223 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Wednesday, July 14, 1999, 26 commencing at 9:00 a.m. 27 28 VOLUME 2 224 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power Society 18 and Producers Society of 19 Ontario, IPPSO. 20 ELIZABETH DEMARCO Various interested parties 21 BRIAN McKERLIE Municipality of Chatham-Kent 22 ROBERT WARREN Consumers Association of 23 Canada. 24 DICK PERDUE Direct Energy and Enershare 25 Technology 26 DAVID POCH Green Energy Coalition, GEC 27 ZIYAAD MIA Coalition of Distribution 28 Utilities et al 225 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 RICK GROULX 11 MARK RONAYNE Competition Bureau 12 KEITH RAWSON TransCanada Power 13 ANDREW BARRETT Ontario Power Generation 14 Inc. 15 RICHARD BATTISTA Union Gas Limited 16 BARBARA BODNER Enbridge Inc. 17 AMIR SHALABY Ontario IMO 18 DAN PASTORIC Energy Advantage 19 JIM RICHARDSON/ Upper Canada Energy Alliance 20 PAUL FERGUSON 21 MICHAEL JANIGAN Vulnerable Energy Consumers 22 Coalition 23 24 25 26 27 28 226 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 227 4 Continued questions of Professor Don Dewees 228 5 Luncheon recess at 12:25 p.m. 356 6 Upon resuming at 1:25 p.m. 356 7 Questions of Mr. John Todd 359 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 227 1 Toronto, Ontario 2 --- Upon resuming on Wednesday, July 14, 1999 3 at 9:00 a.m. 4 MS LEA: Good morning. Welcome to 5 the second day of the technical conference into the 6 Standard Supply Service Code. 7 I have a couple of minor 8 announcements. First of all -- I shouldn't call this a 9 minor announcement -- Mr. Peter Thompson, whose firm is 10 representing Ottawa Hydro, has called to say that 11 Ottawa Hydro invites intervenors with questions 12 regarding their proposal to call Mr. Thompson. If 13 these questions cannot be clarified off the record, 14 then Ottawa Hydro is willing to appear at this 15 proceeding. Peter Thompson's number is (613) 787-3528. 16 If anybody needs that number again, you can come and 17 get it from me. It is on the intervenors list also. 18 MR. WARREN: Jennifer, if we have a 19 question about a car accident do we use that number as 20 well? 21 --- Laughter 22 MS LEA: I am sure if you had a 23 question about almost anything, Mr. Warren, 24 Mr. Thompson would be happy to hear about it. I 25 shouldn't speak for him, though. 26 Are there any other preliminary 27 matters? I see Dr. Dewees is ready and able to take 28 your questions this morning. Is there anything 228 DEWEES 1 further? 2 Thank you. Mr. Warren, I think you 3 are next in the batting order. 4 Can I remind parties that we are 5 under time constraints today because Dr. Dewees is 6 available only in the morning. So to the extent 7 possible, please stick to your time estimates and move 8 briskly along. Thanks very much. 9 Mr. Warren. 10 MR. WARREN: Dr. Dewees, I act for 11 the Consumers Association of Canada in this proceeding 12 and my questions for you are, roughly speaking, in two 13 broad categories. The first category is, I want to 14 try, if I can, to clarify some of the exchanges -- 15 MS LEA: Mr. Warren, you are not 16 coming through as clearly as you might. Could you try 17 adjusting the microphone slightly, I don't know quite 18 what you can do, or leaning into it perhaps? 19 MR. WARREN: The first broad 20 category, Dr. Dewees, is, I want to try, if I can, to 21 understand the MDC's position as a result of some 22 exchanges you had with counsel yesterday, and then the 23 second broad category of areas I want to cover is, I 24 want to try to get your comments on the positions which 25 were being advocated or articulated by some of the 26 other parties here to see if I can understand what your 27 view is of them. 28 First, in the category of 229 DEWEES 1 clarification, toward the end of the day yesterday you 2 had an exchange with Mr. Mark, who appears as counsel 3 to the Municipal Electric Association. Mr. Mark was 4 pursuing, as I understood it, the distinction between 5 risk allocation and risk management for LDCs. 6 First of all, do I understand 7 correctly that the structure of the Electricity Act 8 imposes on LDCs an obligation to provide standard 9 supply? 10 PROFESSOR DEWEES: That's my 11 understanding of the Act. 12 MR. WARREN: Do I understand it, both 13 from your paper and from your exchanges yesterday, that 14 a fixed price regime carries with it some component of 15 risk, albeit risk which may be mitigated through 16 various risk management techniques? Is that correct? 17 PROFESSOR DEWEES: That's correct. 18 MR. WARREN: Would you agree, given 19 those two propositions, that a Board decision which 20 would require a fixed price regime for standard service 21 would amount to requiring some LDCs to assume risks 22 which they may be unable or unwilling to assume? Is 23 that a fair conclusion on my part? 24 PROFESSOR DEWEES: That is certainly 25 possible. I don't know what the situation of all LDCs 26 would be, but I would expect that to be the case. 27 MR. WARREN: Then let me leave out 28 the modifiers "unwilling" or "unable". 230 DEWEES 1 Am I correct in my conclusion that a 2 fixed price regime would have the effect of requiring 3 LDCs to assume some measure of risk whether they are 4 willing or able to accept it or not? 5 PROFESSOR DEWEES: That's correct. 6 MR. WARREN: Okay. So do I take it 7 that the decision of the Board in this proceeding is 8 about -- or would you agree that the decision of the 9 Board whether to accept, for example, a fixed price 10 regime or the spot price pass-through, can we not 11 conclude that it is about both risk allocation and risk 12 management? 13 PROFESSOR DEWEES: Yes, those are 14 certainly two elements that are involved in it. 15 MR. WARREN: Yesterday in questions 16 from Mr. MacOdrum, who was appearing on behalf of 17 Toronto Hydro, raised a question about load profiling, 18 and I regret that I was unable to get the transcript 19 from the Web site last night, so I may, with apologies 20 to Mr. MacOdrum, get it wrong. But as I understood the 21 exchange yesterday, Mr. MacOdrum was suggesting that 22 load profiling represents a risk for LDCs. I would 23 like, if I can, to explore what the MDC position is or 24 what the MDC proposal is on load profiling. 25 My understanding of the MDC position 26 is that the LDCs pay the IMO for what they consume and 27 that there is therefore no risk to them from load 28 profiling. Is that a correct understanding? 231 DEWEES 1 PROFESSOR DEWEES: That's correct. 2 Under the MDC's proposed regime, the LDC would pay to 3 the IMO for all of the electricity that flowed through 4 the meters that connect the LDC to the grid. The LDC 5 would then bill interval meter customers for their 6 consumption, according to their meter readings, and 7 customers with kilowatt hour meters would be billed 8 according to their consumption -- that is, all of the 9 remaining electricity that wasn't billed to interval 10 meter customers -- that is, the net load, would be 11 billed to the kilowatt hour metered customers, so that 12 all of that electricity that comes in through the meter 13 and goes out to customers will be paid for by the 14 customers. 15 The load profile is used to determine 16 the average price to be paid by the kilowatt hour 17 customers, but that average price times their kilowatt 18 hour readings should give the total consumption, which 19 is equal to the amount that came in. 20 MR. WARREN: I then want to move to a 21 question which -- it may have been Mr. MacOdrum, and 22 again my apologies to him if it wasn't, but one of the 23 counsellors yesterday who asked you questions raised a 24 question about the risk which arises for consumers 25 because consumption and prices vary across hours. Is 26 this an issue which was considered by the MDC and, if 27 so, what was the MDC's analysis of the nature and 28 extent of this risk and how it could be dealt with? 232 DEWEES 1 PROFESSOR DEWEES: The MDC 2 recommended a smoothed spot price so that the 3 hour-to-hour variations would be averaged for 4 individual consumers. In fact, that happens 5 necessarily for anyone with a kilowatt hour meter 6 because you don't know what the hour-by-hour take of 7 those customers is. 8 So the draft code recommendation for 9 smoothing over the billing period provides for 10 substantial smoothing of the hourly variations, that 11 is, to the monthly or two-month or three-month average 12 price, and that is consistent with the MDC's 13 recommendation that some sort of smoothing be adopted. 14 MR. WARREN: Is the alternative for 15 dealing with this problem of consumption and prices 16 varying over time the use of interval metering? 17 PROFESSOR DEWEES: Yes, because with 18 a kilowatt hour meter you just don't know how much any 19 individual consumer used in any individual hour, the 20 best you can do is to use some sort of profile to 21 allocate the meter reading over the period of the meter 22 read. That is what we do today. Every distributor has 23 a profile -- every distributor has to allocate 24 electricity to each customer using the meter reading. 25 The alternative to that would be to 26 require customers to have interval meters. The MDC 27 considered this and rejected it on the grounds that at 28 the present time it appeared to be too expensive. This 233 DEWEES 1 would impose an unreasonable burden on consumers. 2 In some other jurisdictions they have 3 said, as a basis for competition, any consumer that 4 switches from the distributor's default supply or SSS 5 to a competitive retailer has to get an interval meter 6 so we know exactly what the hourly consumption of that 7 user is. 8 The MDC considered that possibility 9 and rejected it on the grounds that the cost of 10 installing and servicing an interval meter would be a 11 barrier to competition. Instead, the MDC said that the 12 distributor will establish a load profile for its 13 kilowatt hour metered customers and that same profile 14 will be used whether the customer is served by the 15 distributor or by a competitive retailer. 16 So there is no profile risk in terms 17 of that which has arisen in other jurisdictions when 18 customers switch because the basis on which they are 19 paying is exactly the same as the basis on which they 20 are paying if they stay with a distributor. 21 What we achieve with that is, we 22 avoid the costs of interval metering. As a whole, we 23 avoid the barrier to competition from requiring 24 interval metering for customers who switch, and we have 25 a level playing field because the meter basis on which 26 the customer pays is the same whether it stays with the 27 distributor or goes to a competing retailer. 28 MR. WARREN: Thank you. 234 DEWEES 1 The next question I have arising out 2 of exchanges which you had with various counsel 3 yesterday, if I can summarize that, the questions that 4 were directed to you were under the heading, broadly 5 speaking, of the suggestion that a fixed price system 6 is, from the point of view of the settlement system, 7 simpler than is the spot price pass-through. What is 8 your view on that? 9 PROFESSOR DEWEES: I think it's not 10 simpler. It is likely to be more complicated. With 11 the competitive mechanism that the MDC recommended, 12 basing it on the direct spot price pass-through, the 13 distributor has to be prepared to calculate the spot 14 price for every customer on the system. It will 15 actually do that for any customer that switches so that 16 the distributor can send the spot price bill to the 17 competing retailer. So the retail settlement systems 18 will have to provide for distributors with the 19 capability of calculating the spot price bill for every 20 customer. 21 With the spot price pass-through 22 averaged over the billing period, as the draft code 23 recommends, there is no additional calculation for each 24 customer. The LDC is capable of computing that spot 25 price bill over the billing period and that is the 26 basis on which the bill is sent out. 27 If the distributor offers SSS as a 28 fixed price, then, in addition to being able to track 235 DEWEES 1 the spot price for all customers, the distributor has 2 to keep track of a second calculation, namely, the 3 customer's consumption and a fixed price. The price is 4 truly fixed over the period of a year, the additional 5 complexity is modest, but some of the proposals and 6 some of the discussion yesterday dealt with the 7 distributor buying a portfolio of supply contracts. 8 If a distributor is managing a 9 portfolio of supply contracts, then as those contracts 10 are renewed and new purchases are made, the price of 11 this fixed price offering is going to change, perhaps 12 by small amounts, but it's likely to change during the 13 course of the year. 14 So for those who are talking about a 15 fixed price option based on a portfolio that is going 16 to be changing, as I believe the gas portfolio has 17 changed today, then the fixed price is going to change 18 somewhat during the year. That means the distributor 19 has to be able to keep track of the spot price for each 20 customer and the variations in the fixed price for each 21 customer. It's going to have to have a dual system of 22 some sort, and that necessarily is going to be a more 23 complex information system for the distributor to 24 manage than the single system that deals with the spot 25 price. 26 MR. WARREN: The next area I wanted 27 to cover was yesterday there were questions which were 28 put to you with respect to the fixed price system and 236 DEWEES 1 the suggestion was made -- and again I apologize, I 2 don't have the transcript, so I don't remember who it 3 was, but, as I understand it, the suggestion was made 4 that under a fixed price system the principal or the 5 only factor contributing to a premium under that system 6 was a volume risk. 7 I wanted to know if you felt that 8 there were other factors possibly which might 9 contribute to a premium under a fixed price system, 10 including the volume risk. For example, is there a 11 price risk? 12 PROFESSOR DEWEES: Yes. 13 The MDC mentioned I believe both 14 price and volume risk and at one point or another 15 yesterday I think I mentioned both of those. The 16 supplier of the fixed price SSS, whether it's 17 absolutely fixed or whether it's a portfolio, has to 18 assume the risk that customers will leave SSS, as they 19 are entitled to do, and that imposes the volume risk. 20 One of the main objectives of a fixed price system is 21 to provide price stability, so the supplier of that 22 price presumably will charge a premium for managing the 23 price risk. 24 There are a couple of other 25 additional costs that are associated with managing a 26 fixed price system. There are risk components. If the 27 distributor is actually buying and managing a 28 portfolio, then it has the costs of having a purchasing 237 DEWEES 1 department and a risk management department and running 2 those operations, and it has the additional cost of 3 dealing with the regulatory issues that arise with a 4 regulated fixed price as opposed to the spot price. 5 I think there are a number of 6 components that led the Market Design Committee to 7 believe that the price would be higher with a fixed 8 price offering than the expected cost of a spot price. 9 MR. WARREN: We dealt a moment ago 10 with the potential increase in costs due to the 11 settlement system. Does that also possibly contribute 12 to an increase in costs under the fixed price regime? 13 PROFESSOR DEWEES: Sure. The 14 settlement cost that I was referring to a minute ago 15 would be another component of that. 16 MR. WARREN: Finally, is there an 17 additional cost that may be attributable simply to 18 procurement? 19 PROFESSOR DEWEES: Yes. 20 Under the smoothed spot price 21 pass-through, you don't have to procure; you just need 22 to do the calculations and bill. In the case of a 23 fixed price, if you are assembling a portfolio or 24 negotiating, you have to have an individual or a team 25 that does the buying. So there are some costs 26 associated with that procurement function. 27 MR. WARREN: The final area with 28 respect to clarification is there was much discussion 238 DEWEES 1 yesterday with respect to the issue of level playing 2 field. One of the suggestions that was made to you by 3 Mr. Mark towards the end of the day was, as I recollect 4 it, that there was an unlevel playing field because the 5 natural gas utilities were able to compete in the 6 retail market. 7 Is it your understanding under the 8 laws of the Province of Ontario that the natural gas 9 utilities can compete in the retail market? 10 PROFESSOR DEWEES: By "utility", you 11 mean the distribution company? 12 MR. WARREN: Yes. 13 PROFESSOR DEWEES: I am not an expert 14 in gas. My understanding is that it would be the 15 competitive affiliate of the company that would engage 16 in competitive activities rather than the distributor 17 itself. I am not sure that that distinction came up 18 yesterday. 19 MR. WARREN: I am moving to the 20 second category of my questions and that is to try and 21 get you, if you would, to join issue on some of the 22 other positions that have been taken by other parties. 23 It's really with a view to understanding. My principal 24 concern is whether or not the concerns that were 25 articulated by the MDC and have been set out in your 26 paper or addressed, in your view, adequately by some of 27 the other positions. 28 I want to deal first with the 239 DEWEES 1 position of Mr. Todd. Mr. Todd will be on later today. 2 In fairness to him, I haven't had a chance to seek 3 clarification from him. 4 As I understand Mr. Todd's position, 5 it is predicated principally on a concern that 6 consumers will not know the price for the gas they are 7 paying in advance. Mr. Todd I believe uses the 8 language of saying that that is fundamental to a truly 9 competitive market. 10 Is that an issue which the MDC was 11 aware of in its deliberations? 12 PROFESSOR DEWEES: I don't recall 13 discussion of -- at least I don't recall extensive 14 discussion of that particular issue. 15 There was an expectation I believe 16 that as experience with the smoothed spot price built 17 up an understanding would be developed as to the likely 18 price, certainly the price history. During the first 19 few years, there is an expectation that the price is 20 likely to be pretty close to 3.8 cents -- so averaged 21 over some period, I assume a year -- but the MDC did 22 not talk explicitly about the extent to which customers 23 were likely to know what the price during the next 24 month or two months or three months is going to be. 25 MR. WARREN: Let me pause at the 26 question. The concern, as articulated by Mr. Todd, is 27 a concern the consumers under the proposed spot price 28 pass-through will not know the price they are going to 240 DEWEES 1 pay. If we accept for a moment that that is a 2 legitimate concern, is it sufficient, in your view, to 3 warrant moving to another system, for example, a fixed 4 price system? 5 PROFESSOR DEWEES: No, it's not. I 6 think there are a couple of responses to that concern, 7 and I think it is a legitimate concern. 8 One is that there is likely to be a 9 predictable seasonal variation in the spot price. We 10 would expect the price to be higher in the winter when 11 demands are at their peak, lower in the spring or fall, 12 medium in the summertime. This is what marginal cost 13 pricing would likely lead to. 14 If that is in fact the predictable 15 pattern, I think consumers will come to understand that 16 with experience, in a relatively short period of time, 17 just as we experienced variations in the price of other 18 commodities. 19 Vegetables become cheaper when the 20 Ontario vegetables come in during their season, in the 21 summertime; the rest of the year you pay for shipping 22 them from Mexico or California. I think most consumers 23 understand this. So I think that those predictable 24 variations will be well understood by consumers. 25 The random variation, it is true, 26 will not be known. My expectation is that those would 27 generally be relatively small. So for me, that doesn't 28 impair the ability of the consumer to understand the 241 DEWEES 1 price they are going to be paying. 2 In the case of many residential 3 consumers, there won't be very much response to price 4 in any event. So it's not as if major decisions were 5 going to be made badly because of not knowing exactly 6 what the price in the upcoming period is going to be. 7 In the case of large sophisticated 8 consumers who might adjust some aspects of their 9 operations, I expect that they will have the services 10 of their own energy purchasing department or of 11 retailers or energy service companies that will provide 12 them with price histories and price forecasts that are 13 sufficient for them to make the adjustments that are 14 warranted. 15 So I think in terms of customers 16 behaving reasonably in the face of these prices, I 17 don't see a problem presented by the fact that you 18 don't know in advance exactly what the price will be 19 for the next month. 20 MR. WARREN: You don't need to turn 21 it up, but at page 4 of your prefiled paper you 22 reviewed the fixed price proposals which had been 23 considered by the MDC and you discussed the problems 24 which the MDC felt were associated with them at a broad 25 level of generality. 26 Does Mr. Todd's proposal, in your 27 view, adequately address the concerns that MDC had 28 about the fixed price regime? 242 DEWEES 1 PROFESSOR DEWEES: I don't think it 2 does. I was interested to read Mr. Todd's submission 3 and the other submissions, looking to see whether we 4 could find something that was better than what the MDC 5 had recommended and better than the proposals that it 6 had considered and could not accept. I don't see that 7 the Todd proposal provides that solution. 8 Among other things, Mr. Todd's 9 proposal offers a variety of options. I spoke 10 yesterday about the concern that, number one, the SSS 11 customer who doesn't choose has to be given one thing, 12 he can't be given three things, so there has to be a 13 default. 14 Under Mr. Todd's proposal, which as I 15 recall involves a bidding process, there is still the 16 concern whether all areas of the province will be able 17 to secure reasonable bids, and there is the concern 18 that there has to be some regulatory oversight by the 19 OEB, and we now, under his proposal, have three 20 regulated offerings. It seems to me that this is not a 21 good way to move toward a competitive market, to have 22 three regulated offerings. I think retailers will find 23 it difficult to compete against that array of products. 24 So if the basic question is do we 25 want to move to competition-setting prices or 26 regulation-setting prices, it seems to me that 27 Mr. Todd's proposal leaves us with regulation-setting 28 prices for the vast majority of customers. 243 DEWEES 1 MR. WARREN: In addition to the 2 question of regulation-setting prices or its impact on 3 the competitive market, do you have any concern about 4 the regulatory cost associated with Mr. Todd's 5 proposal? 6 PROFESSOR DEWEES: Yes. The general 7 concerns that the MDC identified, it seems to me, are 8 not solved by Mr. Todd's proposal, because there are 9 potentially three offerings, three rates for the OEB to 10 regulate; and with a large number of distributors, as I 11 indicated yesterday, I think there is a real risk that 12 either the regulatory cost for the OEB and for the 13 distributors is going to be high, or regulation will be 14 ineffective, which seems to me not to be in the 15 interest of consumers. 16 MR. WARREN: Let me leave Mr. Todd 17 aside for a moment and turn to the Adamson analysis. 18 Does the Adamson analysis, in your 19 view, adequately address the concerns which the MDC had 20 about fixed price proposals? 21 PROFESSOR DEWEES: No, it doesn't. 22 The regulatory mechanism that is proposed in the 23 Adamson paper is an interesting one, and I am not sure 24 that the MDC considered this explicitly. But it seems 25 to me it leaves in place really all of the concerns 26 that the MDC had with fixed price offerings. 27 It raises the concern of exactly what 28 happens to the distributor that is above the broadband 244 DEWEES 1 range within which the price is deemed to be 2 reasonable. 3 If the distributors in fact purchase 4 electricity at that price, what does it do when it is 5 told that the price is too high? If it doesn't pay a 6 penalty, then the customers aren't protected; if it 7 does pay a penalty, are the taxpayers paying or is this 8 somehow going to come back to the consumers later on? 9 It is not clear how that would be effective. 10 So, no, I didn't find that the 11 Adamson paper solved the array of concerns that MDC 12 had. 13 MR. WARREN: My final area of 14 questioning is with respect to the issues which have 15 been raised variously by Mr. Todd and Ms Woolf, and 16 Mr. Adamson as well, and that is with respect to the 17 intermediate market. The burden of their criticism, as 18 I understand it, is that the spot price pass-through 19 will have the effect of deterring the development of an 20 intermediate market. 21 I have two questions: First of all, 22 is this a concern, this break, if you wish, on the 23 development of intermediate market; and, if so, do any 24 or all of Woolf, Adamson and Todd fix that problem in a 25 way which is acceptable to you? 26 PROFESSOR DEWEES: My view of the 27 intermediate market is that it is not an end in itself 28 but it's a vehicle that may satisfy demands by both 245 DEWEES 1 suppliers and consumers. So the question is: Do 2 suppliers and consumers want this? 3 As I indicated yesterday, some 25 per 4 cent of the Ontario demand consists of customers whose 5 demand is rated in 5 megawatts. These are large 6 customers spending I believe over a million dollars a 7 year on electricity. If they find the intermediate 8 market serves their needs, surely the demand of that 9 group by itself would be sufficient to support such a 10 market. 11 In addition, I would expect that a 12 significant fraction of the 48 per cent of the general 13 services market that ranges from very small operations 14 up to just below 5 megawatts will be sufficiently 15 sophisticated on their own to participate in such a 16 market. So if they want it, they will be there 17 supporting it. 18 Even for some of the smaller users, 19 for example, McDonald's franchises or Home Hardware 20 stores, each of which may individually be a pretty 21 small consumer, my understanding from discussions at 22 the MDC is that retailers may approach those 23 organizations and offer to serve those customers. 24 So the fact that a Home Hardware 25 store is in fact quite a small customer doesn't mean 26 that it might not get advice from -- I don't know 27 whether it is a franchise or whether they are 28 managers -- get advice from head office as to what 246 DEWEES 1 electricity purchase options would best serve their 2 interests. 3 So I think even at the small end of 4 the market there will be some consumers like those who 5 will have acting for them sophisticated participants 6 who could enter into the intermediate market. 7 If there is a demand for that -- and 8 I expect there will be -- it seems to me that 9 intermediate market can grow and thrive on the basis of 10 that contingent, even if it turns out that most 11 residential consumers and a lot of other small 12 consumers stay with the smoothed spot price and 13 therefore are not involved in such a market. 14 So I don't see that market being at 15 risk as a result of the smoothed spot price 16 pass-through unless it turns out that nobody wants it. 17 I think that is unlikely, but if it turns out that the 18 big sophisticated customers don't want it and the 19 intermediate customers don't want it, then I don't 20 think we should change the market design to make it 21 spring up. 22 MR. WARREN: Thank you. Those are my 23 questions. 24 MS LEA: Thank you, Mr. Warren. 25 Mr. Poch. 26 MR. POCH: Thank you. 27 Dr. Dewees, first a few questions 28 about the nature of the MDC. 247 DEWEES 1 Would you agree with my 2 characterization that the majority of the members of 3 the MDC were from the electricity sector, the industry 4 itself, and the very large consuming groups? 5 PROFESSOR DEWEES: The industry being 6 generators, transmission, distribution, big consumers 7 and -- 8 MR. POCH: Yes. You have indicated 9 decisions were by substantial consensus. What did that 10 work out to, as rule of thumb, in terms of percentage? 11 PROFESSOR DEWEES: Generally 12 speaking, substantial consensus was 11 out of 14 or 13 better. It ranged of course up to unanimity. 14 MR. POCH: Something in excess of 15 two-thirds? 16 PROFESSOR DEWEES: Generally, yes. 17 MR. POCH: Okay. 18 I take it from your earlier comment 19 that groups such as environmental groups and small 20 consumer groups didn't have 33 per cent of the floor 21 vote? 22 PROFESSOR DEWEES: That's correct. I 23 don't know how much support they generated among other 24 members, but Julie Girvan was there specifically as a 25 consumer representative. 26 MR. POCH: But the nature of the 27 decision-making process of the MDCs meant that the 28 industry sector, say, for example, generating, 248 DEWEES 1 transmission and the competing retail sector, would 2 have amongst them sufficient numbers that they could 3 affect veto proposals brought forward to the MDC by 4 groups such as environmental groups or small consumer 5 groups? 6 PROFESSOR DEWEES: Certainly, any 7 proposal had to generate pretty broad support in order 8 to be carried. 9 MR. POCH: Turning to the Board 10 staff -- or the straw man proposal, as it has been 11 called, would you agree that it's in keeping with the 12 MDC approach? You have described that indeed in your 13 first slide. I think, as a guiding objective of the 14 MDC, you show the objective as "to get the lowest 15 price". 16 PROFESSOR DEWEES: I think, with 17 respect to retail competition, the -- I forget the 18 exact wording, but it was to get a best combination of 19 price and service at the wholesale level to get the 20 lowest price, yes. 21 MR. POCH: But, indeed, isn't it fair 22 to say that was how the MDC interpreted the White 23 Paper, that is, we are looking for the lowest price, 24 including other service objectives? 25 PROFESSOR DEWEES: That's correct. 26 That wasn't the only interpretation. 27 We did spend quite a bit of time on environmental 28 matters. 249 DEWEES 1 MR. POCH: Right. 2 PROFESSOR DEWEES: But, with respect 3 to price, that was the objective. 4 MR. POCH: The White Paper uses 5 different phrases, but in its listing of objectives it 6 uses the phrase "reasonable prices". It also refers to 7 enhancing safety, reliability and environmental 8 protection. 9 Can we agree that the lowest price is 10 not necessarily -- or that a reasonable price is not 11 necessarily the lowest price, if we include such 12 factors as risk and social costs? 13 PROFESSOR DEWEES: Sure. 14 MR. POCH: I understand you are an 15 economist who has worked fairly extensively on 16 environmental economics issues? 17 PROFESSOR DEWEES: That's correct. 18 MR. POCH: You would agree, having 19 looked at that matter extensively, that in the broader 20 scheme of regulating the sector, and I use that word in 21 its broadest sense, it is appropriate that social costs 22 not be ignored? 23 PROFESSOR DEWEES: Absolutely. 24 MR. POCH: Now, we can agree that the 25 Board staff straw man doesn't address that issue? I am 26 thinking here of environmental costs in particular. 27 PROFESSOR DEWEES: That's right. 28 Like the MDC, I think the Board staff focused on other 250 DEWEES 1 issues. The MDC recommended a set of environmental 2 measures which it felt would address environmental 3 issues, and then for standard system supply focused on 4 price, assuming that the environment would be taken 5 care of by the other recommendations that it had made, 6 and I think the draft code is consistent with that 7 approach. 8 MR. POCH: The MDC didn't just 9 endorse, in fact, it practically insisted that there 10 needs to be, simultaneously with market opening, the 11 putting in place of a cap-and-trade style environmental 12 management regime if we are receive some assurance that 13 competition is not going to reduce environmental 14 quality. Is that a fair characterization? 15 PROFESSOR DEWEES: Yes. The MDC 16 certainly said that it was important to have air 17 pollution regulation, and a cap and trade, in 18 particular, in place at the time of market opening in 19 order to protect the environment. 20 MR. POCH: Is it fair to say, then, 21 thereafter, having come to that decision fairly 22 early -- I believe it was in Q2 -- the Committee, the 23 MDC, structured the rest of its conclusions and dealt 24 with other proposals for environmental initiatives in 25 light of that, saying, in a sense, having selected that 26 approach, advocated that approach, it then relied on 27 that approach as a reason not to have to put on other 28 add-ons of an environmental nature? 251 DEWEES 1 PROFESSOR DEWEES: Yes, I think 2 that's correct. 3 MR. POCH: All right. 4 Indeed, turning to the practical 5 reality we now face, while we may get an update on NOx 6 and SOx regulation regime in Ontario, am I correct in 7 saying no one is forecasting we are going to have a 8 carbon cap in place by the time we get markets open? 9 PROFESSOR DEWEES: I confess I 10 haven't been following what is going on at the Ministry 11 of the Environment recently, so I am just not in a 12 position to comment on what they are likely to have in 13 place by market opening. 14 MR. POCH: Can we assume, for our 15 purposes of discussion, that we are not talking about 16 having a carbon cap in place? Although many of us are 17 advocating for it, we are not talking about having one 18 in place, in the next month. 