 is that by moving toward wholesale competition we will 26 provide incentives for generators to minimize their 27 costs, stronger incentives than exist under a monopoly 28 regime, and will therefore produce a wholesale 93 1 electricity price that is the lowest possible price for 2 consumers every day. 3 MR. MacODRUM: On page 3 of the 4 submission -- and you alluded to this earlier -- you 5 say: 6 "In addition, the MDC recognized 7 that the price/revenue cap 8 regime recommended by the MDC 9 for Ontario Power Generation ... 10 for the first few years of the 11 competitive market's operation 12 would pay rebates for any amount 13 over the price cap for most of 14 the OPG's share of the energy, 15 limiting the average cost to all 16 Ontario consumers to 17 approximately the level of the 18 cap. Therefore, customer 19 exposure to risks associated 20 with movements in the wholesale 21 price will be limited for the 22 first few years." 23 Your analysis is that there isn't 24 much wholesale risk in the first few years. 25 PROFESSOR DEWEES: I'm sorry, I 26 missed your last sentence. 27 MR. MacODRUM: Is your analysis that 28 there will not be much risk associated with the 94 1 wholesale market volatility in the first few years? 2 PROFESSOR DEWEES: My personal view 3 is that that risk is likely to be relatively small. 4 The uncertainty is the speed at which OPG moves to 5 decontrol. As you know, in our market power mitigation 6 measures we recommended that within 42 months Ontario 7 Power Generation be required to decontrol all but 8 35 per cent of its price-setting generation capacity. 9 By that time, the behaviour of the wholesale market 10 should be reasonably competitive. It is possible. 11 In fact, in our fourth report we 12 encouraged OPG to move faster than that 42-month 13 deadline. So it's entirely possible, depending on how 14 that works out, that the market may become fully 15 competitive or at least workably competitive before 16 42 months. If it does, as OPG decontrols its 17 price-setting plant, the price cap is reduced. 18 What is the effect of that going to 19 be? I think it does create some price risk, but, in my 20 view, that is largely down-side price risk. 21 Jack Gibbons was associated with this submission. I 22 guess it was a Pollution Probe submission that said 23 that the marginal cost of generation with coal-fired 24 power plants was around 2.5 cents. 25 If that's true and if the result of 26 any competitive market under decontrol of the 27 price-setting plants is that we move toward a 28 competitive price, that price is likely to drop from 95 1 3.8 cents downward. I think that is a risk that most 2 Ontario consumers would welcome. As decontrol is 3 achieved as the price cap comes off, it's also possible 4 that the price might go up, although I think that's 5 quite a bit less likely in a competitive market. 6 MR. MacODRUM: That is your personal 7 analysis, I think, as you put it today. 8 PROFESSOR DEWEES: Yes. 9 MR. MacODRUM: I would like to take 10 you back to what the MDC's analysis was when they 11 recommended the smoothed spot price pass-through. 12 Was the analysis on which they based 13 that recommendation being that the wholesale market 14 would not be very volatile? 15 PROFESSOR DEWEES: At the time when 16 the MDC first made the recommendation for a smoothed 17 spot price pass-through -- that was in the second 18 quarterly report submitted at the end of June 1998 -- 19 at that time, we had made only moderate progress on the 20 market power mitigation measures and in fact the 21 measure that we wound up recommending at the end of our 22 deliberations, I think, was not clearly in view at that 23 time. So when we first recommended the spot price 24 pass-through, I don't believe that the members of the 25 MDC had in mind the stabilizing effect of the Market 26 Power Mitigation Agreement. 27 My recollection on that isn't crystal 28 clear and there are several members of the MDC who are 96 1 present here today. They might have other views, but 2 my recollection is that that was not a central element 3 in our decision to recommend the smoothed spot price 4 pass-through. 5 The MDC, as I recall, was comfortable 6 with it, even without having thought through the 7 implications of market power mitigation. Near the end 8 of our deliberations, we re-affirmed the smoothed spot 9 price pass-through and at that time we saw what the 10 market power mitigation measure was going to be like 11 and I believe the members took additional comfort from 12 that. 13 MR. MacODRUM: So your analysis today 14 is that the lack of volatility in the wholesale price 15 makes the smoothed price pass-through option more 16 attractive? 17 PROFESSOR DEWEES: Yes. 18 MR. MacODRUM: Ms Lea, I am looking 19 at the clock. I am just through the first of my four 20 aspects and I wondered if perhaps you could advise me 21 of when you would like to take the luncheon break. 22 MS LEA: Well, I had thought of 23 around of 12:30. No fixed time was in my head. It's 24 now about five past 12:00 by that clock. You can let 25 me know sometime around 12:30. If there is a good time 26 for you to pause, that would be agreeable. 27 Thank you. 28 MR. MacODRUM: Thank you, Ms Lea. 97 1 The second area I would like to turn 2 to now is the question of retail competition. We have 3 just concluded that we are looking at either a smoothed 4 or a direct spot price pass-through which is going to, 5 at least in the initial years, have little price 6 fluctuation. I would like you to address how you think 7 that model will encourage retail competition. 8 PROFESSOR DEWEES: I think there are 9 two elements to that. Let me actually back up a step 10 to ask and then answer: What is the objective of 11 retail competition? My personal view -- and I think 12 this is a view of many, although not necessarily all of 13 the members of the MDC -- was that the purpose of 14 retail competition was to give consumers a good 15 combination of price and service. That's the end goal. 16 I don't think that anywhere we said 17 anything that suggested that having lots of competitors 18 or having lots of customers switch to competitors was 19 the right measure of successful retail competition. So 20 for me the starting point -- and, as I say, I think for 21 many, but probably not all members of the MDC -- the 22 question is how well a customer is being served. 23 The smoothed spot price pass-through, 24 the MDC believed, would offer a good price and, as you 25 have noted, because of the market power mitigation, at 26 least in the initial stages, a pretty stable price. 27 That seems to me to be a good deal for customers and I 28 think that the MDC was comfortable with spot pricing 98 1 partly because customers would be well served. 2 There is concern about volatility. 3 We spent a lot of time at the MDC talking about that, 4 discussing how great would price variability be, what 5 do consumers really want, how much of that are they 6 prepared to face. I think another source of comfort 7 with the SSS that the Market Design Committee proposed 8 was that if in fact customers are not content with 9 whatever price risk exists they can seek the services 10 of competitive retailers and get price security. 11 So that means if customers want it, 12 the competition will be there, that is, if there is a 13 demand for fixed price alternatives or more stable 14 price alternatives there is every indication that 15 retailers would be prepared to present it. As I 16 suggested earlier, I expect retailers will be pounding 17 on the doors of the large and medium-sized customers at 18 least. 19 We may, indeed, be doing that as soon 20 as we get our licences -- have they been issued -- when 21 they are issued, and that retailers who are engaged in 22 that business could easily move on to residential and 23 small general service customers should then be there. 24 The MDC didn't really have a perception of how much 25 retail activity there would be under this option, but 26 my sense was the members thought there would be about 27 as much as customers wanted. 28 MR. MacODRUM: If you turn to page 99 1 4.9 of your Q2 report, at the very bottom of the page 2 it says: 3 "When a consumer signs up with a 4 competitive retailer, the 5 consumer is choosing financial 6 terms and conditions of its 7 electrical service and perhaps 8 other valued services." 9 (As read) 10 So is your model of retail 11 competition that at least in the early years it's not 12 really price competition, it's over financial terms and 13 conditions and other value-added services? 14 PROFESSOR DEWEES: I think it's 15 clearly a combination of those things. 16 Certainly price is central, but other 17 terms and conditions may well be a basis for 18 competition. 19 For larger customers, we recommended 20 that metering be competitive. We could imagine a 21 service provider offering some combination of metering 22 price and energy management services. The MDC didn't 23 try to set limits on what the set of offerings from 24 competitive retailers might be, but it would be more 25 than price. I think everybody assumed that. 26 MR. MacODRUM: But taking into 27 account what you have said about the attractiveness of 28 the initial wholesale price as a result of the 100 1 arrangements that have been agreed to with OPG -- and 2 there isn't going to be much fluctuation around that 3 price -- how would there be much retail price 4 competition in the early years? 5 PROFESSOR DEWEES: I don't know how 6 much there is going to be. There were some 7 suggestions, both during the MDC and in some of the 8 submissions, that retailers may be able to secure power 9 at a price lower than the expected spot price. If they 10 can do that, then they should be in a position to 11 engage in some very serious price competition. I 12 confess personally to some skeptism about that, but I 13 would look to the market to tell us whether that's 14 possible. 15 MR. MacODRUM: Did the MDC consider 16 that there is an incentive in the 3.8 cent 17 arrangements, together with their recommendation for a 18 spot price pass-through based on the wholesale spot 19 price, to bring on new generation and cogeneration 20 projects? 21 PROFESSOR DEWEES: Did the MDC 22 consider that there was an incentive? 23 MR. MacODRUM: Their regime that they 24 proposed, did they feel it provided an incentive to 25 bring on new generation and cogeneration projects? 26 PROFESSOR DEWEES: The MDC's approach 27 to new generation and cogeneration was that those 28 decisions should be based on commercial considerations, 101 1 that they should be market-based and that new 2 generation should be encouraged by prices of whatever 3 sort, whether spot prices or contract prices, that are 4 sufficient to attract investors to building new 5 generation. 6 I don't think that the MDC took a 7 position as to whether 3.8 cents would yield 8 substantial amounts of new investment or not, but my 9 read on the MDC's approach to new generation was that 10 the market will decide whether new generation is needed 11 and we will see new generation coming onstream when the 12 price is above that which the new generation requires 13 in order to make the investment worthwhile. 14 MR. MacODRUM: You say the MDC 15 assumed the market will decide, but then you structured 16 the market in the initial years. Didn't the MDC direct 17 its mind to what impact that proposal was going to have 18 on attracting new generation and new cogeneration 19 projects? 20 PROFESSOR DEWEES: I don't recall 21 that we addressed it specifically in any report. There 22 was some discussion around the table. There was quite 23 a lot of discussion about new generation. Some of that 24 discussion was of the form that new generation is going 25 to be more expensive than 3.8 cents and so this price 26 won't encourage it. 27 One response to those suggestions was 28 3.8 cents is already above the competitive price -- and 102 1 this is following the sort of argument that the 2 Pollution Probe submission made -- so if we had a truly 3 competitive market on day one, the price would be even 4 lower and even less chance for new investment. The low 5 price means we don't need new investment. Why is the 6 price low? Because we have plenty of capacity. 7 Even with seven nuclear units made 8 up, OPG and other generators were able to meet the 9 recent demands during hot weather periods. If MAOP 10 works, if those nuclear plants come back, we have quite 11 a bit of generation available and if we have quite a 12 bit of generation, if we have as much as we need and 13 the result of that is that a truly competitive price is 14 not high enough to reduce other generation, it seems to 15 me that the price is sending exactly the right signal. 16 I don't personally have firsthand 17 knowledge as to what price a new generator would 18 require to build a new plant, but if 3.8 cents won't do 19 it, then waiting a while before those plants are built 20 strikes me as exactly the right thing to do because 21 there is no need for that power right at the moment. 22 MR. MacODRUM: Did the MDC do any 23 analysis of other jurisdictions that it used at spot 24 price pass-through and what the impact was there on 25 retail competition? 26 PROFESSOR DEWEES: We looked at all 27 the other jurisdictions we could find. One problem we 28 had was at the time, during 1998, there were in fact 103 1 very few jurisdictions that had achieved full retail 2 competition. 3 The U.K. was only moving toward it, 4 early this year I guess, or I believe they are there 5 now. New Zealand was moving in that direction. 6 California just came onstream in April or May of 1998. 7 Yes. We looked at other 8 jurisdictions to see what they were doing, but we 9 didn't find very much in the way of guidance. In the 10 case of California, they have a spot price 11 pass-through, but they also have a competition 12 transition charge, a stranded debt charge, that varies 13 inversely with the spot price so that the customer gets 14 a fixed price. Then they reduce the fixed price by 10 15 per cent so the customers will be happy. 16 The result of that is nobody can beat 17 that price, but that's not because of the spot price. 18 That is because they have essentially a regulated price 19 that was driven down 10 per cent. So we don't learn 20 anything about the effect of a spot price pass-through 21 from looking at the California market. 22 I don't recall that at the time we 23 met we found very much guidance from other 24 jurisdictions. As I recall -- I can't remember if it's 25 Argentine or Venezuela is using a spot price 26 pass-through. Interestingly, one of the effects of 27 restructuring that market has been quite a lot of new 28 generation. 104 1 MR. MacODRUM: Venezuela was the only 2 example you found that had used the model that you were 3 recommending. 4 PROFESSOR DEWEES: No, but I can't 5 identify now the range of mechanisms used by the 6 jurisdictions. Well, if I think about it, that may in 7 fact be true. There is probably a little experience 8 with that and I think we are moving toward breaking new 9 ground here, with others in breaking new ground. 10 I believe I recall one member at a 11 meeting saying it is presently concerned that -- 12 responding to some sort of reassurance about this new 13 spot price pass-through by saying in fact there is 14 little or no experience with this elsewhere. There is 15 now a bit, but it's not very much. On the other hand, 16 there's not a lot of experience with other mechanisms. 17 MR. MacODRUM: I would like now to 18 turn to the third aspect to explore with you. That is 19 the issue of the level playing field. You referred to 20 that in your presentation today. 21 Again in your submission on page 11, 22 you said at the bottom of the page: 23 "However, the MDC emphasized 24 that if a distributor chooses to 25 satisfy its SSS obligations 26 through a competitive affiliate 27 or other third party, the 28 appropriate protection methods 105 1 must be in place to ensure that 2 cross-subsidization does not 3 occur and a level playing field 4 is protected." 5 Would you agree with me that a level 6 playing field involves no party having an unfair 7 advantage? 8 PROFESSOR DEWEES: That sounds right, 9 no party having an unfair advantage arising out of the 10 design of the playing field. You have to distinguish 11 between a level playing field and equal teams. You can 12 have a level playing field and unequal teams and the 13 playing field is still level. 14 MR. MacODRUM: But you didn't look at 15 the advantages that the various participants bring to 16 the playing field. 17 PROFESSOR DEWEES: We certainly 18 talked. We had quite a bit of discussion about what 19 various participants might bring to the playing field. 20 MR. MacODRUM: For example, did you 21 take into account the fact that natural gas 22 distributors that wished to enter into the retail 23 competitive market already have a historic relationship 24 with the customers in, for example, an MEU service 25 area? 26 PROFESSOR DEWEES: Yes, we certainly 27 did. 28 MR. MacODRUM: That is an advantage 106 1 to them in selling that market, isn't it? 2 PROFESSOR DEWEES: I would presume. 3 I don't know how their customers feel about their 4 service, but assuming that that has gone well, I 5 presume it would be an advantage. There would be some 6 customers that would regard it as a disadvantage. 7 MR. MacODRUM: Certainly we 8 understand that in the market that Toronto Hydro 9 serves, there is an interest from major U.S. and other 10 foreign electricity suppliers with a large capacity to 11 cross-subsidize from other businesses into their entry 12 into the market and they have established technologies, 13 established brands, established products. 14 Don't they bring an advantage to the 15 retail market? 16 PROFESSOR DEWEES: If that's true, 17 they bring a competitive advantage. You are telling me 18 that there are some retailers out there who are going 19 to be pretty good at retailing. I would suppose, 20 because there is gas retailing both in Ontario and 21 elsewhere in North America and there is some 22 electricity retailing elsewhere in North America, I 23 would presume there are some players who have some 24 experience and capability in that area. 25 MR. MacODRUM: From your year's 26 deliberation, didn't you conclude from just who took an 27 interest in your work that players like Enron and 28 Southern Company and Duke and AET and Detroit Edison 107 1 and a whole list of them, British Energy, may be active 2 in the Ontario market? 3 PROFESSOR DEWEES: I can't vouch for 4 all of the names that you mentioned, but I believe most 5 members understood that there was considerable 6 interest, at least potential interest, in the Ontario 7 market, by various players in the energy industry. 8 MR. MacODRUM: And these players with 9 an established record in electricity markets bring 10 advantages that the local Ontario distributors don't 11 have. 12 PROFESSOR DEWEES: I think there are 13 sort of, if you will, competing strengths. The import 14 of your question, I guess, is that the local Ontario 15 companies don't have experience and competence. Was 16 that the implication? Did you say the others have 17 experience, capabilities and product established? 18 If the Ontario players don't have 19 that, it's something they have to overcome. On the 20 other hand, in our recommendations we did not prohibit 21 affiliates from using brand names that were similar to 22 those of the existing MEU. 23 I would presume that many MEUs have a 24 positive image and brand name and reputation for their 25 customers. I would think that would be a very valuable 26 asset that a retail affiliate would bring to retail 27 competition in Ontario. 28 MR. MacODRUM: But the staff proposal 108 1 which you are endorsing or which you feel is supportive 2 of the MDC's recommendations suggests that a LDC which 3 arranges for its affiliate to provide standard supply 4 service isn't going to be allowed to compete in that 5 market, its own market. 6 PROFESSOR DEWEES: That's right. 7 Frankly, I don't see why a distributor would do that so 8 long as the distributor can either do the standard 9 supply service itself or contracted a third party that 10 is not engaged in retailing to do the data processing 11 and thereby leave its affiliate free to compete as 12 extensively and vigorously as it wishes in its own 13 service area. 14 It seems to me that the draft code 15 doesn't prohibit affiliates from retailing in the 16 service area. It only says the affiliate has to choose 17 is it going to provide standard supply service or is it 18 going to retail, but it can't do both. 19 The reason, it seems to me, asking 20 the affiliate to make that choice or asking the 21 municipality to make that choice is consistent with the 22 MDC's concerns about cross-subsidy and preferential 23 access to information. 