19 PROFESSOR DEWEES: I am prepared to 20 work on that assumption. 21 MR. POCH: All right. 22 Would you agree that merely allowing 23 competitive retailers to offer green power, enabling 24 it -- switch the labelling or what have you -- but 25 merely a permissive act of allowing it, does nothing to 26 cause social costs to be dealt with as a whole? 27 PROFESSOR DEWEES: It allows those 28 who have a particular concerns about environmental 252 DEWEES 1 protection to discuss those concerns, but you are 2 right, it does nothing for those who are concerned. It 3 provides no environmental protection, with respect to 4 those consumers. 5 MR. POCH: As an economist, an 6 environmental economist, would you agree that we can 7 predict with some accuracy that most -- not all, but 8 most general service and industrial large users are 9 going to focus on price and price risk concerns and not 10 particularly be interested in paying anything for 11 social cost reduction? 12 PROFESSOR DEWEES: We see examples 13 from time to time of corporations not choosing the 14 lowest cost because they want to be seen as supporting 15 the environment or other causes, but I wouldn't expect 16 that to be a dominant force. 17 MR. POCH: A body shop might do it, 18 but they are going to be the exception to the rule? 19 PROFESSOR DEWEES: I would expect so. 20 MR. POCH: All right. 21 I am unaware -- and perhaps you can 22 help us -- but at present I take it there is no 23 mechanism in place to force internalization of many 24 environmental costs, such as carbon, greenhouse gas 25 emissions, on brown power producers, nor is there one 26 to subsidize green producers or retailers to level that 27 field from a societal perspective, correct? 28 PROFESSOR DEWEES: With respect to 253 DEWEES 1 C02, I believe that Ontario Hydro, now OPG, has agreed 2 to a voluntary cap on those emissions. Its emissions 3 of other air pollutants are subject to existing 4 regulations by the Ministry of the Environment. 5 MR. POCH: Yes. I was thinking of 6 carbon, in particular, and the sector as a whole. 7 PROFESSOR DEWEES: Okay. 8 Outside of the OPG voluntary 9 commitment, there is no constraint that I am aware of 10 on carbon. 11 MR. POCH: You have noted in your 12 discussion yesterday about the driver for the various 13 MDC proposals, that one driver seems to be -- maybe I 14 have interpreted this correctly; I am not using your 15 words -- that there was a desire to separate the 16 monopoly function from the competitive. Is that fair? 17 PROFESSOR DEWEES: That's correct. 18 MR. POCH: All right. 19 Would it be fair to characterize a 20 parallel distinction on the -- let me rephrase that. 21 Would it also be fair to make a 22 distinction between matters that the market is good at 23 and where a fair result will arise and matters that the 24 market is not good at and will not happen either fairly 25 or adequately in the market? The monopoly ones are -- 26 PROFESSOR DEWEES: It sounds like a 27 distinction. I guess I am not sure where this is 28 going, but I would agree there are some things the 254 DEWEES 1 market does well and other things the market doesn't do 2 well. 3 MR. POCH: Let's put it this way. We 4 want to regulate the monopoly aspects because the 5 market is not particularly good at getting a fair 6 result there. 7 PROFESSOR DEWEES: That's right. 8 MR. POCH: We are backing away from 9 regulation of the commodity because we have some 10 confidence that the market will do an adequate job and 11 do it fairly. 12 PROFESSOR DEWEES: That's correct. 13 MR. POCH: Would you agree that 14 social costs, for the moment, until we have a cap and 15 trade regime, are going to fall in that first category 16 where we need to regulate somehow? The market is not 17 going to do an adequate or a fair job. 18 PROFESSOR DEWEES: Sure. That is why 19 we have a Ministry of the Environment, because the 20 market doesn't provide the socially desired degree of 21 pollution control, in general. 22 MR. POCH: The context we find 23 ourselves in before this Board is this Board has a 24 statutory mandate in the new Act to facilitate the use 25 of cleaner, more environmentally-benign energy sources, 26 and obviously it does that in the context -- and it 27 explicitly says so -- in the context of government 28 policy, from time to time, and in the context of 255 DEWEES 1 government regulation. 2 Given the context we have just spoken 3 about, I want to table a proposal and get your 4 comments. 5 The proposal, and it is a relatively 6 vague one of necessity, is that some green 7 power -- "green" defined by whatever the strictest 8 category under the eco-logo definition turns out to 9 be -- gets bundled into the SSS with spot until such 10 time as either the market or a broader provincial 11 regulation is adequate to bring on significant green 12 generation, that is, the Board would desist from 13 regulating when it no longer needs to, as is its 14 obligation generally now. 15 The presumption in this proposal, 16 which I invite you to question if you wish to, is that 17 new green power development of any scale, the producers 18 will require some kind of contract and will likely 19 require some kind of premium above marginal coal costs 20 until externalities are eliminated by cap and trade or 21 otherwise; and, obviously the per cent of green power 22 in the SSS would involve a consideration of the social 23 benefits, compared to the premium it entails, and be 24 constrained by the need to keep SSS at a reasonable 25 price level relative to competitive offerings. 26 That is the proposal I am suggesting 27 as a means to bridge the gap we have been discussing in 28 regulation. Maybe I will just take you through some of 256 DEWEES 1 the concerns you have already mentioned and ask you if 2 you have any others. 3 First of all, in responding to 4 Mr. Gibbon's ideas tabled yesterday, I think you 5 characterized it as a kind of second-best approach, 6 where the municipals are regulated by the OEB and you 7 were concerned about the Board getting the green 8 quotient right. First of all, have I characterized 9 that as one of your concerns correctly? 10 PROFESSOR DEWEES: Yes. 11 MR. POCH: Isn't that just the same 12 as saying that you would prefer a provincial 13 bureaucracy to regulate -- to decide what the social 14 costs are and how much society should have to pay to 15 overcome them as opposed to an open public regulatory 16 process deciding that? 17 PROFESSOR DEWEES: Another way to put 18 that is that I think it is the responsibility of the 19 elected government to reflect the will of the people in 20 deciding the appropriate degree of regulation of 21 environmental matters. Whether we are happy with the 22 way that is interpreted at any particular time, it 23 seems to me that is the basis of our democratic 24 government. We elect a government with a mandate to 25 carry out a set of programs and it is the democratic 26 process that pushes the government to apply the degree 27 of environmental protection that the people of Ontario 28 want. 257 DEWEES 1 MR. POCH: Couldn't you say that is 2 an economic regulation too? If the government has 3 chosen to delegate that to this Board, and indeed they 4 have chosen to delegate some concerns for environment 5 to this Board explicitly, is that not an appropriate 6 delegation? 7 PROFESSOR DEWEES: I guess my 8 concern -- this Board has experience and expertise in 9 economic regulation. On environmental matters, I would 10 be happy to be corrected, but I expect that there is 11 not much experience, and it is not clear to me that the 12 Board is constituted or structured adequately to 13 consider and reflect environmental matters, whereas I 14 think it has been designed to deal with the sort of 15 economic matters that traditionally come before it. 16 I have some sympathy for the proposal 17 that you make, but I have trouble with -- there is an 18 institutional problem in trying to get the OEB to do 19 something that, in my view, the Ministry of the 20 Environment should really be doing. 21 MR. POCH: I won't enter into a 22 debate with you. I will just mention to you, as 23 something you may want to pursue for your own interests 24 later, that the OEB has in fact been regulating on the 25 gas side for some time the inclusion of demand-side 26 management initiatives, even before the new Act, for 27 many years, and in doing so has considered social 28 costs, and that the gas companies' own evidence shows 258 DEWEES 1 they are now forecasting some hundreds of millions of 2 dollars in net benefits, both societal and financial, 3 for customers as a result. 4 Let's move on to other concerns. 5 You have mentioned regulatory burden 6 as one. First of all, in terms of the suggestion I 7 have just made, you are familiar with the eco-logo 8 process? 9 PROFESSOR DEWEES: Yes. 10 MR. POCH: You would agree that 11 offers a convenient way that the Board, or other 12 regulator, might not need to have to spend a terrific 13 amount of time deciding what is green? 14 PROFESSOR DEWEES: Yes. Indeed, as 15 you know, the Market Design Committee embraced eco-logo 16 precisely because it involved an available, fairly 17 straightforward means of defining "green" that probably 18 saved us two years of trying to come up with a 19 definition ourselves. 20 MR. POCH: You are also aware that 21 this Board will be regulating the MEUs in terms of 22 their distribution costs, OM&A and capital, for 23 example? 24 PROFESSOR DEWEES: Yes. 25 MR. POCH: And that the Board is 26 developing yardstick and price cap regulatory modes to 27 minimize regulatory costs? 28 PROFESSOR DEWEES: I am not involved 259 DEWEES 1 in that in any way, but I understand that it is going 2 on. 3 MR. POCH: Are you aware that the 4 MEUs have been grouping themselves of late, either in 5 small groups or they have set up a buying co-operative 6 mechanism? 7 PROFESSOR DEWEES: I am aware of 8 INNERConnect. 9 MR. POCH: Right. And INNERConnect 10 has over 200 potential participants amongst the MEUs? 11 PROFESSOR DEWEES: I don't know what 12 the -- 13 MR. POCH: All right. We can ask 14 them later. 15 I have indicated that I have been 16 dealing with specifics about regulatory burden. Do you 17 have any other particular concerns arising from the 18 proposal I tabled? 19 PROFESSOR DEWEES: I have several. 20 One I have already articulated, which is the general 21 institutional concern. 22 Second is: What are the rules under 23 which this would be done? Is there any limit on the 24 price that may be paid for the qualifying green power, 25 the price increase to consumers, or is it unlimited? 26 In my view, as an economist, 27 pollution control is desirable and indeed necessary, 28 but you have to consider the cost, so any proposal like 260 DEWEES 1 this would have to have some limitation on the price 2 that we are implicitly paying for cleaner power. The 3 way to measure that is not the increase in the average 4 consumer's bill. The way to measure that is what is 5 the price of the cleaner power vis-a-vis the power that 6 it is displacing, that is, if you are only getting a 7 small amount of green, it is only worth paying a small 8 amount of money for it. 9 MR. POCH: Let me just interrupt you. 10 That would just involve a comparison of green power, 11 which, if we assume it is wind or something of that 12 nature, has very few externalities, and compare it with 13 the marginal and spot market which for the foreseeable 14 future will be coal. Is that correct? 15 PROFESSOR DEWEES: Without judging 16 whether it is going to be coal, certainly a lot of the 17 time coal will be on the margin, yes, you would need to 18 compare the marginal cost there and then ask whether 19 the pollution reduction benefit was worth that cost. 20 The other concern that I have is if 21 what you really want to do is to reduce air emissions, 22 the best way to do that is to mandate a reduction in 23 air emissions, and to subsidize an alternative is an 24 indirect means. For example, under the proposal that 25 you have suggested, or others that the MDC considered, 26 you can't be sure whether the green power that comes in 27 is going to displace a megawatt hour from a highly 28 controlled relatively low-emission coal-fired plant or 261 DEWEES 1 a not very well controlled high-emission coal-fired 2 power plant, or from a medium cost gas-fired operation. 3 There is no way of knowing exactly 4 what is being displaced, and that means that the 5 benefit of the green power that you are subsidizing is 6 harder to measure directly. You can do studies and try 7 to forecast what that will be, but -- 8 MR. POCH: There is some uncertainty 9 is what you are saying? 10 PROFESSOR DEWEES: Yes. 11 MR. POCH: Inherent in that approach. 12 Yes. 13 You have also mentioned risk as a 14 concern, generally, with anything involving fixed 15 price. I understand your concerns. Let me ask you 16 this. 17 First of all, it's clear that the 18 government, as a policy matter, has decided it is 19 acceptable for publicly owned municipal utilities, or 20 municipal corporations at least, to enter into, if they 21 wish, the risk of fixed price offering through their 22 affiliates. 23 PROFESSOR DEWEES: That is allowed in 24 the legislation. 25 MR. POCH: Right. 26 Mr. Warren points out, though, that 27 the difference here would be that you would be imposing 28 it on municipal utilities because they are obliged to 262 DEWEES 1 offer SSS in the statute. 2 Can I ask you, if an MEU is risk 3 averse, would you agree, in the proposal I am 4 suggesting, it could still limit its exposure by 5 limiting its fixed portfolio, the fixed portion of its 6 portfolio, to the small amount that it is required to 7 obtain from the green power market? Would you agree? 8 PROFESSOR DEWEES: Certainly the 9 smaller the share of the SSS current or anticipated 10 demand that is represented by a fixed price, the less 11 likely that demand is to fall down to or below that 12 level. 13 MR. POCH: Right. 14 If we were to make this proposal 15 voluntary, that they could include fixed, and if they 16 do say they have to include some green, then that 17 overcomes that concern entirely because nothing is 18 being imposed, correct? 19 PROFESSOR DEWEES: It is not being 20 imposed on the distributor, but if the distributor so 21 chooses, it is being imposed on its consumers. 22 MR. POCH: Right. Throughout the 23 discussion -- 24 PROFESSOR DEWEES: I'm sorry. 25 MR. POCH: Yes? 26 PROFESSOR DEWEES: And on a class of 27 its consumers, namely, those that are on SSS. It is 28 not being imposed on anyone who switches out. 263 DEWEES 1 MR. POCH: Correct. 2 You have spoken throughout about this 3 idea that customers can get spot through the SSS, and 4 if they wish fixed they will presumably be able to find 5 that elsewhere, correct? 6 PROFESSOR DEWEES: Yes. 7 MR. POCH: That assumes that some 8 retail market develops. 9 PROFESSOR DEWEES: That's correct. 10 MR. POCH: Isn't it also true that if 11 the Board mandated that SSS include a fixed component, 12 or could include a fixed component, it is equally 13 possible that customers would be able to find a pure 14 spot option out in the competitive retail offerings? 15 PROFESSOR DEWEES: Yes. It would 16 have to be spot plus the -- 17 MR. POCH: Plus a mark-up. 18 PROFESSOR DEWEES: The mark-up. The 19 marketing costs and whatnot. 20 MR. POCH: Sure. Okay. 21 From your examination of both the gas 22 market in Ontario and the developing competitive 23 electricity markets elsewhere, is it correct to say 24 that they were likely to see some inertia on the retail 25 side, and the residential side certainly, that is, 26 people tending to stick with the default option? 27 PROFESSOR DEWEES: Yes. I think it 28 is fair to say that the experience elsewhere has been 264 DEWEES 1 that you need a significant price advantage before you 2 get a significant number of customers switching. 3 MR. POCH: So if my proposal involved 4 a relatively small amount of green power at a small 5 premium, offered through SSS without profit mark-up, it 6 is not likely to risk a flight from SSS. It alone 7 wouldn't create that spread in price that is likely to 8 send people packing? 9 PROFESSOR DEWEES: Certainly if the 10 premium is small and the percentage is small, then the 11 impact on switching would be relatively quite small. 12 MR. POCH: Therefore, the concerns 13 about quantity or price risk are contained. 14 PROFESSOR DEWEES: They are certainly 15 diminished as those things become smaller. 16 MR. POCH: Finally, on an only 17 somewhat related topic, I have one question. This is 18 just about the basis for billing without interval 19 meters. 20 Did the MDC have a proposal, and what 21 is your understanding of how it is going to work, for a 22 small customer who obtains an interval meter, say, five 23 years down the road when the solid state interval 24 meters are more commonplace and we have achieved some 25 economy of scale there, and perhaps retailers are 26 offering to install an interval meter as part of you 27 signing on for a year -- will the basis that the MEU 28 bills the retailer then be on the interval meter, or 265 DEWEES 1 will it still be on the profile? 2 PROFESSOR DEWEES: I am trying now to 3 recall exactly what we said. 4 I think we said that initially the 5 metering would not be unbundled or would not be 6 competitive for customers smaller than 50 kilowatts, 7 which would be residential customers, but we invited 8 the OEB to review that with the hope that within three 9 years it would be possible to make metering 10 competitive, and at that time any customer who wanted 11 an interval meter and found a provider willing to offer 12 it could then get the interval meter and get the spot 13 price directly from the distributor, or get some other 14 pricing arrangement through, say, a retailer that 15 provided the meter, and a supply contract as well. 16 MR. POCH: I guess my concern is that 17 if a customer gets an interval meter and its 18 arrangement with its retailer is based on actual 19 metering, retailers may be reluctant to offer such an 20 option if they are having to pay the MEU based on the 21 profile, which may differ significantly from the group 22 of customers that have gone for this option, and that 23 is presumably customers interested in going for an 24 option with interval metering are customers who feel 25 there is some advantage for them in interval metering 26 because of their peculiar load or willingness to 27 control. 28 PROFESSOR DEWEES: I see. Your 266 DEWEES 1 question is: If a small customer gets an interval 2 meter, is it then in the interval metered part of the 3 distributor's load and billed by the LDC on the spot 4 basis, on the interval meter basis, or is it on a 5 profile basis? 6 MR. POCH: Yes. That was my original 7 question, yes. I'm sorry, maybe it wasn't clear. 8 If it isn't, wouldn't that create a 9 risk for the retailer? 10 PROFESSOR DEWEES: I'm sorry, I don't 11 recall whether the MDC spoke precisely on this issue. 12 I think we had a recommendation in our second quarter 13 report that said that a customer with an interval meter 14 would be billed by the distributor on the basis of that 15 interval metering. I think we were thinking of larger 16 customers at that time. 17 But, as I say, I would have to check 18 the report to see whether that's in fact what we said. 19 That was what was in my mind at the time. I am not 20 sure what was in the minds of the members of the MDC. 21 I would agree that would be a desirable outcome. 22 MR. POCH: Thank you. Those are my 23 questions. 24 MS LEA: Thank you, Mr. Poch. 25 Mr. Mia? Mr. Mia, I'm sorry, who do 26 you represent? 27 MR. MIA: I lost my list. 28 It's Brampton, Guelph, Oakville, 267 DEWEES 1 Waterloo North -- I have my list. 2 MS LEA: I'm sorry, sir. I wasn't 3 sure whether you were on my list and had given me an 4 estimate of time. Did you do that? 5 MR. MIA: Yes, I did. 6 MS LEA: Okay. Thank you. So where 7 would I find you here? 8 MR. MIA: I think about 15 to 9 20 minutes. 10 MS LEA: Okay. Thank you. 11 MR. MIA: Just to start, you will 12 correct me if I am wrong, I take it from your paper 13 that basically you think that the Board's Standard 14 Supply Code meets the MDC's recommendation for smoothed 15 pass-through? 16 PROFESSOR DEWEES: That's correct. I 17 think it is consistent with the recommendations that 18 the MDC made. 19 MR. MIA: You will agree with me that 20 it's stated in your paper that the basic goal is for 21 retail customers to get the best possible combination 22 of price and service? 23 PROFESSOR DEWEES: That's right. 24 MR. MIA: Is it correct that the MDC 25 recommended the smoothed price because it was concerned 26 about exposing small consumers to frequent price 27 volatility? 28 PROFESSOR DEWEES: Yes. 268 DEWEES 1 MR. MIA: Would you agree as well 2 that the salient difference between the spot price and 3 the smoothed price is just basically the frequency of 4 price changes? The price remains the same, it's just 5 the frequency of changes, the ultimate price they pay. 6 PROFESSOR DEWEES: Yes. The price 7 averaged over a long time is the same. The shorter the 8 smoothing period, the more variation there is from one 9 bill to the next. 10 MR. MIA: On page 6 of your paper, at 11 paragraph three -- I will just cite it, you won't have 12 to look at it -- you state that, quote: 13 "...a majority of consumers 14 would prefer a low ... spot 15 price to a higher fixed price." 16 In the same vein, would you agree 17 that a majority of consumers would prefer a more stable 18 smoothed price to a more volatile spot price? 19 PROFESSOR DEWEES: It depends on what 20 the level of the price is. A more stable smoothed 21 price that was at the same level as the spot price, of 22 course. If it was going to be at a higher level, then 23 we don't really know exactly what the consumer 24 trade-off is. 25 MR. MIA: Further to my previous 26 statement, if the prices held the same, ultimately 27 would you say that a consumer would choose less 28 volatility throughout the year as opposed to sort of 269 DEWEES 1 frequent monthly or bi-monthly changes? 2 PROFESSOR DEWEES: I suspect, given 3 the assumption that the average in the long run is 4 going to be the same, I think many consumers would 5 choose a longer averaging period over a shorter. 6 MR. MIA: Yes, and that would sort of 7 meet the MDC -- I mean, that was the MDC's concern, 8 basically, in recommending a smoothed price? 9 PROFESSOR DEWEES: Yes, although the 10 MDC did not recommend a particular smoothing period. 11 It really left that up to the OEB. 12 MR. MIA: But it was concerned that 13 it would dampen price volatility. That was their 14 concern, dampened price volatility? 15 PROFESSOR DEWEES: Yes. 16 MR. MIA: Would you agree, then, that 17 the smoothed price really doesn't offer the same 18 combination of price and service that the spot price 19 pass-through does because, ultimately, price being held 20 the same, under the smoothed you receive better service 21 from the customer's perspective because you want to be 22 exposed to less frequent volatility? 23 As a consumer, I don't want to see my 24 bill change every month or every two months. I would 25 rather have the type of plan for a shift in prices, if 26 there are any. 27 Would you agree, then, that on the 28 point of service, because it's price and service, the 270 DEWEES 1 smoothed price is a better option? 2 PROFESSOR DEWEES: I'm sorry, a 3 better option than...? 4 MR. MIA: Than the spot pass-through. 5 PROFESSOR DEWEES: Smoothed over what 6 period? 7 MR. MIA: Say smoothed annually. We 8 are holding price the same. Ultimately, the price to 9 the customer is the same. It's the spot price. You 10 are just paying over a year or you are paying as it 11 comes to you. 12 PROFESSOR DEWEES: Holding the 13 ultimate price the same, I would expect that many 14 consumers would prefer a longer rather than a shorter 15 smoothing period, which I think is why some MEUs today 16 offer equal billing for their customers and I would 17 expect them to continue to do so under the draft code. 18 MR. MIA: I just wanted to get 19 clarification. I don't mean to beat this to death. 20 The question was: On the point of price and service, 21 the smoothed comes out ahead because it provides the 22 same price and better service to the customer? 23 PROFESSOR DEWEES: Yes. 24 MR. MIA: With respect to managing 25 price volatility, you suggested yesterday that 26 customers already manage seasonal variability in price, 27 therefore, they should be okay with managing 28 variability in the spot market price. 271 DEWEES 1 PROFESSOR DEWEES: I'm sorry. I 2 think I said that with respect to electricity they 3 manage seasonal variation and quantity. 4 MR. MIA: Okay. We will clarify 5 that. 6 I thought you mentioned that there is 7 a price difference, but they are used to summer/winter 8 pricing changes, so they are used to that variation. 9 PROFESSOR DEWEES: I suggested that 10 was true for other commodities. 11 My understanding is that today the 12 price is the same throughout the year for residential 13 consumers. At least I think that's true for Toronto 14 Hydro; I think it's true throughout the province. What 15 customers manage today is the difference in their bill 16 between the seasons arising from the different quantity 17 that they consume as a result of heating in the winter 18 and air conditioning in the summer. 19 MR. MIA: So they have no experience 20 with price volatility, then? 21 PROFESSOR DEWEES: With respect to 22 electricity -- 23 MR. MIA: Yes. 24 PROFESSOR DEWEES: -- I don't believe 25 residential consumers have experience with in-year 26 price volatility. We had experience with prices rising 27 at a great rate in the early 1990s. At the beginning 28 of the year, it took a big jump. So consumers have 272 DEWEES 1 experience with changes from one year to the next, but 2 not with in-year, as I understand it. 3 MR. MIA: So, basically, the seasonal 4 variation is they are used to volume changes, and that 5 is not going to change unless they can shift their 6 load, but they can't do that under the present scheme. 7 So they are used to that. That is not going to change. 8 The seasonal variations will remain unless there is a 9 change in the weather. 10 Would you agree, then, that they are 11 not used at all to market-related volatility? 12 PROFESSOR DEWEES: To price changes, 13 that's correct. 14 MR. MIA: You are aware of the 15 significant price changes in the U.S. last summer about 16 this time of year? 17 PROFESSOR DEWEES: In the midwest, 18 you mean? 19 MR. MIA: Yes. 20 PROFESSOR DEWEES: Yes. The MDC 21 followed those with some considerable interest. 22 MR. MIA: It's not a submission. 23 There is a report from the FERC which touches on this 24 that I will just refer quickly to. They list quite a 25 few factors that contributed to this, only one of which 26 was weather. Others were system constraints and 27 problems with the market. 28 Is it foreseeable that this could 273 DEWEES 1 happen in Ontario? 2 PROFESSOR DEWEES: I think that there 3 are some very important differences between the U.S. 4 midwest energy situation and the Ontario market that we 5 are designing. 6 In the midwest where those price 7 spikes occurred, there is not a spot market. There is 8 not a central economic dispatch of generating units 9 over that area. What you have is the traditional 10 vertically-integrated monopolies operating their own 11 generation, transmission and distribution, linked 12 together, as they always have been, as part of a large 13 network and from time to time trading electricity 14 between them. 15 My understanding is that the high 16 prices that were recorded both last summer and in the 17 last month were prices for bilateral trade between 18 vertically-integrated utilities to cover local 19 shortages or to allow surpluses to cover local 20 shortages. That is individual bilateral trades in the 21 absence of any spot market, in the absence of 22 region-wide economic dispatch and, at the time this 23 happened last year, in the absence of any forces that 24 would lead to a demand response. I don't know what 25 changes they have made on the demand side, but the 26 other factors that existed a year ago still exist 27 today. 28 The market that we have designed for 274 DEWEES 1 Ontario will have central dispatch by the independent 2 market operator of generation within the province, 3 across the whole province, dispatching plants in merit 4 order. We specifically recommended demand-side bidding 5 so that large customers, any substantial customer, I 6 guess any wholesale customer that was prepared to 7 reduce its take if the price got above certain levels 8 could indicate that to the IMO and could therefore 9 reduce its demand if prices rose. 10 It seems natural that a 11 well-functioning market of that type should be able to 12 respond to the kinds of supply and demand fluctuations 13 that drove the price spikes in the U.S. much better 14 than the system that exists in the U.S. 15 It's sort of apples and oranges. I 16 don't think you can compare the likely result of an 17 efficient spot market in Ontario with the result of 18 negotiations between interconnected utilities that are 19 not jointly dispatched economically in the midwest. 20 MR. MIA: I take your point about the 21 differences in the market. 22 I am not an economist, but just as a 23 general statement, we are moving away from a 24 centrally-planned monopoly situation -- with all its 25 faults, it is stable -- and we are moving to sort of an 26 open market with multiple players. Wouldn't that 27 introduce more unpredictability than we are used to? 28 Just as a general statement, we are moving towards a 275 DEWEES 1 more open market, more players, everything can't be 2 governed, so there is more of a chance of 3 unpredictability in the system. 4 PROFESSOR DEWEES: I think what we 5 are likely to have is more short-run unpredictability. 6 I think we will be protected against some of the cost 7 increases that we have had in the past in Ontario. One 8 of the objectives of the White Paper was to put new 9 investment decisions on a more businesslike basis and 10 with a competitive generation market investors will 11 decide whether or not to invest in new capacity. 12 If they do invest and it turns out 13 that their costs are reasonable and the market needs 14 that power, they will make money at it. If the project 15 runs way over budget, there is no guarantee that they 16 can recover those costs from consumers. 17 So the price increases that Ontario 18 electricity consumers faced when Darlington came on 19 stream were a result of a monopoly. We had to pay the 20 costs because they were part of Ontario Hydro's 21 rolled-in costs. 22 In a competitive market, if a plant 23 like that came on stream at a time when its capacity 24 was not needed, the owner would be unable to charge 25 higher prices just because it has incurred those large 26 costs. The consumers don't bear the investment risk. 27 So I think that as we look to the 28 future, the competitive market is going to protect 276 DEWEES 1 Ontario consumers against what, after the fact, turned 2 out to be bad investment decisions on the generation 3 side, and I think for me that's one of the major 4 benefits of moving to a restructured market. So that 5 is a longer-range consideration, but all of us today 6 are paying for these investment decisions in the past. 7 I think it's an important protection 8 for Ontario consumers to not pay for investment 9 mistakes in the future, but part of the price for that 10 is that in the short run there will be more price 11 variability. 12 I think it's a trade-off. My 13 personal feeling is that it's a good one. I think the 14 Market Design Committee, if the members hadn't thought 15 that that was the right trade-off, since that was 16 implicit in what they were doing, I presume they would 17 have refused to serve or resign. So I think the 18 Committee felt that overall the benefits of this were 19 going to be good for consumers. 20 MR. MIA: And you will agree -- I 21 guess somebody mentioned yesterday -- that the White 22 Paper stated that default customers should basically 23 get the service that they are used to. That is the 24 principle that came out of the White Paper. 25 That is, basically, I would suggest, 26 what "default supply" means is by default you go to the 27 status quo, what you are used to. You don't want to 28 switch. 277 DEWEES 1 PROFESSOR DEWEES: That's right. The 2 MDC interpreted that as meaning -- we had one proposal 3 that customers should be auctioned off to retailers. 4 There was little support for that. The White Paper 5 said customers who don't want to switch shouldn't have 6 to. I think the Market Design Committee was faithful 7 to that in trying to find a standard system supply that 8 would be a good deal for consumers so they wouldn't 9 have to switch. 10 MR. MIA: And we agreed just a few 11 minutes ago that customers in Ontario are not used to 12 price variability. They are used to stable prices, at 13 least on an annual basis. 14 PROFESSOR DEWEES: That's right. 15 They have some experience within the last decade of big 16 increases from one year to the next, but there is not 17 much experience with in-year fluctuations in the price. 18 MR. MIA: Would you agree then that 19 when the spot price pass-through gives you different 20 changes throughout the year, that is not really meeting 21 the White Paper goal of default supply or giving 22 customers what they are used to? 23 PROFESSOR DEWEES: If you took the 24 White Paper statement to give customers what they are 25 used to, if you took that literally, it would mean we 26 won't change anything, we will stay with a monopoly, 27 generation monopoly, at the retail level, and that 28 can't be what the White Paper had in mind because it is 278 DEWEES 1 all about restructuring. 2 I don't know exactly what those words 3 meant, but the MDC interpreted them to mean you should 4 get a good deal from the distributor, the familiar 5 supplier. Then, in asking what is a good deal, 6 smoothed spot price was the recommendation the MDC felt 7 would best serve the customers' interests. 8 MR. MIA: Right. 9 Back to my original point. I would 10 suggest that the smoothed price better reflects the 11 White Paper goal and the MDC goal which spoke about 12 giving customers what they are used to and giving them 13 the best combination of price and service, as opposed 14 to the spot price pass-through. 15 Would you agree with that statement? 16 PROFESSOR DEWEES: That is why the 17 MDC recommended a smooth spot price, because it felt 18 that some smoothing would be beneficial for the 19 customer. 20 MR. MIA: To take that one step 21 further, basically the smoothed price pass-through is 22 different essentially in meeting these objectives than 23 what the Board's Standard Supply Service Code spot 24 price pass-through has put forward? 25 PROFESSOR DEWEES: The MDC didn't 26 specify what the smoothing period should be. It looked 27 at a range of smoothing periods. 28 As I suggested yesterday, using the 279 DEWEES 1 billing period as a smoothing period is at the short 2 end of what the MDC considered, but I don't think it is 3 outside the bounds, especially when linked with the 4 opportunity for distributors to offer equal billing 5 over the course of a year, it seems to me that that 6 provides good service for the customer. 7 MR. MIA: But no smoothing period 8 wouldn't be really a smoothing period. Nothing has 9 been suggested in the Code as it stands. 10 I mean, you could have different 11 ones. Customers would likely be used to a year, but 12 the Board hasn't suggested anything, so they haven't 13 really picked up the ball from the MDC, then? 14 PROFESSOR DEWEES: Except that the 15 MDC discussed quarterly smoothing as one option, and 16 for those whose billing period is three months, that is 17 quarterly smoothing. So that is entirely within the 18 range that the MDC considered. 19 Frankly, at the end of Q2 when we 20 made the initial recommendation, I am not sure that we 21 had focused on the interaction between the length of 22 smoothing period and the billing period. That 23 certainly came up later on in the year, and the retail 24 technical panel considered that issue. 25 But I don't think that the minds of 26 the members of the MDC were focused on that specific 27 issue at the time we made the recommendation. 28 MR. MIA: Yesterday we heard about 280 DEWEES 1 regulatory burden, and we heard about it today, that 2 is, forecasting for fixed and smoothed prices. 3 You also mentioned yesterday that 4 basically with respect to volatility, because of the 5 Market Power Mitigation Agreement, it is going to be a 6 range but it is not going to be out of sight. There is 7 not going to be much variability. You are going to be 8 hovering around that 3.8 cents. 9 So given your statement with respect 10 to that, again I am not an economist, but I don't see 11 why it is that difficult then to predict, within a 12 range, what the price could be to forecast that price. 13 Wouldn't that minimize your risk? 14 PROFESSOR DEWEES: I'm sorry? Who is 15 predicting? 16 MR. MIA: You spoke yesterday about 17 the range of price variability and that because of the 18 Market Power Mitigation Agreement -- and that is a 19 whole side issue -- basically you were going to be 20 within the 3.8-cent range because the bulk of OPGI's -- 21 PROFESSOR DEWEES: That's right. 22 Averaged over the year, the price is not going to 23 deviate substantially from 3.8 cents. 24 MR. MIA: I am just tying that in to 25 the regulatory burden in forecasting a price, whether 26 there are going to be excessive profits or it's too 27 difficult to forecast a price for a smoothed annual 28 price. 281 DEWEES 1 If the range is so small, it is 2 basically predictable within the range what the price 3 could be, so wouldn't that minimize the regulatory 4 burden and eliminate any of the dangers that we spoke 5 about yesterday? 6 PROFESSOR DEWEES: You mean with 7 respect to choosing a longer smoothing period than the 8 billing period? 9 MR. MIA: Yes. If we are setting the 10 price for this year, the smoothed price, and then we 11 will have true-ups or rebates at the end, we can 12 minimize risk because, to take your earlier statement, 13 there is not going to be much variability in the 14 ultimate price day-to-day, so we can peg it somewhere, 15 and if there is a little variation, well it's not very 16 much, and you can take that same notion to the fixed 17 price. 18 PROFESSOR DEWEES: Setting aside the 19 fixed price for a moment, I think that during the first 20 year or two, until OPG achieves substantial decontrol, 21 I would agree that forecasting the price over the 22 course of a year, after rebate, if there is one, would 23 not be a great burden. 24 There is another point here, though, 25 that I think goes back to what I said in response to 26 some earlier questions. 27 One of the advantages of the 28 smoothing being just over the billing period is that 282 DEWEES 1 for distributors they only have to do one set of 2 calculations, they do the spot price calculations for 3 the customers and then issue a bill on that basis. As 4 soon as you start smoothing over a longer period or 5 offering a fixed price, you now have to keep track of 6 the spot price variations for the consumer, and you 7 have to keep track of the smoothed price. 8 My understanding is that the 9 settlement system cost, the cost for the settlement 10 system for the information technology system for the 11 distributor, would be significantly increased if you 12 move either to smoothing beyond one billing period or 13 to a fixed price alternative. 14 That is not a consideration that MDC 15 had in mind during its second quarter, but it is 16 something that surfaced I think in the technical 17 committee later in the year and should be a 18 consideration for the OEB today. 19 MR. MIA: That could be a cost which 20 could be seen as a trade-off for giving customers some 21 stability. 22 PROFESSOR DEWEES: That is a cost, 23 and then the question is: What is the value to the 24 consumer of having the stability that that would buy? 25 MR. MIA: I will try to speed it up 26 here. I have a question about -- it's just a quick 27 note, a couple of other people raised it -- of having a 28 PBR-type scheme for picking a fixed price or a fixed 283 DEWEES 1 smoothed price, giving them a range. 2 We already know that we could 3 forecast the price. Why can't we just set a range? We 4 don't have to sit here and have the regulatory burden 5 of 200-and-whatever distributors coming in here. We 6 could sit here, set up classes, and give them a range, 7 "Here you go. You provide standard supply within this 8 range, and you have the incentive to lower your cost." 9 PROFESSOR DEWEES: What happens if 10 you do that on the 1st of November, and the 11 distributors have a month or two months to go out and 12 arrange a portfolio of purchase contracts and during 13 the course of that month something changes in the 14 energy market that significantly affects forecasts of 15 the likely price for the upcoming year? A large plant 16 or two goes down or a large plant or two comes back -- 17 you know, Pickering "A" comes back or Pickering "B" 18 goes down, events like that. 19 The day that the Board issues the 20 price or the price range, starting the next day that 21 price is going to begin to be out of date. Some years 22 it may be easy to stay within that price range; other 23 years it may be impossible. 24 What happens at the end of December 25 when the distributors have finished their purchase 26 process, whatever it is, and it turns out that a bunch 27 of them are either way below the regulated range or 28 away above it? If they are way below, do they get to 284 DEWEES 1 keep the difference? This conflicts with giving the 2 best price to the consumer. It gives them an incentive 3 to discourage customers from switching. 4 If the price is away above, are going 5 to beat up on a majority of distributors because the 6 world changed after the OEB issued its statement of 7 what it thought would be a reasonable price for the 8 upcoming year? 9 It is hard for me to see how you 10 could actually implement that in the real world. 11 MR. MIA: Just a side note. 12 I believe that the PBR has an 13 adjustment factor. That is the nature of the PBR, to 14 have adjustment factors to catch things like this. 15 Just a side point. 16 Just a couple of questions about 17 customer mobility. 18 You will agree that that is a key 19 principle of standard supply? 20 PROFESSOR DEWEES: Yes. 21 MR. MIA: Is it a proper 22 characterization to say that this principle means that 23 customers should not have incentives or disincentives 24 to stay with or switch from a default supplier? 25 PROFESSOR DEWEES: We can't control 26 the incentives. If retailers are offering a much 27 better price -- 28 MR. MIA: I mean aside from that, 285 DEWEES 1 sort of internal to the -- 2 PROFESSOR DEWEES: There should be no 3 artificial barriers to switching. 4 MR. MIA: And given the MDC's concern 5 to dampen price volatility, would you agree that a 6 consumer faced with more frequent price changes may be 7 more apt to switch to another supplier as compared to 8 one that faces less frequent price changes? 9 PROFESSOR DEWEES: If the price 10 changes are downward, I expect the customer is not 11 going to switch. 12 MR. MIA: In terms of volatility, if 13 it is just up and down and up and down, and they are 14 just -- I think what I am trying to get at is that the 15 MDC was concerned to, (a) in default supply, give them 16 what they are used to, which is basically a stable, 17 predictable price. So whether it goes hugely up one 18 month and then away down the next month, it is the 19 unpredictability that they may want to run away from. 20 PROFESSOR DEWEES: I think the MDC 21 recognized that, other things equal, consumers would 22 prefer stability to variability. But it also felt that 23 consumers would prefer low prices to high prices, and 24 it felt that the smoothed spot pass-through, which is 25 reflected in the draft code, offered a reasonable 26 trade-off: good price, but some variability -- there 27 is no question about that, and I would expect retailers 28 to do some marketing based on eliminating that 286 DEWEES 1 variability. 2 As I understand the submissions, 3 there are differing views as to whether very many 4 consumers are going to actually choose that. If the 5 experience in other jurisdictions carries on here, if 6 most consumers stay with it, then it seems to me they 7 are saying that their discomfort with that variability 8 is not enormous. 9 MR. MIA: In the new market, 10 customers should switch for rational reasons, and in 11 your paper at page 7 you state, quote -- I will just 12 read it out for you: 13 "...the customer must be able to 14 evaluate all available energy 15 supply options, comprehend the 16 differences between those 17 options, and then switch 18 suppliers if he or she perceives 19 benefits of changing to a new 20 retailer." 21 Given our discussion, would you say 22 it is correct to say that switching primarily because 23 of fear of price volatility is not a rational and 24 considered decision? 25 PROFESSOR DEWEES: I'm sorry? Is not 26 rational or is not irrational? 27 MR. MIA: Is not rational. It 28 doesn't fall within your description of why customers 287 DEWEES 1 may want to switch. 2 PROFESSOR DEWEES: I think it is 3 perfectly rational for customers to be risk averse. 4 Even though, on average, the smoothed spot price is 5 likely to be lower, I don't think it would be 6 irrational for a consumer to say, "Price stability from 7 one billing period to the next is very important to me, 8 and it is so important that I am prepared to pay a 9 premium to have that price stability." That is not an 10 irrational choice to make. 11 MR. MIA: But just contrasted with 12 the list of considerations that should go into a 13 switch, if primarily they are switching just because -- 14 they are happy with the supply and the service, they 15 are just not happy with price variations. 16 PROFESSOR DEWEES: I'm sorry. What 17 was the question? 18 MR. MIA: I'm sorry. 19 If that is the primary reason they 20 are leaving, it doesn't seem to match with what you are 21 saying, that they should be considering alternatives, 22 et cetera. 23 PROFESSOR DEWEES: Could you point me 24 to the sentence that you are referring to? 25 MR. MIA: I will forego that. 26 I will just go to the last question 27 and we can finish up. 28 At page 8 of your paper you state 288 DEWEES 1 that, quote: 2 "-- those customers who are not 3 comfortable with the variability 4 of the smoothed spot price can 5 seek supply from competitive 6 retailers offering fixed 7 prices." 8 You also state in your paper, and you 9 reiterated in your testimony yesterday, that the spot 10 price will likely provide the lowest price. 11 How would you reconcile your 12 statement that customers may switch to more 13 predicability when in reality it is unlikely that a 14 viable retail market will develop because of low 15 prices? 16 Basically, my point is: Doesn't this 17 really give them a hollow choice? It locks them in to 18 the spot market volatility because with the lowest 19 price there may be nowhere else to go. 20 PROFESSOR DEWEES: I think my point 21 yesterday and in the paper was that, for standard 22 supply service, the smoothed spot price will be lower 23 than any other offering, and I suggested a number of 24 reasons why I believe that to be the case, and the MDC 25 report suggested the same thing. 26 A retailer offering a competitive 27 fixed price can lock the customer in for a year or two 28 years, avoid the volume variability, and should be able 289 DEWEES 1 to do better than an SSS fixed price. Whether that 2 retailer can do better than the expected smoothed spot 3 price, I am sceptical, but I don't have a real strong 4 position on that. So I don't know what premium a 5 competitive retailer that is in a position to lock the 6 customer in for a year or two years -- I don't know how 7 much of a premium that retailer is going to charge. 8 If it turns out that it is a very 9 substantial premium, then I think customers are likely 10 to stay with smoothed spot because it is better for 11 them than the alternatives. If that premium is 12 relatively small, then I would expect some customers 13 are going to switch, and the proportion that switch 14 would depend on the magnitude of the premium that is 15 being charged. 16 MR. MIA: Thank you. 17 MS LEA: Thank you very much, 18 Mr. Mia. 19 We will take a 15-minute break, now. 20 Can I ask two favours. During that 21 break, anyone who has questions for Dr. Dewees that has 22 not let me know that, could you do so. 23 Secondly, I am going to put a sheet 24 on that desk down there of time estimates for the next 25 presenter, John Todd. If you haven't given me an 26 estimate perhaps you could fill one out. Thanks very 27 much. 28 Fifteen minutes, please. Ten to 290 DEWEES 1 11:00. 2 --- Upon recessing at 10:35 a.m. 3 --- Upon resuming at 10:51 a.m. 4 MS LEA: Mr. Rawson, for TransCanada. 5 If you can find a seat, sir, with a microphone. 6 Thank you very much. 7 Thank you, Dr. Dewees, for your 8 continued work. 9 We will proceed. Thank you. 10 MR. RAWSON: Keith Rawson, 11 R-A-W-S-O-N, for TransCanada. 12 Dr. Dewees, in your submission and in 13 discussions so far, you have made quite a bit of 14 reliance on the spot market price being representative 15 of low cost. Would you say that it is essential for 16 that to be true, that the spot market price be 17 dependent upon a significant amount of competition? 18 PROFESSOR DEWEES: During the first 19 few years, the spot market price is going to be limited 20 by the Market Power Mitigation Agreement, to the range 21 of 3.8 cents. The MDC recognized the market would not 22 be competitive with OPG having 85 or 90 per cent of 23 generation capacity and so in the early stage that is a 24 regulated price. That cap will come off as OPG 25 decontrols, so by the time that cap is no longer 26 binding there should be a competitive price. The MDC 27 was satisfied with that price as the SSS price during 28 the period while OPG can exercise market power and is 291 DEWEES 1 relying on competition when it can no longer do so. 2 MR. RAWSON: If there had been no 3 indication that the spot market price would have been 4 the result of competition, somewhere down the road 5 would the spot market price have been your preferred 6 option? 7 PROFESSOR DEWEES: You are suggesting 8 that OPG might continue to exercise market power 9 indefinitely. At that point, if that turns out to be 10 true, we haven't achieved the goal of a competitive 11 wholesale market. 12 The retail market is sort of built on 13 the wholesale market, so if that price is not 14 competitive, in the long run, we haven't achieved the 15 wholesale goal. I'm not sure that would have led the 16 MDC to choose some different basis for the standard 17 supply service, though. 18 MR. RAWSON: What I am trying to get 19 at here is that the fundamental value you see in the 20 spot market price, the fact that it would likely be the 21 lowest price, is that not ultimately dependent on a 22 high degree competition and if that high degree of 23 competition does not exist, you wouldn't be able to 24 rely on the spot market price being a low price? 25 PROFESSOR DEWEES: If there is an 26 interaction between the spot market and the contract 27 market, and I don't know what the relationship would 28 be, our expectation was that even during this period 292 DEWEES 1 when the Market Power Mitigation Agreement is in 2 effect -- that is, when the wholesale market is not 3 competitive, in the early stages -- the MDC believes 4 that the spot price would be the lowest price. 5 I'm sorry. I am sort of working this 6 through in my mind as we talk. 7 I think the MDCs assumption was, even 8 when it is not competitive, that is the best available 9 price. 10 MR. RAWSON: That is specifically 11 because of the Market Power Mitigation Agreement that 12 it is the best available price in the absence of open 13 competition? 14 PROFESSOR DEWEES: No. It is because 15 to offer a fixed price involves the other factors I had 16 spoken about before, including volume risk, that would 17 lead to any generator charging a higher price. 18 MR. RAWSON: Let's depart for a 19 moment from the spot market price as a standard service 20 offering and talk about the spot market price as just a 21 representative price in the marketplace -- so not 22 compared to fixed, not compared to anything else, just 23 on its own merit. 24 Is not the fundamental value of the 25 spot market price being representative of the market 26 price dependent on there being a competitive 27 marketplace? 28 PROFESSOR DEWEES: Even if the market 293 DEWEES 1 is not competitive, the spot market price should 2 reflect, in some way, the cost of generators because it 3 is a price that is available to anyone -- that is, 4 because the spot market price comes from economic 5 dispatch of generation it is a price available to 6 anyone. It is electricity flowing down the wires; it 7 can be bought by wholesale consumers at the spot market 8 price. Under our competitive mechanism, any consumer 9 could ask for the spot market price. So it is a price 10 available to everyone. It is a public price and 11 therefore one against which contractual arrangements 12 are going to have to compete, even if the structure 13 isn't competitive. 14 MR. RAWSON: So, then, the spot 15 prices is the price marker that has some value in the 16 marketplace, even without the advantages of 17 competition. Is that the way you would say that? 18 PROFESSOR DEWEES: I think that is -- 19 that is a better summary than I gave, yes. 20 MR. RAWSON: Two questions. 21 Was the Market Design Committee aware 22 of the structure of the North American natural gas 23 market, the fact that there is a high volume of buyers 24 and sellers often referred to as "liquidity" and that 25 that results in a spot price equivalent called "index" 26 that is very representative and also is the result of 27 competition? 28 PROFESSOR DEWEES: More or less, yes. 294 DEWEES 1 MR. RAWSON: In that scenario, where 2 you have a price that is well recognized and reflective 3 of the marketplace, and also reflective of a high 4 number of buyers and sellers, is that not a desirable 5 state to end up with? 6 PROFESSOR DEWEES: I don't know. It 7 seems to work for gas. As I pointed out yesterday, 8 there is a fundamental difference between the gas 9 market and the electricity market. There is not an 10 economic dispatch mechanism that generates the spot 11 price that we will have in Ontario, so the markets 12 aren't perfectly comparable, in that respect. 13 But the point is, you can have 14 competition. The gas market has competition among 15 buyers and sellers, on a contract basis. I am happy to 16 accept that as true. 17 MR. RAWSON: You have mentioned, a 18 couple of times this morning and in this past few 19 minutes and previous, that you are depending on 20 centralized -- well, let's call it centralized 21 dispatch, as being a fundamental characteristic and in 22 fact that is one of the reasons why a spot price is a 23 good index? 24 PROFESSOR DEWEES: Yes. 25 MR. RAWSON: Are you aware of the 26 situation that took place in New England over the last 27 month or two where there were some price spikes and in 28 fact the New England market is characterized by central 295 DEWEES 1 dispatch? 2 PROFESSOR DEWEES: No. I haven't 3 been following that. 4 MR. RAWSON: Moving on to the 5 standard supply for a moment. 6 Was the Market Design Committee aware 7 of a practice that is reasonably common in North 8 America to have a standard offer as a transmission 9 mechanism? 10 PROFESSOR DEWEES: What market are we 11 talking about? Electricity or gas? 12 MR. RAWSON: Electricity. 13 PROFESSOR DEWEES: As a transition 14 mechanism. That doesn't ring a bell. 15 MR. RAWSON: For example, in New 16 England and other parts of the United States, as they 17 move to an open market there is a standard offer, a 18 price, that is determined in advance, often 19 transitioning to a market price. 20 Was the Market Design Committee aware 21 of that mechanism? 22 PROFESSOR DEWEES: We talked about 23 California and PJM. I don't think we talked much about 24 New England. 25 MR. RAWSON: Did you come across any 26 standard offer type of the way I have characterized it. 27 Any of those type examples? 28 PROFESSOR DEWEES: We are certainly 296 DEWEES 1 aware that most jurisdictions require that there be a 2 default supply available to customers, at least those 3 who don't make a choice and maybe one that customers 4 can elect. I am not sure what distinction you are 5 implying by the words "standard offer". 6 MR. RAWSON: The standard offer is a 7 price that is known, essentially, in advance. Somehow 8 or other, the people who set up the market come up with 9 a price that is offered to essentially the default 10 customers. Often that price will transition over time 11 to a market price. 12 PROFESSOR DEWEES: We may have 13 discussed that. I don't recall in detail. 14 MR. RAWSON: Yesterday, and to some 15 extent today, there was some discussion about the 16 degree of competition in the Ontario marketplace and 17 that in fact you expect there to be relatively 18 wholesale competition at market opening and for some 19 time thereafter. Is that fair? 20 PROFESSOR DEWEES: Certainly, at 21 market opening we expect very little. And, then, when 22 it emerges, the mitigation agreement says in 42 months 23 OPG should have achieved decontrol, substantial 24 decontrol of its price-setting units. Will it happen 25 faster than that? It is hard to tell. 26 MR. RAWSON: Would it be desirable 27 for there to be more competition earlier? 28 PROFESSOR DEWEES: I think that would 297 DEWEES 1 be desirable. 2 MR. RAWSON: Is there any awareness 3 that the -- let me rephrase that. 4 In putting forward the standard 5 supply position, was the impact on the competitiveness 6 of the marketplace a factor or was it more just driven 7 by a concern about the customers paying the most price? 8 PROFESSOR DEWEES: I think the MDC 9 considered both of those. 10 MR. RAWSON: The MDC viewed the 11 standard supply offer as being neutral, better than 12 neutral, worse than neutral, with regard to 13 competition? 14 PROFESSOR DEWEES: I think the MDC 15 regarded it as being neutral. It felt that the price 16 was pretty good, likely the best price available. 17 Recognizing that consumers might want to choose a fixed 18 price offer as an alternative, that provided some 19 opportunity for retailers, and it would be up to 20 consumers to decide whether they wanted to go with 21 competitive retailers. So it didn't preclude 22 competition, but it didn't force customers into the 23 hands of retailers. 24 MR. RAWSON: With the Market Power 25 Mitigation Agreement setting a revenue cap at 3.8 cents 26 a kilowatt hour, is it not possible that some classes 27 of customers might pay on average higher than 3.8 and 28 some pay on average lower than 3.8, but the average 298 DEWEES 1 then results in 3.8? 2 PROFESSOR DEWEES: That is possible. 3 It depends on what OPG does. 4 MR. RAWSON: If customers could 5 depend on -- particularly small volume customers who 6 may not have any market power -- in fact, don't have 7 any market power -- if they could depend on a fixed 8 price offering at 3.8, would they not then be better 9 off compared to a price which could be on average 10 higher than 3.8? 11 PROFESSOR DEWEES: If you are asking 12 me if 3.8 is better than more than 3.8, sure. 13 MR. RAWSON: No, I am talking about 14 the regime. The proposed market power mitigation 15 regime talks about an average for all customers at 3.8. 16 If there is a regime that fixed the 17 price at 3.8 for every customer as a standard supply 18 offer, could not then the small volume customers take 19 some comfort in knowing that their price could not be 20 higher than 3.8? 21 PROFESSOR DEWEES: But there would be 22 the concern that if the market price dips below that 23 they are not going to get the benefit of it. Yes, they 24 get some security on the upside, but they lose the 25 opportunity for enjoying the downside should it occur. 26 MR. RAWSON: The possibility of the 27 market price dipping below 3.8, is that not dependent 28 on there being competition? 299 DEWEES 1 PROFESSOR DEWEES: It depends on 2 competition and on what happens to supply. There was 3 some thought at the MDC, at least some people thought, 4 that OPG might have trouble keeping the price up 5 to 3.8. 6 MR. RAWSON: Could you please explain 7 to me how there could be any problem keeping the price 8 up to 3.8 when in fact Ontario Power Generation has 9 market power and can set the price at any level they 10 want, subject to the Market Power Mitigation Agreement? 11 I am afraid I don't understand that. 12 PROFESSOR DEWEES: I wasn't the one 13 who had that concern. I am not sure I can articulate 14 it in detail. 15 I think the thought was, suppose that 16 MAOP is successful and the nuclear plants come back on 17 line, there is lots of supply around, and the tie-lines 18 are expanded so that there are opportunities for 19 imports from other jurisdictions, at the margin, that 20 puts pressure on the price. 21 Is it sufficient to drive it 22 below 3.8? I don't know. All I am saying is that some 23 people thought that was a possibility. 24 MR. RAWSON: If the nuclear plant 25 were to come back still under the control of Ontario 26 Power Generation, would there truly be pressure on 27 price? In fact, they would have more plant to use to 28 sell at the price they set, would they not? 300 DEWEES 1 PROFESSOR DEWEES: I'm not sure. 2 MS LEA: I wonder if you are getting 3 into areas where Dr. Dewees is not an expert. 4 MR. RAWSON: Thank you. 5 PROFESSOR DEWEES: I have spent more 6 time on retail and very little time on market power 7 mitigation. Thank you. 8 MR. RAWSON: All right. Thanks. 9 I think my last set of questions 10 relates to the variability in the spot price about 11 which we had a significant amount of discussion this 12 morning and yesterday. 13 Is it not possible, with the proposed 14 spot price pass-through and the market power mitigation 15 regime, for the spot price to be just as variable as if 16 there was no market power mitigation regime in effect? 17 In fact, the market power regime does not control price 18 variability, it just deals with the outcome of that. 19 PROFESSOR DEWEES: Certainly under 20 the Market Power Mitigation Agreement the price can 21 vary hour by hour and from one season to another. The 22 agreement deals with average revenue over a period of 23 time. It provides a refund if the average revenue has 24 been above 3.8. 25 I expect that the effect of that 26 would be to reduce volatility, but it need not 27 eliminate it. What it does is to guarantee to the 28 consumer at the end of the year that 90 per cent of the 301 DEWEES 1 OPG's share of that power is going to cost no more than 2 3.8 cents. 3 MR. RAWSON: You mentioned that you 4 would think it would reduce volatility. That really 5 does depend, though, on Ontario Power Generation's 6 bidding process and strategy, does it not? 7 PROFESSOR DEWEES: That's right. 8 MR. RAWSON: Thank you. 9 Those are all of my questions. 10 MS LEA: Thank you, Mr. Rawson. 11 Mr. White. 12 MR. WHITE: I am Roger White. I am 13 with ECMI and I am representing a number of municipal 14 electric utilities. 15 Let me characterize for a minute what 16 I think I heard you say about the risk avoidance nature 17 and the decision-making or recommendations of the MDC 18 as it related to the natural monopoly wires business. 19 Traditional regulation of these businesses has been on 20 the basis of risk-free debt, plus a risk premium on top 21 of that risk-free debt for the allowed rate of return. 22 Is that generally the way distributors have been 23 regulated in monopoly environments? 24 PROFESSOR DEWEES: I didn't say 25 anything about capital structure. I understand that. 26 My understanding is that the regulation is based on 27 costs, the cost of capital, and a rate of return on 28 capital. 302 DEWEES 1 MR. WHITE: To the extent that the 2 natural monopoly gets involved in competitive or more 3 risky environments, would that tend, in the debt 4 marketplace, to increase the cost on that natural 5 monopoly? 6 PROFESSOR DEWEES: Yes. I would 7 expect, the more risky the business, the higher the 8 cost of capital. 9 MR. WHITE: Was it the focus of the 10 Market Design Committee to try to minimize the risk 11 exposure to the natural monopoly wires business in its 12 true-up recommendation? 13 PROFESSOR DEWEES: I think it was a 14 general concern of the MDC to try to minimize risk to 15 the wires company. 16 MR. WHITE: At what point would you 17 have a concern -- to the extent that the true-up 18 mechanism might be imperfect, at what risk level as a 19 per cent of the rate base for the LDC would you be 20 concerned that the risk was having an adverse impact on 21 the retail price of electricity -- not the energy 22 component, but the price the customer pays? 23 PROFESSOR DEWEES: The MDC didn't get 24 into anything like that level of detail. I don't have 25 an opinion on that at this time. 26 MR. WHITE: In your earlier 27 discussions I think I heard you talk about the LDCs 28 having a monopoly. Was I correct? 303 DEWEES 1 PROFESSOR DEWEES: Yes. 2 MR. WHITE: Are you aware that they 3 have no exclusive franchise under their licence? 4 PROFESSOR DEWEES: I haven't looked 5 at the licence, no. By "natural monopoly", I was 6 referring -- I take the point that maybe someone else 7 can build a line somewhere within a service territory, 8 but down a given street there is likely to be just a 9 single line running, it seems to me unlikely. We all 10 have very many examples of competing lines going down 11 the street. I think that is the sense in which I think 12 of it as a natural monopoly. 13 MR. WHITE: OHSC, incidentally -- and 14 this is a point of information for you -- in meetings 15 has indicated that they intend to build wires within 16 municipal LDCs' service areas, in direct competition 17 with the utility, to supply end-use customers. 18 Non-interval metering, currently used 19 by LDCs or municipal electric utilities, those meters 20 are read periodically during the month, regularly. 21 They are not all read on the same day. 22 PROFESSOR DEWEES: That is my 23 understanding. 24 MR. WHITE: If the true implication 25 of the SSS requires billing delays typically in the 26 order of three weeks, does that produce an acceptable 27 financial burden on the consumers who pay the end-use 28 bills? 304 DEWEES 1 PROFESSOR DEWEES: I don't know what 2 the magnitude of that risk would be, so I am not in a 3 position to answer that question. But I think that 4 Mr. MacOdrum pointed out that there could be a billing 5 delay as a result of the spot price mechanism, and I 6 accept that that does produce a cost for the 7 distributor. 8 MR. WHITE: And, correspondingly, the 9 end-use customers? 10 PROFESSOR DEWEES: Yes. 11 MR. WHITE: Do you have any concerns 12 about the likelihood of the administrative costs 13 incurred by an LDC dealing with an after-the-fact 14 adjustment in the 3.8 price should OPG fail to achieve 15 the 90 per cent 3.8 threshold required by the 16 agreement? 17 PROFESSOR DEWEES: The MDC didn't 18 deal with the mechanics of how that refund would be 19 handled, and I haven't been involved in any discussions 20 of it, so I don't know whether that will be easy or 21 difficult. 