24 MR. MacODRUM: Any one of the 25 reasons, though, that distributors are looking to do it 26 through a retail affiliate is that the Act in fact 27 envisages that the right to do it directly will end at 28 some point in time. 109 1 PROFESSOR DEWEES: Yes. The Act 2 allows for that possibility. 3 MR. MacODRUM: Don't other major 4 customer service organizations -- I am thinking like 5 people like Sears and Canadian Tire and The Bay, 6 Zellers, aren't they going to be bringing very strong 7 assets and advantages into a competitive retail market? 8 I'm thinking of their billing and credit card customer 9 service systems. 10 PROFESSOR DEWEES: I have no idea 11 whether those companies are interested in the 12 electricity market in specific or the energy market in 13 general. If they were, I suppose they would bring 14 billing and credit card experience with them. 15 They would bring, I suspect, profound 16 ignorance of the electricity market which strikes me as 17 a substantial disadvantage, but as the MDC recommended 18 and as the draft code provides, I don't see any 19 limitation on what forums could get into the energy 20 retailing business so long as they are not already 21 privy to electricity customer specific information. 22 MR. MacODRUM: In using the analogy 23 of a level playing field, you said it's going to be a 24 level playing field but with unequal players on it, 25 that the level playing field was all that the Market 26 Design Committee was concerned with designing. 27 Aren't you, in effect, not just 28 designing the level playing field, but you are also 110 1 designing the strength of some of the players? You are 2 handicapping some of the players, aren't you? 3 PROFESSOR DEWEES: The draft code has 4 a uniform requirement that no one who provides, no 5 third party that provides standard service supply can 6 also engage in retailing. 7 It seems to me that's a rule of 8 general application to all parties. It would affect 9 Sears or Enron or Toronto Hydro's affiliate equally. 10 It seems to me that's perfectly fair. 11 MR. MacODRUM: But the proposed 12 Standard Supply Code only applies to existing 13 distributors. 14 PROFESSOR DEWEES: The Code applies 15 to existing distributors. 16 MR. MacODRUM: If it's going to be a 17 code that is attached to the distribution licence? 18 PROFESSOR DEWEES: Yes. 19 MR. MacODRUM: Isn't the effect of 20 that and the effect of your endorsation of the staff's 21 proposal or even the MDC's proposal itself, in effect, 22 to handicap one of the players on this so-called level 23 playing field? 24 PROFESSOR DEWEES: I'm sorry? I 25 don't see why. 26 MR. MacODRUM: What I tried to 27 suggest to you was you have got gas utilities who have 28 historic relationships with your customers that they 111 1 can exploit. 2 PROFESSOR DEWEES: If Toronto Hydro 3 has an affiliate, it has at least a brand name 4 associated with the historic relationship which I would 5 presume it can exploit. It doesn't seem to me there's 6 a difference there. I don't see a handicap there. 7 MR. MacODRUM: Remember your model. 8 You have got the retail segment not wanting to go 9 anywhere for the first few years. The competition is 10 all going to be in the large -- above 5 megawatts in 11 the general service. 12 PROFESSOR DEWEES: I didn't say it 13 was not going anywhere. I said that if customers are 14 content with the smoothed spot price pass-through, then 15 there would likely not be very much retail activity at 16 the residential level. I am not in a position to be 17 confident, but that's the outcall. 18 MR. MacODRUM: What you are saying 19 is, to that market which is going to be less inclined 20 to enter the competitive sphere that the local 21 distribution companies as part of their standard supply 22 offering be equivalent to, which your report says is 23 equivalent to existing rates and rate offerings, are 24 not going to be able to offer a combination of services 25 and price that is attractive to their customers and 26 their customers want? 27 PROFESSOR DEWEES: The affiliate can 28 offer that combination just as Enron or any other 112 1 retailer can. 2 MR. MacODRUM: You are saying they 3 can't offer it as part of their standard supply 4 service. 5 PROFESSOR DEWEES: No. 6 MR. MacODRUM: They are not going to 7 want to move to a competitive service? 8 PROFESSOR DEWEES: But if the 9 affiliate is allowed to market directly to the SSS 10 customers, then it seems to me that it is just a 11 playing field that nothing but affiliates will operate. 12 I don't see how anyone else is going to get into the 13 market if the affiliate provides standard supply 14 service and particularly if they do that on a fixed 15 price basis, even if it is through the smoothed spot 16 price pass-through and is in a position to market 17 directly to those customers using those data. It seems 18 to me that that is a market that will discourage any 19 other competitors from entering. 20 I am reminded of the experience in 21 PJM -- Pennsylvania and New Jersey area -- where they 22 have, I think unwisely, made standard supply service so 23 unattractive that people have to be allowed in in order 24 to get a good price and so there has been some 25 significant switching there. 26 The experience there is that half of 27 the customers who switch go with the affiliate of the 28 distributor. I don't know whether that experience 113 1 would generalize here; but if it did, that suggests 2 that the affiliates may do reasonably well. 3 MR. MacODRUM: What is the nature of 4 those? Are they owned by the communities in which they 5 serve? 6 PROFESSOR DEWEES: No. Those are 7 private investor owned utilities. 8 MR. MacODRUM: So the community 9 doesn't have the direct stake in them that they do in 10 Ontario. 11 PROFESSOR DEWEES: That's right. 12 MR. MacODRUM: Ms Lea, perhaps we 13 could break here. I do have part of this area and my 14 fourth area to cover, and perhaps we could resume that 15 after lunch? 16 MS LEA: Thank you very much, 17 Mr. MacOdrum. 18 Is an hour and a quarter for lunch 19 acceptable? Object now or hold your peace. 20 Okay. Thank you. 21 We will reconvene at a quarter to 22 2:00, a few minutes after quarter to 2:00 by that 23 clock, please. 24 --- Upon recessing at 12:32 p.m. 25 --- Upon resuming at 1:45 p.m. 26 MS LEA: Good afternoon. 27 MR. MacODRUM: Before I return to the 28 aspect that I was discussing with you before the lunch 114 1 break of the level playing field, I would like to get 2 two matters clarified. 3 Did the MDC view the smoothed spot 4 price option as a transitional option for standard 5 supply? 6 PROFESSOR DEWEES: No, I don't 7 believe it did. When the proposal was first 8 introduced, when we first considered it, there was some 9 discussion that it might be a transitional method, but 10 when we came to make a decision in June and then to 11 reassess that decision, my recollection is that the 12 committee members were thinking of this as the 13 mechanism for default supply or standard service. 14 MR. MacODRUM: That would be the 15 basis upon which standard supply would be provided 16 until a distributor could avail themselves of the 17 provisions of section 20.9.4 of the Electricity Act, 18 where the Board can exempt a distributor if the Board 19 is satisfied that there is sufficient competition among 20 retailers in the distributor service area? 21 PROFESSOR DEWEES: I don't recall 22 that we discussed what would happen in that situation. 23 MR. MacODRUM: Obviously, there would 24 be no obligation to provide default supply under that 25 circumstance if an exemption is obtained, so wouldn't 26 it logically follow, then, that the option would then 27 no longer have to be used by the distributor? 28 PROFESSOR DEWEES: I don't know. 115 1 MR. MacODRUM: When we discussed the 2 smoothed spot price pass through option before we 3 talked about the need for forecasts to implement that 4 option and that a forecast of spot prices would have to 5 be provided. Who would provide the forecast of spot 6 prices for the smoothed spot price pass through option? 7 PROFESSOR DEWEES: I don't recall, 8 again, that the MDC specified who would be responsible 9 for that, as between the OEB or the IMO, and here my 10 memory may simply be failing me. I would have to look 11 back at the report to see if we spoke specifically to 12 that issue. We talked about both of those, as I 13 recall, but I don't remember where we came out on that. 14 MR. MacODRUM: But it is the MDC's 15 view that it should be either the IMO or the OEB who 16 provides the forecast? 17 PROFESSOR DEWEES: Or who would 18 secure the forecast, whether they do the forecasting or 19 whether somebody else does. 20 But, as I say, my memory is not 21 crystal clear on that. I would have to go back and 22 review our reports to be sure. 23 As I understand the draft code that 24 we are discussing here, because the smoothing would 25 take place simply over a billing period, there is no 26 requirement for forecasting in order to implement this 27 draft code. 28 MR. MacODRUM: No, but there is a 116 1 requirement for there to be load profiles available to 2 allocate the spot price among various customers. 3 PROFESSOR DEWEES: That's right. 4 MR. MacODRUM: Just following that 5 up, the effect of that could be that, because you might 6 have an area load profile, there could be two customers 7 living side by side who have very different actual load 8 profiles, but they would get the same price charged to 9 them. 10 PROFESSOR DEWEES: That's right. As 11 with electricity today, two customers living side by 12 side would face the same price. 13 MR. MacODRUM: Returning to the 14 aspect of the level playing field, on page 15 of your 15 written submission, in the third last paragraph, the 16 sentence last sentence reads: 17 "Firms operating in a service 18 area will have to choose whether 19 to engage in competitive or 20 regulated activities, but they 21 cannot do both." 22 If you look at the structure of the 23 OEB Act where section 71 says that a municipal 24 distributor cannot retail except through an affiliate, 25 and then section 3 which restricts a distributor as 26 long as they are over 50 per cent municipally owned to 27 certain specific activities, including the retailing of 28 electricity, but does enable the municipal electric 117 1 utility to retail electricity, isn't your comment on 2 page 15 depriving a municipally owned electric utility 3 of one of the rights afforded to it under section 73 of 4 the Act? 5 PROFESSOR DEWEES: What the Market 6 Design Committee did in writing rules for the entire 7 market was to constrain the activities of participants 8 in the marketplace within the limits that had been set 9 by the legislation, that is, if the legislation was all 10 we needed, we wouldn't have had a Market Design 11 Committee, we would just pass legislation and the 12 market would start. The purpose of the Market Design 13 Committee was to provide lots of detail, and in this 14 area, as in others, the recommendations that we made 15 would require participants in the marketplace to act 16 within a more narrow set of constraints than is 17 provided by the legislation itself. 18 So it is true that the MDC 19 recommendations would foreclose some things that might 20 otherwise be provided in the Act, but that is not 21 unique to this area, that is true of many of the 22 recommendations that we made. 23 MR. MacODRUM: But the goal of the 24 government, as I read the legislation, and the 25 Electricity Act, which requires municipal electric 26 utilities to convert within two years of the 27 proclamation certain parts to a business corporation, 28 if that is all that were said there is no restriction 118 1 on the businesses that that business corporation could 2 get into under the Ontario Business Corporations Act. 3 PROFESSOR DEWEES: Okay. 4 MR. MacODRUM: An OBCA corporation 5 has the powers of a natural person and can get into -- 6 I am relying on your expertise as a 7 law professor here, Dr. Dewees. 8 PROFESSOR DEWEES: This sounds 9 familiar. 10 MR. MacODRUM: It has unlimited 11 businesses within the Province of Ontario that it can 12 get into, an OBCA corporation? 13 PROFESSOR DEWEES: At least a range 14 of businesses. 15 MR. MacODRUM: But then, the 16 compromise that was made and is reflected in section 73 17 of the Act, that as long as those business corporations 18 are owned more than 50 per cent by a municipal 19 corporation, they are restricted to the numerated 20 headings in section 73(1), which include the retailing 21 of electricity. 22 PROFESSOR DEWEES: Okay. 23 MR. MacODRUM: Is that your 24 understanding of the legislation? 25 PROFESSOR DEWEES: I haven't looked 26 at that part of the legislation for some time, but it 27 sounds plausible. 28 MR. MacODRUM: So what you are 119 1 saying, if I understand correctly your earlier 2 testimony, is that the MDC took it upon itself to 3 further restrict the restrictions that had been placed 4 upon municipal electric utilities by the Act, 5 restrictions that they wouldn't have to otherwise have 6 upon them if they had the full powers of an OBCA 7 corporation. The MDC took upon itself to further 8 restrict the areas of business that a municipally owned 9 OBCA corporation could get into. 10 PROFESSOR DEWEES: The MDC was 11 concerned, as I indicated earlier, about the risks of 12 cross-subsidy and preferential access to consumers, and 13 so it set restrictions on what affiliate companies 14 could do. That's correct. 15 MR. MacODRUM: Were you concerned at 16 all that those restrictions were contrary to the intent 17 of the White Paper and contrary to the language of the 18 statute? 19 PROFESSOR DEWEES: On the contrary. 20 I don't know what was in the minds of the various 21 members of the MDC, but it seemed to me personally that 22 what we were doing was perfectly consistent with both 23 the White Paper and with the legislation. The White 24 Paper talks about creating a level playing field. The 25 White Paper talks about not having preferential access. 26 And the Market Design Committee was trying to develop a 27 set of rules that would provide that protection. 28 MR. MacODRUM: In your presentation 120 1 this morning, in the slide entitled "The Effects of SSS 2 Design on Retail Competition", you say that the MDC's 3 purpose of retail competition is to provide the best 4 combination of price and service for the consumer. 5 At page 4.1 of what you call the Q2 6 report, you say -- and this is principle No. 2: 7 "Customers who do not wish to 8 make a conscious choice or 9 cannot receive service from a 10 competitive retailer should be 11 able to receive electricity 12 service from their local MEU 13 with service and price 14 attributes similar to what they 15 have historically received." 16 (As read) 17 What was the MDC's understanding of 18 the service and price attributes that customers had 19 historically received from their local distribution 20 company? 21 PROFESSOR DEWEES: I don't recall a 22 specific discussion of that phrase. The MDC must have 23 felt that what it recommended in the smoothed spot 24 price pass-through qualified, but I am not sure exactly 25 what the understanding of those particular words was. 26 MR. MacODRUM: Was the MDC aware that 27 a number of utilities -- and I am thinking here of the 28 former Toronto Hydro and Etobicoke and North 121 1 York -- offered and continue to offer a residential 2 time of use option? 3 PROFESSOR DEWEES: I suspect that 4 came up. I don't recall extensive discussion on it, 5 but I believe that at least a number of members were 6 aware of that. 7 MR. MacODRUM: Were you aware that 8 the take-up of that option by customers in each of the 9 utilities I have enumerated -- the former Toronto 10 Hydro, Etobicoke and North York -- has been 11 disappointing compared to the customers who, I think 12 the utilities expected, could realize savings from it? 13 PROFESSOR DEWEES: I am not familiar 14 with either the expectations or the take-up rate. 15 MR. MacODRUM: The MDC didn't look 16 into that at all? 17 PROFESSOR DEWEES: I don't recall 18 that we looked at it in any detail. 19 MR. MacODRUM: If that is the case, 20 if I am correct in that assertion, wouldn't that 21 indicate that customers historically want to receive a 22 flat rate, an annual price -- want annual price 23 stability? 24 PROFESSOR DEWEES: Again, I am not 25 familiar in any detail with the time of use pricing 26 program, but it was not my impression that that was 27 offered and advertised widely for general residential 28 consumers. As I say, I don't know what the practice 122 1 for that program was. It is not clear to me that 2 that's a fair test of the consumer interest in this 3 regard. 4 MR. MacODRUM: You are hurting us 5 deeply, Professor Dewees, because that says you don't 6 read your bill stuffers. 7 --- Laughter 8 PROFESSOR DEWEES: I actually have 9 one in my briefcase right now, which I have been 10 intending to read for at least two weeks. 11 MR. MacODRUM: Did the MDC do any 12 customer research to test whether a spot price 13 pass-through or the smoothed spot price pass-through 14 would meet customers' needs and desires? 15 PROFESSOR DEWEES: No, we didn't 16 commission any research of that sort. 17 MR. MacODRUM: You didn't do any 18 market surveys? 19 PROFESSOR DEWEES: No. 20 MR. MacODRUM: Did you do any focus 21 groups? 22 PROFESSOR DEWEES: No. 23 MR. MacODRUM: Did the Market Design 24 Committee look at the experience of the restructuring 25 of the natural gas industry and the introduction of 26 retail competition and the handling of system supply, 27 as it's called, the system supply customers in the 28 natural gas industry in Ontario? 123 1 PROFESSOR DEWEES: Yes, we had some 2 submissions from the natural gas industry about their 3 experience. 4 MR. MacODRUM: Hasn't the experience 5 been, with respect to retail competition in the natural 6 gas industry, that a large number of the smaller 7 customers, residential customers particularly, would 8 prefer a stable price from an established supplier, 9 even if that price is slightly higher than the prices 10 being offered by discounters and brokers? 11 PROFESSOR DEWEES: I don't recall 12 that from the discussions that we had. 13 MR. MacODRUM: Did you look at all at 14 what the impacts would be on the in-year fluctuations 15 in the bill of people on fixed incomes? 16 PROFESSOR DEWEES: We looked at what 17 the effect of the smoothed spot price pass-through 18 might be with in-year fluctuations in the bill 19 generally. 20 MR. MacODRUM: Would it surprise you 21 if I indicated that if you took an April and July, July 22 being the year to date, comparison that the residential 23 customer with -- and this is comparing an April load 24 profile for both examples, in Ontario and a PJM 25 example -- that the fluctuation would have been 12 per 26 cent for the customer between April and July on a 27 fixed-rate basis and 42 per cent on a spot price basis? 28 PROFESSOR DEWEES: Using what data 124 1 for the spot price? 2 MR. MacODRUM: The actual prices in 3 the PJM market. 4 PROFESSOR DEWEES: So you are 5 referring now to the PJM experience? 6 MR. MacODRUM: Yes. If you compare 7 the PJM using the same customer load profile for April 8 for both PJM and Ontario and the same, but different 9 from the April one, the same profile for July and make 10 a comparison, whereas there is a 12 per cent 11 fluctuation in Ontario -- well, these are Toronto Hydro 12 figures -- and a 42 per cent fluctuation if you factor 13 in a spot price comparison? 14 PROFESSOR DEWEES: I would expect a 15 fluctuation in Philadelphia in the PJM area to be 16 greater than here simply because it's a much warmer 17 climate and the summer air conditioning load is going 18 to be heavier down there, in general, than it is up 19 here. So I would expect more spring-to-summer 20 variability there than I would expect here. 21 MR. MacODRUM: We are using the same 22 load profile, though, for both. We are just varying 23 the price? 24 PROFESSOR DEWEES: Yes, but the 25 variation in price is driven in part by shifts in 26 demand and the demand increase in PJM I would expect to 27 be later in the summer. In general, my understanding 28 in the past is Ontario Hydro has frequently exported 125 1 power to the U.S. in the summer because we have a 2 winter peak and they have a summer peak. So I would 3 expect their peak prices to be higher in the summer 4 than ours would be. 5 MR. MacODRUM: Did the MDC consider 6 that under a spot price model customers with identical 7 consumption patterns, but with different meter-reading 8 dates, could have significantly different bills for the 9 same period? 10 PROFESSOR DEWEES: I don't recall 11 that issue specifically, but I would -- I am not sure 12 what phenomenon you are referring to. 13 MR. MacODRUM: The fact that it 14 varies with the actual -- the fact that it would vary 15 not just with different dates, but I am advised that if 16 you read the meters at different hours of the day it 17 would produce different bills for the same period? 18 PROFESSOR DEWEES: That's possible. 