22 MR. WHITE: If you are dealing with a 23 situation -- and to try to simplify things, maybe if we 24 can think about a distributor that has only two 25 consumers. For that distributor, meters can be read at 26 the same time, so whether the time line fits the month 27 does not matter in terms of the billing. 28 In other words, if the two meters are 305 DEWEES 1 read simultaneously, then the profile of the 2 non-interval meter loads over the same period, even 3 though it may not perfectly match one customer, or 4 either customer for that fact, but on average, for the 5 two of them, it is easy to match the spot market 6 profile price for those two customers? 7 PROFESSOR DEWEES: I would think it 8 would be pretty easy. 9 MR. WHITE: To the extent that you 10 move the meter reading dates and shift those windows, 11 does that make it more difficult to match the load 12 profiles of those two customers with the spot market 13 price? 14 PROFESSOR DEWEES: I haven't been 15 involved in discussions of the settlement system and 16 the mechanics of working that out. I think the 17 principle is that the LDC should get paid for all of 18 the electricity it delivers to its customers, but 19 exactly how that is worked out with different reading 20 dates I don't have an opinion on. 21 MR. WHITE: Can I characterize that 22 answer as being that what is essential from your 23 perspective is that there be a true-up as opposed to 24 specifically when the true-up must happen? 25 PROFESSOR DEWEES: I don't see the 26 connection between the true-up and the problem that you 27 are discussing. 28 MR. WHITE: Let me -- because we are 306 DEWEES 1 trying to help here. 2 If when the utility issues the bill 3 they are not aware of what the spot market price is, 4 then they are going to have difficulty, implicitly, in 5 matching that spot price, and because of the 20-day 6 delay that produces costs and adverse costs for 7 consumers. 8 PROFESSOR DEWEES: You are suggesting 9 that the utility may choose to issue a bill based on an 10 estimate of what the spot price was, and if it does 11 that and the spot price deviates significantly, then 12 there may be a true-up. 13 MR. WHITE: I am suggesting that is 14 what the Market Design Committee recommendation 15 recognized, that in fact, in order to maintain the cash 16 flow that the municipal electric utilities had, it's 17 normal to render the bills and try and do a true-up 18 down the road based on what the actual was and what the 19 current was and therefore not have the cash flow 20 implications. Are you comfortable with that 21 perspective? 22 PROFESSOR DEWEES: The committee 23 itself did not go into that level of detail and, not 24 having been involved in those details, I don't feel 25 comfortable making a judgment on that. 26 MR. WHITE: If the delay in knowing 27 the true spot market price were to increase the price 28 that customers pay, would that be a good thing, from 307 DEWEES 1 your perspective? 2 PROFESSOR DEWEES: You always have to 3 ask: What are the choices? I can't say whether one 4 thing is a good thing without looking at what the 5 alternatives are and how big is the cost. 6 You are asking about the details of 7 implementing the system and these are very important. 8 The Market Design Committee had a retail technical 9 panel that looked at some level of detail and I believe 10 the OEB -- in fact, I think I saw a sign out in the 11 hall saying there is a settlement panel working right 12 now, and I suspect they are dealing with precisely some 13 of the issues that you are raising now. 14 The MDC's advice was at a higher 15 level. I don't think it's going to be helpful for 16 sorting out those matters. I think those things are 17 best sorted out by the participants who understand the 18 details. 19 MR. WHITE: My concern, on behalf of 20 my clients, is that in fact what we are dealing with in 21 the standard supply service criteria is in fact 22 something which will impose a standard that the 23 mechanics may not be able to reach and therefore you 24 get into all the rate issues that we had the discussion 25 about at the front end as to whether the charges that 26 the LDCs are levying for standard supply service can 27 have in fact force of law. 28 PROFESSOR DEWEES: I recognize the 308 DEWEES 1 concern and I would assume that the technical panels 2 that are working on these things will look for 3 solutions that provide a combination of reasonable 4 service to the customer and reasonable cost for the LDC 5 and all other participants. 6 MR. WHITE: Thank you. Those are all 7 my questions. 8 MS LEA: Thank you very much, 9 Mr. White. 10 Mr. Reghelini? 11 MR. REGHELINI: I would like to 12 return to your discussion about the level playing field 13 and competitive advantage and just make sure I 14 understand your comments of yesterday. You indicated 15 that gas utilities could compete in the electricity 16 marketplace through the use of an affiliate. 17 PROFESSOR DEWEES: That's my 18 understanding. I'm not an expert on the gas industry, 19 by any means. 20 MR. REGHELINI: And you considered 21 that that affiliate's use of the existing relationship 22 that the utility had with its customers through a 23 similar name and brand were a source of legitimate 24 competitive advantage for that affiliate. Is that 25 correct? 26 PROFESSOR DEWEES: That's correct. 27 MR. REGHELINI: Would you also say 28 that if that affiliate had the use of a customer list 309 DEWEES 1 from the gas utility, that would also be a source of 2 legitimate competitive advantage? 3 PROFESSOR DEWEES: I am not aware 4 that the competitive affiliate would have access to a 5 list from the distribution utility itself. I would 6 think that the competitive affiliate would be -- our 7 design proposal for electricity was that the 8 competitive affiliate could not take advantage of the 9 distributors' customer data and, while I don't know 10 what the arrangements are on the gas side, the parallel 11 requirement would be that the competitive affiliate 12 could not take advantage of the customer list from the 13 distribution utility. 14 MR. REGHELINI: So, in your view, 15 then, having access to that list would not be a 16 legitimate source of competitive advantage? 17 PROFESSOR DEWEES: Would not be "a" 18 legitimate? 19 MR. REGHELINI: Right. 20 PROFESSOR DEWEES: That's correct. 21 MR. REGHELINI: Also, yesterday in 22 speaking about the prohibition of a standard service 23 supplier in providing competitive retail within the 24 same service area, you acknowledged that one structure 25 utilities could use to deal with the concern about 26 utility information going to a competitive retailer 27 would be to set up two affiliates, one that would work 28 with the competitive retail and one which would just do 310 DEWEES 1 standard supply, and that would ensure that knowing 2 proper use of customer information took place. 3 PROFESSOR DEWEES: Yes. "Ensure" is 4 probably too strong a word, but it would help to 5 assure. 6 MR. REGHELINI: Is there another 7 possible structure in which the utility either chose to 8 do the billing internally itself or through a separate 9 billing affiliate and then used a different affiliate 10 to provide standard supply and contracted strictly on 11 an aggregate basis without providing that standard 12 supplier any customer information? In that event, 13 would there be the same level of concern if that 14 affiliate doing standard supply also did competitive 15 supply in the same service area? 16 PROFESSOR DEWEES: The problem that I 17 have with that proposal is I don't understand why 18 anyone would do that. In fact, I may not understand 19 exactly what you said. 20 On the first part, what do I think of 21 having a party that's not providing competitive 22 activities doing the billing and bookkeeping that's 23 associated with standard supply, fine, I see no problem 24 with that. The other part of your question was what 25 about having an affiliate that provides competitive 26 activities, providing bulk power for standard supply 27 service. Is that -- 28 MR. REGHELINI: That's right. Rather 311 DEWEES 1 than the utility providing the standard service 2 supplier individual customer information, instead 3 provide the standard supplier what its aggregate 4 requirements were for standard supply. 5 PROFESSOR DEWEES: The problem I have 6 with that is that with the spot price pass-through 7 there is no advantage to the distributor. The 8 distributor can get the spot price pass-through direct 9 from the IMO. In fact it's going to be billed by the 10 IMO for that spot price. 11 Why would it turn around to a third 12 party, even its good friend the affiliate, and say, "I 13 will buy this from you, so I will send you the bill 14 from the IMO and you pay that and I will pay you. We 15 are going to write some extra cheques here, but for 16 exactly the same amount of money"? It doesn't make any 17 sense to me. 18 As I pointed out in my paper, if the 19 affiliate thinks it can make money on this somehow, 20 that it can buy power at a fixed price and resell it at 21 spot, it can do that without having any customers. It 22 doesn't need the SSS customers. This is essentially 23 making a bet about what is going to happen with the 24 spot price and you can do that on a financial basis 25 without the customer list. So I don't understand the 26 motive for the arrangement. 27 MR. REGHELINI: Setting aside that 28 concern, if we just focus strictly on the affiliate's 312 DEWEES 1 inappropriate use of customer information by doing both 2 competitive and standard supply from the same entity, 3 would the concerns about that be lessened if it was 4 done in aggregate? 5 PROFESSOR DEWEES: If the affiliate 6 doesn't get any customer information, then my concerns 7 about customer information are satisfied, yes. 8 MR. REGHELINI: Thank you. 9 MS LEA: Thank you, Mr. Reghelini. 10 Mr. Ronayne? 11 MR. RONAYNE: Hi. Mark Ronayne from 12 the Competition Bureau. I have a few questions I would 13 like to go through as quickly as I can. 14 One is that I wanted to clarify a 15 couple of things about what you would include in the 16 pass-through option. Would there be a mark-up to 17 encourage retailers? Do you think that's something 18 that might be anticipated if they are having a problem 19 meeting the spot market price? 20 PROFESSOR DEWEES: No, I think that's 21 inconsistent with the MDC recommendations. 22 MR. RONAYNE: What about the costs 23 of -- can you give me a brief explanation why you think 24 that would be a problem? 25 PROFESSOR DEWEES: Because the whole 26 idea of the spot price pass-through is that it gives 27 the customer the wholesale spot price for the 28 electricity, it allows the distributor to recover the 313 DEWEES 1 actual costs of administering what is essentially a 2 billing function -- it's not even a procurement 3 function, but a billing function -- for managing that 4 spot price pass-through and there is no reason for the 5 price charged to the customer to be any greater than 6 the spot price plus the actual administrative costs. 7 Some submissions suggested that the 8 price should be raised further because retailers can't 9 compete with this. The whole point of competition is 10 to see whether competition can provide better service 11 and for that you need the price to reflect the costs. 12 So if retailers can compete with the spot price 13 pass-through with only the administrative costs, 14 terrific, they will take customers away. If they can't 15 compete with it, customers are better off not going to 16 them. 17 To charge any more than that is to 18 provide excess profits for the distributor and, 19 essentially, to subsidize switching to retailers. 20 There was nothing in the MDC Report that suggested 21 support for that. 22 MR. RONAYNE: Earlier there was a 23 discussion about what might be incremental cost to LDCs 24 to put together the spot price pass-through option. 25 Would those then be passed on through the spot price 26 pass-through, the incremental cost? 27 PROFESSOR DEWEES: Yes. Those costs 28 should be recovered by the distributor. 314 DEWEES 1 MR. RONAYNE: What about default 2 customers? I am talking about ones that don't pay for 3 which there is an obligation to serve for a period of 4 time. Do you see that sort of thing being included in 5 a spot price pass-through option or is that something 6 separate or should be dealt with in some other way? 7 PROFESSOR DEWEES: The MDC didn't get 8 down to the level of deciding how specific costs like 9 that should be allocated, but it seems to me that the 10 obligation to provide standard service supply should 11 also mean that the supplier can recover all costs 12 associated with it. If that includes unpaid bills, 13 that's part of the costs. 14 MR. RONAYNE: Onto another area. 15 Thank you very much. 16 On the signalling properties of a 17 spot price pass-through mechanism, let's say we had a 18 rebate from Ontario Hydro that was done on a 19 retroactive basis so customers were seeing what the 20 actual variability was in their -- while they are 21 somewhat protected from volatility in their net bills, 22 the net price or the average price they are paying, 23 they are seeing something like a signal for what the 24 price is going to be maybe 42 months down the road when 25 the market is deregulated, if in fact it is at that 26 point in time. Do you see that as a signalling benefit 27 possibly from this option? 28 PROFESSOR DEWEES: I am not sure how 315 DEWEES 1 I would interpret deviations from the 3.8 cents during 2 the time when OPG has substantial market power as a 3 forecast of what is going to happen once there has been 4 decontrol. Personally, I wouldn't be inclined to infer 5 very much from that. 6 MR. RONAYNE: There was a discussion 7 that came up yesterday which was about access to 8 forward markets. You don't believe, then, that 9 consumers should be precluded from forward markets. Do 10 you see this as something that is probably more in the 11 realm of a retailer -- that access to these forward 12 markets is something more in the realm that a retailer 13 should be providing? 14 PROFESSOR DEWEES: Yes. I don't see 15 small residential customers participating directly in 16 forward markets, although large industrial or 17 commercial customers may well do that. To the extent 18 that there is residential consumer demand for price 19 protection, I would expect that would be provided by 20 retailers who would aggregate residential customers. 21 MR. RONAYNE: Fair enough. 22 You made reference yesterday to the 23 difference between competition and competitors. Does 24 that touch to the heart of the price pass-through 25 option in the sense that this option is designed to 26 pull through the benefits of wholesale competition to 27 retailers in a particular household, that maybe if you 28 don't have a bunch of competitors at the retail end of 316 DEWEES 1 the business you can still have competition for 2 supplying those customers through the wholesale market? 3 PROFESSOR DEWEES: Yes. 4 MR. RONAYNE: If I can go to page 10 5 of your submission, there is a paragraph that starts 6 with: 7 "Comments on the draft Code 8 suggest that distributors should 9 not be restricted to obtaining 10 supply from the spot market, but 11 should be allowed to contract 12 for SSS power through a physical 13 bilateral contract indexed to 14 the spot price with a discount. 15 The motive for such a discount 16 would be to build a long-term 17 relationship with distributors." 18 Could you expand a bit on what you 19 are intending to get at with that statement? 20 PROFESSOR DEWEES: All I was doing 21 was repeating what the commentator had said in the 22 comments that had been submitted. So that is my 23 repetition of what somebody else said. 24 The next sentence is my own, saying I 25 am not sure where the commodity like electricity -- 26 what the value of the long-term relationship is. I 27 would guess the distributors, if they were purchasing 28 power, would be looking primarily for price, if the 317 DEWEES 1 product is the same. 2 MR. RONAYNE: Okay. You also have a 3 reference in here, if I can find it, about this 4 possibly raising some concerns about price 5 discrimination, and some other matters. 6 You have not thought more fully on 7 what those concerns might be? 8 PROFESSOR DEWEES: No. The text 9 reflects my thoughts there. 10 MR. RONAYNE: Later in that paragraph 11 there is a statement: 12 "If undertaken by a dominant 13 generator, it might be perceived 14 as price discrimination, the 15 abuse of market power, or 16 manipulation of the spot price." 17 Is that a concern that might be 18 possible also in regard to, say, bilateral physical 19 contracts? 20 You are talking here about standard 21 supply service. Is that an issue that could come up in 22 regard to bilateral physicals that are not SSS 23 contracts, supposing the dominant generator is 24 contracting through bilateral physicals instead? 25 PROFESSOR DEWEES: Yes. The problem 26 is trying to find the same commodity being sold at two 27 different prices. I think it would be easier to 28 identify that in the spot market where it is clear what 318 DEWEES 1 the product is. 2 But physical bilateral contracts 3 might raise the same concern. 4 MR. RONAYNE: Did the MDC contemplate 5 whether this might be a source of concern in the 6 marketplace, depending on how the 3.8 cents is 7 enforced? 8 PROFESSOR DEWEES: I don't recall 9 discussions of that. 10 MR. RONAYNE: Do you have any 11 thoughts on that? 12 PROFESSOR DEWEES: I have a concern, 13 as expressed in this paragraph. 14 MR. RONAYNE: Okay. Thank you very 15 much. 16 MS LEA: Thank you, Mr. Ronayne. 17 Mr. Power. 18 MR. POWER: Yes; thank you very much. 19 Mr. Dewees, I believe I am the last. 20 I will try to get you out of here by 12:30, is it? 21 PROFESSOR DEWEES: Thank you. 22 MR. POWER: I will do my best. 23 By way of background, for your 24 information, I am here on behalf of ATCO Power, GPU 25 Electric, ENERConnect, the International Brotherhood of 26 Electrical Workers (Local 636), and Hydro Mississauga, 27 London Hydro, Oshawa PUB, Sarnia Hydro, St. Catherines 28 Hydro, Whitby Hydro, Ingersoll PUC, Petrolia PUC, and 319 DEWEES 1 St. Thomas PUC. 2 My apologies. I wasn't here 3 yesterday, so if I need to, I may have to stand back 4 and ask a couple of questions. If they have been 5 solved, just let me know and I will move on. 6 I have taken the time to go through 7 the MDC reports, your reports, and I have spoken with 8 various MDC members. What I am going to try and get at 9 in the next little while is the foundation for some of 10 the thinking behind what occurred at the MDC, the 11 underlying information and thoughts at the time. 12 Just before I get into that, I need 13 one clarification, if I may, in terms of your 14 appearance here today. 15 If I understand correctly, you are 16 here as a neutral facilitator of the MDC process who is 17 here to report on the MDC process itself. Is that 18 correct? 19 PROFESSOR DEWEES: Yes. I was asked 20 by the Board staff if I would make a written submission 21 and speak to explain the basis of the MDC 22 recommendations and to talk about those in connection 23 with the draft code. 24 MR. POWER: You are not appearing, 25 then, as an expert in electricity markets or 26 electricity market regulation, and these sorts of 27 things? 28 PROFESSOR DEWEES: Well, I am an 320 DEWEES 1 economist. I have a year's experience now with the 2 MDC, so I am relying on that expertise in what I am 3 doing here. 4 MR. POWER: But you wouldn't qualify 5 yourself on the marketplace as an expert in the 6 regulation of electricity marketplaces, and I take it 7 you haven't been retained by a jurisdiction in the 8 world to advise them on the regulation of their 9 marketplace: codes, licences, these sorts of things? 10 PROFESSOR DEWEES: That's right. 11 Aside from working for the MDC for a year, I have not 12 had other assignments in electricity. 13 MR. POWER: Okay. So your knowledge 14 comes from the MDC process? 15 PROFESSOR DEWEES: And from my 16 training as an economist and as an electrical engineer. 17 MR. POWER: Right. I understand 18 that. I have your CV here. 19 I would like to go through your paper 20 and just distinguish in your paper the comments of the 21 MDC, on which I have some questions, versus the 22 comments which you have fairly, I think, characterized 23 as your personal comments, and then just divide those 24 out. 25 PROFESSOR DEWEES: Okay. 26 MR. POWER: On page 5 of your report, 27 in the bottom paragraph, the third sentence on the 28 right-hand side begins with: 321 DEWEES 1 "I believe that it was not 2 supported because it would allow 3 distributors..." 4 And then you go on to the bottom and 5 say: 6 "Not having to change suppliers 7 should mean not being 8 overcharged if you do not 9 change." 10 I take it that is a personal comment, 11 the way you have qualified that? 12 PROFESSOR DEWEES: That is correct. 13 MR. POWER: On to the next page, 14 page 6. In the paragraph at the top, in the third line 15 you state that: 16 "While the MDC did not address 17 these items in particular, I 18 believe that it was the intent 19 of the MDC that the regulated 20 distribution charge should 21 include reasonable costs 22 associated with the distribution 23 function..." 24 You go on with the rest of the 25 sentence and carry on and say: 26 "I see nothing in the MDC 27 recommendations..." 28 Then you go on in the next sentence 322 DEWEES 1 to say: 2 "Indeed section 2.5.4 of the 3 draft Code..." 4 And you reiterate that in the rest of 5 the sentence, and you then go on to say: 6 "This does not mean that the 7 charges should be the same as 8 those of competitive 9 retailers..." 10 If I understand correctly, those 11 comments within the majority of that paragraph are your 12 personal comments as well. Is that fair? 13 PROFESSOR DEWEES: The MDC didn't see 14 the draft code. These are my comments based on my 15 understanding of the intent of the MDC as it was doing 16 its work. 17 MR. POWER: Thank you. 18 Down lower in the page, the second 19 paragraph from the bottom, on the fourth line you start 20 off with: 21 "I believe that the MDC choice 22 is consistent with the principle 23 that the purpose of competition 24 is to provide consumers with a 25 desirable combination of price 26 and service and with the belief 27 that a majority of consumers 28 would prefer a low smoothed spot 323 DEWEES 1 price to a higher fixed price. 2 Indeed, I view the assertion 3 that the retailers may be unable 4 to beat the spot price as a 5 tribute to the smoothed spot 6 price pass-through. It means 7 that without effort small 8 consumers will have the best 9 deal available." 10 I take it again that this is a 11 personal view of yours? 12 PROFESSOR DEWEES: That's correct. 13 MR. POWER: On page 7, in the second 14 paragraph from the bottom, in the latter half there are 15 a number of comments in there. In the seventh line up 16 from the bottom of that paragraph, on the right-hand 17 side, it says: 18 "I believe that this should 19 provide a basis for a futures 20 market in Ontario if there is a 21 demand for it." 22 And you carry on with other comments, 23 such as: 24 "...I do not think that they 25 should be forced to do so by a 26 regulatory requirement. I 27 believe that the futures market 28 is not an end in itself and 324 DEWEES 1 should drive the design of the 2 retail market..." 3 Those are personal comments as well, 4 I take it, and not the MDC's. 5 PROFESSOR DEWEES: Yes. I think 6 there was some discussion about this issue at the MDC, 7 and I recall at least some comments that if there is a 8 demand for a futures market it would emerge. But there 9 was no formal statement by the MDC. These are my own 10 views and I think the views of some members expressed 11 during that discussion. 12 MR. POWER: That is consistent with 13 my understanding in reviewing the report. That is your 14 commentary on it, then. 15 PROFESSOR DEWEES: Right. 16 MR. POWER: At the bottom of page 7, 17 that last paragraph starts out with: 18 "I also believe that adoption of 19 a fixed price SSS might hinder 20 the development of futures 21 markets." 22 Again, there are a number of comments 23 in there, and it goes on to say "yet I believe", and 24 then over to the top of the next page, the remainder of 25 that paragraph. 26 As I understand this, and comparing 27 it with the MDC report, these are your personal 28 comments as well. Is that correct? 325 DEWEES 1 PROFESSOR DEWEES: That's correct. 2 MR. POWER: And then on page 8, in 3 the first full paragraph at the top of the report, 4 starting on the second line on the right-hand side, 5 again it continues on: 6 "I believe, and a number of 7 stakeholder comments on the 8 draft SSS Code seem to agree, 9 that the smoothed spot price 10 will be lower..." 11 And it carries on for the rest of the 12 paragraph. 13 Again, from my review, this is a 14 personal comment of yours? 15 PROFESSOR DEWEES: Actually, the 16 conclusion that "the smoothed spot price will be lower, 17 on average, than a fixed price SSS could be", I think 18 is an MDC -- there is a statement in the second quarter 19 report to that effect, as I recall. 20 MR. POWER: There is on that 21 particular point, I agree. 22 PROFESSOR DEWEES: On that issue, 23 yes. 24 MR. POWER: But generally, the 25 remainder of the paragraph is your analysis of comments 26 others have made and the implications of it. 27 PROFESSOR DEWEES: That's right. 28 Certainly discussion around the customers that are not 326 DEWEES 1 comfortable can seek supply from competitive retailers, 2 that was generally in the minds -- I think that was 3 what we talked about around the table at the MDC. 4 But the next sentence is my 5 characterization. 6 MR. POWER: Thank you. 7 In the first full paragraph under 8 "Procurement", in the fourth line down there is a 9 comment: 10 "The draft Code imposes little 11 additional burden on 12 distributors beyond what they 13 already will have to do in the 14 move to wholesale and retail 15 competition." 16 Is that your personal comment as 17 well? 18 PROFESSOR DEWEES: Probably so. 19 MR. POWER: Okay. Thank you. 20 Then at the bottom of the last full 21 paragraph, in the third line from the bottom on the 22 right-hand side there is a statement: 23 "...and would result in little 24 additional burden on 25 distributors beyond what they 26 already would be required to do 27 under the proposed competitive 28 retail market." 327 DEWEES 1 So the same point there: that is 2 your personal observation? 3 PROFESSOR DEWEES: Yes. The MDC, at 4 the time it made the spot price pass-through 5 recommendation in the second quarter, had not set up a 6 technical panel and started looking at settlement 7 mechanisms, and whatnot. 8 The results may have come up in that 9 process late in the day, but more in the technical 10 panel, I think, than at the MDC itself. 11 MR. POWER: They weren't analyzed by 12 the MDC and a formal conclusion drawn on that. 13 PROFESSOR DEWEES: That's correct. 14 MR. POWER: So then when I go to 15 page 9, to the second paragraph from the bottom, the 16 third line from the bottom of that paragraph on the 17 right-hand side, the same thing: 18 "The draft Code does not impose 19 any additional burden on 20 distributors beyond what they 21 already will have to calculate." 22 The MDC does not have a view on that, 23 I take it? 24 PROFESSOR DEWEES: That's correct. 25 MR. POWER: On page 10, the bottom 26 paragraph, in the second line on the right-hand side it 27 states: 28 "I do not see the need to decide 328 DEWEES 1 this question because the 2 proposed arrangement serves no 3 commercial purpose." 4 And following that are a number of 5 arguments to advance that proposition. It goes over to 6 page 11 and a financial analysis that is included in 7 that top paragraph. 8 I take it these are also your 9 personal views as well? 10 PROFESSOR DEWEES: That's right. We 11 had some discussion of this at the MDC, but there was 12 no formal conclusion or recommendation that came out of 13 that. 14 MR. POWER: Thank you. 15 On page 12, the first full paragraph 16 states: 17 "The draft Code accomplishes the 18 aims of the MDC recommendations. 19 And it goes on to talk about the 20 draft code. I assume, again, those are your personal 21 comments, given that the Code has come out after the 22 fact? 23 PROFESSOR DEWEES: Yes. 24 MR. POWER: Again at the bottom 25 paragraph, in the third line in the middle, it says: 26 "The draft Code meets the MDC's 27 concern in two ways..." 28 And then it carries on with an 329 DEWEES 1 analysis of the Code. Again, those are your comments 2 as well? 3 PROFESSOR DEWEES: Yes. 4 MR. POWER: And on page 13, at the 5 top of the document there is a statement there that: 6 "It is difficult to monitor and 7 enforce confidentiality of 8 customer information." 9 And it continues with the analysis of 10 the Code that was started on the prior page and goes 11 into the next paragraph as well. 12 I take it this is also your personal 13 analysis and not the MDC's. 14 PROFESSOR DEWEES: There was 15 certainly discussion at the MDC about the problems of 16 enforcing codes of this sort. I think that was one 17 reason why the MDC recommended a strong separation. 18 I am not sure that this statement 19 particularly appears in one of the MDC reports. 20 MR. POWER: Thank you, sir. That is 21 consistent with my research. 22 Now, just a question on the MDC 23 process. 24 If I understand correctly, is it fair 25 to say that the MDC relied pretty well exclusively on 26 one consultant, PHB? 27 PROFESSOR DEWEES: PHB was the lead 28 consultant and they provided enormous assistance. The 330 DEWEES 1 14 members brought to the proceedings their own 2 background and experience with, in some cases, the 3 MacDonald Committee, with the electricity business, and 4 in some cases the gas business. I was impressed by the 5 depth of the experience of the MDC members themselves. 6 Many members brought to many MDC meetings their 7 consultants, consultants and advisers. So we had the 8 benefit of not just the input from PHB and the input 9 from members but also from consultants to those members 10 throughout the proceedings and that was, in many cases, 11 very valuable. 12 MR. POWER: But it is fair to say 13 that PHB did the lion's share of the original analysis 14 and work? 15 PROFESSOR DEWEES: Yes, I think that 16 is true. 17 MR. POWER: Was there any peer review 18 by other recognized expert consultants that the MDC 19 retained to review the work and advice of PHB from time 20 to time? 21 PROFESSOR DEWEES: No. We chose PHB 22 in a competition. We solicited proposals and reviewed 23 them and chose PHB. But having chosen them, we relied 24 on them and on the other input that we got from the 25 other consultants. 26 One other important part of the 27 process was an international workshop that we held in 28 the spring of 1998 where we invited individuals from 331 DEWEES 1 around the world who had been involved in other 2 restructuring experiences to come in and give us the 3 benefit of their experience. I think they were there 4 for two days. 5 MR. POWER: I was there for that, 6 actually. It was quite useful. 7 I remember one of the comments of one 8 of the fellows saying that, "No matter how much you try 9 and regulate, the free market will always find a way 10 around it". It sort of resonated in my head. 11 PROFESSOR DEWEES: It was an 12 excellent workshop and I think everybody found that 13 very helpful. 14 MR. POWER: I would just like to go 15 back to your paper. 16 On page 1, in the third paragraph, 17 five lines down, it says: 18 "-- the smoothed spot price 19 pass-through has vastly smaller 20 regulatory burdens for the OEB 21 and market participants than the 22 principal alternative SSS 23 proposals." 24 I'm sort of focusing on "vastly". 25 What analysis do you have to support the contention 26 that "vastly" smaller regulatory burdens would exist? 27 PROFESSOR DEWEES: I can't point to a 28 research or analysis that would support the "vastly". 332 DEWEES 1 The MDC, I believe, concluded that 2 the regulatory burdens would be smaller. 3 I think that "vastly" is my own word, 4 and that arises from comparing what has to be done with 5 this new spot, which is simply record the price, do the 6 calculation, charge it to the consumer. 7 The regulatory oversight is really 8 simply to ensure that that accounting has been done 9 accurately, whereas, with any other mechanism, some 10 assessment of a price, or a portfolio of prices, has to 11 be made, some judgments have to be drawn. It seems to 12 me there is an enormous difference in the nature of the 13 work that has to be done if one is to effectively 14 regulate a fixed price or a portfolio price as compared 15 to seeing whether they actually did the calculation 16 that passes the spot price through to the consumer. 17 MR. POWER: So the highest we can put 18 this is that there was some discussion and, perhaps, 19 consensus in the belief that there be a vastly smaller 20 regulatory burden, but nobody has modelled or analyzed 21 this directly? 22 PROFESSOR DEWEES: That's correct. 23 MR. POWER: On page 2, at the bottom 24 of the page, the last paragraph there, the second to 25 third line says: 26 "Consultants presented analyses 27 on the potential effect of price 28 volatility on Ontario 333 DEWEES 1 consumers." 2 I just want to make sure I haven't 3 missed anything. 4 My understanding is that there is 5 only one presentation that was made on this. There 6 wasn't a series of analyses conducted. 7 PROFESSOR DEWEES: That's correct. 8 As part of this discussion, we had the document that is 9 cited in footnote 3. 10 In addition, Enron, at about the same 11 time, or shortly after this, submitted a report that 12 they had done or had been done for them analyzing the 13 price volatility in the midwest during that June or 14 July, which had captured the attention of the MDC, and 15 the report that Enron provided was posted on the MDC's 16 Web site so it was available for members and the 17 general public. 18 MR. POWER: Do you have a copy of 19 that document with you here, because I have some 20 questions specifically on it, the footnote, the 21 reference that you make for the statement, the PHB 22 report, quote: 23 "The Effect of Volatile 24 Electricity Prices on the 25 Residential Customer's Bills"? 26 PROFESSOR DEWEES: This is 27 Retail 9-4? 28 MR. POWER: Yes. Do you have that 334 DEWEES 1 with you? 2 PROFESSOR DEWEES: I may have that. 3 If you will just give me a moment. 4 MR. POWER: If you don't, I have some 5 spare copies of that, just because I know there are 6 probably questions on it. If anybody else wants a 7 spare copy, I have about 30 of them here. 8 PROFESSOR DEWEES: I have a copy. 9 MR. POWER: Okay. 10 --- Pause 11 MR. POWER: Somebody grabbed the 12 wrong pile and handed them up, but that's okay. There 13 are two sets here. I will let this go around. 14 PROFESSOR DEWEES: You just passed 15 out the INNERConnect business plan for next year. 16 MR. POWER: We will try and get 17 there. I think that is the one. 18 There are two of them, but the one we 19 are focusing on right now is RET 9-4, which is, "The 20 Effect of Volatile Electricity Prices on the 21 Residential Customer's Bills", dated August 25, 1998. 22 So, if I understand your testimony 23 correctly and your document correctly, this is the work 24 done by PHB that the MDC relied on in addressing the 25 issue of volatility on the residential customer's bill. 26 Is that fair? 27 PROFESSOR DEWEES: Yes. As I recall, 28 this is the principal analysis that was done for us. 335 DEWEES 1 As I said, we had at least one other submission on 2 volatility and we had quite a bit of discussion. 3 MR. POWER: Right. Okay. 4 So we have two documents: there is 5 the Enron one; and this one, this one being prepared by 6 the prime consultant. 7 Is it fair to say that there is 8 really just a series of overheads? There is an absence 9 of any footnotes, you know, of significance, where you 10 can trace the assumptions behind it. It's not in the 11 nature of a journal article where I can understand the 12 logic behind it and independently check the assertions. 13 PROFESSOR DEWEES: It is a set of 14 overheads. I am looking through to see if there are 15 footnotes but I presume you have looked carefully and 16 the answer is: No, there are not. 17 MR. POWER: We tried to research the 18 background assumptions of this and this document 19 couldn't help us. So we assume that it stands on its 20 own, so to speak, in terms of what the MDC looked at? 21 PROFESSOR DEWEES: Yes, I think so. 22 MR. POWER: Okay. When I looked at 23 page 2, it mentions in fact this is just a 24 presentation, so I guess the report confirms that 25 status. 26 I note that the first several pages 27 talk about extremely high electricity prices in other 28 jurisdictions. 336 DEWEES 1 I take it that was the focus of this 2 presentation? 3 PROFESSOR DEWEES: I would have to 4 look through the whole thing to see if that was the 5 focus. 6 That was one of the factors that led 7 us to be concerned about this issue, but the focus of 8 this was trying to provide some information on what 9 might happen in Ontario. 10 MR. POWER: Right. Trying to reach 11 an analysis of what might happen in Ontario. 12 Is it fair to say that the MDC 13 members, it sounds like, as a whole, from what I found 14 out, were very concerned about volatility when this was 15 presented to them? 16 PROFESSOR DEWEES: I think there was 17 concern about volatility before -- you are saying at 18 the time this was presented there was some concern? 19 MR. POWER: Yes. 20 PROFESSOR DEWEES: Yes, I think 21 that's true. 22 MR. POWER: If I understand the 23 report correctly, what it does is it looks at the 24 extreme volatility in the U.S. and then it looks at 25 Alberta prices and then it suggests that we can look to 26 Alberta as a model of what might occur in Ontario. Is 27 that fair? 28 PROFESSOR DEWEES: That's correct. I 337 DEWEES 1 don't know whether it is in here or whether it was 2 delivered orally, but the caveat is that it is 3 difficult to move from one market -- to make a forecast 4 of what is going to happen in one market by looking at 5 another simply because there are significant 6 differences among these markets. But I think the 7 feeling of PHB was that looking at the Alberta market 8 would be -- that the Alberta market would be more 9 useful for trying to forecast what would happen in 10 Ontario than looking, say, at the midwest, for some of 11 the reasons that I enunciated earlier. 12 MR. POWER: Some of the concerns I 13 would have with that is Alberta is not going to be 14 interconnected with Ontario, so it wouldn't deliver us 15 price indications of what might affect our market. Is 16 that fair? 17 PROFESSOR DEWEES: That's right. 18 There is no spill-over. Rather the question is: What 19 will happen within the market? Alberta has a 20 reasonably self-contained market. We looked at what 21 would happen there to see what would happen within the 22 Ontario market. 23 MR. POWER: Would it not have also 24 been useful to compare with a jurisdiction that we are 25 interconnected with to see what prices signals that 26 they would be sending? Surely, that would have had an 27 influence on volatility. 28 PROFESSOR DEWEES: There are lots of 338 DEWEES 1 other things you could do in looking at interconnect 2 prices. I'm not sure how you would integrate that with 3 the analysis that's here. 4 MR. POWER: I think the difficulty is 5 that there is a lack of analysis. There is no 6 explained rationale for the choice of Alberta over 7 others. There are pretty strong suggestions that other 8 marketplaces are perhaps equal or better benchmarks 9 upon which to extrapolate. 10 Do you have any disagreement with 11 that? 12 PROFESSOR DEWEES: My recollection is 13 that Alberta was chosen because it was -- they have 14 established a competitive market, so in that respect it 15 is comparable, that the data were readily available. 16 One problem we had was to introduce an analysis, you 17 need to be able to find the data. Alberta seemed to be 18 as good as any, in terms of having some comparability 19 and data availability. 20 MR. POWER: Is there any analysis of 21 the Alberta market's cap on the $1,000 megawatt cap 22 they have on price and how that affected data on their 23 volatility? 24 PROFESSOR DEWEES: I don't recall 25 that there was any analysis. There was certainly an 26 understanding that because of the way their computers 27 are programmed the price couldn't go above $999. 28 MR. POWER: Right. Okay. 339 DEWEES 1 Then, looking at what we have here on 2 Alberta, on page 16 of the document, page 16 of the 3 document provides a snapshot of volatility. 4 I think it is fair to say that, over 5 the time period indicated on that chart, volatility is 6 continually increasing over the time frame. Is that 7 fair? 8 PROFESSOR DEWEES: Over this time 9 frame, I would say the price level is increasing, the 10 trend line seems to be moving up and volatility seems 11 to be increasing. 12 MR. POWER: Okay. Thank you. 13 So when we get to page 20 and 22, 14 after looking at Alberta, there were some assumptions 15 made about the Ontario residential marketplace and what 16 we could extrapolate from Alberta. 17 I am particularly curious, because 18 this seems to be a really seminal point in the 19 discussion, this analysis of what might occur in 20 Ontario, as to, I guess, what other sober thought was 21 presented around this Ontario analysis. I mean, I have 22 the lead consultant who has given me overheads; I have 23 some assumptions laid down here without explaining the 24 basis of the assumptions, to any great degree, why we 25 chose some over others; I have no comparison to other 26 markets to give me a sense of how it might look; and, I 27 have an absence of a peer review on this, yet it is a 28 fairly seminal analysis -- or presentation, more 340 DEWEES 1 accurately. 2 Am I missing something? I seem to be 3 missing something here. 4 PROFESSOR DEWEES: At the time of the 5 presentation, there was certainly discussion of many 6 aspects of this. As I recall, there was some 7 discussion of the assumptions that went into it. 8 But was there a competing analysis? 9 No, not that I am aware of. I don't think anybody had 10 available, at the time, another analysis that looked to 11 be as useful as this was. 12 MR. POWER: I note this analysis 13 itself, on page 28, lists just some of the caveats that 14 they have put on the analysis. So is it fair to say 15 that this PHB presentation was incomplete in terms of 16 it didn't analyze a variety of factors that may affect 17 the Ontario marketplace? Is that fair? 18 PROFESSOR DEWEES: Well, any analysis 19 is incomplete in that you could always do some more. A 20 colleague of mine once said, "Research is never 21 completed; it is merely abandoned." So here I think 22 PHB did what they could in the time that was available. 23 If we had had a year, I am sure they could have done 24 much more. 25 MR. POWER: So their study was 26 constrained by the timing, then? 27 PROFESSOR DEWEES: Sure. 28 MR. POWER: Then I turn to page 29, 341 DEWEES 1 which is the conclusion. The conclusion is: one, 2 nothing is risk free; and, two, you can pay me now or 3 you can pay me later. 4 What should I draw out of that 5 conclusion? It doesn't seem to be the most 6 professional summary of an analysis. 7 PROFESSOR DEWEES: As I recall, the 8 conclusions that were drawn during the discussion at 9 the MDC were drawn by looking at the figures in the 10 middle of the report, starting on page 13, and going on 11 from 13 through 19. As I recall, there was some focus 12 on what had happened in Alberta and what did it mean. 13 Part of the concern that was raised 14 was when people read about prices of $999 a megawatt 15 hour, compared to a normal price of $30 or $40 an hour, 16 that is very high. What is the implication of that? 17 So this presentation takes us 18 through, looking at the hourly prices on page 13, 19 showing the distribution of the marginal price on 20 page 14, and accumulative distribution, which shows 21 that, on page 15, most of the prices are in the $20 to 22 $40 range, and then there is a thin tail that goes up 23 to $100 and beyond. 24 For me, the graphs on pages 16 and 17 25 were central. We spent some time on those, because 26 those show what would happen if you smoothed over 27 various periods. 28 MR. POWER: I guess my question, 342 DEWEES 1 though, was simply on page 29, the conclusion. There 2 is an absence of a conclusion here. Was there some 3 other conclusion brought by the consultants that is not 4 self-evident in this report? 5 PROFESSOR DEWEES: I think the 6 consultant pointed, as I am suggesting now, to the data 7 and, for example, on page 16, noted that -- let's see. 8 Page 16 is bi-monthly averages. It shows the variation 9 in bi-monthly prices. I think our attention was drawn 10 to the fact that, not surprisingly, the variation in 11 bi-monthly prices is enormously less than the variation 12 in hourly prices. That follows naturally from 13 statistical principles, but this shows exactly what it 14 meant in Alberta. 15 Then, on page 17, hourly prices 16 versus annual averages, my recollection is that when 17 the consultant directed our attention to page 17 they 18 pointed out that, while yes there is variability in the 19 bi-monthly prices on page 16, there is also variability 20 in the annual prices -- that is, if we assumed a regime 21 of prices that were fixed on an annual basis in 22 Alberta, and if they tracked the average of the spot 23 price, then Alberta consumers would not have been 24 spared volatility, they would have been spared 25 short-term volatility, but they would have experienced 26 price jumps in 1997 and another price jump in 1998. 27 MR. POWER: I guess the document is 28 self-evident, but with the benefit of this having been 343 DEWEES 1 recorded somewhere else, I guess we are just left with 2 what is evident here in the conclusion at the end. I 3 am just asking a simple question. I am also aware of 4 your timing. There is nothing else anywhere else? 5 PROFESSOR DEWEES: I'm sorry. I will 6 try to talk less. 7 I guess my point is I don't think 8 that the conclusions that are listed on page 29 capture 9 the important elements that I, and I suspect many 10 members of the MDC, took away from this presentation. 11 MR. POWER: That is fair. 12 On page 4 of your document there is a 13 reference that the MDC and the retail technical panel 14 evaluated four alternative price calculation 15 methodologies and spot price pass-throughs, and the 16 authority for this is footnote 9. Footnote 9 reads: 17 "Retail Technical Panel, 18 `Evaluation of Default Supply 19 Options.' September 4, 1998." 20 Do you have a copy of your reference 21 document there? 22 PROFESSOR DEWEES: No, I don't. 23 MR. POWER: I think we have a copy 24 here for you. 25 Could you tell me who prepared this 26 document? 27 PROFESSOR DEWEES: I believe that it 28 was prepared by the PHB consultant who was sitting on 344 DEWEES 1 the retail technical panel, for the technical panel, in 2 consultation with that panel. 3 MR. POWER: As an aside, I take it 4 that it is fair to say that PHB was a proponent of the 5 spot market price pass-through. That is certainly what 6 other MDC members have led me to believe. 7 PROFESSOR DEWEES: PHB suggested 8 that. I think it was Larry Ruff who suggested that 9 back in April when we first began discussing retail 10 competition. 11 MR. POWER: Again, I look at this 12 document -- and you would agree with me that they are 13 only overheads? We have no reference materials here 14 and no back-up data. There is a suggestion of a 15 subjective model for evaluating criteria, but no 16 explanation of the basis of it. 17 I take it, again, there is no other 18 back-up document that was presented to the MDC which 19 explains the subjective judgments that are laid out in 20 this document? 21 PROFESSOR DEWEES: I don't recall 22 another document that accompanied this. 23 Once again, there was quite a bit of 24 discussion at the presentation, but again we were under 25 a serious time constraint. We had asked the technical 26 panel to look at this for us and they worked very 27 quickly and produced this report for us to look at. 28 MR. POWER: Yes, and in fact the 345 DEWEES 1 consultant was very fair about that, because on page 19 2 of this document they say: 3 "There are important policy 4 issues that apply to all default 5 supply options but were not 6 addressed by the Retail 7 Technical Panel." (As read) 8 Then they go on to list six pretty 9 important caveats on this study which strongly 10 suggest -- in fact, they say that the analysis or the 11 review is incomplete. 12 Were those six points ever addressed 13 later in the process? 14 I can't find it if it was. 15 PROFESSOR DEWEES: We certainly spent 16 a lot of time talking about No. 2. 17 MR. POWER: I am asking, I guess: 18 Did the consultant provide a report, in writing, that 19 addressed those six caveats and any other ones that 20 they clearly identified as important policy issues not 21 addressed by the retail technical panel? 22 PROFESSOR DEWEES: Certainly the MDC 23 talked about some of these issues in its later 24 deliberations on through the end of the year and I 25 simply don't recall at this point what documentation we 26 may have been provided along the way. We saw tonnes of 27 paper. 28 MR. POWER: Yes, I believe that. It 346 DEWEES 1 has a wall in our office. 2 I guess it is fair to say that this 3 assessment is incomplete in a number of other ways. 4 If you could turn to page 17 -- just 5 prior to getting to page 17, on page 12 this document 6 talks about the technical sub-panel having set out the 7 following 15 evaluation criteria, and then it goes to 8 the criteria, just by way of context. 9 When we get to page 17 there is 10 evaluation criteria there for the effect on 11 competition. Is it fair to say that this evaluation 12 criteria on the effect on competition that are listed 13 there have missed the effect on new generation? 14 PROFESSOR DEWEES: I don't see that. 15 I certainly don't see "effect on new generation" on 16 page 17. Are you suggesting that it is in the earlier 17 criteria? 18 MR. POWER: No, it is nowhere in the 19 document, actually. 20 PROFESSOR DEWEES: Okay. 21 MR. POWER: Again, when I turn to 22 page 18 about risk management, which is what a lot of 23 this discussion is about, there is no analysis of risk 24 management on other market participants, such as 25 generation: impacts on financing new generation and 26 impacts on competition and, therefore, impacts on the 27 price to the customer at the end of the day. 28 PROFESSOR DEWEES: That's right. We 347 DEWEES 1 talked on several occasions about financing new 2 generation, but that was not part of this discussion 3 here. 4 MR. POWER: In fact, though, as a 5 result, if you accept that generators are market 6 participants, we have missed an analysis of the risk of 7 a spot market pass-through on your generation 8 completely then. 9 PROFESSOR DEWEES: It is not in here. 10 As I say, it was at least discussed at the MDC. 11 MR. POWER: Then on page 18 we have 12 also missed the analysis of the impact on the spot 13 market pass-through on retailers, who are also market 14 participants. 15 PROFESSOR DEWEES: That's right. 16 This looks at risks to customers, the distributor, the 17 default supplier and -- yes. 18 MR. POWER: Okay. Thank you. 19 I take it that both in this document 20 and in the MDC process, generally, there is no analysis 21 of the yardstick approach that has been presented by 22 Seabron Adamson. Is that correct? 23 PROFESSOR DEWEES: I don't recall 24 that we -- that may have been mentioned at some point, 25 but I don't recall any substantial discussion of that 26 particular approach. 27 MR. POWER: If I understand 28 correctly, the MDC did not have an evaluation of the 348 DEWEES 1 spot price pass-through in other jurisdictions. 2 PROFESSOR DEWEES: Did not -- 3 MR. POWER: Have an evaluation of the 4 impacts on market participants of the spot price 5 pass-through in other jurisdictions. 6 PROFESSOR DEWEES: We had the 7 benefits of the international conference and Norway, 8 which has a spot price pass-through, talked about the 9 operation of their system. I recall seeing some 10 documents about the experience in Norway. 11 Once California started operating we 12 had some information from there. They have a spot 13 price pass-through, although their experience doesn't 14 tell much about what happens to it. 15 I think we had such information as 16 was available, but there wasn't much to analyze at that 17 time. 18 MR. POWER: Okay, that's fair. Thank 19 you. 20 I can't find any analysis of the spot 21 price impact on Genco's divestiture and market 22 mitigation plans. Are you aware of that? 23 PROFESSOR DEWEES: I'm sorry? I 24 missed what you said. 25 MR. POWER: I can't find, through the 26 MDC process, an analysis of the spot price impact on 27 Genco's divestiture and market mitigation plans. It is 28 certainly not in here. 349 DEWEES 1 PROFESSOR DEWEES: As I indicated 2 earlier, I wasn't involved in the market power 3 discussions in detail. There was an enormous effort 4 that went into working out the Market Power Mitigation 5 Agreement. I don't know to what extent that discussion 6 and the analysis that support it -- there was quite a 7 lot of analysis that went on in support of the 8 development of the market power mitigation. I just 9 don't know to what extent they incorporated the spot 10 price pass-through. 11 MR. POWER: All right. You have no 12 knowledge of it. I can't find anything in the MDC 13 report, so we are on the same wavelength there. 14 Are you familiar with the materials 15 filed regarding the impact of spot price pass-through 16 on the Lakeview project? 17 PROFESSOR DEWEES: Which? 18 MR. POWER: This is the proposal to 19 convert part of the Lakeview generating station, the 20 first step in Ontario Hydro-Genco's divestiture plan, 21 whereby they are bringing in three other partners to 22 convert part of a coal-fired station to gas fire. Are 23 you familiar with that? 24 PROFESSOR DEWEES: My understanding 25 was that they weren't going to change the existing 26 boiler, they were going to build a new gas-fired unit 27 there. 28 MR. POWER: Right. 350 DEWEES 1 Have you read the materials filed by 2 the others who will be presenting here in the next few 3 days about the impact of the spot price pass-through on 4 that proposed $400 million-plus project? 5 PROFESSOR DEWEES: I have read those, 6 yes. 7 MR. POWER: Their evidence is that 8 the spot price impact on that Lakeview project, which 9 is the first step in decontrol, is going to at least 10 substantially delay the project if not kill it 11 outright. Do you have any reason to disagree with 12 their evidence? 13 PROFESSOR DEWEES: I think the 14 question is: What does this have to do with spot price 15 pass-through? If that project is going to produce 16 power at a price lower than the expected market price, 17 which for the next couple of years is likely to be 18 3.8 cents, I don't see why the proponents of that 19 project can't sell the power directly to some of the 20 large industrial customers in this province who will 21 have an interest in low-cost power. 22 There is 25 per cent of the market in 23 customers over 5 megawatts. There is a large chunk of 24 demand out there that I would think would be interested 25 in low-cost power, if that is what this plant is going 26 to generate. 27 If what it is going to do is generate 28 power that is more expensive than 3.8 cents, then I 351 DEWEES 1 would imagine that the proponents will have trouble 2 selling that to sophisticated customers and, on behalf 3 of the small residential consumers, I don't see why 4 they should be expected to pay a price that 5 sophisticated customers wouldn't pay. 6 So I don't see that the spot price 7 pass-through has any impact on that project. The real 8 question is: Is that project economic in the 9 environment that we expect to see over the next few 10 years? If it is, I just can't imagine that 11 sophisticated investors and sellers and sophisticated 12 buyers can't make a deal. 13 MR. POWER: I take it you have no 14 experience in financing $400 million-plus projects. Is 15 that fair? 16 PROFESSOR DEWEES: That's correct. 17 MR. POWER: Would you tell me what 18 the financial criteria are for investors who roll 19 $400 million? 20 PROFESSOR DEWEES: I have no idea. 21 MR. POWER: Nobody is going to roll 22 $400 million unless they have a substantial assurance 23 that they are guaranteed to sell their product at the 24 end of the day. 25 PROFESSOR DEWEES: Okay. 26 MR. POWER: On the spot market price 27 pass-through mechanism that is proposed here in the 28 Codes, there will be no bilateral contracts or other 352 DEWEES 1 contracts to have some assurance of a revenue stream 2 earlier to the project with the possible exception of 3 the directs that command 25 per cent of the market that 4 you have referred to. Is that correct? 5 PROFESSOR DEWEES: The 25 per cent 6 could enter into direct contracts and of the 48 per 7 cent that constitute general service customers smaller 8 than 5 megawatts, I would expect there would be a 9 substantial amount of that demand that either is large 10 enough to enter into such contracts or could be 11 aggregated by retailers if there is really a good price 12 to be had. 13 MR. POWER: You are guessing, aren't 14 you? 15 PROFESSOR DEWEES: On the latter 16 part. I don't know what the size of that is, but we 17 heard at the Market Design Committee that retailers 18 were good at aggregating customers together and putting 19 together buyers and sellers. If the price is good -- 20 MR. LEA: I think, Mr. Power, you may 21 be asking Dr. Dewees things again which stray outside 22 the scope of his presentation. This is why he may be 23 trying to assist you and perhaps not as certain as he 24 might be about the answers. 25 MR. POWER: He gave me an answer that 26 he believed that the spot price pass-through would have 27 no impact on divesture or the Lakeview project in 28 particular, which is fundamental to price and the cost 353 DEWEES 1 to consumers at the end of the day. So I think these 2 questions are fairly reasonable. 3 MS LEA: I am not doubting that the 4 questions arise from that, sir. 5 Dr. Dewees, can you help him further 6 or not? 7 PROFESSOR DEWEES: I don't mind 8 continuing this discussion for another couple of 9 minutes. 10 MR. POWER: I think it's fair to say 11 one thing, that the market participants will dictate 12 what risk is reasonable on major projects like that. 13 Is that correct? 14 PROFESSOR DEWEES: Yes. In fact I 15 think that's the intent of the design of this market, 16 to allow private investors to decide what risks they 17 want to take and what they don't. 18 MR. POWER: Thank you. 19 On page 5 of your report -- and I am 20 moving rapidly to try and get you out of here in the 21 next eight minutes, if that is helpful -- you expressed 22 a concern. It said: 23 "It was noted that distributors 24 may be owned by municipalities, 25 so if the supplier fails there 26 are no shareholders to absorb 27 the loss, only customers and 28 taxpayers." 354 DEWEES 1 I guess that was a concern that was 2 raised at the MDC. 3 PROFESSOR DEWEES: That's correct. 4 MR. POWER: Is it fair to say that 5 Bill 35 has essentially ended that debate by enabling 6 municipalities and their subsidiaries to engage in 7 risk-based business? 8 PROFESSOR DEWEES: It enables them. 9 I don't think that that eliminates the concern that 10 arose at the MDC. 11 MR. POWER: But the legislature sort 12 of has the say at the end of the day, doesn't it? 13 PROFESSOR DEWEES: The legislature 14 says what is allowable. The MDC's job was to further 15 constrain what goes on. You missed it yesterday and I 16 will be brief, but if we didn't need detailed market 17 design, we wouldn't have had a market design committee. 18 We would have had just legislation and do whatever you 19 want in the legislation. 20 The whole purpose of the Market 21 Design Committee was to set a bunch of rules. We wrote 22 hundreds of pages of rules that would constrain or 23 intend us to do something less than all that was 24 allowed within the legislation or to say how it is to 25 be done. So part of what we did, I think 26 appropriately, was to set those constraints. 27 MR. POWER: I understand a comment 28 you made yesterday is that you expect prices to decline 355 DEWEES 1 with decontrol. 2 PROFESSOR DEWEES: That's my 3 expectation, but, as I indicated yesterday, it's not 4 based on deep analysis. It's based on putting together 5 what I have heard. 6 MR. POWER: Are you familiar with the 7 Ministry of Finance analysis, which shows that prices 8 will increase as decontrol proceeds? 9 PROFESSOR DEWEES: That was asked 10 yesterday and my answer then was I was familiar with it 11 from a distance. 12 MR. POWER: Thank you. Those are all 13 my questions. I appreciate it very much. 14 MS LEA: Thank you very much, 15 Mr. Power. 16 Any other questioner that I may have 17 missed? 18 No response. 19 MR. DADSON: Ms Lea, I might have had 20 some questions, but I think Mr. Power has covered all 21 of them. 22 MS LEA: Thank you. 23 Thank you, Mr. Power. 24 Dr. Dewees, thank you very much for 25 your attendance here and for your two days of 26 testimony. We really appreciate it and I am sure the 27 Board will benefit greatly from the questions asked and 28 the answers given. Thank you very much. 356 DEWEES 1 PROFESSOR DEWEES: You are welcome. 2 I hope it has been helpful. 3 MS LEA: Yes, thank you, it has. 4 We will take one hour for lunch, 5 please, as our presenter for the afternoon also has 6 time constraints. So we will reconvene at 1:25. 7 --- Upon recessing at 12:25 p.m. 8 --- Upon resuming at 1:25 p.m. 9 MS LEA: Good afternoon. I think 10 Mr. John Todd is our next presenter. 11 Mr. Todd, if you would like to take a 12 seat right at the front. 13 Mr. Janigan, I understand you are 14 counsel for Mr. Todd. 15 MR. JANIGAN: Yes. Thanks very much. 16 I don't know if I have made an 17 appearance in this proceeding as of yet. I am Michael 18 Janigan appearing on behalf of the Vulnerable Energy -- 19 MS LEA: Could you spell your name 20 for the reporter, please, sir? 21 MR. JANIGAN: Sure. It's 22 J-A-N-I-G-A-N. I am appearing on behalf of the 23 Vulnerable Energy Consumers Coalition. We have 24 tendered in evidence in this proceeding comments and an 25 alternate proposal of John Todd. 26 MS LEA: I don't think your 27 microphone is picking up very well, Mr. Janigan. 28 MR. JANIGAN: I think we have a 357 DEWEES 1 defective one here because I think the same thing 2 happened -- 3 MS LEA: Once you get closer, it 4 works. Lean in. 5 MR. JANIGAN: Technical advice. 6 MR. POWER: Can I interrupt briefly, 7 if I may? 8 MR. JANIGAN: Sure, go ahead. 9 MR. POWER: I have a brief public 10 service announcement, I guess -- I had hoped there 11 would be more people around -- just to let you know 12 that we have instructions to file a motion for the 13 Board to seek an amendment to the procedural order. We 14 will hopefully have our formal notice of motion in 15 terms of the Board's procedural directions here 16 available tomorrow and then I guess we will have to go 17 from there, but you could pass that on to whoever the 18 powers are. 19 MS LEA: Whoever they are, I will 20 attempt to pass it on. 21 MR. POWER: Okay, great. Thank you 22 very much. 23 MS LEA: But you are thinking that 24 you will be filing tomorrow? 25 MR. POWER: Hopefully, we will have 26 at least a notice, as normally required. I understand 27 there is a two-day notice period available tomorrow. 28 MR. JANIGAN: And the motion is to 358 DEWEES 1 the effect of...? 2 MR. POWER: To amend the Board's 3 procedural order. 4 MR. POCH: In regard to the nature of 5 the hearing structure or -- 6 MR. POWER: Yes, the hearing 7 structure and what we are going through. 8 MS LEA: I am just thinking about the 9 notice period. We sometimes shorten it as people -- 10 you know, you are kind of beginning to give notice now. 11 We may be able to accommodate a shorter notice period 12 and I think it is in all our interests to do so. 13 Perhaps we can talk, then, at the break about when we 14 might want to have this motion heard. I will attempt 15 to find out some possible dates. 16 Thanks very much. 17 MR. POWER: Thank you. My apologies. 18 MS LEA: Mr. Janigan? 19 MR. JANIGAN: The Vulnerable Energy 20 Consumers Coalition has offered comments and an 21 alternate proposal by John Todd. Mr. Todd, as a 22 witness and consultant, is well known to the Board. In 23 the interests of brevity, we propose that we commence 24 the questions immediately. Mr. Todd will not be making 25 a presentation on his comments unless it's elicited in 26 the course of the questions. 27 MS LEA: Thank you very much, 28 Mr. Janigan. 359 DEWEES 1 Mr. Todd, if you are ready, I think 2 Mr. Gibbons is the first questioner. 3 MR. GIBBONS: Thank you, Jennifer. 4 John, on page 3 of your testimony, 5 paragraph 3, you state: 6 "It follows that the SSS should 7 not be designed (explicitly or 8 implicitly) so as to be 9 unattractive to customers in 10 order to create a bias in favour 11 of retail alternatives." 12 Then on page 17 of your testimony you 13 suggest that an LDC could have up to or maybe more than 14 three standard supply service options. Is that 15 correct? 16 MR. TODD: That's right. 17 MR. GIBBONS: Yesterday when I asked 18 Don Dewees if there would be any problem of an MEU 19 offering the spot price pass-through as one option, 20 plus if the MEU wanted to also offer another option 21 which could include a mix of portfolio made up of spot, 22 medium and long-term contracts, I asked if he thought 23 that would create any harm and, according to Don, the 24 reasons why he didn't think that was the right way to 25 go was if the MEUs could offer multiple SSS options, 26 then it would be extremely difficult for other 27 companies to compete against them in the residential 28 and small commercial market. 360 TODD 1 My question to you is: In order for 2 Ontario to experience the benefits of electricity 3 competition, is it necessary for the MEUs to experience 4 significant loss of market share in the residential and 5 small commercial markets? 6 MR. TODD: The way my proposal is set 7 up, I have described the role of the LDC as kind of a 8 consignment seller,; so, in essence, marketers, other 9 people that want to participate in the marketplace. 10 One of the ways to take that accessed customer is by 11 offering the lowest bid to a particular MEU being on 12 their list of options for their customers and, in 13 essence, they gain the customer, though it was done 14 through the MEU. 15 There is some restriction. If the 16 mobility objective is to be achieved, then there may be 17 some restriction on what the MEU would offer and the 18 examples I have given were all to a maximum of a 19 one-year fixed price term or a one-year pricing 20 arrangement. Marketers, if they go the route of gas, 21 may be offering five-year pricing arrangements, which 22 may have escalators in them or could be at a fixed 23 price. 24 So I think there are enough 25 alternatives out there that the more attractive -- the 26 more acceptable you make the SSS option, the smaller 27 will be the share that goes to the rest of the market. 28 If your objective is to get people 361 TODD 1 away from the SSS and away from the LDC to the retail 2 market alternatives, then this will work against that 3 goal. I have tried to balance that off by saying that 4 the very same people who may be offering services in 5 the retail market would be able to, in effect, access 6 the customer through the LDC by coming up with an 7 attractive offer. 