19 I would expect that over a number of meter reads these 20 things would average out, though. I don't sense in the 21 issue that you have identified any particular bias 22 either for or against an individual customer. 23 MR. MacODRUM: How would you suggest, 24 though, that the distributor explain this to neighbours 25 talking over the back fence or the Board handle the 26 calls to answer questions about this? 27 PROFESSOR DEWEES: At this point I 28 don't have any reason to believe that those differences 126 1 would be substantial. I wouldn't expect them to be. 2 MR. MacODRUM: As I understand your 3 analysis, you don't expect there to be in the early 4 years much wholesale competition. Is that correct? 5 Because of the 3.8 cent arrangement with OPG, there is 6 not going to be much -- 7 PROFESSOR DEWEES: It is not because 8 of the 3.8 cent arrangement. It's because on OPG's 85 9 or 90 per cent market share, this is not a competitive 10 structure. Until there is decontrol of a number of the 11 price-setting units for OPG, it's going to continue to 12 exercise considerable -- it will have considerable 13 market power. 14 MR. MacODRUM: Just as an aside from 15 that comment, when you talk about a smoothed spot price 16 pass-through or a spot price pass-through, in what 17 sense, given that market power, is the spot price a 18 competitively-set price? 19 PROFESSOR DEWEES: It will be a 20 competitively-set price to the extent that the market 21 becomes competitive, but it's a fact of life here that 22 as long as OPG has 85 or 90 per cent of the market, 23 whether it's spot price pass-through or negotiated 24 contract, we are dealing with a party that has 25 considerable market power. The exercise of that power 26 is limited by the 3.8 cent cap, but that doesn't make 27 it competitive. 28 MR. MacODRUM: So that initially at 127 1 least we are not going to have a competitively-set spot 2 price, but you are recommending a spot price-based 3 standard supply option? 4 PROFESSOR DEWEES: The proposal that 5 we made was to mitigate OPG's market power, limit its 6 pricing to 3.8 cents. We felt that was reasonable and 7 that, therefore, makes that a reasonable price to pass 8 through to end-use consumers. As price-setting plant 9 is decontrolled and the market becomes more 10 competitive, the price will move from a protected 3.8 11 cents to competitive, whatever competition produces. 12 MR. MacODRUM: Returning to page 6 of 13 your brief where you said: 14 "Having weighed the arguments, 15 the MDC recommended the smoothed 16 spot price. I believe that the 17 MDC choice is consistent with 18 the principle that the purpose 19 of competition is to provide 20 consumers with a desirable 21 combination of price and service 22 and with the belief that a 23 majority of consumers would 24 prefer a low smoothed spot price 25 to a higher fixed price. 26 Indeed, I view the assertion 27 that retailers may be unable to 28 beat the spot price as a tribute 128 1 to the smoothed spot price 2 pass-through. It means that 3 without effort small consumers 4 will have the best deal 5 available." 6 Based on that analysis, you are not 7 envisaging much retail competition, are you, in the 8 early stages? 9 PROFESSOR DEWEES: There are some 10 "ifs" there, but if that's correct, then I would not 11 expect much retail competition particularly at the 12 small end of the market. 13 MR. MacODRUM: So you are not 14 expecting much wholesale competition, you are not 15 expecting much retail competition, and even in that 16 climate you are recommending that a local distribution 17 company like Toronto Hydro be prohibited from providing 18 its existing customers with the full range of services 19 and prices and pricing options and financing options 20 directly or through its affiliate that they are 21 entitled to by the new legislation? 22 PROFESSOR DEWEES: They can offer all 23 of those things through the affiliates, as provided by 24 the legislation, but in the Standard Supply Service the 25 MDC recommended that customers be given direct access 26 to the wholesale market by passing through the 27 wholesale spot price. If customers really prefer a 28 more stable price, however stable this smoothed spot 129 1 price turns out to be, if it's a far more stable price, 2 they will be able to get that from retailers. 3 It's my view, and I think it was the 4 view of many on the MDC, that if we are going to 5 restructure and try to create competitive markets -- 6 and we tried to do that on a wholesale level, although 7 we realized it will be a few years before that 8 wholesale market is truly competitive -- then we should 9 set up retail competition that will provide for 10 competition, provide something straightforward for 11 consumers, but allow the market to decide -- that is, 12 allow consumer choice to decide -- when they prefer to 13 stick with the smoothed spot price or to move to a 14 different offering that is made available to them by 15 retailers. 16 If the standard supply service, the 17 SSS, is a regulated price -- that is, a fixed price -- 18 that would have to be regulated by the OEB. If that is 19 going to be a regulated price, then right out of the 20 box you haven't been able to move away from regulation 21 at the consumer level. The smoothed spot price, 22 because the price of the commodity itself comes right 23 from the wholesale market, means that the regulatory 24 role for the OEB is minor. 25 They have to regulate the 26 distribution tariff, they have to regulate whatever the 27 costs of administering this are, but the commodity 28 price itself is just a pass-through of the wholesale 130 1 price. Anything else means regulating the price of 2 electricity itself. That seems not to be moving 3 towards the competitive model that it seems to me the 4 White Paper is talking about. 5 MR. MacODRUM: But that's what they 6 have done with respect to the natural gas industry in 7 their review of system gas? 8 PROFESSOR DEWEES: That's right, but 9 gas is different from electricity. In the case of 10 electricity, it's produced the instant that it's 11 consumed. There is no storage, unlike natural gas, and 12 there is dispatch by the IMO of generation on an 13 hour-by-hour basis that will yield a market-clearing 14 price. They take bids, arrange them in the merit 15 order, and dispatch the least expensive power that will 16 satisfy the needs for that hour. 17 So the electricity dispatch and 18 wholesale market automatically generates a spot price 19 that reflects the marginal cost or at least the bid 20 prices of generation in every hour. There is no 21 comparable mechanism in gas. I don't know what you 22 would turn to. You couldn't turn to a market where 23 power is being bid in the way it is at the IMO and find 24 a spot price that you could readily pass through to 25 consumers. This is something that's different for 26 electricity and it provides an opportunity for a 27 Standard Supply Service that's different from what can 28 be done in natural gas. 131 1 MR. MacODRUM: The final area I would 2 like your help with, Professor Dewees, at the time of 3 the MacDonald Report and the White Paper, MEUs like 4 Toronto Hydro, and certainly Toronto Hydro, were 5 enthusiastic supporters of the move to wholesale and 6 retail competition. Certainly after the second report 7 of the Market Design Committee, we really questioned 8 whether our enthusiasm was well placed. The staff 9 report proposal shook that support even more 10 dramatically. 11 I wonder what you would advise us in 12 the light of your analysis at the MDC as to why a 13 distributor like Toronto Hydro should continue to 14 support these changes in the industry. 15 PROFESSOR DEWEES: I think you have 16 to ask the question: What are we trying to achieve 17 with these changes? My sense of the purpose of 18 restructuring was to provide for market-based decisions 19 on investment. That's one of the things that the White 20 Paper talks about, so that we don't have a regulated 21 utility making investments which can turn out to be 22 expensive or unneeded, the cost is passed on to 23 consumers, and providing incentives for the 24 participants at all competitive levels to look for 25 efficiencies to try to reduce costs to get lower cost 26 electricity for Ontario consumers. 27 If you are going to do that, the way 28 that restructuring works is by taking power away from 132 1 monopolists. You can't restructure the wholesale level 2 without OPG losing its ability to control parts. 3 We recommended decontrol over a 4 period of time so that the wholesale market would 5 become competitive, so there would be enough firms 6 bidding power into that market or selling it under 7 contract so that the price at the wholesale level would 8 be a competitive price. 9 Then the puzzle is: If you achieve 10 competition at the wholesale level, how do you get 11 these benefits to consumers? Some of the experience in 12 other jurisdictions suggests that if you don't have 13 retail competition, if retail customers don't have the 14 ability to choose, the benefits of wholesale 15 competition may not be passed down to them. They may 16 be absorbed at the distribution level. 17 The distribution is going to remain a 18 monopoly. Then why is business or transmission and 19 distribution still natural monopolies? You need a 20 mechanism to ensure that the benefits get passed to the 21 monopoly. 22 If the concern by MEUs is that they 23 don't want to give up monopoly power, then they would 24 oppose this restructuring or any other restructuring 25 that was effective. So I think the MEUs have to decide 26 are they prepared to abandon their monopoly over the 27 provision of power to customers. 28 They will have the power over wires. 133 1 That's a good business, an absolutely essential 2 business, and I presume the MEUs and their successors 3 will continue to operate those businesses well. Then 4 if they want to be in the retailing the business is 5 another question. I guess for me the puzzle is: 6 What's the sticking point for MEUs with respect to the 7 proposals on the competitive side? 8 You talked about a level playing 9 field and advantages and disadvantages. One way to 10 look at this would be to say it's about who has the 11 best position in the emerging market. I can understand 12 MEUs wanting to get the best position they can get, but 13 surely there has to be some limits on the position they 14 are offered if there is going to be an opportunity for 15 other competitors at all, if there is going to be a 16 truly level playing field. 17 I think the MEUs need to decide where 18 their interests lie and to what extent they really want 19 to participate in a truly competitive market and let 20 that guide their enthusiasm through this restructuring 21 process or not. 22 MR. MacODRUM: Thank you very much, 23 Mr. Dewees. 24 MS LEA: Thank you very much, 25 Mr. MacOdrum. 26 Dr. Dewees, I think the next 27 questioner then is Jack Gibbons. Just as a note, and 28 this isn't directed particularly at you, Jack, I would 134 1 ask all questioners that follow other questioners to 2 try and not to go over ground that has already been 3 covered or clarified by previous questioners. 4 We do have some time constraints upon 5 us, so we will try to proceed on that basis. 6 Thank you. 7 MR. GIBBONS: Thanks, Jennifer. 8 Don, as you know, I represent 9 Pollution Probe in this proceeding. 10 PROFESSOR DEWEES: Yes. 11 MR. GIBBONS: Don, in your paper you 12 have provided three rationales for choosing the 13 smoothed spot price pass-through as the SSS option: 14 first, to minimize risk to municipal electric 15 utilities; second, to minimize regulatory costs; and, 16 third, to achieve the lowest price for consumers over 17 time. 18 I would like to explore with you 19 those three rationales for deciding what should be the 20 SSS option. 21 If we could turn first to the 22 rationale of minimizing risk to municipal electric 23 utilities. 24 Under your proposal, the portfolio 25 would simply be the spot price, the spot purchases. 26 Another possible portfolio for the 27 municipal electric utilities would be a mixed portfolio 28 which would include spot purchases and a mix of medium 135 1 and long-term contracts which could have fixed prices. 2 That portfolio, as a regulatory 3 regime, could allow the municipal electric utilities to 4 pass all the costs of that portfolio, all the recently 5 incurred costs of that portfolio, on to their 6 customers. It could have a variety of supply options 7 in the mix, but doesn't imply necessarily that the 8 price the retail customer faces is fixed. They would 9 still be subject to certain price fluctuations, but 10 maybe less than a spot pass-through option. 11 I'm just wondering, under this 12 portfolio would this still be a low-risk portfolio or a 13 low-risk option for municipal electric utilities? 14 PROFESSOR DEWEES: I think it depends 15 on the terms and conditions in the portfolio contracts 16 that were blended in with a smoothed spot price. If 17 those contracts are fixed quantity, then there is the 18 risk that if the contracts are seriously out of market, 19 spot price drops unexpectedly, the nukes come back and 20 the price declines. Then the distributor faces the 21 risk that it has bought some power that is more 22 expensive than consumers want. They may leave. Then 23 the blended portfolio and those other straight spot 24 prices and the utility now is buying price at a fixed 25 level and having to sell it at spot, so there is a 26 risk. 27 As you made the fixed price portfolio 28 smaller and smaller, that risk becomes less and less, 136 1 but the benefit to consumers, if any, would become less 2 and less. Any time you introduce some fixed price 3 purchases, you then impose a regulatory regime. The 4 spot price comes out of the wholesale market. We don't 5 have to regulate that. 6 The IMO will be supervising the spot 7 market. For retail purposes, we can take that that as 8 competitive prices as we can have given the market 9 structure, but once you have power purchase portfolios, 10 then you have got to regulate. That gears up the 11 apparatus that we see today. 12 It's analogue to the OEB trying to 13 regulate the rate in the purchase portfolios and 14 potentially 270 distributors across the Province of 15 Ontario, and I believe one of the concerns of the MDC 16 was that's potentially very expensive. 17 I can't think of any other 18 jurisdiction that has the number of distributors that 19 we have that tries to regulate them in a way that would 20 be necessary to deal with even a blended portfolio of 21 the kind you have suggested. That means either 22 substantial costs from the OEB and substantial 23 aggregate costs from the distributors as they file and 24 respond and defend and appeal or it means the 25 regulation is not going to be very effective. 26 The distributors will simply assemble 27 a portfolio and pass that on to consumers and the 28 consumers will pay it. If it's high, well it's high. 137 1 There was concern about both of those 2 issues there, so there is a risk concern and there is 3 also a regulatory cost concern. It's not in the 4 portfolio, the level of the risk, but the regulatory 5 concern remains. 6 MR. GIBBONS: Okay, Don. I'm going 7 to get to the issue of regular cost in a minute. I'm 8 trying to focus now just on risk in municipal electric 9 utility. We can leave the mandatory cost issue for a 10 few minutes. I will come to that. 11 PROFESSOR DEWEES: Okay. 12 MR. GIBBONS: You certainly pointed 13 out how the portfolio that I have outlined with long 14 term and medium-term contracts could have imposed some 15 risks if there was a fixed quantity, but there are ways 16 that that can be mitigated. 17 MR. GIBBONS: Of course, 18 sophisticated municipal electric utilities, I think you 19 alluded to them in your opening remarks this morning, 20 is that not correct, that there could be ways to -- it 21 wouldn't be fixed quantities but that could be 22 mitigated? 23 PROFESSOR DEWEES: Yes. There is a 24 variety of risk mitigation measures that a 25 sophisticated utility could undertake. Part of the 26 concern in Ontario is: With 270 utilities, is it 27 reasonable to expect that all would be able to do that? 28 Even with a good risk management system, it doesn't 138 1 always work out. 2 Good risk management doesn't mean no 3 risk. It means you try to control the risk, try to 4 mitigate it, but I don't see a way to make the risk to 5 go away. 6 MR. GIBBONS: Oh, no, I was never 7 suggesting that, Don. 8 PROFESSOR DEWEES: Okay. 9 MR. GIBBONS: I'm just talking 10 about -- I certainly agree with you the spot price 11 pass-through is least risk. I'm just kind of trying to 12 explore with you whether there are other options that 13 aren't least risk but are acceptable risks or not too 14 high a risk. 15 If there are ways, and I am not 16 trying to suggest even that this is necessarily a 17 desirable option for 270 municipal utilities, but we 18 have a very wide range of municipal electric utilities. 19 We have Toronto Hydro which is a very large electric 20 utility, for example. 21 I am just wondering if with a company 22 of that size, this could be a low-risk option that they 23 could manage it, have a low risk option. 24 PROFESSOR DEWEES: I wouldn't want to 25 speculate on what the risk would be. I take the point 26 that if the -- as the proportion of fixed price power 27 is reduced, the risk is reduced. Maybe that's 28 acceptable. 139 1 The MDC in our deliberations 2 considered a variety of options. That was not one that 3 it found put forward to the smoothed spot price 4 pass-through. At this point I hadn't heard enough to 5 persuade me that I would prefer that myself. 6 MR. GIBBONS: Right. Don, I do 7 realize when we removed competition in the natural gas 8 industry in Ontario in 1985, the Ontario LDCs had long 9 term contracts with TCPL or its successor company. 10 Under that competitive market, when the LDCs lost 11 market share because customers went to non-LDC 12 suppliers, there was a mechanism to reduce the contract 13 volumes that the Ontario LDCs were obliged to purchase 14 from TCPL. 15 PROFESSOR DEWEES: I don't know the 16 details of that at all. I have heard of it. 17 MR. GIBBONS: Yes. 18 PROFESSOR DEWEES: I am just 19 wondering, you know, if there could be a similar 20 mechanism for an MEU here. 21 The problem is the draft code has a 22 particular mechanism which has been thrashed out pretty 23 extensively by the MDC and is getting considerable 24 hearing here and has received comments over a period of 25 time. 26 In order to choose something else, it 27 seems to me you need a totally thrashed-out alternative 28 examined in some detail. Could I imagine a mixed 140 1 system of the type you are suggesting? Sure, I could 2 imagine that. I don't know what it would be like 3 because without seeing a lot of detail, I would be hard 4 pressed to assess it. 5 MR. GIBBONS: Given the amount of 6 knowledge you have now, you couldn't make a categorical 7 statement that, "That is the end of it, I am stretched 8 out for you", would be a high risk or too high a risk 9 for an MEU, a large sophisticated MEU? 10 PROFESSOR DEWEES: My sense of the 11 MDCs' view is that it felt that the spot price 12 pass-through represented the appropriate level of risk. 13 This would be somewhat more of a risk. Would that be 14 appropriate? For myself, I'm not persuaded yet and I 15 wouldn't want to try to speak for the MDC on a 16 particular question that I don't think it addressed 17 precisely. 18 MR. GIBBONS: But you as a person and 19 as an economist don't have a view about the level of 20 risk this scenario I have sketched out would entail? 21 PROFESSOR DEWEES: No. I would need 22 more details to be able to do that. 23 MR. GIBBONS: Thank you. As you 24 know, the MDC has recommended the spot price 25 pass-through be available to all retail customers in 26 Ontario. 27 PROFESSOR DEWEES: That's right. 28 MR. GIBBONS: Let's assume that is 141 1 done and that option is available to all customers in 2 Ontario through their municipal electric utility or 3 through the Ontario Hydro Services Company. Let's 4 assume that option is available for everyone. 5 If certain municipal electric 6 utilities, presumably maybe the larger municipal 7 electric utilities, also wanted to offer their 8 customers another option, which would be this option I 9 have sketched out to you, "I have a mixed portfolio 10 which would have a mix of spot and medium and long term 11 contracts", would you see any municipal electric 12 utility wanting to do that, the Board of Directors 13 approving it, the shareholders approving it? Would 14 there be any harm in allowing that municipal electric 15 utility to do so? 16 PROFESSOR DEWEES: I see no harm 17 whatsoever in the municipal electric utility doing that 18 through its retail affiliate. It seems to me that's 19 exactly the place to make an offering of that sort. 20 There are two problems in trying to 21 do it through the utility. Number one, the MDC was 22 discussing defaults upon how we ask the question, 23 "What's going to happen to the customer who doesn't 24 choose, who doesn't fill out any forms, doesn't respond 25 to phone calls, solicitation and whatnot? What service 26 will they get?" You can't have two things that will 27 happen to that customer. It has to be one thing or 28 another. There can only be one standard supply 142 1 service, the standard supply service that those who 2 don't choose are going to receive. 