8 The difference is that by accessing 9 those customers through the LDC, their marketing costs 10 are much lower and, therefore, the price they can offer 11 will be much lower, plus they would probably go to 12 regions they might not otherwise go to. They might not 13 want to go Goderich and knock on doors or wherever, but 14 if you go to the local MEU and sort of through a 15 check-off ballot you can get those customers, you would 16 probably find it more attractive to go. Plus you are 17 certainly focusing on competitive price because the 18 only selling technique that would really work in this 19 model would be having the best price of those offered 20 to the MEU for a particular set of terms and 21 conditions. 22 So, in my view, there are lots of 23 opportunities. The marketers, the retail competitors 24 will be accessing the market in a different way. They 25 act as intermediaries as opposed to knocking on doors. 26 MR. JANIGAN: I wonder if you could 27 move your microphone a little closer to your mouth. I 28 am having trouble hearing back here. 362 TODD 1 MS LEA: Again it's a question, I 2 think, of leaning in. You are in the big board chairs 3 and they tend to be not very accommodating at this 4 time. 5 MR. TODD: What I like about this one 6 is I see right in front of me "priority override", so 7 be careful in your questions. 8 MR. GIBBONS: So, in short, it is 9 possible, in your view, for us to gain the benefits of 10 competition in the electricity market without the LDCs 11 losing significant market share in the residential and 12 small commercial markets? 13 MR. TODD: If it is truly the LDC 14 that is providing the supply, nobody else is involved, 15 as in the draft proposal, they are buying from the IMO, 16 then almost by definition they have to lose market 17 share for other players to have a role in the 18 marketplace. Under my model where they are a 19 consignment retailer, the SSS could have a significant 20 market share and you still have lots of other 21 participants. 22 So it depends on what the LDC is 23 offering. If the LDC is offering, in effect, 24 competitive alternatives, no, they don't have to lose 25 market share. But if they were offering something that 26 they themselves are assembling, then almost by 27 definition you have to lose significant market share, 28 unless you are arguing something like a contestability 363 TODD 1 view of the marketplace of competition as opposed to 2 competition through active alternatives. 3 MR. GIBBONS: Just to get a bit more 4 clarification on your proposal, the LDC is a 5 consignment retailer. That starts on page 16 of your 6 testimony. I believe you are suggesting three 7 different pricing options would be available to 8 customers. One would be the spot pass-through, another 9 one would be where there was kind of a mixed portfolio 10 of medium and long-term contracts. Under your 11 proposal, would the LDCs be making any profit margin on 12 this consignment business? 13 MR. TODD: First, let me emphasize 14 that what was set out here as options were just 15 examples. The examples would be arrangements that 16 would be available from an intermediary. So it would 17 not be a portfolio. They wouldn't be assembling 18 portfolios to create a product. 19 It could be an intermediary to effect 20 the assembling of a portfolio in order to create an 21 offering that they would bid on with the LDC, but there 22 would be a supplier of electricity under certain terms 23 and conditions and that would be flowed through to the 24 customer with a mark-up to reflect costs, such as are 25 proposed under the draft proposal with the pure spot 26 market pass-through, so marked up to cover customer 27 care costs. That would still be there. 28 Since it's a fixed price, in effect, 364 TODD 1 it potentially would be to profit if the LDC was able 2 to carry out that function at a lower cost per customer 3 or per kilowatt hour, but there is no explicit profit 4 margin. 5 MR. GIBBONS: And under your proposal 6 of the LDC as a consignment retailer, would that 7 increase the LDC's business risk? 8 MR. TODD: No, because it's a 9 straight pass-through of a product that is available to 10 them from an intermediary. The intermediary is the one 11 that is bearing the risk, not the LDC. 12 MR. GIBBONS: Okay. Turning to the 13 subject of regulatory cost, Don Dewees raised the 14 spectre that we have 200-plus municipal electric 15 utilities, and if they all came before the Board with 16 separate gas supply portfolios, other than as a spot 17 purchase pass-through, there could be very high 18 regulatory costs. 19 It is my belief that if utilities 20 were given the option of doing a spot price 21 pass-through, plus one or two other options, some kind 22 of portfolio of a combination of spot and long-term 23 contracts, there is a relatively few number of 24 utilities or groups of utilities that would come 25 forward with that option. 26 What springs to my mind is that 27 Toronto Hydro might do it, and the G6 group of 28 utilities might do it as a group, and the ENERConnect 365 TODD 1 might do it as a group. So there would be a relatively 2 small number of utilities or groups of utilities that 3 would pursue an option like you have sketched out. 4 Would you agree with me about that? 5 MR. TODD: Yes. To emphasize the 6 point, this morning we heard of one of the evaluation 7 default supply options in the retail technical panel. 8 If you turn to page 8 of that, there is an option 9 called a Regulated RFP. In this regard, that is the 10 same proposal. 11 They say there -- and I think it 12 describes mine well: 13 "The bidding process follows a 14 predetermined protocol 15 established by the OEB. The OEB 16 will not second-guess the 17 resulting fixed price as long as 18 the conditions of the 19 competitive bidding process are 20 met." (As read) 21 So one of the attractions of mine, as 22 far as I am concerned, is that there is no regulatory 23 overstep required. We are supposed to be going to a 24 competitive market. What we are doing is saying we 25 will let the competitive market set the price. 26 The point of this proposal is to say: 27 We don't want the spot price to be the only 28 competitively determined market price. We would like 366 TODD 1 to see a competitively determined one-year fixed market 2 price, or a month-by-month price or seasonal price. 3 We can structure whatever sort of 4 makes sense that they can be in, but which one of the 5 market price-setting competitors is coming in to create 6 a competitive price for that product. Once you have 7 competitors determining the price through a competitive 8 bidding process, regulatory oversight would be 9 inappropriate, exactly as described in that retail 10 technical panel document. 11 MR. GIBBONS: Are you suggesting that 12 there would be no regulatory oversight? Would the OEB 13 not establish some kinds of rules for the public 14 tendering process and the monitoring -- 15 MR. TODD: Yes. What it said here, 16 exactly the same as mine, is that the oversight is of 17 the process. There would be a standardized acceptable 18 process. As long as the process is followed, that 19 would be determinative of that being a prudent price. 20 There are clearly competition issues. 21 You obviously have to be wary of bid rigging, that 22 there is a limited number of suppliers that come in. 23 Are there enough players that they could actually get 24 more than one bid? Those kinds of issues. 25 But those would not be addressed on a 26 MEU-by-MEU basis. Those would be issues related to the 27 marketplace generally. I guess ultimately, if we 28 cannot get competitive bidding at the MEU level, do we 367 TODD 1 really think we can have competition in this 2 marketplace at all? 3 It is inconsistent with the whole 4 concept of moving to a competitive market to say you 5 are not going to have competitively determined prices 6 that don't need to be reviewed by a regulator. 7 MR. GIBBONS: Thank you. Those are 8 my questions. 9 MS LEA: Thank you, Mr. Gibbons. 10 Mr. Adams. 11 MR. ADAMS: I have a couple of 12 questions of clarification. 13 To start, I will flip through a 14 couple of pages with you. 15 If I could ask you to turn to page 6 16 of your remarks in the last paragraph, the first 17 sentence reads: 18 "...in most commodity markets 19 both producers and end-users 20 rely primarily on fixed-price 21 contracts reflecting 22 risk-aversion." 23 I just want to clarify: Does that 24 statement apply to a wholly unregulated energy 25 commodity? 26 I am thinking of gasoline, fuel oil, 27 fuel wood. 28 MR. TODD: First of all, I realize 368 TODD 1 that the draft I am working off was printed in my 2 office and is slightly different I guess than the one 3 that went around. 4 Michael, do you have a spare copy of 5 the official version? 6 MR. ADAMS: I am working from a faxed 7 version sent July 5th. 8 I will let you find it first. 9 --- Pause 10 MS LEA: Try again, Mr. Adams. 11 MR. TODD: So you were finding it on 12 page 6, in the last paragraph. 13 MR. ADAMS: In the last paragraph. 14 It's under a heading -- 15 MR. TODD: Does it say "The 16 development of a market" at the beginning of the 17 paragraph? 18 MR. ADAMS: The next paragraph, 19 starting with "Indeed". 20 MR. TODD: Okay. Even with this one 21 there is a page difference. 22 Just as a warning to everybody, there 23 seems to be a few different versions of this going 24 around. I think the words are all the same, but the 25 formatting is a little bit different. 26 MR. ADAMS: I will try to help wade 27 through paragraph numbers in my further references. 28 MR. TODD: Okay. 369 TODD 1 MR. ADAMS: I am just referring to a 2 sentence that reads: 3 "Indeed, in most commodity 4 markets both producers and 5 end-users rely primarily on 6 fixed-price contracts reflecting 7 risk-aversion." 8 Have you got that? 9 MR. TODD: Yes. 10 MR. ADAMS: My question is: Are you 11 referring to wholly unregulated energy commodities, and 12 if so, give me an example? 13 I have never bought gasoline on the 14 basis of a fixed-price contract. 15 MR. TODD: Okay. 16 Firstly, I was not referring to 17 energy specifically; I was referring to commodities. 18 If it is not in that paragraph, there is a comment 19 about impediments to the marketplace, market 20 imperfections. 21 I guess, actually, it is the next 22 sentence: 23 "The primary limitations to 24 reliance on fixed prices are 25 high transactions costs and 26 other market imperfections." 27 If you look at large producers and 28 large end-users, transaction costs are not a problem. 370 TODD 1 If you go to other markets -- and I guess I am thinking 2 a lot of manufacturing industries generally buying 3 copper as a commodity, methane. You go through 4 actively traded commodities, you know, pork bellies. 5 There is a certain reliance on the marketplace. 6 But Colonel Sanders writes contracts 7 for chickens. He doesn't buy chickens on the spot 8 market, though they would be available. If you have 9 production requirement, end-users -- I am using 10 end-users generally -- like a certain amount of price 11 certainty. 12 In the gasoline market there are 13 transactional problems. If you write a contract for a 14 fixed price, if that contract can't be enforced you 15 would go in and take a price unless that day you can 16 get a lower price somewhere else. So nobody is going 17 to write a fixed contract with a customer. 18 I fully admit that in markets for 19 individual customers there is an impediment to 20 fixed-price contracts. 21 MR. ADAMS: The focus of our 22 discussion here is primarily the small general service 23 firm customer; right? 24 We are talking about households 25 basically, I thought. I didn't think we were talking 26 about Colonel Sanders. 27 MR. TODD: This section is talking 28 about spot versus intermediate markets. So if you want 371 TODD 1 a conceptual discussion of the role of intermediate 2 markets as opposed to spot prices, it is the norm in 3 actively traded commodities that there is an 4 intermediate market. That is the basic point. 5 And end-users and producers, when 6 they have access to that, like to go for a fixed price. 7 With mortgages, if you take a small customer, mortgage 8 customers tend to go with fixed rather than variable 9 price, certainly a significant proportion of them, 10 where they have access to fixed prices. 11 In natural gas, the product that is 12 being sold today in Ontario are fixed-price contracts. 13 MR. ADAMS: We do have a profound 14 role of regulation in the natural gas market, wouldn't 15 you agree? 16 MR. TODD: In direct purchase, people 17 sell what they want to sell. 18 MR. ADAMS: I mean, customers are 19 getting billed from the gas company. The relationship 20 between the customer and the producer in the gas 21 industry is a little bit more abstract than it is in 22 the gasoline industry, when you go to the pump and as 23 you drive along, you are shopping. 24 MR. TODD: What I have said is that 25 you cannot have an enforceable contract to a fixed 26 price in gasoline, therefore, they are not available in 27 the marketplace. But that is a matter of what I am 28 suggesting. That is a matter of inability to enforce. 372 TODD 1 If there were enforceable contracts 2 from the producer's side, and somebody went out and was 3 offering gasoline at a fixed price for the year, I 4 would hypothesize, although we haven't got the 5 opportunity to test the markets in this regard, that a 6 lot of people would opt for that, assuming it's a 7 competitively determined and attractive price. 8 You know, if you accept that 9 customers have some risk aversion, they don't like 10 price uncertainty, the only question, then, is how much 11 of a premium are they prepared to pay in order to fix 12 the pricing? 13 MR. ADAMS: Well, you would think, in 14 the gasoline market, if there was much of a market for 15 price protection, somebody would figure out a way of 16 meeting that market. Some marketer would come up with 17 this. 18 Anyway, I think we are getting too 19 far -- 20 MR. TODD: You can't enforce the 21 project. 22 MR. ADAMS: Don Dewees was expressing 23 his view that he anticipated that, over the long haul, 24 a spot price pass-through will perform better for 25 customers in terms of generating lower long-term prices 26 than a fixed price alternative. 27 Are you comfortable with that 28 assertion? 373 TODD 1 MR. TODD: I agree with that 2 assertion, but it's two different products and what the 3 customer is willing to pay for a fixed product versus a 4 floating price -- 5 MR. ADAMS: I have no argument with 6 that, that it is two different products, but -- 7 MR. TODD: The general thesis is that 8 you will pay less in the long run if you take a spot 9 price because there is a premium for the risk 10 associated with and transaction costs of providing a 11 fixed price. That is generally applicable to markets. 12 MR. ADAMS: Okay. 13 Maybe I can turn you specifically 14 with regard to that statement. 15 If you go to the first paragraph 16 following the heading that reads, "The Monthly Spot 17 Market Price is Not an Efficient Price" -- 18 MR. TODD: Yes. The first paragraph. 19 Page 9, for other people, in mine. 20 MR. ADAMS: Right. I have page 9. 21 The last two sentences of that 22 paragraph read, as follows: 23 "The monthly spot market 24 pass-through price will be a 25 monthly price, but it will 26 understate the price that would 27 be necessary to provide a fixed 28 monthly price to the customer in 374 TODD 1 advance." 2 MR. TODD: That is reflecting my 3 comment that you just referred to of Don Dewees'. 4 MR. ADAMS: Okay. Then, you add: 5 "It will therefore provide a 6 deceptive price signal in the 7 market." 8 MR. TODD: Yes. 9 MR. ADAMS: Now, I would have thought 10 that the Vulnerable Energy Consumers' Coalition would 11 have been in support of the lowest price that could be 12 designed into this market? 13 MR. TODD: This is the lowest monthly 14 price. 15 There are other design 16 considerations. If you look at the other design 17 considerations, of primary concern for small customers 18 is not in the price volatility that will occur month to 19 month with the draft proposal, but also the fact that 20 they don't know the price to pay until after it is too 21 late to do anything about it. There are some serious 22 problems. There is a maybe, particularly in the early 23 years, in terms of price spikes which could be 24 sustained. At the end of the month you find out, "Gee, 25 I'm paying a lot. I wish I had turned my air 26 conditioning down this month." 27 MR. ADAMS: If the price spikes up, 28 wouldn't you expect to see that information in the 375 TODD 1 newspaper? 2 MR. TODD: The price spike is not the 3 price the customer sees. 4 MR. ADAMS: Well, the price the 5 customer sees is a price that is generated after the 6 fact, as you have described. If the customer sees the 7 price go up, knows their consumption, during that 8 period, has an ability to influence the consumption 9 during the period of the high price -- 10 MR. TODD: The customer doesn't see 11 that high price, specifically. What you have is you 12 can have a two-hour price spike. It's a huge 13 difference in terms of the impact on the monthly price 14 as compared to a two-day price spike. You would need a 15 very sophisticated customer to read in the paper that a 16 price spike is happening today and then from that 17 figure out what it's going to do to the monthly price. 18 I mean, sure, it can be done, but that's pretty 19 academic as far as I'm concerned. 20 MR. ADAMS: Did you have a look at 21 this -- there was a significant discussion previously 22 about this volatility of electricity price discussion 23 from the retail panel 9-4. Right? 24 MR. TODD: Yes. 25 MR. ADAMS: Would you share with me 26 an observation that although it looks like prices are 27 very volatile, through a smoothing mechanism the 28 differentials in the prices don't appear to be really 376 TODD 1 hugely large? 2 Let me rephrase my point. 3 MS LEA: Please let him answer the 4 question. 5 MR. ADAMS: I will rephrase my 6 question. 7 MS LEA: All right. 8 MR. ADAMS: I will withdraw my 9 question and rephrase it. 10 My question is: If you have a 11 one-hour price spike, do you think most customers will 12 notice or care? Again, talking about the customers we 13 are talking about here. We are talking about small, 14 general service firm customers. If you have a 15 one-hour, $1,000 megawatt price spike in a month where 16 the prices the rest of the time are 3.8 cents, do you 17 think customers care? 18 MR. TODD: Given the market power 19 mitigation agreement and the 3.8 cents over the year, a 20 sophisticated customer that realizes it is probably 21 going to say, "I don't care." This is what Don was 22 saying this morning, that no matter what you do, you 23 are not going to get much of a price response from your 24 average, small residential customer. 25 I am a little less pessimistic than 26 he is. I think that, you know, with appropriate market 27 signals, you are going to get some adaptations in the 28 marketplace and consumption behaviour over time. But 377 TODD 1 if the customer -- and it is going to be a 2 sophisticated customer -- actually realizes that they 3 are paying a smoothed spot market price, they are not 4 going to respond to that $1,000 price, specifically -- 5 although they may if they don't really understand the 6 mechanism -- they may respond to it if they think it is 7 going to have an impact on their average monthly cost. 8 But it is a pretty diffused price signal. It is not 9 what we are really trying to create. 10 My point is that they are paying a 11 monthly price so why not have them pay a market 12 determined monthly price rather than some 13 artificially-created market price? 14 MR. ADAMS: You are advocating a 15 position that the smoothed spot -- you know, an 16 averaging period reflecting the meter reading 17 interval -- is not a marketed-determined price? 18 MR. TODD: No. It is a monthly price 19 that is not determined by the market. It doesn't 20 reflect the price that would be paid for a fixed 21 monthly price. What that is is a smoothed spot price, 22 which is different from a fixed monthly price. It's a 23 different price because the risk is on the customer not 24 on the supplier, although there is a fixed price being 25 paid. 26 I mean, this smoothed monthly price, 27 I defy you to find a real market where that 28 spontaneously appears in the marketplace. A fixed 378 TODD 1 price is a standard creation or evolution out of 2 competitive markets. This is totally a governmental 3 regulatory artifact to create this smoothed price. 4 MR. ADAMS: It is an artifact of 5 government or it's an artifact of the metering 6 technology? Which is it? 7 MR. TODD: What I suggest is that if 8 you have a limitation on your metering technology, what 9 you do is you create market-determined contractual 10 terms that reflect that and you have a monthly price. 11 But for that, what you do is you go out to the market 12 and say, "Okay, what is it going to cost me for a fixed 13 price on a monthly basis", and what you are going to 14 pay for a fixed monthly price is different from the 15 monthly smoothed spot price pass-through. 16 MR. ADAMS: If we had interval meters 17 on everybody, would you have an objection to a spot 18 price pass-through? 19 MR. TODD: As an option, if everybody 20 had an interval meter and everybody -- 21 MR. ADAMS: That is what I said, sir. 22 MR. TODD: -- and everybody paid 23 the -- well, I wouldn't support a monthly smoothed 24 price. 25 But if customers chose to pay the 26 hourly spot price on the hourly consumption, as large 27 industrials do, and if that could apply to everybody, 28 fine. Then there would be -- 379 TODD 1 MR. ADAMS: Let me rephrase my 2 question. 3 MR. TODD: -- pricing on the same 4 basis as they are actually consuming it, and that would 5 be a market-determined price. 6 MR. ADAMS: Just so that the 7 transcript is clear here, if we had interval meters on 8 all customers, would you support a spot price 9 pass-through as SSS? 10 MR. TODD: Not the one being proposed 11 in the draft. 12 I would support, as an alternative, a 13 spot price pass-through where the customer pays the 14 hourly price for their consumption in that hour, the 15 hourly spot market price. 16 MR. ADAMS: Fine. 17 MR. TODD: As long as they are 18 charged the same thing as the market-determined price. 19 MR. ADAMS: Several times in your 20 paper, in two locations -- my page 3 and my page 17, 21 and I can take you to those paragraphs -- you advocate 22 restrictions on customer mobility. 23 In your bullet point 2 of section 2 24 of your paper and -- 25 MR. TODD: Yes, I advocate that there 26 may be an appropriate trade-off between objectives that 27 may involve less than perfect mobility. I said that in 28 at least one place, probably in two places. 380 TODD 1 MR. ADAMS: Would you agree that all 2 regulated contract supply options do necessitate 3 restrictions on mobility? 4 I will clean up my question. 5 Do you agree that all regulated 6 contract supply options will necessitate restrictions 7 on customer mobility? 8 MR. TODD: I don't think all would be 9 appropriate. I mean one could -- 10 MR. ADAMS: Give me an example of one 11 that wouldn't. 12 MR. TODD: It seems to me that the 13 after-the-fact pricing, with all of its other 14 imperfections, you would see why you would have to 15 restrict mobility in, for example, what is being 16 proposed in the draft proposal. 17 MR. ADAMS: The draft proposal was 18 not a contract supply proposal. 19 MR. TODD: You could have a contract 20 for supply under those terms. 21 What do you mean by a contract supply 22 proposal? 23 MR. ADAMS: Fixed price, fixed term. 24 MR. TODD: Okay. If you have a fixed 25 price, fixed term, yes, there have to be limitations on 26 mobility. You can have a contract for a floating price 27 too, of course. 28 MR. ADAMS: I have one final point. 381 TODD 1 A couple of times in your paper you refer to 2 deficiencies in the not fully competitive nature of the 3 wholesale market, sharing an observation that probably 4 many people have that the wholesale market will not be 5 fully competitive. 6 My question is: Do you agree that 7 the lack of full competition in the wholesale market is 8 a problem for all retail pricing proposals; not just 9 spot price pass-through, everything? 10 MR. TODD: It is a problem that one 11 would hope that certain proposals may address more 12 effectively than others, because the point of the 13 observation is that the problem suggests that you would 14 like to introduce a mechanism that will help reduce and 15 ultimately overcome that problem by being compatible 16 with the development of independent supply and, in my 17 submission, encouraging the development of 18 inter-marrying markets, which will help mitigate that 19 over time. 20 What you are trying to do is -- this 21 whole thing is designed to move the market over time, 22 so the issue is not -- I agree with you entirely. When 23 you start off with ineffective competition, no matter 24 what you do, you are going to have ineffective 25 competition. The relevant issue is where you go from 26 day one and how quickly you address that problem. 27 MR. ADAMS: Just to follow up on 28 this, do you take the view that the design of pricing 382 TODD 1 mechanisms for customers taking supply from their 2 municipal distribution utility ought to be guided by 3 somebody's view of how much and what kind of power 4 plant ought to be built in the marketplace? 5 MR. TODD: No. I think that what is 6 offered as an SSS should be guided by what customers 7 want, which is why I make my proposals. Let customers 8 choose and that will drive the market, and to the 9 extent that certain power supply options have a role to 10 fill economically in the marketplace, they will have an 11 opportunity to step in and offer something attractive 12 to customers. 13 MR. ADAMS: But just to clarify, my 14 question was: Should we be designing a pricing 15 mechanism for customers of LDCs that causes a 16 particular kind of plant to be built? 17 Your answer just now was no, and I 18 want to confirm on the record that your answer is still 19 no. 20 MR. TODD: My answer is, no, you 21 should not be designing it for that reason, but if that 22 is a consequence of a good design, so be it, and then 23 probably that is good. 24 MR. ADAMS: Thank you. 25 MS LEA: Thank you very much, 26 Mr. Adams. 27 Mr. Stephenson. 28 MR. STEPHENSON: Thank you. I want 383 TODD 1 to follow up on the mobility question that was raised 2 earlier. 3 Assuming that the Board determined 4 that, either as a matter of law or as a matter of 5 policy, full mobility for SSS customers, both on and 6 off SSS, was going to be the way it was done, what 7 impact would that have on your proposals? 8 MR. TODD: It means you would not be 9 able to have a fixed price arrangement for an extended 10 period of time. It would be a monthly fixed price at 11 most, from a practical perspective. 12 Even with some mobility, you could 13 probably still have a monthly price because mobility is 14 never going to be hourly mobility or even daily 15 mobility. But it would make it very difficult, if not 16 impossible, to have seasonal or annual fixed prices. 17 Even seasonal you might get away with. It is not how 18 much opportunity is there for a gaining of the system. 19 MR. STEPHENSON: I don't know if you 20 have had an opportunity to review the Seabron Adamson 21 proposal. Have you had a chance to review that at all? 22 MR. TODD: Fortunately, I had a 23 couple of hours on the plane last night and got through 24 it. 25 MR. STEPHENSON: Can you assist me? 26 In terms of your review of that and your understanding 27 of that, if the same issue that I have raised about 28 customer mobility were true, that is, that the Board 384 TODD 1 decided as a matter of law or policy that you would 2 have virtually complete customer mobility, do you have 3 any views as to the workability of that proposal? 4 MR. TODD: What I would consider to 5 be the essential elements of it in terms of, as I 6 understand it, the utility assembling a portfolio, that 7 price being looked at through yardsticking regulatory 8 mechanisms and so on, that in itself would not create 9 a -- I'm sorry. 10 Those essential elements of the 11 proposal would not be compromised by full mobility. 12 If, however, what was being assembled 13 was a product which is going to have a longer term 14 fixed price, then it would create a problem because 15 customers could leave the utility at selected times to 16 try to gain that system. 17 But, as I say, I don't see that term 18 of price necessarily as being a necessary condition of 19 that proposal. They should speak for themselves on 20 that. 21 MR. STEPHENSON: One of the issues 22 that Professor Dewees raised was the issue of LDCs 23 providing an equal billing service in conjunction with 24 the spot price pass-through SSS option as a de facto 25 mechanism for providing price stability over time. 26 Insofar as price stability is an 27 issue for customers, and obviously you view that it is, 28 do you have any views as to whether or not that kind of 385 TODD 1 mechanism available to LDCs in fact would provide 2 customers, particularly residential customers, with the 3 kind of comfort that they are looking for? 4 MR. TODD: First of all, equal 5 billing provides bill stability, not necessarily price 6 stability. You could have a significant amount of 7 price volatility and have bill stability through the 8 equal payment plan mechanism. Probably most customers 9 would be satisfied with that. My pure speculation is 10 that -- although I guess it is informed speculation -- 11 you will get a lot of feedback from customers that all 12 they want to know on their bill is, "What do I owe this 13 month?" 14 MR. STEPHENSON: Let me just stop you 15 there. 16 At the end of the day, actually, when 17 you talk about customers wanting price stability -- and 18 I think everybody says that -- really isn't what they 19 want bill stability, more or less? 20 MR. TODD: I think they are two 21 separate issues. Bill stability is very attractive to 22 customers because it gives them the opportunity to 23 budget. You know, particularly for VECC-type clients, 24 a monthly payment that is pretty stable is very 25 attractive because their income is fixed per month and 26 most other expenses, rent and food and everything are 27 pretty much fixed per month. They can budget with that 28 and that is extremely attractive. If you have rate 386 TODD 1 stability and bill stability, you end up with -- at 2 least over the year you paid the same amount. 3 You know, there is another, a very 4 different element, which is this rate instability, 5 which can create uncertainty over the year. Certainly 6 rate instability can accentuate the month-to-month 7 instability for people who are not on the equal billing 8 plan. 9 The equal billing plan probably takes 10 a lot of the problem away. 11 For example, even with the Market 12 Power Mitigation Agreement so that the price over the 13 year with the rebate at the end is going to be 3.8 14 cents, there is little risk in terms of volatility of 15 the price averaged over the year, but the price could 16 actually fluctuate quite a bit from month to month. 17 Obviously, an equal billing plan would eliminate that. 18 To the customer, the thing that 19 matters is that it's 3.8 cents average over the year. 20 Without an equal billing plan, you could see 21 substantial fluctuations which would accentuate both -- 22 there would be price instability, but it could 23 accentuate bill instability because there would be a 24 tendency that in the high consumption months price is 25 higher and therefore you would accentuate the monthly 26 variations in the bill. 27 MR. STEPHENSON: I guess what I come 28 back to is,assuming that the draft code was the sole 387 TODD 1 SSS option but equal billing was something that LDCs 2 provided to customers on an optional basis, insofar as 3 customers were concerned about that kind of volatility, 4 doesn't that come pretty close to being almost a 5 complete answer to that concern? They could either opt 6 into the equal billing if it's a concern or, if it's 7 not a concern, they don't need to. 8 MR. TODD: Only in the short run. In 9 practice, with the Market Power Mitigation Agreement, 10 the price is essentially known -- the average price 11 over the year is known and if you have equal billing, 12 there would be some variance in your consumption. So 13 what it is going to cost you per year will vary only 14 with your aggregate consumption over the year, but 15 that's a limited time. 16 Once you don't have the constraint on 17 the price for the year, then there is also simply the 18 risk that you don't know what you are going to be 19 paying on average per kilowatt hour over the year. It 20 not only will vary per month, but also the average 21 price can vary. 22 So there would be some uncertainty 23 going into the year 2004 that if you are following the 24 spot market, you don't know what you are going to be 25 paying average per kilowatt hour for the year 2004, but 26 if you have the option of going to a fixed price 27 contract, you would know exactly what you are paying 28 and that is the reduction of risk. 388 TODD 1 MR. STEPHENSON: Let me turn to a 2 different issue. 3 One of the advantages you see of your 4 proposal is that it, in a sense, fosters the 5 development of the intermediate market. 