3 It was the MDC's view that that 4 standard supply service should be the smoothed spot 5 price pass-through. Having decided that, we then spent 6 quite a lot of time discussing whether the distributor 7 should be allowed to offer something else. This isn't 8 the thing that would happen to people who don't choose, 9 but it would allow people to say, "I don't want the 10 standard supply offer. I want something else." 11 We debated whether a second offer 12 should be allowed and the MDC decided no, it should 13 not. I believe one of the reasons was that offering a 14 fixed price or semi-fixed price, which is what you were 15 suggesting, that sort of offering is exactly the kind 16 of thing that retail affiliates or other retailers 17 should be in the business of doing and it would confuse 18 things to have the regulated distributor engaged both 19 in the regulated function of passing through the spot 20 price and doing something that is exactly like what a 21 competitive retailer could be doing. 22 I think the MDC's recommendations 23 were consistent with the view that the distributor 24 should simply pass through the spot price -- that's the 25 default for those who don't choose or anyone else who 26 wants it -- and that anything more complicated can and 27 should be offered by an affiliate, if that MEU forms 28 one, or by another retailer in the province. 143 1 That is a clean division of 2 responsibility between the distributor and other 3 entities. 4 Going down the path you have 5 suggested, in a sense John Todd is one step farther 6 down the path, because in his submission he suggests, 7 if I recall, offering maybe three options through the 8 distributor. The more options the distributor has, the 9 less possibility there is for competitive retailers to 10 get into the business. 11 The MDC, in trying to strike a 12 balance between giving a good deal to consumers but 13 also providing opportunities for retailing, felt that 14 the right balance was the distributor has what offer. 15 That is the standard supply service, and anything else 16 is offered by retailers, whether affiliated or not 17 affiliated. 18 So those are the two problems that I 19 see and that I think the MDC saw in having two options 20 within the distributor. 21 MR. GIBBONS: Don, I certainly 22 understand the rationale for your proposal in terms of 23 simplicity, that it is the simplest option, but I am 24 wondering whether simplicity is being achieved at the 25 expense of other legitimate goals. 26 Under the option that I have sketched 27 out, the customer of the utility has two options, two 28 electricity supply options from his regulated utility. 144 1 And that gives him greater customer choice. One of the 2 benefits that is often linked with competition is 3 increasing customer choice. 4 So I would have thought that 5 increased customer choice would be another benefit. 6 Maybe you should comment on that one. 7 You also said that the fixed price or 8 the semi-fixed price could be an option that could be 9 provided by a non-MEO, by the competitive market. That 10 again is true. 11 The thing is, what the customer 12 doesn't get when he gets the fixed price or the partly 13 fixed price from some other company, some non-utility, 14 is he no longer gets a supply option which is regulated 15 by the Ontario Energy Board. 16 I would like to suggest to you that 17 for many small customers, being able to purchase an 18 option which is regulated by the Ontario Energy Board 19 provides significant benefits. Basically, they know 20 it's regulated by the Ontario Energy Board, and they 21 know they are getting a fair price. It removes them 22 from the need of shopping around. 23 For many small customers for whom 24 electricity is a small portion of their total consumer 25 purchases, for many of whom both adults are working and 26 have lots of responsibilities, they don't really want 27 to spend a lot of their time shopping around for the 28 best price and are really happy if the OEB can reduce 145 1 their transaction costs by just regulating these 2 different options and ensuring them that they are 3 getting a fair price. 4 PROFESSOR DEWEES: I think you are 5 worried about many people not wanting to spend much 6 time on making electricity choices, and I think that is 7 one reason why in other jurisdictions the rate of 8 switching to competitive retailers has been relatively 9 low. But we come back to the problem of the difficulty 10 of regulating this. 11 Customers may take some comfort from 12 the fact that the OEB is regulating. But if it is a 13 costly process, if it's a difficult process, if it's 14 not a very effective process -- all of which I think 15 are possibilities -- then the customer's sense of 16 security may not be terribly well placed. 17 So I am not sure that the customer 18 actually gains as much as he or she would like to from 19 that. 20 MR. GIBBONS: Sir, I take it that, at 21 least on a personal level, your objections, if any, to 22 having the MEUs offer two supply options are that you 23 believe the regulatory costs will either be excessive 24 or that the OEB won't really do a good job, or both. 25 PROFESSOR DEWEES: That is a concern 26 not just with offering the two offerings, but that was 27 one of the concerns that the MDC had with fixed price 28 offerings in general; and to a lesser extent with the 146 1 blended price offering that you suggested. 2 MR. GIBBONS: Thank you. Now let's 3 turn to the issue of regulatory costs. 4 Again, I certainly concede that your 5 proposal, the smoothed spot price pass-through, 6 minimizes regulatory costs. There are no regulatory 7 costs to speak of. 8 Let's try to examine this other 9 proposal, and let's try to figure out if the regulatory 10 costs would be significant. 11 Again going back to when the natural 12 gas industry was deregulated in Ontario in 1985, are 13 you aware that at that time there were three large 14 natural gas LDCs in Ontario? 15 PROFESSOR DEWEES: That sounds right. 16 MR. GIBBONS: When those utilities 17 were deregulated in 1985, all three of them went to 18 mixed portfolios, a combination of spot, medium and 19 long-term contracts. Those supply portfolios were all 20 regulated by the Ontario Energy Board. 21 PROFESSOR DEWEES: Yes, that is my 22 understanding. 23 MR. GIBBONS: Is it your 24 understanding that there was a general consensus that 25 the Ontario Energy Board did a good job of that 26 regulation? 27 PROFESSOR DEWEES: My understanding 28 is that that -- 147 1 MS LEA: I think I am going to object 2 to that question. 3 PROFESSOR DEWEES: I want to express 4 my deepest confidence in the degree of energy of the 5 Ontario Energy Board before I answer this question. 6 My understanding -- and I have not 7 been close to the gas industry myself -- is that in 8 fact that process has been a difficult one for the 9 participants and perhaps for the Board. 10 Part of the problem is: What is the 11 nature of a portfolio purchase arrangement? Somebody 12 comes in and says: "Here's what I bought. What do you 13 think?" 14 Well, what is the answer to that? It 15 looks good? It doesn't look good? Does the Board wind 16 up saying: "Well, you know, on this contract maybe if 17 you had pressed harder, you could have gotten a lower 18 price." 19 It is very difficult, I believe, for 20 the Board to try to evaluate regulation of that sort as 21 opposed to more traditional rate regulation say in 22 electricity, where you have some physical plant and 23 some capital operating and maintenance costs. You 24 submit those and ask for a rate of return, and the 25 Board can look at it and ask the question: Are these 26 costs reasonable? What is the rate of return? What is 27 the rate base? 28 There, you have something tangible to 148 1 grab on to. 2 Here, trying to judge the reasonable 3 purchases after the fact I think has proven difficult 4 for the Board, although there are others in this room 5 who participated in that process extensively and 6 perhaps can inform us better. 7 My sense is that the utilities 8 themselves have come to the point where they are not 9 excited about the process, partly because on occasion, 10 having made some purchases, they find that something is 11 disallowed. What do you do now? You bought the gas. 12 You can't undo that. And yet the Board says you can't 13 cover all that cost. 14 My understanding is that the gas 15 distributors are trying to move out of the standard 16 supply service precisely because with this regulatory 17 regime, they just haven't found it very attractive. 18 Again, I am not an expert on gas 19 regulation, that that is my sense of what has happened 20 there. 21 There was some discussion of that 22 history at the MDC, and I think that contributed to a 23 sense of unease at the MDC about trying to apply the 24 same process to electricity. 25 MR. GIBBONS: Don, do you think that 26 one of the reasons why the gas LDCs may be wanting to 27 move out of a regulated gas supply for their customers 28 that the Ontario Energy Board doesn't allow them to 149 1 make a profit on those gas supplies and that if they 2 could have all their customers move out to an 3 unregulated affiliate, they could make a profit on 4 those gas supplies? 5 PROFESSOR DEWEES: I don't know 6 enough about it to be able to comment on that. 7 MR. GIBBONS: Okay. 8 PROFESSOR DEWEES: I can easily 9 imagine that profit is on their minds somehow. 10 MR. GIBBONS: Yes. Getting back to 11 the issue of regulatory costs -- and again, I certainly 12 can see that your option is in minimizing regulatory 13 costs and some kind of mixed portfolio where the Board 14 has to scrutinize it with a high regulatory cost. I 15 can see that. The whole question is not whether or not 16 there is regulatory cost but whether the regulatory 17 cost may be less than the benefits of going this way. 18 I think you are quite right in saying 19 that if the Board allowed an option or MEUs could go 20 for a mixed portfolio of spot and medium and long term 21 contracts, it is reasonable to assume that not all of 22 them would take up that option. 23 It just seems to me that if the Board 24 created that option, there would be relatively few that 25 would take up that option. The possibilities are 26 companies like Toronto Hydro, which is very large; 27 maybe the G6 group, that I think Mr. Budd represents, 28 they might do it collectively; the Enerconnect group 150 1 might do it collectively. So far I have just listed 2 three groups or three companies that could do it. 3 I think it is reasonable to assume 4 that there would be a relatively small number of these 5 types of portfolios of supply contracts that the Board 6 would have to regulate. They would certainly be way, 7 way below 270. 8 I am just wondering, first, if you 9 think my assumptions are reasonable, and, if you do 10 think they are reasonable, could it be in the public 11 interest, or do you see any reason why the Board should 12 rule out that option just automatically without even 13 weighing the costs and benefits? 14 PROFESSOR DEWEES: I don't have a 15 good sense of how many MEUs would be interested in that 16 particular option. I would certainly be astonished if 17 it turned out that it was 270, or anything like that. 18 Beyond that, I don't have a basis for 19 judging how many there would be. Because we have so 20 many MEUs, certainly the risk is there that the more 21 who take up this option, the greater the regulatory 22 burden. 23 I think there would be some concern 24 about having a form of standard supply service that was 25 going to be available in some parts of the province and 26 not in others. That is a political problem, an equity 27 problem, and I am not sure how great that is. 28 The MDC is focused on looking for a 151 1 single approach that would be uniform across the 2 province. At this point, I think I would still favour 3 that in the absence of real evidence, in the terms you 4 put, that the downside is too great. At this point, I 5 don't see that. 6 MR. GIBBONS: So you are open to be 7 convinced, if a person can bring the case, that the 8 benefits would exceed these regulatory costs. You 9 wouldn't shut the door just on that matter of principle 10 or dogma. 11 PROFESSOR DEWEES: I try always to be 12 flexible on matters that I have to consider. I have 13 some concerns about the proposal. I think it is fair 14 to say that I could never imagine it. But at this 15 point, I still prefer what is in the draft code. 16 MR. GIBBONS: I would now like to 17 turn to the third and final criteria for the SSS, and 18 that is its lowest price. I believe you have made the 19 case that you believe that the smoothed spot price 20 pass-through will give customers the lowest price over 21 time, and that is one of the commendable features of 22 it. 23 PROFESSOR DEWEES: Yes. Just to be 24 clear, I believe it would be lower than a fixed price 25 SSS. I am not too confident that a retailer couldn't 26 simply undercut it with a fixed price/fixed quantity 27 offer. But with respect to an SSS offer, the MDC said 28 it thought that the smoothed spot would be lower than 152 1 an SSS fixed price offer could be. I agree with that. 2 MR. GIBBONS: Is it your belief that 3 it is in the public interest for a regulatory board 4 like the OEB to motivate municipal electric utilities 5 to purchase supplies of electricity which have the 6 lowest financial costs when the prices of electricity 7 do not include their external public health and 8 environmental costs? 9 PROFESSOR DEWEES: Yes, I do, subject 10 to three qualifications. 11 One, I was pleased that the MDC 12 recommended that the Ministry of the Environment should 13 set pollution limits for electricity generation, and it 14 specifically recommended a cap and trade program for 15 the relevant pollutants. It seems to me that is an 16 essential element in environmental protection. You 17 can't get the right amount of pollution if you don't 18 regulate it. The market by itself is not going to 19 provide that. That is why we have regulations on air 20 and water pollution throughout the province and that is 21 why the Market Design Committee recommended 22 specifically that pollution control measures be adopted 23 for the electricity generation industry. That is an 24 important qualification. 25 Second, here we are talking about 26 standard supply service, and there I think the 27 municipality, the distributor, should get the lowest 28 price. But, again, I was pleased that the Market 153 1 Design Committee recommended both green power marketing 2 and power labelling which would first allow retailers 3 to sell to consumers power that had particular 4 environmental characteristics, that qualified as green 5 power under the eco-logo definition, and that would 6 allow consumers to express their preference for green 7 power in the marketplace by paying for it. 8 Second, the energy labelling 9 recommendations would provide that all energy consumers 10 would see the environmental and fuel characteristics of 11 the power that they purchased. So that the consumer 12 who is on standard supply service would receive a 13 report with the electricity bill that showed the fuel 14 source and emissions that were associated with that 15 supply. This would allow competing retailers, whether 16 affiliated or otherwise, to offer a package of power 17 with a different price and also the different 18 environmental characteristics. 19 I think those are excellent things 20 for the competitive electricity market to do to allow 21 consumers to express their preferences for clean power. 22 Having said that, it seems to me that 23 the Standard Supply Service should be based on price. 24 If it turns out that is dirty power, hopefully energy 25 labelling will lead consumers to move away from it. 26 MR. GIBBONS: But, Don, as you 27 alluded to, according to chapter 7 of the MDC's final 28 report, the MDC's cornerstone environmental 154 1 recommendation was for the establishment of an air 2 pollution cap and trade program which would ensure that 3 the generation of electricity for Ontario would not 4 contribute to the degradation of air quality in the 5 province. You refer to that as an important 6 qualification for your commitment of purchasing at the 7 lowest financial cost. 8 If it isn't the case that before 9 competition starts in the year 2000 the government has 10 not established strict emissions caps for all of the 11 relevant electricity-weighted air pollutants, do you 12 still think it is in the public interest for the OEB to 13 tell the electric utilities that they must purchase 14 solely on lowest financial cost when that could mean 15 large purchases of coal-fired electricity? 16 PROFESSOR DEWEES: Certainly the 17 problem becomes more difficult then. 18 The MDC, as you correctly point out, 19 in its fourth report emphasized the importance of that 20 earlier environmental recommendation. If it should 21 turn out that the government is not pursuing that, the 22 problem then is, is there a reasonable second-best 23 strategy that makes sense? The risk with the proposal 24 to allow municipalities to purchase other than on the 25 basis of price is whether they are going to be in fact 26 accurately representing the wishes of their consumers 27 in balancing higher price and cleaner, if that turns 28 out to be what the choices look like. 155 1 It is certainly far preferable to 2 have a competitive electricity market and regulation 3 strictly limiting the emissions. Once you get into 4 saying that the lowest price isn't the only criterion, 5 I think there are big risks to consumers about cost 6 being raised for a number of purposes which seem 7 worthwhile, but may not in fact best represent the 8 preferences of those consumers themselves. 9 I think that is a very difficult 10 situation. 11 MR. GIBBONS: Let's explore that 12 situation and let's assume that Toronto Hydro, which is 13 a large municipal electric utility -- that the Board 14 gave Toronto Hydro the permission to offer the Standard 15 Supply Service option and a mixed portfolio like I have 16 talked about, which would include purchasing power from 17 the Boralex co-generation plant and some wind turbines 18 from the Lakeview new generation project. Let's assume 19 they did that. You postulate that the risk for that is 20 that consumers of Toronto Hydro may end up paying too 21 much for power. But under this scenario, if the 22 consumers don't like this mixed portfolio that we are 23 talking about, this mixed relatively cleaner portfolio, 24 they have the option of buying the spot price 25 pass-through option from Toronto Hydro, which is the 26 lowest, dirtiest cost option, or they have the option 27 of purchasing power from a non-regulated company, from 28 Consumers Gas or Sunoco or American Electric Power. 156 1 PROFESSOR DEWEES: I like your 2 proposal, except that I think the alternative that you 3 identified, which sounds to me like it could be an 4 attractive alternative, I think should be offered by 5 the retail affiliate, which Toronto Hydro has clearly 6 indicated they intend to set up and operate. I think 7 that is the body that should do the retailing of the 8 mixed portfolio, of the greener power, of, I would 9 expect, a whole variety of options. Leave the smoothed 10 spot as the Standard Supply Service and let the 11 competitive retailer offer a variety of products with 12 environmental and price characteristics and let's see 13 how consumers move to those. 14 If that is really what consumers 15 want, then they will buy it. If they aren't prepared 16 to buy competitively, then I am nervous about Toronto 17 Hydro or any distributor essentially force feeding it 18 to its SSS customers. And remember, I am still 19 uncomfortable with having more than one SSS, so I 20 wouldn't want to see that as the only SSS. If that is 21 the only one, then I think it should be on the 22 competitive side. 23 MR. GIBBONS: Let's explore this. 24 You are saying under the proposal that I am outlining 25 that customers are being forced to purchase the green 26 option and that is somehow wrong. Isn't it equally 27 valid to suggest, under your proposal, where the 28 default option is coal, that customers are forced to 157 1 purchase the dirtiest option unless they actually 2 positively elect to go to some other non-regulated 3 company and buy a cleaner source? 