6 Professor Dewees, basically, as I 7 understood him, indicated that he assumed that the 8 25 per cent of the marketplace -- that is, large, 9 sophisticated users -- would be ready, willing and able 10 to access that market if they considered it to be 11 attractive to do so and, moreover, there was another 12 segment of the market which is large and sophisticated 13 as well. He viewed that segment, however big it is -- 14 some percentage in excess of 25 per cent -- as plenty 15 large enough to provide the incentive for a 16 well-developed intermediate marketplace even if all of 17 the residential or small users stayed on SSS. 18 Do you have any views about those 19 thoughts? 20 MR. TODD: You can view the 21 intermediate market as encompassing a couple of 22 different things. If what you are talking about are 23 market mechanisms like NYMEX or something equivalent to 24 that being developed in Ontario where you have futures 25 prices and options, if you talk about financial 26 instruments to be used to mitigate risk, it's not 27 enough to have a number of large players in, shall we 28 say, the direct purchase market because one way they 389 TODD 1 can do it is simply doing contracts with somebody for 2 supply. It depends on what time frame we are looking 3 at here. 4 When you have to come through the 5 IMO, you have a different mechanism, but it could be 6 one-on-one contracts, shall we say, instead of making 7 use of these market instruments. So what you need is 8 active trading and that would -- so you need something 9 more than just a number of players out there making 10 their own pricing arrangements with somebody who is 11 supplying power. 12 Probably the reality is they would go 13 into intermediaries and you would get the development 14 of the intermediary market. I guess all I am saying is 15 that, all other things being equal, if you have 100 per 16 cent of the market functioning through intermediaries, 17 you probably have a more quickly developing and more 18 efficient intermediary market than if you have 25 or 40 19 per cent active in that market. 20 MR. STEPHENSON: Let's assume, just 21 for the purpose of this discussion, that it's about a 22 third of the market, something like -- I probably have 23 the number wrong, but say 10 terawatt hours a year. 24 That is a pretty big market, isn't it? 25 The real issue is: Isn't this a 26 threshold question about whether you get enough of a 27 market working in conjunction with some form of 28 intermediary to make it go or not? Doesn't the 390 TODD 1 marginal benefit of making the market bigger decline 2 and then the real question is: Do you get to the 3 threshold or not? I guess the question then is: Are 4 you at the threshold at 10 terawatts or whatever a 5 third of the Ontario market is? 6 MR. TODD: My understanding of the 7 electricity features in the NYMEX market is that there 8 is fairly efficient trading one and two months out, but 9 there is not enough trading volume to have efficient 10 meaningful pricing if you are looking out several 11 months or the year, year and a half that they offer in 12 terms of features prices. Similarly, with the options, 13 they only put 12 months but, again, longer term there 14 is not enough trading. 15 On NYMEX there are a couple of fairly 16 large areas in terms of the instruments that are being 17 priced on that market. What is the threshold? Yes, I 18 guess in a sense you are saying it's a threshold 19 question. I have not looked at that specific question, 20 but I would not presume that a third of the Ontario 21 market would give you a dynamic intermediary market 22 where you have a meaningful one-year forward price, for 23 example. 24 MR. STEPHENSON: Those are my 25 questions. Thank you very much. 26 MS LEA: Thank you, Mr. Stephenson. 27 Mr. Power, you asked to be stood 28 down. 391 TODD 1 Mr. Rodger, please. 2 Do you need water, John? 3 MR. TODD: I have my own jug here. 4 I apologize for my throat, people. I 5 have been abusing my body recently, not in any fun 6 ways, but just through too much travel. 7 MR. RODGER: Thank you, Ms Lea. 8 Just a couple of questions, Mr. Todd. 9 I am appearing as counsel for Toronto Hydro. 10 I want to turn again briefly to your 11 concept of a consignment retailer on page 16, as it 12 appears at least in my version of your paper. I 13 understand that your approach here is that LDCs who 14 would be providing the standard supply service wouldn't 15 actually be procuring power themselves, but suppliers 16 would be selected through a tendering process. Is that 17 correct? 18 MR. TODD: That's right. 19 MR. RODGER: Because it's a tendering 20 process, your view is that no OEB oversight would be 21 necessary in terms of the prices that are selected 22 under that process? 23 MR. TODD: That's right. 24 MR. RODGER: Could you explain to me 25 what is the basis on which you are advancing this 26 tendering concept in the context of the Ontario market, 27 as we know it today, and what it is proposed to be some 28 time in the year 2000 when this new market opens up? 392 TODD 1 MR. TODD: I am not sure what you 2 mean "on what basis". 3 MR. RODGER: I guess it's a simple 4 question of: How is it expected to work here? You can 5 use the example of my client, Toronto Hydro, 6 approximately 25 per cent of the provincial load. 7 Assume that a significant majority of their customers 8 will stay with the standard supply service. How would 9 the tendering process that you envision work for 10 Toronto Hydro? 11 MR. TODD: For simplicity of 12 discussion, let's assume that there is going to be one 13 option offered to customers and let's say that option 14 is a one-year fixed price arrangement. Toronto Hydro 15 would put out to tender that its system supply 16 customers would be supplied on the one-year price and 17 anybody who is prepared to guarantee that price or to 18 guarantee a price, which could be 3.8 cents because 19 they know they can get that from the IMO, it could be 20 3.9 cents, it could be 3.7 cents, depending on what 21 instruments they plan to use, they would come in and 22 bid on the right to provide that supply. 23 The lowest bidder would then enter 24 into a contract with Toronto Hydro. The Hydro 25 customers would be billed that amount and that 26 intermediary would be responsible for making sure that 27 the effective cost of power to Hydro is that price, 28 which you would then pass through to customers. 393 TODD 1 MR. STEPHENSON: But in the case of 2 Ontario, where we are not going to have a real 3 competitive market because one player, Genco, has 4 market dominance, some 90 per cent of the market, you 5 can use the analogy of Toronto Hydro has this big 6 wooden bucket. That is the standard supply customers. 7 Isn't Toronto Hydro essentially going to the same well 8 and the issue is can you really have a tendering 9 process with such market power? It is all going to 10 come from the same spot. 11 MR. TODD: Toronto Hydro will 12 probably have the biggest challenge, that and OHSC, 13 because you have the largest -- you are talking pretty 14 large blocks. To the extent that there is, I believe, 15 15 per cent of the market outside of OPGI, it may be 16 hard to get enough of that power. Plus, given the 17 dominance, is there really going to be any price other 18 than 3.8 cents averaged over the year? 19 What you may end up with is a squeeze 20 on the risk premium for fixed price because what is 21 going to be happening -- even that, I guess, was in the 22 first couple of years with the Market Mitigation 23 Agreement, the rebates and so on. I agree it's a bit 24 of a tricky issue, but it doesn't change the fact that 25 you are going to have competitive bidding. 26 You are going to end up with price 27 that reflects the market value of power. You are going 28 to have an incentive for individual players in the 394 TODD 1 marketplace to find other sources of power, to expand 2 on that 15 per cent. Whether it's a matter of 3 developing new sources of supply, new generation 4 facilities, whether it's importing power, whatever they 5 do, it is going to be a strong incentive for players to 6 find a way to beat that going price. 7 What we have is something which 8 inevitably next year is not going to be competitive in 9 the market. I agree with you entirely. What we are 10 basically talking about, in my view, is structuring 11 system supply so that it moves us ahead towards a more 12 competitive market that is sufficiently priced as 13 quickly as possible. All I am saying is this 14 instrument would seem to provide a mechanism for 15 getting the development of the market to effective 16 competition more quickly than the draft proposal. 17 MR. STEPHENSON: I suppose my concern 18 is where we are here on December 31st of the year 2000 19 and the market is opening today. What would be the 20 rationale for Genco to even respond to a Toronto Hydro 21 tender when they know that Toronto Hydro cannot get its 22 load met elsewhere in the market because there just 23 isn't the generation capacity on December 31st, 2000? 24 MR. TODD: But there is a market for 25 power with the IMO. Anybody can get power. It's just 26 that they may be getting OPGI power. I thought the 27 point you were making was that there is only going to 28 be one price out there, 3.8 cents averaged over the 395 TODD 1 year. The only question is the volatility in that 2 price through the year. 3 MR. STEPHENSON: Price and supplier. 4 I guess to bring it back to your statement, would it be 5 fair to say that in this context of market dominance by 6 Genco the tendering process may not be appropriate for 7 at least the first few years of the market until we in 8 fact have a real market and that is multiple 9 generators? 10 MR. TODD: My concern is that in the 11 absence of that proposal, there won't be any players in 12 the marketplace. Under the draft proposal, there won't 13 be any, with two consequences: one, is there is not 14 going to be much of an incentive to change that 15 situation of market power; and, second, as it does 16 change and as there is room for competitors -- say it 17 takes the three years, say it takes the five years -- 18 the development of competitive alternatives, the 19 appearance of competitors on the scene and some name 20 recognition and so on, is it going to be pushed for 21 those three to five years and are we going to be 22 starting to develop a competitive market that is 23 visible to the marketplace three to five years out, 24 maybe 10 years out? 25 What this proposal would do is allow 26 other players to come into the marketplace and appear 27 on the ballot as a supplier to Toronto Hydro and begin 28 getting some name recognition. People competing 396 TODD 1 through a regulated process might include everybody 2 from a Toronto Hydro affiliate or Toronto Hydro working 3 with some others, to international trading companies, 4 to the marketers who are active on the gas side. They 5 will be all in there trying to establish themselves in 6 the marketplace. 7 I take your concern. Your problems 8 seem very, very real. What we want to do is give a leg 9 up to getting out of that dilemma as quickly as 10 possible. 11 MR. STEPHENSON: Just one final 12 point, Mr. Todd. 13 Mr. Dewees, on a number of occasions, 14 recalled one of the goals stated in the White Paper 15 with respect to retail competition, that the goal of 16 the White Paper was to ensure that any customer is not 17 forced to switch suppliers if they don't want to. Is 18 that your understanding as well as one of the goals? 19 MR. TODD: Yes. 20 MR. STEPHENSON: Mr. Dewees also 21 stated that if it turns out that, despite all the good 22 intentions of the Market Design Committee, the smoothed 23 spot pass-through price just isn't attractive to 24 customers, price volatility or other issues, Mr. Dewees 25 was saying customers then can just switch and that's 26 really the answer to the question. Would you support 27 that approach? Does that solve the problem? 28 MR. TODD: No, I don't accept that 397 TODD 1 approach. First of all, given the limitations in 2 supply, if the only place they can go -- and we are 3 talking small volume -- is out to the market, and given 4 that the source of supply to the alternatives is 5 exactly the same 3.8 cents over the year, the 6 alternatives are going to be 3.8 cents plus marketing 7 costs, plus whatever. 8 My suggestion is let's keep those 9 marketing costs low so that when they go to 10 alternatives the premium they are going to pay is going 11 to be as low as possible. 12 If we design the SSS so that it is 13 unattractive, we are pushing people out into the 14 competitive market. But the competitive market does 15 not have that capacity to provide the competitively 16 priced, attractive -- if they can provide a part that 17 is priced attractively in terms of a fixed price over 18 the year, but it is not attractively priced in the 19 competitive sense, then I think you have a problem. 20 Plus there is the problem that if 21 customers actually understand that they are going to be 22 paying 3.8 cents per kilowatt-hour over the year, 23 period, are they going to pay 3.5 to somebody else? 24 They may tolerate the instability. 25 They may rely on the equal billing plans and look at 26 other things. Either everybody will stay on the 27 default option, the SSS, because they have an 28 understanding that over the years it is going to work 398 TODD 1 out fine for them, or you could end up with a price 2 hike in the summertime where people see a very high 3 price in one month and they become very interested in 4 the alternatives. 5 Perhaps people don't realize that 6 over the year it is going to come back to 3.8 cents 7 thanks to rebate or something. 8 MR. RODGER: And finally, if the 9 scenario that I described does happen, that customers 10 in Ontario, for whatever reason, are very unhappy with 11 the standard supply prices proposed by the MDC, and in 12 your words are pushed out into the market, would you 13 agree with me that that is tantamount to forcing 14 consumers to switch suppliers, and that would be 15 contrary to the White Paper's goals? 16 MR. TODD: There is perhaps a 17 semantic in the legal question there. Yes, I would say 18 to all intents and purposes, if you provide them with 19 something that is unattractive, you are pushing them 20 out. Technically, you may not have given them an 21 option. 22 There are mitigating circumstances, 23 like peak plant and so on and the Market Power 24 Mitigation Agreement, where it will be arguable that 25 they are not being pushed out. If they actually 26 understand what is going on and they see a very high 27 price in July, they should realize that that doesn't 28 mean anything so they shouldn't get driven away from 399 TODD 1 SSS because they pay a high price in one month. 2 But in the practical, real world, 3 human terms, you probably are pushing them out -- which 4 is violating the spirit. 5 MR. RODGER: Hopefully, we are still 6 talking about customers in human terms. 7 Thank you very much. 8 Thank you, Ms Lea. 9 MS LEA: Thank you, Mr. Rodger. 10 Mr. Mark. 11 MR. MARK: Thank you. 12 Sir, who constitutes the Vulnerable 13 Energy Consumers Coalition? 14 MR. TODD: It is the Ontario 15 Coalition Against Poverty and the Ontario Coalition of 16 Senior Citizens Organization. 17 MR. MARK: Do you have a position or 18 function with the Energy Marketers Association? 19 MR. TODD: Yes, I do. 20 MR. MARK: What is that position? 21 MR. TODD: I am Chairman of the Board 22 of the Ontario Energy Marketers Association. 23 MR. MARK: And that is the position 24 you hold today? 25 MR. TODD: Yes. 26 MR. MARK: How long have you held 27 that position? 28 MR. TODD: As Chairman of the Board, 400 TODD 1 I think it was March. 2 MR. MARK: Did you have an 3 association with that organization before you were 4 Chairman of the Board? 5 MR. JANIGAN: Excuse me, Mr. Mark. 6 If this questioning has some relevance to the 7 testimony, I am prepared to let it proceed. 8 MR. MARK: If you want to take the 9 position that your man's background qualifications and 10 experience are irrelevant, I will accept that, and we 11 can present his paper to the Board on that basis. 12 Otherwise, why don't you let me get on with it. 13 MR. JANIGAN: Mr. Mark, you are 14 entitled to ask any question you want concerning his 15 presentation, but this is not a cross-examination on 16 his credentials. 17 MR. MARK: I am asking for 18 clarification on his qualifications. 19 If you want to withdraw any 20 suggestion that the man did anything other than fall 21 off a turnip truck yesterday, then I am happy to do 22 that. But if you are putting him forward as somebody 23 who knows from whence he speaks, will you do me the 24 courtesy of letting me ask him about his background. 25 MR. JANIGAN: I am not going to have 26 a cross-examination on his expert credentials. If you 27 want to ask him on what basis he gives this evidence, 28 or what is his experience is to give this evidence, 401 TODD 1 then ask him. But I am not going to have a 2 cross-examination of his credentials. 3 MR. MARK: Well, I don't accept that 4 limitation. 5 How long has your association with 6 the Energy Marketers been, sir? 7 MR. JANIGAN: I am instructing him 8 not to answer that question. 9 MS LEA: Gentlemen, one moment, 10 please. 11 Mr. Mark, do I understand, then, that 12 you are suggesting that John Todd is not qualified to 13 give his evidence or that he has a conflict of 14 interest? 15 MR. MARK: He hasn't given us a 16 resume. I don't know whether the man is qualified or 17 not. 18 MS LEA: Mr. Janigan, could you 19 assist us by taking Mr. Todd briefly through his 20 qualifications and then allowing Mr. Mark to question 21 him on those? 22 MR. JANIGAN: I would also undertake 23 to file a resume, which ordinarily would have been 24 filed in the context of evidence to accompany his 25 comments, however I don't happen to have a copy of it 26 before me. 27 I wonder, Mr. Todd, could you outline 28 in general terms your experience with respect to the 402 TODD 1 matters on which you have commented in this proceeding? 2 MR. MARK: Could we take time out for 3 a moment here? 4 He has had his opportunity. He has 5 presented his paper. He has had his opportunity to 6 give his presentation today. My friend passed on that 7 opportunity. I now have the opportunity to ask 8 questions in clarification. 9 My questioning is not an opportunity 10 to correct the record that somebody else has left 11 deficient. 12 MS LEA: As I said earlier, this 13 technical conference is intended to allow parties to 14 clarify the evidence presented in the presentations by 15 presenters. 16 I hear Mr. Mark, that he wants to 17 understand the qualifications of the witness, although 18 I wasn't completely clear that his questions tended 19 only to that issue. 20 Can we suggest a resolution here that 21 will satisfy parties? If not, then I will pass to 22 another questioner and we will deal with this matter on 23 the break between ourselves, not on the record, and 24 then we will deal with it on the record when we get a 25 resolution. 26 MR. JANIGAN: As I have indicated, if 27 Mr. Mark wishes to inform himself concerning the 28 credentials of Mr. Todd, I am happy to undertake to 403 TODD 1 file a resume of his credentials for this proceeding. 2 If there are any questions that arise from that 3 resume, Mr. Todd will be in attendance again on Monday 4 and will certainly be prepared to entertain any 5 questions associated with that resume at that time. 6 MR. MARK: Let's move on, because I 7 take it, Mr. Janigan, that whether or not you provide 8 me with the resume, you are not going to let me ask 9 this witness any further questions about his 10 affiliation with the Energy Marketers Association. 11 Is that a fair conclusion for me to 12 draw? 13 MR. JANIGAN: Well, I would like to 14 hear the question and how it relates to his evidence 15 before I give you an answer that I am going to object 16 to the question. 17 MR. MARK: Well, I can't do much 18 better than ask the question I have tried to ask 19 several times: How long have you been associated with 20 the Energy Marketers Association? 21 MS LEA: I think it was March of last 22 year, Mr. Todd? 23 MR. TODD: I have been involved with 24 the Ontario Energy Marketers Association since it was 25 created, and it was a name change from the prior Direct 26 Purchase Industry Committee, which was created after 27 the direct purchase hearing in 1994, 1995, something 28 like that -- anyway a number of years ago. 404 TODD 1 I have participated in that 2 committee, and subsequently OEMA, since its inception, 3 because of my involvement in the direct purchase 4 hearing on behalf of Ontario Coalition Against Poverty. 5 The follow-up was that issues were transferred over to 6 that organization, and since that time I have been very 7 much involved in it. 8 That committee has chaired the 9 downstream committee. I have sat on the board, and now 10 I am Chair. 11 MR. MARK: I want to assure you, sir, 12 that I meant no disrespect by the question. I was 13 simply -- 14 MR. TODD: I didn't think you did. 15 MR. MARK: -- inquiring with respect 16 to counsel's presumption that it was intended to deal 17 with your credibility. I want to assure you that it 18 wasn't. 19 The concept of the distribution 20 company, the LDC, performing this function on a 21 consignment basis, is the consignment aspect of it 22 critical to the success of your proposal in terms of 23 its objectives of fulfilling the needs of creating an 24 efficient market? 25 MR. TODD: It's not fundamental to 26 that objective. It is fundamental to Objective No. 5 27 out of the Board's paper, which says a distributor 28 should not bear any volume or price risk in providing 405 TODD 1 standard supply service. 2 MR. MARK: Yes. I just want to 3 clarify that in fact the consignment feature of your 4 model is intended to respond to Objective No. 5, which 5 is one of the objectives set out in the Board's staff 6 paper, correct? 7 MR. TODD: Yes. 8 MR. MARK: As I understand it, sir, 9 you have not set out to develop your own list of 10 objectives or critique whether or not the Board staff's 11 list of objections is complete or appropriate? 12 MR. TODD: The words in my paper are 13 that, in my view, these objectives are an appropriate 14 design criteria for the FSS, although I add three. 15 MR. MARK: Yes. But as I understand 16 your paper, you have taken as a starting position 17 working with the assumptions set out in the Board 18 technical staff paper, and you have come to the 19 conclusion that they are appropriate. But you didn't 20 start from an empty basket, if you will. You were 21 responding to a proposal that was on the table. 22 MR. TODD: Yes, that's correct. And 23 that is taken as the constraints going back, not just 24 the Board paper obviously, but the MDC and the White 25 Paper, and so on. There is a history of policy issues, 26 and I accepted that as one of the policy issues or 27 constraints in developing my proposal. 28 MR. MARK: Are you suggesting to me 406 TODD 1 that the issue of no risk on the distributor is 2 something that comes from the White Paper? 3 MR. TODD: No. I am just saying that 4 when you look back over the debate over the entire 5 time, it doesn't appear for the first time in the staff 6 paper. They were adopting it as this seems to be the 7 direction where things are going and to be an important 8 criterion. 9 MR. MARK: Fair enough. Would you 10 have any objection, sir, to the retail affiliate of an 11 LDC being the intermediary? 12 MR. TODD: No, provided that it is 13 all done in accordance with the process and that there 14 is no favouritism being shown. 15 MR. MARK: Would you expect that the 16 intermediaries, the non-retail affiliate 17 intermediaries, as I think you envisage in your 18 proposal, are going to be active in other aspects of 19 the market? 20 MR. TODD: I expect so. Different 21 ones would be different -- what I should say is that 22 some of them are likely to be and some may not. 23 MR. MARK: And some are likely to be 24 involved in other retail marketing efforts. 25 MR. TODD: I would anticipate a 26 variety of types of organizations with different 27 strategies in the marketplace would participate. 28 MR. MARK: Have you in your proposal 407 TODD 1 dealt at all with the concern raised by the Market 2 Design Committee and others about that resulting in 3 these intermediaries getting preferential access to 4 customers or customer information? 5 MR. TODD: I haven't dealt with that 6 explicitly. I think that is an area of the draft 7 proposal that I was comfortable with. 8 MR. MARK: Assume with me for the 9 moment that this Board accepts, as one of the primary 10 objectives of any scheme, that performing the default 11 supply function should not result in transfer of 12 customers or customer information to competitive 13 entities. How do we incorporate that objective in your 14 proposal? 15 MR. TODD: The LDC is acting sort of 16 as an intermediary in that relationship. In essence, 17 the market intermediary is bidding on a block of power, 18 and the customer contact relationship is between the 19 LDC and the customer. So there would not be any 20 customer-specific information going back to the 21 marketer. 22 MR. MARK: You envisage this simply 23 as a procurement function. You don't see any 24 contractual or information relationship between the 25 intermediary and the consumer. 26 MR. TODD: The pass-through 27 procurement in the sense of going in and passing it 28 through to the customer, not for the cumulative sense 408 TODD 1 of going out and assembling a product. 2 Procurement has often been used in 3 the sense of -- 4 MR. MARK: Who has the obligation to 5 pay the intermediary? In other words, who is assuming 6 the credit risk here? 7 MR. TODD: The credit risk in terms 8 of bad debts from customers? 9 MR. MARK: Let's start with that one. 10 MR. TODD: The LDC. 11 MR. MARK: So the LDC is responsible 12 as principal to the intermediary? 13 MR. TODD: I have not specified 14 whether they would -- there are probably legal 15 questions that you may be interested in that don't 16 interest me. 17 In terms of would the LDC legally 18 have to take possession of the electricity, I am not 19 sure what is required under the Act. But as we have 20 seen on the natural gas side, for example, natural gas 21 utilities have had to take possession of the natural 22 gas to resell to customers in the past in order to 23 complete the transaction. That is part of the 24 arrangement. 25 I guess my presumption was that -- to 26 be honest, I didn't think about who has title to the 27 electricity in each step of the chain. Logically, it 28 probably would be the utility, but I didn't think about 409 TODD 1 that question. 2 MR. MARK: So, as you envision it, 3 then, the utility is going to be taking possession of 4 the electricity, is going to have the obligation to pay 5 the intermediary for the electricity, is going to have 6 the credit risk associated with the consumers? 7 MR. TODD: Yes, and whether they take 8 possession or not, they have the credit risk. 9 I mean the two models on the gas side 10 are buy/sell, where the utility takes possession, and 11 the ABC service, agency-between-collection service, 12 where title, at least in the future, would transfer to 13 the customer. It's a transportation service, but the 14 utility still is responsible for collecting the monies 15 and they absorb the debt risk, and that is part of 16 their mark-up. 17 MR. MARK: So, if I may, what is the 18 consignment aspect of the arrangement you are 19 proposing? 20 How is it a consignment transaction, 21 as opposed to a purchase and sale transaction between 22 the LDC and the intermediary and then the LDC and the 23 customer? 24 MR. TODD: Because the LDC does not 25 take possession in advance. It's a ballot. I'm 26 suggesting there may be alternatives. So they are not 27 committing to a quantity or number of customers on 28 anything specific. They are going up and getting 410 TODD 1 customers to buy. 2 So if I walk into a consignment 3 store, I walk in and I buy that and when I agree to buy 4 a particular product, then the transaction is done, and 5 the person in the store only gets involved at that 6 point. If I give them a cheque and that cheque 7 bounces, then they may be at risk. But you don't go 8 out and buy products and then try to sell it. They 9 don't procure for themselves and then try to sell it. 10 What they do is they are in the middle, facilitating an 11 arrangement between a supplier and an end-use customer. 12 MR. MARK: I understand that in a 13 consignment arrangement the retailer has no obligation 14 to pay the seller of the goods, if you will, unless and 15 until that item is sold to a retail customer. That is 16 the feature of consignment, correct? 17 MR. TODD: Yes. 18 MR. MARK: But am I not correct, sir, 19 that in your model the LDC is in fact assuming the 20 obligation to pay for the supply? 21 MR. TODD: Only after the customer 22 has chosen it. They have the billing responsibility 23 and collection responsibility. 24 MR. MARK: Yes. But, in fact, that 25 obligation arises once the electricity is delivered to 26 the customer, regardless of whether the customer gives 27 the retailer the cheque? 28 MR. TODD: Yes. 411 TODD 1 MR. MARK: There is some discussion 2 in your paper, and you have had some discussion with 3 some of the other counsel, about the issue of 4 mobility -- and I may be a bit confused at this point. 5 As I understood your presentation, 6 sir, your concern was that the proposal for standard 7 supply service, as contained in the Board's staff 8 paper, in fact was going to be pushing people off 9 standard supply to other arrangements. Is that your 10 concern? 11 MR. TODD: It could be, and it 12 depends on what volatility customers actually reserve 13 in the marketplace once the market is opened up. Its 14 customers would be pushed by extremes if there is a 15 high month-to-month volatility, which there may well 16 be, and then they would be pretty well pushed into 17 fixed price arrangements which they only get elsewhere. 18 MR. MARK: I understand it may or may 19 not happen. But the concern you have on the mobility 20 issue is that, if anything, the proposed structure in 21 the Board's staff paper will, if you will, unnaturally 22 or artificially create migration off SSS? 23 MR. TODD: Yes, and then naturally, 24 because SSS is defined in a very narrow way and it may 25 be something that is unattractive to customers. 26 MR. MARK: You had some discussion 27 with one of the previous counsel about circumstances 28 when customers might or might not notice price spikes. 412 TODD 1 Recently, in Alberta, there were 2 three days when the price was over $560.00 for eight 3 hours a day. Is that a price spike that you would 4 expect customers to notice? 5 MR. TODD: I mean that type of price 6 spike hits the newspapers, and the way customers will 7 take that information depends on their understanding of 8 the marketplace. I mean, if they think of themselves 9 as paying that price, they may well respond to it, 10 although, if they reported that yesterday it went, you 11 know, to a high price but today it has come back down 12 again, by the time they hear about it it may be too 13 late for them to shut down their air conditioning. 14 Others that are a little bit more 15 sophisticated and recognize they are paying a smoothed 16 monthly price may say, "Well, you know, whether I 17 consume in this high-priced period or not, I am going 18 to pay the same price per kilowatt hour for the month 19 and my cost per kilowatt hour spread over the month is 20 actually going to be quite low, maybe five cents or 21 something. I'm not going to be paying a price that 22 directly relates to this one day's spot price. I pay 23 the monthly average for consumption during that price 24 spike." 25 So if a customer understands it 26 correctly, he would probably have a very limited, if 27 any, response. 28 That, in some social sense, 413 TODD 1 achieves -- like voting, you know, "If I do it and 2 everybody else does it, we will keep that price down 3 and we will do better on the monthly average." 4 MR. MARK: Or more likely you will 5 ask a neighbour if he is switching. If he is not, you 6 may just decide, "I might as well stay on board." 7 MR. TODD: Or canvass the 8 neighbourhood and sign up and everybody will do it 9 together, or we are not going to do it at all. 10 MR. MARK: Safety in numbers may be 11 an issue here. 12 MR. TODD: Well, it's just a matter 13 of: Is there going to be a big enough impact to affect 14 the price? 15 MR. MARK: All right. Thank you, 16 sir. Those are my question. 17 MS LEA: Thank you, Mr. Mark. 18 Mr. Brett. 19 MR. BRETT: Yes. Thank you. 20 I just have a few questions, 21 Mr. Todd, brief questions. 22 I recall, in your paper, that you 23 make some comment about there being some policy 24 justification in certain circumstances for some 25 restriction on customer mobility. 26 Could you just elaborate a bit on 27 that, like how you would see that working and what the 28 importance of that might be? 414 TODD 1 MR. TODD: Well, the tradeoff is that 2 you cannot offer a longer than one-month fixed price, 3 like a quarterly, six-month, one-year fixed price, and 4 allow customers full mobility rights, especially if he 5 has a right to move back and forth. You could end up 6 with a customer taking the system supply fixed price 7 option and, you know, take that when the market price, 8 the current market price, is high and go to some other 9 source of supply when the current market price is low 10 and then they are not, I should say, fulfilling their 11 part of the bargain, as -- I think it was with 12 Mr. Adams, earlier -- if you gave a long-term fixed 13 price, you have to commit to that term. 14 So I was saying that there is a 15 tradeoff between the ability to offer a fixed price and 16 mobility. 