4 Under both cases there may be a 5 default option. You are saying that the best default 6 option is the dirtiest option. We are proposing a 7 default option which is cleaner than the dirtiest 8 option, and under our option, if they don't like it, if 9 they really don't like paying slightly more for 10 electricity to get cleaner air, they are free to go to 11 the SSS or they are free to go to a non-regulated 12 supplier. What is wrong with that any more than your 13 proposal? 14 Both may limit customer choice -- 15 MS LEA: Mr. Gibbons, I don't wish to 16 cut anybody off during this proceeding, but, remember, 17 this is an attempt to get clarification from 18 Dr. Dewees, not to debate the issues with him. We 19 certainly hear the debate of the issues in time. So if 20 you could try to restrict your questions to 21 understanding Dr. Dewees' position -- 22 MR. MARK: When might that be? 23 --- Laughter 24 MS LEA: Oh, well. My instructions 25 are -- 26 If you could attempt to restrict your 27 questions to clarification at this time. Thanks very 28 much. 158 1 MR. GIBBONS: Do you want to respond, 2 Dr. Dewees? 3 PROFESSOR DEWEES: Sure. 4 There are several things at play 5 here. The MDC, I believe, was trying to maintain some 6 separation between environmental regulation, which it 7 said should be the responsibility of the Ministry of 8 the Environment to do, and do it right, providing 9 standard supply of service, which it said should be the 10 responsibility of the distributor and can build simply 11 on the smoothed spot price, and retailing competitive 12 products, which the Market Design Committee fully 13 anticipated would include green power, that should be 14 done by retailers, whether affiliated or 15 non-affiliated. 16 Once you start breaking down those 17 divisions, then all of the concerns about 18 cross-subsidy, about consumers subsidizing high-cost 19 production it seems to me come into play. So my 20 preference would still be to try to keep them separate, 21 but to encourage Toronto Hydro or any other utility, 22 through its retail arm, to aggressively market green 23 product. I would be delighted to see that and see it 24 working very successfully. 25 MR. GIBBONS: Don, could you just 26 explain to me, if Toronto Hydro had two options, the 27 spot option and the cleaner option, why there would 28 necessarily be a cross-subsidy? 159 1 PROFESSOR DEWEES: I am not sure that 2 between those there would be a cross-subsidy. My 3 concern is with what you described as the cleaner 4 option. Once that has opened up, how do we prevent the 5 distributor from simply investing in slightly above 6 market generation, new generation, because it wants to 7 build some new generation, passing that cost on to its 8 SSS customers, whether cleaner or not? 9 I think we have worked hard in 10 restructuring to put the risks of new investment on 11 investors and I am concerned, and I think the MDC 12 recommendations reflect the concern, about attempts to 13 come back and load those new investment risks on to 14 default or standard supply service customers. That is 15 an area of real concern. 16 MR. GIBBONS: Thanks, Don. Those are 17 all of my questions. 18 MS LEA: Thank you very much, 19 Mr. Gibbons. 20 Mr. Adams, how long do you expect to 21 be? We are thinking of a break in about 15 minutes. 22 MR. ADAMS: I will be finished in 15. 23 MS LEA: Thank you. 24 MR. ADAMS: My name is Tom Adams. I 25 represent Energy Probe. 26 The procedures for this discussion 27 group have not permitted those parties in support of 28 the Board staff's position and Dr. Dewees' position to 160 1 put their position on the record, and I will do that 2 now, in advance of asking two brief questions. 3 Energy Probe supports the position 4 that Dr. Dewees has articulated, out of concern for the 5 regulatory complexity of fixed price options, and also 6 view that SSS, through spot price pass-through, is 7 likely to be the cheapest long-term option for ordinary 8 consumers. 9 We are very concerned about the many 10 proposals articulated by the critics of the spot price 11 pass-through that, in our view, are simply arguments 12 for increasing prices. 13 We share the view of those spot price 14 supporters that a spot price pass-through will provide 15 economically efficient prices to the best of the 16 ability with the metering technology that we have in 17 the field. 18 Finally, we also support the views 19 that Dr. Dewees has articulated with regard to having 20 environmental protection undertaken as the 21 responsibility of the appropriate authorities, which is 22 not the Ontario Energy Board. 23 Dr. Dewees, there are just two areas 24 that I want to ask you to expand on slightly. 25 In your presentation you discussed 26 the implications for a fixed price distributor offering 27 in the event that market prices fall and customers exit 28 the regulated supply, creating, effectively, a stranded 161 1 cost. 2 Walk us through the implications for 3 an open fixed price offering in a situation where 4 market prices rise. What would you expect to see 5 happen? 6 PROFESSOR DEWEES: If the standard 7 supply service is at a fixed price and the spot price 8 rises over not just a few days, but over a period of 9 time, then when the spot price is above that fixed 10 price offering one would expect to see -- 11 If the SSS is a fixed price, 12 consumers on SSS will stay there as the spot price 13 rises, because there is no reason for them to leave. 14 If the spot price falls, presumably they will leave SSS 15 to take the straight spot pass-through, or competitive 16 offerings if those competitive offerings have dropped 17 below. That then means that the quantity that is going 18 to be taken under SSS is potentially quite variable, 19 varying inversely with the spot price -- varying 20 directly with the spot price. 21 MR. ADAMS: Can you outline the 22 customer mobility advantages of the spot price 23 pass-through for competing commercial retailers? 24 PROFESSOR DEWEES: I think there are 25 a couple of advantages for competing retailers, whether 26 affiliated or not affiliated, in the smoothed spot 27 price pass-through. 28 One is that the distributor has no -- 162 1 because all the distributor is doing is recovering 2 costs, the distributor doesn't have an incentive to try 3 to prevent the customer from leaving. 4 One thing that has happened in other 5 jurisdictions is that a distributor that's offering a 6 fixed price which just happens to have some profit in 7 it leaves the distributor very keen not to have those 8 customers leave and distributors in other jurisdictions 9 have shown some substantial ingenuity in creating 10 roadblocks for competing retailers who try to sign up 11 customers, actually getting those customers 12 transferred. So there is concern that a fixed price 13 offering could lead to that sort of behaviour on the 14 part of the distributor discouraging other retailers. 15 The other is that one of the 16 marketing advantages that a retailer offers, whether an 17 affiliate or independent, under the draft Code is price 18 stability. There is no doubt that is going to be a 19 concern. A big concern, a little concern we are not 20 sure, but if the SSS is a fixed price, then that takes 21 away one of the marketing tools that any retailer, 22 including an affiliate, would have. It seems to me 23 that that reduces the likelihood of competing retailers 24 emerging or succeeding in Ontario. 25 MS LEA: Thank you very much, 26 Mr. Adams. 27 Mr. Stephenson, did you wish to begin 28 at this time? 163 1 MR. STEPHENSON: I think I am going 2 to be quite short, so why don't I start and if it 3 carries on, you will cut me off. 4 Professor Dewees, I think you had 5 indicated that one of the effects of the smoothed spot 6 market pass-through mechanism, whether or not it's the 7 purpose of it, but one of the effects of it is in a 8 sense to produce a postage-stamp commodity price in 9 Ontario in the sense that it will be uniform 10 geographically. 11 PROFESSOR DEWEES: Yes. To the 12 extent that the wholesale price is uniform 13 geographically, which it will be during the first 18 14 months of this market, then the SSS would be uniform 15 geographically. 16 MR. STEPHENSON: Let's look at it the 17 other way. If there were a fixed price SSS that was 18 the same for all LDCs in Ontario, there was a single 19 fixed price for whatever period of time it was in 20 place, can you assist us in what the implications of 21 that would be in terms of the effects of that on the 22 various LDCs in Ontario ranging from the smallest to 23 the largest if the offering was a single fixed price 24 geographically? 25 PROFESSOR DEWEES: I think the 26 problem that you raise is how to implement the single 27 fixed price all across the province were the OEB to 28 decide that the SSS should be, say, 3.8 cents plus 164 1 administrative costs. If distributors across the 2 province have to purchase portfolios of power in order 3 to meet that, even if the OEB has done its job very 4 well, presumably those portfolio purchases are going to 5 be at different prices. It would be kind of surprising 6 if everybody managed to make the same deal. 7 Very large MEUs may be more 8 successful in bargaining than some of the small ones 9 would be, so they would wind up with different purchase 10 prices, but we would then have to supply their 11 customers at the same price. If the OEB-regulated 12 price is sort of in the middle, then you have some 13 distributors losing money and some distributors making 14 money. 15 Alternatively, the OEB-regulated 16 price could be equal to the highest price that the 17 worst negotiator in the province managed to secure, 18 which would mean a pretty high price falling on 19 consumers and real profits for every other distributor 20 in the province, thereby raising the concern about 21 distributors' lack of enthusiasm for customers leaving 22 more than anything else. 23 So we looked at the single price 24 across the province, but it's a puzzle as to how to 25 move from that simple attractive notion to actual 26 implementation in the real world and make it work and 27 be fair both to all customers across the province and 28 to all the distributors across the province. My 165 1 recollection is that we didn't see how that would 2 achieve all the objectives. 3 MR. STEPHENSON: Thank you. 4 Moving to another area, as I 5 understand it, obviously one of the things that the Act 6 provides is that a utility can provide SSS through an 7 affiliate. As I also understand -- I believe it was an 8 MDC recommendation and it's certainly in the draft 9 Code -- that if they choose to do that, then the 10 affiliate may not engage in competitive retailing 11 activities within the service area of the SSS. I think 12 I have that right. Is that right? 13 PROFESSOR DEWEES: Yes, that's right. 14 MR. STEPHENSON: Okay. 15 From the perspective of the MDC and 16 its considerations, did it recommend anything that 17 would inhibit or restrict the ability of an LDC or a 18 utility to set up two separate affiliates, one of which 19 would engage in SSS activities within the service 20 territory and the other which would engage in 21 competitive retailing anywhere in the province? 22 PROFESSOR DEWEES: No, there is 23 nothing in our recommendation that would prohibit that 24 and, indeed, during the extended discussions that we 25 had at the MDC about this set of issues, exactly that 26 alternative was raised and I think it was acknowledged 27 that any municipality could set up two affiliates, one 28 to do the SSS and the other one to do competitive 166 1 retailing. 2 MR. STEPHENSON: In terms of the 3 draft Code, do you see anything there that would 4 inhibit the ability of a utility to structure itself in 5 that form? 6 PROFESSOR DEWEES: No, I don't. 7 MR. STEPHENSON: Similarly, in terms 8 of having a third party provide SSS, I understand the 9 draft Code contemplates that scenario. Am I right 10 about that? 11 PROFESSOR DEWEES: Yes. 12 MR. STEPHENSON: In that scenario, 13 would there be anything which would impede a utility 14 from setting up an affiliate to engage in competitive 15 retailing anywhere in Ontario? 16 PROFESSOR DEWEES: The municipality 17 would be perfectly free to do that, as I understand the 18 draft Code. 19 MR. STEPHENSON: The last item I have 20 for you is I understood that in terms of the issues 21 relating to the limitation on third parties, one of the 22 issues that you were concerned about was that there be 23 no preferential access to customer data. Is my 24 understanding on that right? 25 PROFESSOR DEWEES: That's correct. 26 MR. STEPHENSON: As I understand it, 27 that issue can be resolved in, fundamentally, one of 28 two ways: either nobody gets the utility's customer 167 1 information -- that is, neither the utility's affiliate 2 nor any other retailer -- or, in the alternative, 3 everybody gets it in the sense that there is certain 4 information which any licensed retailer would be able 5 to access, some body of information. Would you agree 6 with me that either of those two alternatives deal with 7 the issue of the preferential access to the 8 information? 9 PROFESSOR DEWEES: Yes, I would. The 10 MDC talked some about the widespread provision of that 11 information and one of the recommendations of the MDC 12 in the second quarter report was that customer 13 information should be kept confidential, except with 14 express written authorization. There was concern 15 around the table about the idea of making customer 16 lists widely available. 17 With great respect to the gas 18 industry, I think some people had some recollections of 19 marketing experiences in gas and were concerned about 20 being besieged -- about the electricity consumers 21 across the province being besieged by marketers, all of 22 whom had just gotten the customer list. So there was 23 not a lot of enthusiasm for the broadcast of that 24 information. But, you are right, both of those methods 25 deal with the under-advantage issues. 26 MR. STEPHENSON: Just to be clear 27 about that, this issue concerning the broadcasting and 28 the concerns about the broadcasting, I take it those 168 1 are driven by, in essence, privacy-related concerns on 2 the part of individual customers, but not by, shall we 3 say, market-design concerns? 4 PROFESSOR DEWEES: That's right. 5 Those are concerns about privacy issues rather than 6 market-design or competition concerns. The unfair 7 access is a competition concern, but not this one. 8 MR. STEPHENSON: Okay, thank you. 9 Those are my questions. 10 MS LEA: Thank you, Mr. Stephenson. 11 I have been asked by several parties 12 to get time estimates for those folks who intend to 13 question Dr. Dewees. I wonder if during the break 14 those people who are intending to ask questions of 15 Dr. Dewees could come up and tell me how long they 16 expect to be. If I am not here, just write it down on 17 this piece of paper what time estimates. It's just 18 sitting on my desk here. Thanks very much. 19 Let's take a 20-minute break, please. 20 At 25 to 4:00 we will be returning. Thank you. 21 --- Upon recessing at 3:15 p.m. 22 --- Upon resuming at 3:35 p.m. 23 MS LEA: I don't see Mr. Budd here. 24 Doesn't anyone know if he is prepared to begin his 25 questioning now? 26 Whoever is here can begin. Who is 27 ready to begin? There is also the gentleman from 28 Chatham-Kent I think who is sitting next to Mr. Budd. 169 1 Is he ready to begin? 2 You are there. I beg your pardon. I 3 wasn't sure. Mr. Mark. 4 MR. MARK: Dr. Dewees, I have a note 5 of a response you gave I believe to Mr. Stevenson 6 toward the end of his questioning, that one of your 7 problems with a fixed price standard supply regime was 8 that it would be difficult to have uniform pricing 9 across the province. Did I understand you correctly? 10 PROFESSOR DEWEES: Yes. 11 MR. MARK: Where in the legislation 12 do you find the imperative or the guideline that there 13 is to be geographical uniformity in pricing? 14 PROFESSOR DEWEES: I don't recall 15 that being a requirement in the legislation. 16 MR. MARK: I take it, sir, you 17 understand that in the competitive service environment 18 there will not be geographical uniformity in pricing. 19 PROFESSOR DEWEES: I would not expect 20 it to be perfectly uniform across the province. 21 MR. MARK: That's right. I will ask 22 again: What is the basis, sir, for your presumption 23 that geographically uniformity should be an objective 24 of the standard suppliers? 25 PROFESSOR DEWEES: My comment was a 26 reference to concerns raised by one or more MDC members 27 when we discussed the alternative pricing regime. One 28 of those concerns held by some MDC members was that 170 1 this would introduce non-uniform pricing across the 2 province. 3 MR. MARK: I take it, sir, we are 4 agreed that in the competitive environment that is 5 envisioned down the road, the uniformity of pricing 6 across the province is not going to happen and is not 7 one of the objectives, correct? 8 PROFESSOR DEWEES: I'm not aware that 9 it's an explicit objective of that competitive regime, 10 but it was a concern of some members of the market 11 design committee. 12 MR. MARK: On the topic of concern of 13 members of the market design committee, am I correct, 14 sir, that the issue of standard supply service was one 15 of the issues on which there was not consensus at the 16 MDC? 17 PROFESSOR DEWEES: The recommendation 18 for a smoothed spot price as they developed the buy or 19 standard supply service was approved in June by a 20 substantial consensus of the Market Design Committee. 21 MR. MARK: I'm advised, sir, that 22 there were several members of the market design 23 committee who were not in support of the smoothed spot 24 price. Do you say that's not the case? 25 PROFESSOR DEWEES: The substantial 26 consensus was not unanimity. I don't recall the 27 specific vote, but I believe there was substantial 28 consensus, but there was some opposition. 171 1 MR. MARK: Now, you indicated a 2 moment ago that there was nothing in the legislation 3 dealing with geographical uniformity, but let me ask 4 you this, sir: Did you undertake a review of the MDC's 5 standard supply service proposal in terms of its 6 conformity with the legislation? 7 PROFESSOR DEWEES: Did I undertake a 8 review? 9 MR. MARK: Well, let's start with 10 that. Did you yourself, sir? 11 PROFESSOR DEWEES: Just now you mean? 12 MR. MARK: No, when you were doing 13 your work or when you completed your work, did you sit 14 down and say, "Well, we have had this discussion about 15 the standard supply service. Now let's go back and 16 touch base with the legislation and see if we conform 17 with its requirements"? 18 PROFESSOR DEWEES: Yes. We looked at 19 the legislation as we were discussing standard supply 20 service. 21 MR. MARK: Did you get the advice of 22 counsel with respect to the conformity of the proposal 23 with the legislation? 24 PROFESSOR DEWEES: We sought the 25 advice of counsel on a variety of issues from time to 26 time. I simply can't recall the extent to which we may 27 have sought the advice of counsel on specifically the 28 standard supply service issue. I don't remember. 172 1 MR. MARK: You indicated in one of 2 your comments earlier today, sir, and I want to make 3 sure I have it right, that you expected that once there 4 is decontrol of generation pricing, you expected that 5 prices would go down. 6 PROFESSOR DEWEES: That's my 7 expectation. It's not a forecast, but that's my 8 expectation. 9 MR. MARK: Was that a working 10 assumption that you had when doing your work on this 11 matter at the MDC? 12 PROFESSOR DEWEES: Now we are talking 13 about me personally, or are you talking about the MDC 14 in general? 15 MR. MARK: Either. Firstly, what 16 about yourself? 17 PROFESSOR DEWEES: We had some 18 discussion at the MDC about the relationship between 19 the 3.8 cents and what a competitive price would be. 20 My recollection is that there was a general feeling 21 that 3.8 cents was above a competitive price, that is 22 the price that would result from competition among all 23 the generation units of Ontario Hydro. 24 That was my understanding at the 25 time. I believe that was shared by most MDC members. 26 MR. MARK: I haven't found any, 27 Professor, and I'm sure you have seen it. It is an 28 Ontario Ministry of Finance document which is the 173 1 preliminary asset valuation in calculation of stranded 2 debt and it is dated October 26, 1998. 3 The Ministry of Finance forecast that 4 in about 2003, which coincides roughly with the end of 5 the control period, that electricity prices will rise. 6 Are you familiar with that document, sir? 7 PROFESSOR DEWEES: I have seen that 8 document. I haven't looked at it for a long time. 9 MR. MARK: In light of that did the 10 MDC go back and reconsider any of its findings and 11 recommendations? 12 PROFESSOR DEWEES: The MDC received 13 one or more presentations from the Ministry of Finance 14 as it did its work on the financial structure. We had 15 that in mind as we wrapped up our work. I don't think 16 it led us to reconsider the assumptions that we had. 17 MR. MARK: I take it, Professor, we 18 can agree that the spot market is not the only market 19 that is expected to develop as a result of the 20 restructuring of the industry? 21 PROFESSOR DEWEES: That's correct. 22 MR. MARK: You will anticipate and 23 hope, I gather, to see the development of forward 24 markets as well. 25 PROFESSOR DEWEES: Yes. 26 MR. MARK: To maximize the benefits 27 from competition, would you agree the customer should 28 have the ability to access both the spot market and the 174 1 forward markets if they so choose? 2 PROFESSOR DEWEES: If they choose, 3 sure. 4 MR. MARK: Would you agree with me 5 that a consumer who does not have access to forward 6 markets does not get the full benefits of wholesale 7 competition? 8 PROFESSOR DEWEES: No. It depends on 9 what the consumer wants. I would think lots of 10 consumers may not be interested in forward markets and 11 may be perfectly content to work with short term 12 markets and may be well satisfied. Others may wish to 13 access forward markets. 14 MR. MARK: No, but I'm talking about 15 a customer who is precluded from accessing the forward 16 markets. That customer is not getting the full benefit 17 of wholesale competition. Is that correct? 18 PROFESSOR DEWEES: That customer is 19 getting the full benefit of short term competition, but 20 isn't getting the benefit of a forward market. 21 MR. MARK: That's right. Would you 22 agree with me that SSS customers getting the smoothed 23 spot price are not getting the full benefits of 24 wholesale competition? 25 PROFESSOR DEWEES: No. I think that 26 customers on SSS are getting the full benefits of 27 wholesale competition now. Those who wish to hedge 28 against future price changes I expect will have access 175 1 to retailers, marketers or others, to contract to 2 provide them with those services. 3 MR. MARK: No, but to be clear, a 4 customer who chooses to take his or her supply from his 5 or her local distributor does not get the full benefits 6 of wholesale competition. Would you agree with that? 7 PROFESSOR DEWEES: No. I think they 8 do get the full benefits of competition. They don't 9 get the benefits of forward markets. 10 MR. MARK: You say if they don't get 11 the benefits of forward markets they still nonetheless 12 get the benefits of wholesale competition? 13 PROFESSOR DEWEES: At the present 14 time, yes. 15 MR. MARK: I'm sorry. I don't 16 understand that, "At the present time". 17 PROFESSOR DEWEES: If it's not priced 18 today, you have got the benefits of wholesale 19 competition today. 20 MR. MARK: Yes. 21 PROFESSOR DEWEES: If you want to 22 enter into a contract regarding future, if you do that, 23 you get the benefits of forward markets, if not, then 24 you are not getting the benefit of the forward market. 25 So I would separate that from getting the benefits of 26 today's price today. 27 MR. MARK: Well, the customer on 28 standard supply service, as I understand the proposal 176 1 that was advanced by Board staff and which you concur 2 in, does not make access to the forward markets 3 available to the customer who chooses to have the local 4 distributor as his or her supplier. Is that correct? 5 PROFESSOR DEWEES: That's correct. 6 MR. MARK: You also indicated that 7 one of your objections to the fixed price standard 8 supply regime, and I want to make sure I understand it 9 and hope I get some clarifications, is you say that 10 that involves, if I can put it this way, heavier 11 regulation than the proposal that has now been 12 advanced. 13 PROFESSOR DEWEES: That's right. 14 MR. MARK: You say, sir, that that is 15 because it involves the Board in the exercise of what? 16 PROFESSOR DEWEES: The exercise of 17 the regime of the prices offered by the various 18 distributors under the fixed price regime. The 19 smoothed spot price, the spot price arises out of the 20 operation of a wholesale market. If we pass that 21 through, there is no need for the Board to review that 22 price further. That is simply the wholesale price. 23 Any other price, a price arrived at 24 as a result of the settling of price of portfolio 25 purchase contracts is not this price that arises from 26 the economic dispatch of generation in Ontario and, 27 therefore, would have to be subject to regulation by 28 the Board to see whether it was reasonable or not. 177 1 MR. MARK: Perhaps I'm interested in 2 your definition of "regulation". Do you not consider a 3 ruling by the Board that standard supply customers can 4 have one option and one option only in terms of how 5 they buy electricity to be heavy regulation? 6 PROFESSOR DEWEES: No. I regard that 7 as regulation, but in terms of the effort -- maybe we 8 are speaking at cross-purposes here. My concern was 9 about the effort required in regulation. 10 MR. MARK: Okay. You will agree with 11 me that it is pretty heavy regulation, what is being 12 proposed here, to say to standard supply service 13 customers that despite the fact that we want to 14 introduce competition in customer choice, you are only 15 going to get one choice if you want to purchase from 16 your LDC. That is regulatory intervention in a 17 significant way, is it not, sir? 18 PROFESSOR DEWEES: It's regulation, 19 but for the customer who makes no choice, there must be 20 a single service that that customer gets. You can't 21 get two things or three things. You have to get one 22 thing. 23 It's necessary to define what is 24 nothing that a customer doesn't choose. What does that 25 customer get? That's the standard supply service. 26 What else might they get? I think they should get a 27 wide range of things. The question is who should offer 28 them? Should it be the wires company or should it be 178 1 some other entity? 2 What the MDC said was it should be 3 some other entity. 4 MR. MARK: What about the customer, 5 though, who is not a no-choose customer but comes 6 within section 29(2) or 29(3)? Did the MDC turn its 7 mind that it's apparently not on the face of the report 8 that you did, did the MDC turn its mind to whether 9 those customers who are making an election to take 10 service from their LDC should be so restricted in the 11 options available to them as LDC customers? 12 PROFESSOR DEWEES: I believe so, and 13 the MDC said that there should be one thing available 14 from the distributor, and that if you want other things 15 you should go to competitive retailers, one of which 16 could be an affiliate with the same brand name and some 17 of the same friendly folks you dealt with over the 18 years. But the marketing of competitive alternatives 19 should be done by a competitive retailer, affiliated or 20 otherwise, and not by the regulated LDC, distributor. 21 MR. MARK: Do I have it correct, sir, 22 that earlier in your presentation you indicated that 23 you were guided in your deliberations by the White 24 Paper? 25 PROFESSOR DEWEES: Yes, we were. 26 MR. MARK: Did the MDC guide itself 27 by the statement in the White Paper that customers were 28 to be free to choose, if they wished to do so, to 179 1 continue to take supply from their local distributor? 2 PROFESSOR DEWEES: Yes, we did, and 3 that is why we provided that SSS would be provided by 4 the local distributor. 5 MR. MARK: But am I correct, sir, 6 that if a customer wants something other than a spot 7 price pass-through under the MDC proposal, that 8 customer cannot take supply from the LDC. 9 PROFESSOR DEWEES: That's right. 10 MR. MARK: Sir, I think you indicated 11 a couple of times in your presentation today, and I 12 want to be sure I understand it: Was it the MDC's view 13 that spot price pass-through is the most beneficial 14 rate that can be made available to customers today? 15 PROFESSOR DEWEES: I think it was the 16 MDC's view that it was the best price that could be 17 made available to customers as the standard supply 18 service. 19 MR. MARK: I want to explore that. 20 I had understood you to say that the 21 spot price was simply the best price that could be made 22 available, period. Do I have that wrong? 23 PROFESSOR DEWEES: Close. But I 24 wouldn't rule out the possibility that a retailer that 25 was buying fixed quantity and fixed price might at some 26 times be able to get a price that would be better than 27 the expected spot price. 28 I think it is unlikely, but I think 180 1 it is possible. 2 That is different from being able to 3 get a requirements contract at a fixed price, which it 4 seems to me -- and I think most members of the MDC 5 accept it -- would have to be at a price higher than 6 the expected spot price because of the volume risk. 7 MR. MARK: Given those assumptions, 8 then, how is it that you expect that there will be 9 significant retail activity if it appears that the spot 10 market simply can't be beat, especially amongst larger 11 customers? 12 PROFESSOR DEWEES: I don't know what 13 the larger customers will do, but I think the larger 14 customers are sophisticated enough so that they can 15 wisely choose among any options that are presented to 16 them. 17 With respect to the smaller 18 consumers, I think retailers have several things going 19 for them. 20 Number one, as comments on the draft 21 code and at this meeting have suggested, there is some 22 concern about the variability or uncertainty of the 23 spot price, and I expect retailers to remind customers 24 of that uncertainty and use that as a basis for 25 marketing fixed price options. 26 That is one reason not to let the 27 distributor offer a fixed price. So if fixed prices 28 are going to be offered, they are offered by 181 1 competitive retailers. 2 Secondly, there is the green power 3 issue. Competitive retailers can sign up green power 4 of various sorts and market that to consumers, who may 5 be prepared to pay more for that particular type of 6 power. Therefore, for customers where metering is 7 deregulated, there can be offerings combining power 8 purchase, particular types of meters and energy 9 management services. 10 I think there is a range of 11 opportunities for retailers to compete for end-use 12 customers. 13 MR. MARK: That's fine. I appreciate 14 that clarification. But I want to go back a step. 15 Do I take it now that the MDC does 16 not say that it has made a determination that spot 17 price is thee best thing that can be made available for 18 customers? Rather you recognize that there are 19 customers who won't share that view. 20 PROFESSOR DEWEES: I think the MDC's 21 view was that the spot price was the best standard 22 supply service that could be offered to customers, but 23 it recognized that some customers may prefer something 24 else and did not really express an opinion as to what 25 proportion might choose something else, because that 26 would depend on the price and other characteristics of 27 other offerings. 28 MR. MARK: Did the MDC not accept 182 1 that there may be a significant body of customers out 2 there who would not agree that spot price pass-through 3 is the best standard supply format? 4 PROFESSOR DEWEES: I don't think that 5 the MDC ever said that. How you decide -- the smoothed 6 spot price, I believe, was accepted by the MDC. It was 7 recommended by the MDC on the grounds that that was the 8 best standard supply service that could be offered to 9 customers. 10 That doesn't mean that some wouldn't 11 choose something else. 12 If you ask the question a little 13 differently: Do people want high prices or low prices? 14 They want low prices. Do you want steady prices or 15 variable prices? You want steady prices. 16 But as between a lower variable price 17 and a higher fixed price, which do they prefer? The 18 MDC recommended the lower variable price, recognizing 19 that another option would be available for those 20 consumers who wished to choose it. 21 MR. MARK: Did the MDC consider the 22 wisdom of letting the local distribution companies 23 decide, in conjunction and in consultation with their 24 customers, what the preferred standard supply offering 25 should be? 26 PROFESSOR DEWEES: We were asked to 27 consider simply leaving it up to the local distributor 28 to decide what the form of the standard service 183 1 offering would be, and the MDC rejected that offering 2 in favour of the one that we see reflected in the draft 3 code. 4 MR. MARK: Did you consider the 5 option of leaving it to the local LDC to propose the 6 preferred option and have it subject to approval by the 7 Ontario Energy Board under its jurisdiction under 78 of 8 the Ontario Energy Board Act? 9 PROFESSOR DEWEES: I think in our 10 discussions of this -- I don't remember whether that 11 specific option was before us, but we did talk a lot 12 about this. My recollection is that we talked about 13 various ways in which the distributor might have some 14 choice about what was going to be offered, rather than 15 a standard offering that would be the same across the 16 province. And that did not garner support. 17 MR. MARK: I gather that there was no 18 consideration of a proposal such as I have suggested, 19 whereby the LDC makes a proposal regarding the 20 preferred standard supply option which is subject to 21 regulatory approval by the Board. 22 PROFESSOR DEWEES: I think that was 23 implicit in the range of things that we talked about. 24 If there was going to be an option, if there was going 25 to be something other than "one size fits all", then 26 presumably it would have to be approved by the OEB. 27 So I don't think that is outside the 28 range of proposals. 184 1 MR. MARK: And that was rejected why? 2 PROFESSOR DEWEES: All things 3 considered, the Committee felt that the smoothed spot 4 price pass-through was a good price. It would be 5 straightforward to administer, both for the 6 distributors and for the OEB. And for those who 7 preferred something else, other things would be 8 available. That is, it would not eliminate competitive 9 opportunities. 10 One of the concerns that the MDC had 11 was if the distributor offers a range of products -- 12 smoothed spot price, fixed price, blended price -- 13 every addition to the portfolio of options that the 14 distributor offers reduces the opportunity for 15 competitive retailers, whether affiliates or otherwise, 16 to enter the market. 17 The MDC is not in the business of 18 promoting competitors, nor was it in the business of 19 trying to preclude competition. My sense is that the 20 support for the smoothed spot price felt that it struck 21 a reasonable balance between those things. 22 MR. MARK: So the two considerations 23 were the inherent benefits of the rate itself and your 24 desire, if I can put it this way, to impose some 25 constraints, if you will, on the ability of the LDC to 26 compete with other retailers. 27 PROFESSOR DEWEES: And the concern 28 about regulatory complexities. 185 1 MR. MARK: In terms of the 2 complexities -- let's talk about that for a moment -- 3 how complex is that going to be, given that for the 4 next several years there is a price cap on generation? 5 What do you see as the complexity in having the Board 6 determine a price cap for fixed price offerings? 7 PROFESSOR DEWEES: How would the 8 Board do that? 9 MR. MARK: How did you set 3.8 cents 10 for the GENCO cap? You didn't pull it out of a hat, 11 did you? 12 PROFESSOR DEWEES: Not out of a hat. 13 MR. MARK: No. So you opened up the 14 sock drawer. 15 Why can't the OEB do the same thing 16 for the retail level? Where is the complexity? 17 PROFESSOR DEWEES: The 3.8 was chosen 18 as a limit, not the only price but a limit on the 19 exercise of market power by GENCO, by OPG during the 20 first 42 months of the operation in the market. If the 21 OEB is to regulate a price for standard supply service 22 across the province for the long run, you need to have 23 some basis for the OEB to choose that. 24 If the mechanism for distributors is 25 going to be going out and purchasing a portfolio of 26 supply, on what basis would the OEB choose a price, 27 either during the 3.8-cent regime or later, that will 28 apply either for all of Ontario or that it can apply to 186 1 each proposal that comes in, if they are all to be 2 treated differently? 3 You look, in the third quarter, at a 4 variety of fixed price options, and looking at how to 5 implement them. None of them seem to dominate the 6 smoothed spot price faster. 7 MR. MARK: So your concern is that 8 the OEB would not be able to find a way to determine 9 what would be a just and reasonable rate in absolute 10 dollars and cents terms. 11 PROFESSOR DEWEES: I think they would 12 find that difficult. It would be costly for both the 13 OEB and for the participants to deal with whatever 14 process they manage to set up to try to do that. 15 I turn again to the gas industry, 16 where something like this has been going on, as I 17 understand it, to some dissatisfaction by a number of 18 the parties with that regulatory process. There, there 19 are only three distributors. We have 270 distributors 20 now, perhaps less in the future. 21 The quantitative problems of dealing 22 with the vast array of distributors requires regulatory 23 process be something pretty straightforward if it is 24 going to have any effect at all. 25 MR. MARK: You have made several 26 references, I believe, in your paper and in your 27 presentation, sir, to one of your motivations being to 28 ensure that the distribution companies do not take on 187 1 risk. 2 Is that fair? 3 PROFESSOR DEWEES: I have tried to 4 minimize the risk of distribution companies, yes. 5 MR. MARK: And is that because they 6 are distribution companies, or is that because they are 7 publicly owned? 8 PROFESSOR DEWEES: There is a 9 combination. They are regulated distribution 10 companies. The wires business, compared to other 11 things, is not a very high risk business. Potentially 12 portfolio management, risk management for electricity 13 is. The MDC was concerned that this was a high risk to 14 put into what is otherwise a relatively low risk 15 operation. 16 It is also a concern that it was 17 desirable to separate regulated activities from 18 competitive activities and that risk management was 19 more appropriately done in a competitive environment 20 than in the rather more conservative -- 21 MR. MARK: I am not sure that answers 22 my question. I am still looking to see, for example, 23 what it is about the fact that they are publicly owned 24 that causes you not to want them to be assuming any 25 risk. 26 PROFESSOR DEWEES: One of the 27 concerns that arose regarding public ownership was 28 that, in the absence of shareholders to absorb risk, if 188 1 the activities turn out badly and losses are incurred, 2 either the customers are going to pay for them or the 3 taxpayers are going to pay for them. Since the 4 municipality is the owner and since the taxpayers and 5 the customers are a largely overlapping set, the 6 distributor is taking risks, to some extent, with the 7 customers' money. 8 MR. MARK: But is there some reason 9 why the directors of the corporation, who will 10 presumably be representative of the local populous, 11 aren't able to make an assessment as to what is an 12 appropriate degree of risk for the LDC to assume? 13 PROFESSOR DEWEES: They may be able 14 to make an assessment, but the MDC had some concerns 15 about exposure to those risks nonetheless. 16 Let me expand. I think there was a 17 third concern, and that was if the distributor is 18 engaged in assembling relatively fixed priced 19 portfolios, then, in a sense, they are competing with 20 retailers, whose major advantage would be to offer 21 fixed priced contracts, and if the taxpayers are 22 standing behind the loss, then there is an unlevel 23 playing field if taxpayers subsidize losses by the 24 distributor, as compared to the private retailer who 25 has shareholders that would bear the loss. 26 MR. MARK: So the concern is a little 27 bit different then. The concern is that you don't want 28 the LDC to have pockets which are deeper than Union Gas 189 1 and Consumers Gas and all of those companies. 2 PROFESSOR DEWEES: It was a concern 3 about using public moneys for those management 4 activities. 5 MR. MARK: Why is putting those 6 riskier functions in the retail affiliate any better? 7 PROFESSOR DEWEES: Because it is 8 separate from the -- it is the competitive unregulated 9 activity. 10 MR. MARK: But you do understand, 11 sir, do you not, that the ultimate shareholders of the 12 retail affiliate are the same body as the shareholders 13 of the distribution company? 14 PROFESSOR DEWEES: That's right, so 15 long as those affiliates continue to be municipally 16 owned, and I presume they will be, at least in the 17 initial stages. 18 MR. MARK: So then how is the risk 19 allocated any differently if it is put in the retail as 20 opposed to the distribution, and how are the pockets 21 any deeper or shallower if the function is put in the 22 retail affiliate as opposed to the distribution 23 company? 24 PROFESSOR DEWEES: The expectation, I 25 think, was that the character of these firms would be 26 very different. 27 MR. MARK: No, I am talking about the 28 criteria that you mentioned, sir. How is it any less 190 1 risky for the taxpayers, or the populous of a 2 municipality, to have the risky venture carry on in the 3 retail affiliate than it is in the distribution 4 affiliate if they both have the same shareholders? 5 PROFESSOR DEWEES: For the 6 municipality that elects to establish a competitive 7 retail corporation, not just for setting the lights and 8 hot water heaters but for electricity purchase and 9 resale, that is a corporation that is in the business 10 of entering into and managing risks. That is at the 11 core of its activity. At least that corporation will 12 be set up specifically to deal with those sorts of 13 higher risk activities. The distributor starts, as a 14 basis, with a wires operation and -- 15 MR. MARK: Is the risk, sir, rather 16 than with risk allocation, is it with risk management? 17 Is that really the issue here? 18 PROFESSOR DEWEES: Certainly risk 19 management is an issue. 20 MR. MARK: Because I don't see the 21 distinction. Unless you have something else to tell 22 me, I still don't understand why there is any different 23 result in terms of the shareholders, depending on 24 whether you put the risky activity in the retail 25 affiliate or the distribution company. I have only 26 heard you say it is a difference in the ability to 27 manage the risk. Is that it? 28 PROFESSOR DEWEES: That may be. That 191 1 is all I can think of now. 2 MR. MARK: I have a couple of final 3 points, sir. I am going back to the level playing 4 field issue. Do the rules of the game, as you see it, 5 permit competitive retailers to bring their existing 6 customers and customer lists to the game? 7 PROFESSOR DEWEES: Allow a 8 competitive retailer to bring their existing retail 9 customer lists? 10 MR. MARK: Yes. 11 PROFESSOR DEWEES: I don't see any 12 problem with that. 13 MR. MARK: So you would expect that 14 the gas companies who decide to get into the 15 electricity retailing business will be allowed, as part 16 of their equipment, to have their customer contacts and 17 their customer lists? Is that fair? 18 PROFESSOR DEWEES: I would expect so. 19 MR. MARK: And am I correct that what 20 you are proposing is that the retail division of the 21 distribution company is not permitted to bring that 22 piece of equipment? 23 PROFESSOR DEWEES: It is not 24 permitted to bring the customer list and information 25 that arises out of performing the standard supply 26 service to that operation, that's right. Because that 27 is a regulated activity and that would confer a -- 28 MR. MARK: In your view of the rules 192 1 of the game, could they bring the present day list of 2 utility customers? 3 PROFESSOR DEWEES: No. 4 MR. MARK: All right, then we will go 5 back to my question, sir. You are telling them that 6 they can't bring any list to the game. They can't play 7 with this piece of equipment. Do I have it right? 8 PROFESSOR DEWEES: No, because my 9 understanding is that some MEUs currently have 10 activities that would not fit in the regulated sector 11 that could be handled in the retail part of the 12 business. Hot water heaters -- the MDC never -- we 13 talked about hot water several times, but we never came 14 to any recommendations on it. 15 I am not aware that the Board has 16 made a decision, but I could imagine that hot water 17 heaters might wind up in the retail -- 18 MR. MARK: Respectfully, sir, my 19 question wasn't about hot water heaters. I just want 20 to clarify -- 21 PROFESSOR DEWEES: If your question 22 is about customer lists and if the hot water business 23 goes to the competitive side, presumably that takes 24 with it the customer list. If there are other retail 25 activities that are put into the retail affiliate, 26 surely, in order to handle those activities the retail 27 affiliate has to have the information for those 28 customers. 193 1 MR. MARK: What is the difference 2 between the list of customers who have water heaters 3 and the list of customers who consume electricity? 4 PROFESSOR DEWEES: The hot water 5 heater customers are -- if a hot water heater rental is 6 a competitive activity, then that is an activity that 7 in the retailer. 8 The MDC didn't, in fact, say that you 9 can transfer the hot water heater customers to the 10 retail side. We wound up saying nothing about it. But 11 if that is where they are ultimately transferred, that 12 provides some customer base with at least the hot 13 water -- 14 MR. MARK: So are you saying, sir, 15 that with respect to competitive activities, you accept 16 that it is appropriate for the retail affiliate to 17 bring into its business the list of utility customers 18 with respect to that service? 19 PROFESSOR DEWEES: That is my 20 feeling. The MDC did not express itself -- it didn't 21 say that. It didn't express itself on this issue. 22 MR. MARK: But that is your view? 23 PROFESSOR DEWEES: That is my view. 24 As I recall, the MDC said, simply, that no customer 25 list can be transferred from the distributor to the 26 affiliate. 27 MR. MARK: Thank you, those are my 28 questions. 194 1 MS LEA: Thank you, Mr. Mark. 2 Mr. Brett, did you have questions for 3 Dr. Dewees? I don't have an estimate for you on my 4 list. 5 MR. BRETT: Yes, I do have questions. 6 MS LEA: About how long do you expect 7 to be, sir? 8 MR. BRETT: Between 20 minutes and 9 half an hour. 10 MS LEA: Thank you. 11 MR. BRETT: Dr. Dewees, my name is 12 Tom Brett. I act for the Independent Power Producers' 13 Society of Ontario. My first question has to do with 14 the last exchange that you had with Mr. Mark. Did the 15 MDC look at the issue of whether the ownership of the 16 utility changed? If the distributor became privately 17 owned would you be more inclined to allow it to engage 18 in either a fixed price contract for its default supply 19 or some other aspect of what you have called risk 20 management? Do you see a difference if it becomes 21 private? 22 PROFESSOR DEWEES: No. The issue we 23 were talking about was one of the concerns, but the MDC 24 recognized that both affiliates and distributors may 25 become privately owned over the course of time and its 26 recommendations did not contemplate any change in 27 regime should private ownership emerge. 28 MR. BRETT: And your reason for that 195 1 is what, just as a matter of interest? You are not 2 using public funds any more. 3 PROFESSOR DEWEES: As I recall, that 4 was only one of several concerns that led the MDC to 5 recommend that the distribution company only offer 6 standard service supply. Other concerns included a 7 concern about cross-subsidy. 8 MR. BRETT: Let me ask you, just 9 going back to the table that you had as an appendix to 10 your proposal this morning -- 11 PROFESSOR DEWEES: Yes. 12 MR. BRETT: You have a large area in 13 the middle here that you describe as general service 14 customers between 5 megawatts and the residential size 15 and you pointed out that, by your rough calculation, 16 that constituted about one-half of the marketplace in 17 Ontario. My question for you is this: Do you have any 18 further breakdown of that market -- of that number? 19 Let me preface that by saying that I 20 understand that 48 per cent was taking everything from 21 very small, let's say mom and pop retail organizations, 22 a small store somewhere -- in other words, not really 23 any bigger than a residential customer, except 24 commercial in nature -- all the way up to a mid-sized 25 industrial. I take it you don't have any sense of what 26 the breakdown is within that 50 per cent of the market 27 as between smaller, less sophisticated customers and 28 larger, very sophisticated customers, ones that would 196 1 just be below the threshold of the over 5 megawatt 2 customer. 3 PROFESSOR DEWEES: That is correct. 4 I don't have any further -- 5 MR. BRETT: You don't know what that 6 is. 7 PROFESSOR DEWEES: No, I don't know 8 what that is. 9 MR. BRETT: Okay. I want to ask you, 10 if you turn up page 5 of your paper from this 11 morning -- this is a question with respect to profits 12 and I want to make sure I am not confusing two things. 13 PROFESSOR DEWEES: I'm sorry. Are 14 you on the presentation or on the submission? 15 MR. BRETT: I am on your filed 16 presentation; not your slides, but your filed 17 presentation that you filed on the 5th of July. 18 On page 5 of that, toward the bottom, 19 in the last and second-to-last paragraphs you talk 20 variously about distributors making excessive profits 21 on a fixed price offering, and then below, in the last 22 paragraph, you say that distributors profit handsomely 23 from a regulated service and so on. I want to make 24 sure that I understand this. 25 If I put to you the situation where a 26 distributor would offer a fixed price default supply 27 option, but he would also purchase on a fixed rate 28 basis to do that, in that instance the distributor is 197 1 not making any profit, he is simply passing through to 2 his customers whatever price he pays for the 3 electricity. I want to make sure that we are not sort 4 of collectively -- at least I am not confusing two 5 things. We always have had the tradition in Ontario in 6 the gas industry of the distributor passing through at 7 his cost the commodity. There is never any question of 8 him making a profit or otherwise. That doesn't occur. 9 I am assuming in the electricity 10 industry that if the distributor were to offer a 11 fixed -- let me put it another way. Whatever default 12 service the distributor offers, he is not making a 13 profit on it. It is a profitless transaction. He is 14 passing through his cost -- his price at his cost, 15 whatever that happens to be. 16 Do you concur with that? 17 PROFESSOR DEWEES: That is certainly 18 one way to arrange it. If that could be managed 19 successfully, then I presume it would simply be cost 20 recovery by the distributor. 21 These comments were, in part, a 22 response to some suggestions that were made at the MDC 23 that the standard supply service price should be a high 24 price, intentionally set high, and one motive for that 25 would be to encourage customers to choose competitive 26 retailers. 27 But if you intentionally set that 28 price high, then you are generating profits for the 198 1 distributor, thereby creating an incentive for the 2 distributor to hold on to the customer and not giving 3 the customer the best price. 4 So that is different from what you 5 were suggesting -- 6 MR. BRETT: That's fair enough, but I 7 guess what I am hoping is that we could agree that in 8 discussing whether or not it is appropriate to have a 9 fixed price default supply or standard supply service 10 option, we don't have to mix that up with the notion of 11 the distributor earning a profit. We could arrange 12 things such that the distributor -- without earning a 13 profit and without therefore having an incentive to 14 hold the customer as opposed to letting him or her 15 migrate -- could offer that option. 16 There are many other considerations 17 that come into the debate, but you can isolate the 18 profitability issue. 19 PROFESSOR DEWEES: I think you would 20 separate the two issues. I would agree with that. 21 MR. BRETT: Thank you. 22 Now, on page 1 -- and you touched on 23 this today in different forums, but I am still a little 24 bit not clear myself on this. On your first page of 25 your paper that you submitted on July the 5th, in the 26 third paragraph toward the bottom you say: 27 "The smoothed spot price is 28 supported by the belief --" 199 1 "By the belief", my emphasis: 2 "-- that it will be lower than 3 any fixed price SSS could be..." 4 My question is really that I take it, 5 first of all, the main reason for that view is that 6 what you have reasoned is that if the distributor were 7 to offer a fixed volume -- sorry, were to offer a fixed 8 price for its supply in order to be able to operate 9 fixed SSS to its customer, it would have to pay a 10 somewhat higher price than the spot price to deal with 11 this issue of volume risk. 12 Because of the mobility provisions in 13 the statute which give this sort of untrammelled 14 ability to the customer to swing back and forth however 15 many times he wishes, he might very well do that in 16 certain circumstances and, therefore, the generator or 17 the marketer who is supplying that distributor would 18 want a premium from that sort of contract because he 19 doesn't know what his volume is going to be. 20 I understand that, although I guess I 21 would note in passing, as Mr. Gibbons mentioned 22 earlier, we have had those kinds of contracts in the 23 gas industry since 1987 with so-called commodity demand 24 reduction ratchet provisions in them. Some might argue 25 that those contracts have been higher than they would 26 otherwise have been had it not been for those 27 provisions. 28 It's difficult, I suppose, to know 200 1 that with certainty, but the reason it is difficult to 2 know that is because the gas utility is also a very 3 attractive customer. He is a large customer, so he has 4 a certain amount of leverage by virtue of his size. 5 Just going to the question of price, 6 I understand that reason, the volume risk reason. Is 7 there any other reason why you make the statement that 8 the belief is that it would be lower than a fixed SSS 9 price could be? If the answer is "yes", if there is 10 another reason, is there any evidence -- what is the 11 evidence for that? Do we have any evidence based on 12 where we are at now in the restructured market as to 13 how those prices would compare over time? 14 PROFESSOR DEWEES: I think that's the 15 principal reason and an additional reason is that, 16 aside from the volume risk, the supplier with that 17 fixed price electricity is taking price risk. My 18 understanding is that generally a premium is charged 19 for engaging in risk management, so there would be 20 likely some premium charged simply for providing that 21 service. 22 In terms of evidence, I don't think 23 we -- we certainly don't have any evidence from 24 Ontario, obviously. I don't think the other 25 jurisdictions give us -- let me think. I would have to 26 reflect on that. Off the top of my head, I can't think 27 of evidence from other jurisdictions that would be 28 helpful with this issue, but there may be some. My 201 1 impression is that -- well, no. I would have to 2 reflect on it. 3 MR. BRETT: Just as an aside, I would 4 note that again in the gas industry it's quite common, 5 as I think you know, certainly for many, many customers 6 to wish to hedge their pricing decisions -- sorry, to 7 wish to hedge their prices over at least part of the 8 year, to have firm prices, particularly through the 9 winter season. 10 I would be very surprised if you 11 would find too many direct purchasers of natural gas in 12 this room or anywhere else today who would be 13 contemplating going through the upcoming winter on a 14 floating rate price, either indexed to Empress or any 15 one of the transaction points out west. They don't 16 want to be on the floating rate price. 17 In terms of the regulatory burden 18 issue -- I guess this would be on page 4 -- there is a 19 comment that these are the various reasons why the MDC 20 did not recommend a fixed price. We have been over 21 that some today. The reasons start at the bottom of 22 page 4 and the first one is the burden on the OEB. 23 Mr. Mark discussed this with you at 24 some length, but it seems to me that you have the OEB 25 moving now toward a PBR system for these 270 municipal 26 utilities in every other aspect of their operation, 27 their O&M, their capital, all of that, and one of the 28 things the PBR tries to do, as you know, is to simulate 202 1 competition for the utility, to make it operate more as 2 it would under competitive conditions and, therefore, 3 reduce costs and, if they are successful in reducing 4 costs, share those reductions with the ratepayers. 5 What is, in your view, so different 6 about the electricity commodity? Why would it not be 7 possible to have some kind of request for proposal 8 process or, to cite some of the ideas that other 9 parties have laid on the table here in their papers, a 10 benchmarking process or guidelines of some sort that 11 the Board would publish within which they would deem 12 electricity purchases to be prudent? 13 I am wondering out loud about this, 14 but it strikes me that this may be a bit overdone. Why 15 is the commodity so different than the other aspects 16 that the Board has to regulate and which they propose 17 to regulate through PBR guidelines and the rate 18 handbook? 19 PROFESSOR DEWEES: I think there are 20 a couple of factors. As between gas and electricity, 21 we have a very large number of distributors in 22 electricity compared to a very small number of 23 distributors in gas. So there is simply a number of 24 parties that have to be dealt with that renders this 25 regulation much more difficult. 26 With respect to the actual process of 27 regulation, I don't know what the final PBR process 28 will look like, so I can't really comment on how that 203 1 would apply here, but there is an overriding question 2 of what does the OEB do in the case where it's not 3 happy with, for example, the parties of the portfolio 4 that the distributor has assembled. If it doesn't 5 disallow the cost, then the consumers pay a price that 6 the OEB has said is too high; if they disallow the 7 cost, then the distributor takes a loss at least early 8 in the market where most of the distributors are 9 municipally owned. 10 That means it's passed on to the 11 taxpayers who are, to a substantial extent, ratepayers. 12 So either they pay the higher price or they pay through 13 their taxes. It's not clear that this is saving the 14 consumers from the consequences of the purchase that 15 the Board deemed not to have been prudent or economic 16 or fitting within the PBR guidelines. 17 With respect to at least one of the 18 proposals that was made, we have a variety of MEUs, 19 different size, density, other characteristics across 20 the province. As they go out to secure supply in the 21 contract market, if some of them are able to secure 22 lower prices than others, are the small municipalities' 23 customers always going to get higher prices -- that is, 24 is the OEB going to have to have a sophisticated 25 regulatory regime that makes allowances for different 26 characteristics of the municipalities -- or are they 27 going to say, "We will treat everyone the same", in 28 which case are the small or late-bidding municipalities 204 1 going to find that they are regularly penalized? 2 There just seems to me a lot of 3 unanswered questions about how you would actually apply 4 this with this large number of distributors and make it 5 work fairly for all the consumers. 6 MR. BRETT: Could you give them the 7 option, for example? Could you give the distributors 8 the option of using the spot market or some alternative 9 method? 10 PROFESSOR DEWEES: It seems to me 11 that still raises all the problems. Sure, some would 12 choose spot, others would choose this method, but for 13 those that choose this method, all the problems I have 14 identified would still remain. 15 MR. BRETT: In gas over the years 16 there wasn't really much difficulty regulating the 17 price of gas at which the distributors bought gas, in 18 my recollection. That was fairly straightforward. For 19 the first five or six years they bought on one-year 20 fixed prices, or two-year or three-year or five-year 21 fixed prices, and they had portfolios of contracts. 22 Very seldom, if ever -- I can only 23 recall once when a utility was actually deemed to be 24 imprudent in respect of -- and "imprudent" may be not 25 quite the accurate way to put it in terms of the small 26 piece of its purchase. That was fairly recently. 27 That's in 15 years. What caused the problem was a 28 separate issue, which was that the price was being used 205 1 for another purpose as well. The price was being used 2 to set the buy price for so-called buy/sell agreements. 3 If you go back and analyze a lot of 4 the debate, it seems to me -- my recollection is that 5 the debate was usually over the fairness of using the 6 price in two different ways. It was over the notion of 7 how you would use this average utility cost of gas for 8 a different purpose as opposed to the actual prices 9 that were paid themselves. That never seemed to take 10 up, in my recollection, a lot of regulatory time. 11 I don't know how closely the MDC 12 examined the history of the regulation of the gas 13 commodity in the province since 1987. Did you get into 14 this in any great detail or were there papers presented 15 and analyzed? 16 PROFESSOR DEWEES: We had some 17 discussion. There was some information presented. I 18 can't say we went into great detail. My impression was 19 that there was more recent experience that we thought 20 to be problematic. 21 MR. BRETT: With respect to the 22 options that a distributor might give to its customers, 23 I believe the MDC essentially said that they get two 24 options. They get the smoothed price, but then you 25 also said that they would have to offer the unsmoothed 26 spot price as a second option. So you gave them two 27 options and you have discussed with others today the 28 notion of giving them another option, which would be, 206 1 in my hypothetical, a fixed price option as well. 2 It seemed to me what you ended up 3 coming down to there was that you were concerned about 4 the complexity of that perhaps confusing people and, 5 secondly, concern that in some fashion you would steal 6 the retail affiliates' thunder, as it were. Is there 7 anything else or are those the two main things, adding 8 an extra option onto what people could get? 9 PROFESSOR DEWEES: Let me distinguish 10 between the two things that you have identified. For 11 standard supply service, the Market Design Committee 12 recommended smoothed spot price pass-through. In order 13 to facilitate retail competition, we recommended that 14 every distributor be required to provide simply the 15 spot price to any customer that asked for it. 16 The purpose of that is not to give 17 another option, although it does give a slightly 18 different option. The purpose of that was because 19 that's the basis for retail competition. If a customer 20 wants to sign up with a retailer, whether affiliated or 21 unaffiliated, they request a direct spot price 22 pass-through and request that their bill be sent to the 23 competing retailer. So that's really to facilitate the 24 competitive mechanism. 25 There is only standard supply service 26 and that is the smoothed spot price. The MDC was not 27 enthusiastic about adding anything to that option in 28 the way of offerings by the distributor. 207 1 MR. BRETT: You had mentioned in one 2 or two of your conversations, you talked about risk 3 management activities as being inappropriate or not 4 being a monopoly service. At the same time, you would 5 agree that, for example, there are a number of items 6 that considered in isolation might be said to be not 7 monopoly in the sense that they are not like the wires 8 or the pipe. 9 Billing would be an example. Billing 10 has been historically bundled by the distributors, gas 11 and electric, into their business, even though it 12 wouldn't really be viewed, I think, by most people as 13 an intrinsic monopoly service. 14 Risk management has been something 15 that the gas utilities have practised, again for about 16 some seven or eight years, with some success in some 17 years, less success in other years. These are tools 18 that the monopolies have used in effect in part to 19 hedge themselves against risks on the spot market such 20 as we were discussing earlier. 21 I'm not sure why you -- I heard your 22 conversation with Mr. Mark, but that said, I'm not sure 23 why you see that -- assuming they are done subject to 24 Board guidelines, which they are in the case of gas, 25 subject to a plan put forward by the monopoly as to how 26 they are going to do this, why would this be so 27 inappropriate or impractical, seeing that there were a 28 set of guidelines that allowed a certain amount of this 208 1 activity, in the event the distributor felt it was 2 necessary. 3 PROFESSOR DEWEES: I'm not sure I can 4 add much to what I said before. 5 MR. BRETT: One of the things you 6 talk about that seems to underlie your reluctance, and 7 I guess this would be page 7 of the paper, you talk 8 about -- here we go, toward the bottom -- and you echo 9 this in various, I think, phases of the MDC reports. 10 The last paragraph on page 7: 11 "If most power is sold through 12 fixed price contracts rather 13 than through the spot market, 14 the spot market could be thinly 15 traded and more volatile." 16 What if you had not an either/or, 17 black or white situation, what if you allowed both 18 bilateral distributors, both bilateral arrangements and 19 spot market arrangements, does it have to be all one 20 way or the other? 21 I guess what you are saying in part 22 here is if everybody goes bilateral, if distributors 23 have the right to contract on a fixed price basis for 24 their SSS supply and they all do that, you have got to 25 stop the spot market. You don't have a spot market, it 26 seems to me what you are driving at there. 27 Isn't there some sort of a mid point 28 or an in between position that could be developed where 209 1 you have a certain amount of activity that is 2 channelled through the spot market but a certain amount 3 of activity that can go on a bilateral basis? Why does 4 it have to be 100 per cent zero with respect to the 5 default of the standard service supply? 6 PROFESSOR DEWEES: My expectation and 7 hope would be at the wholesale level there would be a 8 combination of spot market transactions and bilateral 9 transactions of the supplies if there wasn't a 10 substantial contract market developing. 11 For the standard supply service, the 12 MDC felt that that should be done way, standard across 13 the province, recommended the smoothed spot, and if you 14 did it one way across the province by power purchase 15 portfolios, you would then swing this large block of 16 power from spot to the contract market. 17 It seems to me you might then run the 18 risk of having an activity created spot market. This 19 is I think not a drive. This concern is not a driving 20 force in the choice, but it is partly a response to the 21 concern that there wouldn't be a futures market if we 22 used the spot price. In fact, I think there would be 23 and the data that I showed this morning showing there 24 are 25 per cent large customers and another bunch of 25 medium size customers. If these people want to engage 26 in future transactions, that's a large enough part of 27 the market to sustain the futures market satisfactorily 28 it seems to me. 210 1 I think that would give us a blend. 2 I don't think that's an argument for putting it 3 into -- for converting the standard supply service into 4 fixed parts. 5 MR. BRETT: Just a general question. 6 Do you see the wholesale markets and the retail markets 7 being linked or do you see them as two quite separate 8 markets? 9 I get the sense from listening to 10 your presentations that you see these as two markets 11 that are totally disassociated one from another. 12 PROFESSOR DEWEES: No, I don't think 13 so. I think they are a link. In fact, in our proposal 14 there is a very clear linkage. You pass through the 15 spot price to the standard supply service customer and 16 then the retail market operates in competition with 17 that. 18 What goes on in the wholesale market 19 has a direct bearing on the opportunities for reach out 20 competition. 21 MR. BRETT: Is it fair to say though 22 that one of the things that you should take into 23 account in designing the retail aspect of the market is 24 to do whatever you can to enhance competition of supply 25 in the wholesale market? After all, it was competition 26 of supply in the investment and jobs that it purports 27 to bring that seem to be the cornerstone of the White 28 Paper. 211 1 That's where it all started, it seems 2 to me. I wonder whether we are losing sight of that as 3 we progress along the road here. 4 PROFESSOR DEWEES: I certainly 5 support a competitive wholesale market and to the 6 extent that that competition will drive down prices and 7 so new investment that is more costly, you might argue 8 will enhance competition, but if it's raising prices 9 for consumers, it seems to me there is no benefit to 10 consumers from that. 11 I don't see new investment in 12 generation as an object in itself. I see it as when it 13 happens in response to a market demand, terrific. If 14 not, okay. 15 MR. BRETT: Thanks. Those are my 16 questions. Thank you. 17 MS LEA: Thank you very much, Mr. 18 Brett. 19 Ms DeMarco, do you have questions? 20 There is a blank line on the estimates page. Sorry, 21 I'm just teasing. 22 MS DeMARCO: I have no questions at 23 this time. 24 MS LEA: Thank you. 25 Mr. McKerlie, do you believe that you 26 can accomplish sufficiently by five o'clock to make it 27 worth your starting now? 28 MR. McKERLIE: I would prefer that. 212 1 Many more hours, I might forget my questions. 2 MS LEA: Then please go ahead. 3 MR. McKERLIE: Thank you. 4 There were some questions earlier 5 about the SSS smoothing. If I could perhaps just focus 6 on that particular option for a moment. It's with 7 respect to the SSS smoothing period. 8 It appears to me that in the market 9 design committee report that there was some sense of 10 preference for a smoothing period that was longer than 11 a potential one month, two month billing cycle that is 12 envisioned in the code. Would you agree? 13 PROFESSOR DEWEES: The MDC didn't 14 express any preference, but the range of smoothing 15 period that it looked at was between billing period and 16 the year, so the draft code comes out at the low end of 17 the range that we were looking at, but the MDC really 18 at the end said "We don't have any opinion on this and 19 we leave it to the OEB to look at it in more detail and 20 then make a decision". 21 MR. McKERLIE: Recognizing that some 22 of the concerns are around price volatility, I am just 23 wondering about your thoughts then on the perspective 24 of the other end of the spectrum, which would be the 25 benefits of a longer term versus a shorter term. 26 PROFESSOR DEWEES: There are benefits 27 and costs both. The longer term is a little more 28 stability for the consumer. It raises the risk of 213 1 larger true-ups for customers that leave during the 2 course of the year and it involves managing a larger 3 flow for the distributor. 4 In fact, you can achieve more or less 5 the same thing through an equal billing plan. As I 6 read the draft code, it would be open to a distributor, 7 it would be his option to offer equal billing if it 8 felt that a one year stability in price was preferred 9 by its customers. At least attempting to smooth those 10 variations with equal billing would be preferred. The 11 utility could do that. 12 MR. McKERLIE: Even equal billing 13 though would have a requirement for some form of 14 forecasting and true-ups at the end of the year though. 15 PROFESSOR DEWEES: Yes. It would 16 raise the same concerns that are raised by the annual 17 smoothing. 18 MR. McKERLIE: I'm wondering from the 19 perspective of the discussions that took place, the 20 true-ups in managing the true-ups of, let's call it, an 21 annual smoothing period. 22 Did you view that being managed 23 through a formula adjustment or do you see the OEB 24 having an oversight role in actually managing that 25 true-up amount as opposed to a formula process? 26 PROFESSOR DEWEES: The MDC didn't get 27 into that level of detail. I don't have an opinion on 28 that myself. 214 1 MR. McKERLIE: I'm sorry, you don't 2 have -- 3 PROFESSOR DEWEES: I don't have an 4 opinion on that myself. 5 MR. McKERLIE: Did you have any 6 discussion then about what a maximum smoothing term 7 would be in your mind? 8 PROFESSOR DEWEES: I don't recall 9 that we discussed anything longer than a year. I think 10 it was billing period up to a year was the range that 11 the MDC considered. 12 MR. McKERLIE: Okay. Under the SSS 13 code as presented, there is provision for SSS including 14 billing services to be managed using a non-retail 15 affiliate, non-retailing affiliate. That is provided 16 for in the code as laid out, correct? 17 PROFESSOR DEWEES: Yes. 18 MR. McKERLIE: I guess I'm wondering. 19 You talked a little bit about billing in your 20 submission. Do you have an opinion on the type or the 21 brand or the corporate identity that would be reflected 22 on that bill? Whose name would the bill go out under? 23 PROFESSOR DEWEES: There again the 24 market design committee talked about the sum, but as I 25 recall, did not make any recommendations. I don't have 26 an opinion. There's a lot of complicated issues 27 associated with billing that the MDC didn't come to a 28 resolution on and I don't have a position to offer the 215 1 Board at this time. 2 MR. McKERLIE: Okay. 3 Thank you. 4 MS LEA: Thank you very much, 5 Mr. McKerlie. 6 I do notice there is one party that 7 indicates it has five minutes of questions, if they 8 hold to their estimate, Upper Canadian Energy Alliance. 9 If you can hold to your estimate, sir, perhaps we can 10 finish you today. 11 MR. RICHARDSON: We will attempt to 12 do that. It certainly won't drag on for 10 or 15. 13 I just have a few questions here, 14 Don. I would like to clarify some issues. 15 I was a member of the Market Design 16 Committee, so sometimes Don and my recollections 17 coincide and sometimes they might be a little 18 different. 19 MS LEA: I'm sorry, sir, I am going 20 to have to interrupt you to get your name for the 21 reporter. 22 MR. RICHARDSON: Yes. Jim 23 Richardson. 24 MS LEA: Mr. Richardson. Thank you. 25 MR. RICHARDSON: Let me just go 26 through the Market Design Committee and the decisions 27 that were made. 28 Certainly, some of the decisions were 216 1 unanimous. I would say the majority of the decisions 2 were substantial consensus. Ron would say "Does anyone 3 have a problem with this?" and there might be one or 4 two people who would nod their heads that they have a 5 problem, and Ron would say that's substantial consensus 6 and away we would go. 7 Your interpretation of the second 8 quarter decision or vote on the SSS was that it was 9 substantial consensus. I don't remember that quite as 10 well as you do. 11 So let's move on to the third quarter 12 and the fourth quarter, where we redebated it. We 13 obviously redebated it because there is a very 14 contentious issue. Certainly when it was voted on 15 again in the third and fourth quarter, it certainly 16 wasn't substantial consensus. I think at one point 17 there was probably a bare majority. 18 I would just like us to be aware that 19 I think the decision on SSS was more a squeak-through 20 in the end as opposed to a solid majority of the Market 21 Design Committee, albeit I will acknowledge the Market 22 Design Committee did eventually come up with that 23 result. But it certainly wasn't, in my estimation, a 24 third and fourth quarter substantial consensus. 25 PROFESSOR DEWEES: If I could just 26 respond very briefly to that, I think we are in 27 agreement that the second quarter recommendation was 28 substantial consensus. There was certainly lots of 217 1 debate in the third quarter. 2 My recollection is that what we were 3 considering was: Should we add something else to the 4 smoothed spot price that we had agreed to in the second 5 quarter? My recollection is that we did not agree that 6 we would add anything to that. 7 I think you are correct that there 8 was heated debate over that issue. 9 MR. RICHARDSON: So certainly this 10 issue is very contentious and took a lot of the MDC's 11 time. 12 PROFESSOR DEWEES: Yes. 13 MR. RICHARDSON: So I certainly think 14 the Board wants to make sure they study this from every 15 angle they can. It certainly wasn't clear-cut, 16 whatever the MDC came up with, and I am sure the Board 17 will give it the weight that the MDC had given it. 18 PROFESSOR DEWEES: Just to round that 19 out, though, as I recall it, the paragraph that we put 20 in the final report was at least substantial consensus 21 and perhaps unanimous. 22 MR. RICHARDSON: That was a 23 compromise position, would you not say? 24 PROFESSOR DEWEES: That's why it got 25 such broad support. 26 MR. RICHARDSON: When you have a 27 compromise position, it probably isn't a good one 28 either way. It's something down the middle. So I 218 1 don't know if it is in the -- 2 PROFESSOR DEWEES: The lawyer in me 3 could never agree with that proposition. 4 MR. RICHARDSON: Did the MDC get 5 legal advice on how the Act related to the MDC's 6 interpretation of the SSS? 7 PROFESSOR DEWEES: As I said before, 8 my recollection isn't clear on this. When concerns 9 were raised by some members, we said: "The Act says 10 this and we are saying something else". 11 We talked to the lawyers, but I don't 12 recall whether we got a formal opinion or not on that. 13 We certainly never got an opinion that said that what 14 we were doing was in any way a contravention of the 15 Act. 16 MR. RICHARDSON: That certainly would 17 be a concern of ours; that decisions were made and it 18 wasn't legally compared with the intention of the Act 19 and whether the MDC recommendation covered off all the 20 options that the Act seemed to imply. 21 PROFESSOR DEWEES: I think I agreed 22 earlier that the MDC's recommendations did not 23 implement everything that the Act allows for. We spent 24 most of our time during the year writing rules that 25 would constrain people not to do everything you could 26 possibly imagine under one aspect of the Act or 27 another. 28 MR. RICHARDSON: Mr. MacOdrum I think 219 1 had asked earlier on if the MDC had done any customer 2 surveys, any customer polls to see what the customers 3 of the province would like, and I believe your answer 4 was no, they had not done that. 5 I remember that I had brought to the 6 retail subcommittee a pollster in the province who had 7 done some customer surveys, and there seemed to be a 8 bit of reluctance on the part of the committee. But I 9 insisted that we bring someone who had done some 10 customer surveys. 11 If I remember, the gist of what they 12 are saying is that customers in the province of Ontario 13 liked the way they are getting electricity now. They 14 wanted to be left alone. They didn't want to be 15 disturbed by people phoning them up and knocking on 16 their door and giving them all sorts of offerings and 17 everything else. 18 I remember when we were debating this 19 after the fact, I was saying: Well, this seems to be 20 what the customer want. They like the fixed price they 21 are getting now. They like the service they are 22 getting from the LDC. Why does the MDC want to 23 recommend something that is totally different from 24 that? 25 One of the comments I got from, not 26 an MDC member but from someone around the table was: 27 "Well, who cares what the customer wants? We are here 28 to provide a competitive market." 220 1 This thoroughly upset me, because -- 2 MS LEA: Mr. Richardson, do you have 3 a question for Dr. Dewees? This is an attempt to get 4 clarification of his views. 5 MR. RICHARDSON: I am just trying to 6 clarify a point when he was asked whether we did any 7 customer surveys. The MDC did not specifically, but a 8 customer survey was presented to the Market Design 9 Committee. 10 MS LEA: That is certainly something 11 that the Board will hear from, no doubt, when it hears 12 your submissions. But do you have a question for 13 Dr. Dewees? 14 PROFESSOR DEWEES: On that, Jim is 15 absolutely right. We did have a presentation from a 16 pollster. I don't recall now the details of it, but it 17 wasn't a study that we commissioned. It had been 18 commissioned by someone else for another purpose. But 19 we did receive that input. 20 MR. RICHARDSON: I just want to make 21 that clarification. That's it. Thank you. There is 22 my five minutes. 23 MS LEA: Thank you. Well, your 24 estimate was certainly accurate. Thank you for that. 25 MR. RICHARDSON: I think my comments 26 were too. 27 MS LEA: The original scheduled 28 start-up time for tomorrow morning was 9:30. 221 1 Dr. Dewees, I don't want to put you 2 on the spot -- and it's quite permissable for you to 3 say no -- but would you be available to start at 9:00? 4 If you are not, that's fine; we will start at 9:30. 5 PROFESSOR DEWEES: How long do you 6 anticipate running tomorrow or how long do you 7 anticipate me being on tomorrow? 8 MS LEA: If I look at the estimates 9 and the estimates are accurate, we would finish your 10 testimony at about 12:30, allowing for a 15-minute 11 break. 12 But whether these estimates are 13 accurate or not, of course I can't say. 14 That's where we are at in terms of 15 adding up the minutes that have been put down here. 16 PROFESSOR DEWEES: I am prepared to 17 come at 9:00. I would very much like to be out by 18 12:30. 19 MS LEA: I am not in complete control 20 of that, but we will certainly work on that. If you 21 are available at 9:00, I think that would facilitate 22 you getting out in the morning. 23 Are you prepared to do that? 24 PROFESSOR DEWEES: I am prepared to 25 come at 9:00. 26 MS LEA: Thank you. 27 Are there counsel who are available 28 at 9:00 a.m. to begin their questioning? 222 1 I am seeing nods from Mr. Poch and 2 Mr. Mia. That would probably take us through the first 3 half hour anyway. Thank you very much. 4 Then we will begin promptly at 5 9:00 a.m. tomorrow, and hope to send Dr. Dewees home by 6 12:30. 7 --- Whereupon the hearing adjourned at 5:04 p.m., 8 to resume on Wednesday, July 14, 1999 at 9 9:00 a.m.