17 MR. BRETT: I apologize, Mr. Todd, I 18 was a little late coming back, if I ask you a question 19 that you have answered, just tell me and I will pass on 20 to expedite things here. 21 Is my recollection correct that in 22 the gas industry there are some notice provisions and 23 things of that nature to, for want of a better word, 24 inhibit switching back and forth on a monthly basis on 25 kind of an infinite basis? 26 MR. TODD: On the gas side, there is 27 sort of practical constraints of how long it takes from 28 when you sign up to when you would be transferred and, 415 TODD 1 also, in all cases I'm aware of, when you go to a 2 marketer you are committing for a period of time and 3 therefore you can't switch back. 4 In the return system, there is 5 different treatment by the two companies, but there's 6 also -- for one union there have been some restrictions 7 on -- 8 MR. BRETT: That was my 9 understanding. 10 Just a couple of brief questions. I 11 wanted to address the points that were -- some of the 12 points that were laid in Dr. Dewees' paper, when he 13 read out -- I guess what he really did was reiterate 14 the Market Design Committee's problems with a fixed 15 price option. 16 There is one reason he gave, though, 17 that wasn't in the summary in the paper. He seemed to 18 be saying yesterday that one of the reasons why he 19 didn't like the notion of the distributor offering a 20 fixed price option was that this would somehow leave 21 the retailer with nothing to do; the competitive 22 retailer would have his thunder stolen, as it were. 23 Could you comment on that 24 consideration? 25 MR. TODD: I believe that the concept 26 of the fixed priced that he was looking at was the LDC 27 procuring petroleum power, doing its own risk 28 management and actually providing the product, if you 416 TODD 1 want, to the customer. 2 That is different than what I am 3 proposing. 4 MR. BRETT: Okay. 5 The second item in here I'm really 6 referring to, at the bottom of page 4, page 5 of his 7 proposal -- you probably don't have to turn this up. I 8 can summarize, briefly, each of them. We heard a lot 9 of talk about the regulatory burden of the fixed price 10 proposal at anything other than a spot market proposal. 11 Could you just briefly sketch what 12 involvement you see the regulator having in your 13 proposal if -- 14 MR. TODD: I think I did answer that 15 question in that if it's competitively determined they 16 would only be overseeing -- they would be approving the 17 process -- 18 MR. BRETT: Overseeing an RFP 19 process? 20 MR. TODD: An RFP process. 21 Therefore, there would be no regulatory burden. 22 MR. BRETT: Okay. The next point 23 that was raised was -- and I know you covered this in 24 your paper, toward the end, but a point was raised, by 25 the MDC and by Dr. Dewees that in the, for want of a 26 better word, hinterland areas of the province people 27 might not want to offer a fixed price offering and 28 therefore customers would be disadvantaged if that was 417 TODD 1 the only product they had access to. 2 MR. TODD: I see no reason why 3 anybody would not want to offer a fixed price option in 4 the hinterlands. They may not want to offer anything 5 in the hinterlands, particularly if they have to market 6 on a customer-by-customer basis. 7 I think the day is a long time off 8 before we see energy marketers knocking on farm doors, 9 as they do on city doors, walking from farm to farm 10 or -- you know, they will just be going to small towns 11 a long way away. I mean they are going to focus on 12 major markets, as one would expect. There tends to be 13 movement first to major markets and then going out to 14 smaller and smaller markets. 15 So, you know, I certainly have a 16 concern that, under the draft proposal of Board staff, 17 alternatives will not be readily available, although 18 that may depend. If it is a matter of advertising in 19 The Globe & Mail, that goes everywhere and people phone 20 in, probably they will market -- you know, they will 21 provide a product available anywhere in Ontario. If 22 they have to sell by marketing techniques similar to 23 those in natural gas, there will be a tendency not to 24 go to hinterlands, as you referred to it. 25 The attraction in my proposal, one of 26 the attractions, in my view, is that if what you are 27 doing is going to a smaller utility -- and it may well 28 be going through a block of smaller utilities, which 418 TODD 1 together are significant -- you have the opportunity to 2 pick up a large chunk of customers through making one 3 bid. You are probably much more likely to have a large 4 number of players entering that market when they have a 5 product that is attractive to sell, that the customers 6 will be interested in. 7 MR. BRETT: There was another point 8 made that said, in effect, there was a concern on the 9 part of the MDC and Dr. Dewees that anything other than 10 a spot market price could result in -- that there might 11 be a tendency for suppliers to default and leave the 12 customer or the distributor with a -- that is to say, 13 default when spot market prices were above whatever the 14 fixed price, or contract price to be more precise, was 15 agreed to. 16 Is that, in your view, anything more 17 than a normal commercial phenomenon that might occur 18 rarely but certainly would result in the supplier that 19 did so default never being asked to tender again? Has 20 that happened, to your knowledge, in the gas business, 21 to any extent? 22 MR. TODD: Well, on the gas side 23 there's significant experience with that issue. There 24 would be a contractual relationship between the MEU and 25 the supplier. The supplier, of course, would have to 26 be licensed, so they would have to fulfil their 27 contractual obligations. If they failed to deliver at 28 any point in time, clearly the MEU would be drawing 419 TODD 1 power, which would in effect presumably come from a 2 backstopping arrangement at the IMO. There would be a 3 cost to that to be passed through to the company that 4 had an obligation that delivering didn't. 5 The only place where there is both a 6 failure to supply and an inability to collect for 7 backstopping supply is if a supplier has gone out of 8 business -- and that can happen. It certainly is a 9 possibility, although it's not one that has been a 10 problem on the gas side. But in that extreme 11 eventuality, it would probably mean that the customer 12 no longer gets a fixed price because their fixed price 13 supplier is no longer there to provide it. 14 MR. BRETT: Thanks very much. Those 15 are all of my questions. 16 MS LEA: Thank you very much, 17 Mr. Brett. 18 Mr. Poch. 19 MR. POCH: Thank you. 20 Mr. Todd, I just have a few 21 questions. 22 You were here this morning, I 23 understand, when I was discussing with Dr. Dewees his 24 suggested green tweak of bundling in a minimum green 25 power requirement to SSS? 26 MR. TODD: Yes. 27 MR. POCH: Could you comment on the 28 compatibility of that suggestion with your proposals? 420 TODD 1 MR. TODD: If the Board were to want 2 to build that in, I mean, it is totally compatible. It 3 could be built in in a number of ways, either requiring 4 that to be a part of the portfolio that the utility 5 provides -- having it as one of the options. People 6 can choose it as opposed to non-green options, "If you 7 want it: Yes or No." Whatever their objective is, you 8 set rules around it, because there are rules around the 9 bidding process and what is being offered. 10 MR. POCH: So you could simply make 11 it a minimum requirement to be met in the bidding 12 process. 13 MR. TODD: Presuming the Board could 14 do that, yes. 15 MR. POCH: All right. 16 If they did that, then, the benefits 17 of the reduced regulatory burden that you and I think 18 Putnam, Hayes pointed out and discussed earlier of an 19 RFP-style process would be obtained: minimum 20 regulatory burden and still harnessing the 21 competitiveness? 22 MR. TODD: Yes, but it still has to 23 show that they have adhered to the RFP process. If 24 that were to be part of it you wouldn't have to, on a 25 case-by-case basis, review it. You wouldn't have to 26 review it on a case-by-case basis. 27 MR. POCH: Right. Okay. 28 Does my suggestion raise any alarms 421 TODD 1 or significant concerns for you? 2 MR. TODD: The issue of green power 3 is being raised by the province. It is part of the 4 context in which the Board is deciding. If the Board 5 decides that is the way to go, I have no concerns, that 6 is just part of it. 7 MR. POCH: As an economist, I take it 8 that you would agree that in some fashion it is 9 appropriate that the restructuring take into account 10 the problem of externalities? 11 MR. TODD: Yes, which could be 12 addressed in totally different ways. They would feed 13 through here, but in some ways that is not inconsistent 14 with the policies that are established and economic 15 principles. 16 MR. POCH: Right. 17 Finally, could you just confirm for 18 me, is it within your knowledge -- my understanding is, 19 in several U.S. jurisdictions a mandatory green or 20 renewables component is part of the restructuring 21 regime. I think the most recent one of note is in that 22 bastion of the free market, Texas. 23 MR. TODD: Is that a question? 24 MR. POCH: Yes. Is that your 25 understanding, that this is a feature that is showing 26 up in a number of places, other jurisdictions that are 27 restructuring toward competition? 28 MR. TODD: I have not looked at that 422 TODD 1 issue closely, but I understand that is correct. 2 MR. POCH: Thank you. Those are my 3 questions. 4 MS LEA: Thank you, Mr. Poch. 5 Mr. Warren, I understand that you 6 have more than 15 minutes of questions? 7 MR. WARREN: I do. 8 MS LEA: Thank you. Then let's take 9 a 15-minute break at this time, please. We will return 10 at 3:17 p.m. Thank you. 11 --- Upon recessing at 3:02 p.m. 12 --- Upon resuming at 3:17 p.m. 13 MS LEA: Good afternoon. There are a 14 couple of comments on scheduling. As you have been 15 noticing, we are falling a bit behind, about half a day 16 behind, on our original schedule. As I understand the 17 order of things for tomorrow, the plan is that Mr. Mark 18 and Mr. Jennings will begin the day at 9:00 a.m. -- 19 9:00 a.m., not 9:30. I will check with them, but I 20 think that is all right with them. 21 Then the first witness panel will be 22 called by Mr. Power, that consisting of Fiona Woolf, 23 Barry Conway, et cetera, followed by the MEA panel, and 24 then the Seabron Adamson panel will follow that. 25 I would be surprised if we get 26 anything else done tomorrow. That is what the thought 27 is for tomorrow's activities. 28 If anyone has a problem with that, 423 TODD 1 let us know. Otherwise, let's continue. I think that 2 Mr. Janigan is here. 3 Mr. Warren, please. 4 MR. WARREN: Thank you. 5 Mr. Todd, I have questions in two 6 broad categories. The first are questions that are 7 designed to try to understand the premise on which your 8 proposal is based, and then a few questions on the 9 proposal itself. 10 Can I ask you first, if you look at 11 pages 3 and 4 of your paper, you make an observation 12 there, beginning at the bottom of page 3, that: 13 "The distributor can avoid all 14 volume and price risks either by 15 purchasing power exclusively on 16 the spot market, which shifts 17 all of the risk down to its 18 customers, or by purchasing from 19 a qualified intermediary under 20 terms that shift all of the 21 volume and price risk to the 22 intermediary." 23 Do you see that observation? 24 MR. TODD: Yes, I do. 25 MR. WARREN: Let's take the second 26 half of that proposition, which is that the volume and 27 price risk is shifted to the intermediary. May I 28 conclude that one of the virtues of your proposal, from 424 TODD 1 your point of view, is precisely that, that it shifts 2 the volume and price risk to the intermediary away from 3 the LDC? 4 MR. TODD: Away from the customer, 5 yes. 6 MR. WARREN: Away from the customer. 7 In addition to that, is not one of the virtues of your 8 proposal that it shifts the volume and price risk away 9 from the LDC as well? 10 MR. TODD: Yes. Taking it out of the 11 context of the sentence, yes, it would do that as well. 12 MR. WARREN: Now, is it reasonable 13 for me to assume that there will be a premium to be 14 paid by somebody -- and we will get to whom in a 15 minute -- there will be a premium to be paid for the 16 assumption by the intermediary of that volume and price 17 risk? 18 MR. TODD: Yes. Whoever bears that, 19 there will be a premium determined by market forces for 20 that shift. 21 MR. WARREN: And we can presume, all 22 things being equal, that that premium will be absorbed 23 by the customers. Fair enough? 24 MR. TODD: Yes. 25 MR. WARREN: Now, assuming for a 26 moment -- and we will get to this question later, but 27 assuming for a moment that full mobility to and from 28 the standard service is permitted under your 425 TODD 1 scheme -- and I appreciate that you have talked in some 2 circumstances about limiting that, but just assume for 3 the moment that there is full mobility -- do you have 4 any way of determining the level of the premiums that 5 would be required in order to shift all of the risk to 6 the intermediary? 7 MR. TODD: No. We don't have free 8 electricity markets and electricity markets have their 9 own risk characteristics. They have comparatively very 10 high volatility high risk. 11 But the key determinant of the risk 12 premium, if you want, that would be required is the 13 ability to mitigate that risk. Can it be diversified 14 by a supplier? And the extent to which they can 15 actually have a portfolio of customers and suppliers 16 that diversifies the risk, or, for example, finding 17 suppliers who also want a fixed price. It creates the 18 opportunity to mitigate the risk and keep the premium 19 down, and we will not know what the premium would be in 20 Ontario until we see market forces driving that out. 21 MR. WARREN: Let's follow through on 22 this question of allocation of risk. 23 What do you do in a circumstance 24 where the intermediary -- let's assume that you have in 25 your scenario an intermediary who walks away from the 26 contract. Just to follow up a little bit on Mr. Mark's 27 analysis, the contracts that we are talking about are 28 contracts between the intermediary and the LDC to 426 TODD 1 supply power. Is that correct? 2 MR. TODD: That's right. 3 MR. WARREN: If the intermediary 4 walks away from that, then the LDC has to assume the 5 burden of that obligation. Is that fair? 6 MR. TODD: The rules could be written 7 in different ways. When you say that an intermediary 8 walks away, presumably they are exiting the Ontario 9 marketplace. Is that what you are saying? 10 MR. WARREN: Let's suppose they fail. 11 Suppose an intermediary in your scenario bids, wins a 12 contract to supply power, and the intermediary fails 13 and there is no power which is available from the 14 intermediary. We have two circumstances in this 15 scenario. One is that the LDC in those circumstances 16 retains the statutory obligation to provide standard 17 service. Is that fair? 18 MR. TODD: Yes. 19 MR. WARREN: So the LDC has to go out 20 and find power somewhere else. 21 MR. TODD: Yes. 22 MR. WARREN: In those circumstances, 23 I take it that there is still -- notwithstanding the 24 benefit of shifting the risk, as you put it, from the 25 LDC to the intermediary, there remains the risk of 26 contract failure which the LDC always bears. Is that 27 fair? 28 MR. TODD: No. First of all, there 427 TODD 1 would be contractual terms that if the supplier failed 2 to supply, one would expect, as is the case in gas and 3 so on, that if there is a failure to supply, then the 4 LDC makes up, if you want, the volumes that have not 5 been delivered and charges the supplier, in effect, for 6 back-stopping service. 7 So costs would only be visited upon 8 the LDC if the supplier were to exit the market. 9 MR. WARREN: Given that the contract 10 is between the intermediary and the LDC, can we not 11 agree that the LDC continues to bear a risk, even under 12 your scenario? You haven't shifted the risk wholly 13 away from the LDC. Is that not fair? 14 MR. TODD: Yes, but that risk, of 15 course, can be mitigated through contractual terms, 16 providing a requirement to have their own back-stopping 17 in place. 18 MR. WARREN: And who would set those 19 contractual terms? The Board? 20 MR. TODD: It would be a 21 Board-approved process for the bidding, and the Board 22 could have requirements that as part of this mechanism 23 the terms and conditions for bidding are that there are 24 requirements which minimize those risks. Clearly there 25 is always going to be some residual risk, and that is 26 why -- I guess I was reading a lot into it, but that 27 was the intent of the phrase "a qualified 28 intermediary". In other words, I am not going to be 428 TODD 1 able to walk in and win a bid by having the lowest 2 price. 3 MR. WARREN: You wouldn't just fall 4 off a turnip truck and go and bid, would you? 5 MR. TODD: Well, I might want to do 6 that if I fell of a turnip truck, but I probably 7 wouldn't be a qualified bidder. 8 MR. WARREN: Would you in your 9 scenario -- with the LDC in your circumstance, in order 10 to mitigate its risk of contractual failure, might it 11 engage in forms of risk management? 12 MR. TODD: The primary risk 13 management would be contractual terms. Perhaps there 14 could be on top of that some risk that is beyond the 15 ability of contractual terms to provide protection. It 16 may be appropriate to ensure against that. 17 There are two ways for the LDC to 18 mitigate or manage that risk. One would be that part 19 of the terms and conditions with the customer in 20 setting up these arrangements is, if your supplier 21 failed absolutely, to have the risk float back to the 22 customer, that although they had a price of 3.75 cents 23 for the year, you would have to make up -- if the 24 supplier failed halfway through the year, he is gone. 25 We couldn't back-stop. We couldn't recover any costs 26 from the supplier. It would cost us 4 cents for the 27 balance of the year, so you would have to pay 4 cents 28 for the power in the balance of the year because your 429 TODD 1 supplier failed. 2 That would be one way to protect the 3 utility. Obviously that doesn't protect the customer 4 and it doesn't guarantee the customer's contractual 5 rights, having chosen that option. 6 The other way would be to have, in 7 effect, an insurance mechanism, either Board-sponsored 8 or they go out and do it themselves. That would be 9 incorporated into the mark-up. That concept has been 10 dealt with quite a bit on the gas side, through the 11 Market Design Task Force and so on, not to any final 12 resolution. 13 MR. WARREN: Can we agree that any 14 risk mitigation measure which an LDC might engage in to 15 protect itself has costs which would ultimately be 16 borne by the consumer? Is that fair? 17 MR. TODD: Yes. 18 MR. WARREN: Could I ask you to turn 19 to page 4 of your paper? You refer to one of the 20 principles that formed the Board staff's and the MDC's 21 analysis of these problems, and that is that rules 22 related to standard supply service should ensure that 23 all retail market participants operate on a level 24 playing field. 25 There are various suggestions which 26 have been made in this hearing and in some of the 27 submissions about the importance of the LDCs being able 28 to compete, for example, by the retail side getting 430 TODD 1 access to customer information. 2 Is it a fair summary, on my part, of 3 your proposal that what you want to do is to set up a 4 system which, in effect, has as one of its principal 5 objectives the creation of a competitive market? 6 MR. TODD: One of the things I 7 advocate in consideration of design is the creation of 8 effectively competitive markets, yes. 9 MR. WARREN: But one of the things 10 you want to do, as I understand it, is you want to 11 advance the interests -- correct me if I am wrong in 12 this -- of the marketers, the existing marketers, by 13 allowing them at little marketing cost or relatively 14 low marketing cost to be able to, as I think you put it 15 to someone before, make a name for themselves in the 16 market and, indeed, if they can bid effectively, to 17 supply service to customers. That is one of the 18 objectives of your proposal. Is that not fair? 19 MR. TODD: No, that's not fair. That 20 may be an observation of a consequence of it. I am 21 trying to achieve very different things, which is let 22 the customers choose the different products they want 23 and to make specific products, not just the spot price 24 but other products available to them at the lowest 25 possible cost. So it's customer-driven, not 26 marketer-driven. 27 MR. WARREN: I will return to that 28 later when I talk about the details of the operation of 431 TODD 1 your proposal itself. 2 On page 5, you address the question 3 of the importance of facilitating the development of a 4 spot and intermediate market. You indicate in the 5 middle of numbered paragraph 9 that: 6 "...an active spot market will 7 not drive the development of an 8 active intermediate market if a 9 large share of the market is 10 precluded from utilizing the 11 intermediate market." 12 Can you tell me what it is that 13 constitutes a large share? 14 MR. TODD: What I was referring to 15 there is the SSS market. We don't know now what the 16 market share of SSS will be of the total electricity 17 consumed in Ontario, but it would be, I think in 18 earlier discussions, potentially two-thirds of the 19 market. If there is significant erosion, it might be 20 half and going down. I would say the large share I am 21 referring to there is the SSS market, assuming that a 22 significant number of customers opt for that. 23 MR. WARREN: Do you disagree with 24 Professor Dewees' observation that an intermediate 25 market is likely to develop even under a spot price 26 pass-through system? 27 MR. TODD: I am not as confident as 28 he is. I think I did comment on that earlier, 432 TODD 1 suggesting that it depends on the vehicles used by 2 those who opt out of standard system supply and it also 3 depends on how significant standard system supply is. 4 The intermediate market requires active daily trading 5 to really be efficient for people to go in and out of 6 the market on a daily basis and that requires a high 7 level of activity. 8 Given transmission constraints and 9 other things, we are probably ultimately going to be 10 needing to rely on an Ontario market, a pricing point 11 in Ontario that is going to require significant 12 trading. I do not believe that there is any that will 13 necessarily get an active intermediate market with 14 efficient pricing out of the draft proposal for SSS. 15 MR. WARREN: I'm sorry. I didn't 16 quite catch the balance of your answer. You do not 17 believe -- 18 MR. TODD: The draft proposal -- 19 MS LEA: I am sorry, I couldn't hear 20 either of you that time. 21 MR. WARREN: Is your answer that you 22 do not believe that an intermediate market will 23 necessarily develop under the proposal in the Board 24 staff paper? Is that what you said? 25 MR. TODD: That's what I am saying, 26 yes. 27 MR. WARREN: On page 6 of your paper, 28 at the end of the third full paragraph, you indicate 433 TODD 1 that: 2 "On the other hand, they may 3 prefer the certainty of a fixed 4 price contract, even if there is 5 a market premium for price 6 certainty. Given risk aversion, 7 the latter option is likely to 8 be the one most relied upon." 9 Can you tell me, first of all, 10 Mr. Todd, what analysis you have undertaken about price 11 volatility in this province? 12 MR. TODD: In the last couple of 13 months I did a study on price volatility in this 14 province and that's part of the basis. Or at least my 15 office did. I participated in it. 16 MR. WARREN: It wasn't attached to 17 your paper. Is it somewhere else? 18 MR. TODD: It was not done in 19 connection with this submission. 20 MR. WARREN: The conclusion of that 21 analysis which we haven't seen is what, there is 22 certain to be significant price volatility, maybe? 23 What is it? 24 MR. TODD: The basic observation is 25 that if you -- in the absence of mitigating factors 26 such as the Market Power Mitigation Agreement, if we 27 look at electricity markets throughout the world, 28 electricity markets, certainly spot price markets, are 434 TODD 1 highly volatile compared to other commodities. That is 2 a direct result of the inability to store electricity. 3 Secondly, it looked at mitigating 4 factors and concludes that the Market Power Mitigation 5 Agreement, while providing some stability in terms of 6 the average annual price, doesn't look like it would be 7 particularly effective in controlling month-to-month 8 fluctuations and daily and hourly fluctuations in the 9 price and could well lead to some very high volatility, 10 even if it results in a rebate at the end of the year. 11 Therefore -- 12 MR. WARREN: I am sorry, even if it 13 results in what at the end of the year? 14 MR. TODD: In a rebate at the end of 15 the year. 16 MS LEA: A rebate at the end of the 17 year? 18 MR. WARREN: A rebate at the end of 19 the year. 20 MR. TODD: The way it's designed is 21 if the average price is over 3.8 cents, then OPGI does 22 a refund of the price overall with respect to the 23 marketplace. 24 MR. WARREN: Does your analysis draw 25 any conclusion about the impact on bills of this 26 volatility? 27 MR. TODD: Yes, it looks at the bill 28 impact of what would happen and essentially takes spot 435 TODD 1 market prices, using the methodology of the draft 2 proposal, and examines using experiences in other 3 markets where there are spot prices already established 4 and examines what the impact on bills would be. It 5 shows that they are highly volatile. That of course 6 does not consider equal billing options, which would 7 eliminate that volatility. 8 MR. WARREN: I take it that the fear 9 of volatility is one of the drivers for your proposal. 10 Is that fair? 11 MR. TODD: I wouldn't say it's the 12 fear of volatility. It's saying that one of the things 13 that customers are prepared to pay for is price 14 stability and, given the volatility of the market, 15 there is a market value to providing a fixed price. 16 All I am saying is that I would like to see customers 17 being given that option through a mechanism that has 18 some protections in it that avoids high marketing costs 19 and is subject to effective competition through a 20 bidding process that is Energy Board sponsored. 21 MR. WARREN: What I am getting to, 22 Mr. Todd, though -- there is no magic in it -- is that 23 Mr. Power, in some questions he posed to Professor 24 Dewees, asked some questions about what evidence there 25 was. This is a gloss on Mr. Power's question, but the 26 burden of it was what evidence there was about price 27 volatility. 28 What I take it you are telling me is 436 TODD 1 that you have done a study which tells us, assesses, 2 what price volatility is likely to be. My question is: 3 Why wouldn't you give it to us so that we can take a 4 look at it and make an assessment of what the price 5 volatility is likely to be? Is there a 6 confidentiality -- 7 MR. TODD: It was not done for VECC. 8 If you would like the study, I can check with the 9 client and they may be prepared to put it on the record 10 of this proceeding. 11 MR. WARREN: So there is a 12 confidentiality issue, is that it, that it wasn't -- 13 MR. TODD: It wasn't done for VECC 14 for this submission. 15 MR. WARREN: But you are relying on 16 the conclusions of that study, in part, for the 17 recommendation which you are making in your paper. Is 18 that fair? 19 MR. TODD: When I prepare a proposal 20 such as this, I draw on my past experience over 21 10 years in the gas and electricity markets and all the 22 work that I have done and all the perceptions I have 23 gained. Certainly that study is something I consider, 24 that and some experience and some learning, is relevant 25 to my judgments, I guess. 26 MR. WARREN: Is there any other 27 information other than the study about price volatility 28 that you are relying on when you express your concerns 437 TODD 1 about price volatility? Is there some other 2 information other than what Mr. Power referred to in 3 his questions this morning, which is the experience 4 that we had in the midwest United States last year, and 5 the MDC's analysis of it? Is there other information 6 that we should have on price volatility? 7 MR. TODD: There are things that I 8 rely on. Just off the top, I had reviewed studies done 9 by London Economics prior to the change in the 10 legislation a year or so ago. 11 MS LEA: I'm sorry, I couldn't 12 understand those words, sir. Do you wish to continue? 13 MR. TODD: I am okay if you can sort 14 it out. It probably sounds worse than it is. I am 15 supposed to lean. We need a narrower table up here. I 16 guess the Board members don't usually spend a lot of 17 time talking. They listen. 18 Papers or information that I rely on 19 in these kinds of judgments include the London 20 Economics and other studies and information related to 21 the problems in the Alberta market and what led to 22 proposals for change in that legislation, my experience 23 with the natural gas market in Ontario, everything from 24 years of hearings that have dealt with these matters 25 and involvement with the Ontario Energy Marketers 26 Association. All of that is relevant, as well as just 27 simple economics that is almost an article of faith for 28 economists. 438 TODD 1 People are risk-averse and they are 2 prepared to pay for reduction of risk. We see that 3 very clearly. There is a mass of evidence of that in 4 financial markets, just indicators of risk aversion, 5 and that flows through, logically, to this market. We 6 don't have experience in Ontario yet with the spot 7 price, but it does seem to be the case pretty 8 universally. 9 MR. POWER: If I could be helpful, I 10 understand that the study you are asking for -- and I 11 may be wrong, Mr. Todd, but is that the study that was 12 prepared for INNERConnect? 13 MR. TODD: Yes, it was. 14 MR. POWER: I have just been advised 15 that INNERConnect would be pleased to waive the 16 confidentiality on that study, if that is of assistance 17 to you. 18 MR. WARREN: Terrific. I am glad to 19 have co-operation between you and Mr. Power on any 20 issue I can get, Mr. Todd. Can you make the paper 21 available to us -- 22 MR. TODD: Not this minute, but it 23 could be provided tomorrow morning. 24 MR. WARREN: -- as an addendum to 25 your paper? It would be helpful, if you could. 26 MR. TODD: In whatever form they are 27 prepared to provide it, whether it's an addendum or 28 just them -- I mean they are a party to this 439 TODD 1 proceeding. They may want to provide it themselves, I 2 don't know. 3 MR. POWER: Obviously, we don't have 4 copies here, but we can work something out. 5 MR. WARREN: Can I turn you to 6 page 11 of your presentation? You refer at the bottom 7 just before the heading "The Prices Consumers Pay Will 8 Not Be Equitable" to a -- 9 MS LEA: I am sorry, Mr. Warren, we 10 can't hear you. 11 MR. WARREN: You refer on page 11 at 12 the bottom of the second full paragraph to "efficient 13 consumption". Can you tell me, Mr. Todd, am I to take 14 it from this that, in your view, having a fixed price 15 regime will lead to more efficient consumption? 16 MR. TODD: I am using that term as an 17 economist. "Efficient consumption" means that people 18 are consuming in a manner that is consistent with 19 efficient pricing. So, for example, if you have a 20 price that is a spot market price, they should be 21 reacting to the hourly spot market price and seeing the 22 $1,000 price was $1,000 and cutting back consumption. 23 The economic theory on the point of 24 efficiency is that the consumer will only use the 25 amount of electricity that is worth the price or more. 26 They won't consume if the value of it is less, so they 27 may turn off their TV set. If they are somebody like 28 me, other people may choose to turn it on when the 440 TODD 1 price is high. It's individual decisions and that's 2 the concept of efficiency. With a monthly price, the 3 concept is, if you are paying the market price for a 4 fixed monthly product, then you are responding to that 5 price. It's the market price for a fixed monthly 6 price, and so on. 7 You are always getting customers to 8 react to the price that they are being faced with and 9 my basic point is that in the small volume market you 10 can't practically get customers making consumption 11 decisions based on hourly prices, especially not if you 12 give them a price after the fact. If you are going to 13 get efficient consumption, you have to use the market 14 prices that are monthly or quarterly or annually. They 15 are informed in advance. 16 MR. WARREN: So am I right, then, 17 that what you are saying is that a fixed price will 18 lead to more efficient consumption? That is your 19 proposition? 20 MR. TODD: If it is a 21 market-determined price. The point I made earlier was 22 that if you -- there is a monthly price in the draft 23 proposal, which is the average spot price over the 24 month. That is not a market price for a monthly fixed 25 price product. 26 MR. WARREN: Your definition, I take 27 it, of a market price is one that resulted from a bid 28 process where the LDC has had a number of bids, let's 441 TODD 1 say, on a fixed price regime and has accepted one of 2 those. That is your definition of what constitutes a 3 market price. Is that right? 4 MR. TODD: A bid process is one way 5 to switch market price -- 6 MR. WARREN: If you are proposing -- 7 MR. TODD: -- value as well. That is 8 my proposal, which will produce a market price which is 9 an efficient price. And it is not my definition. That 10 is the definition of economics. 11 MR. WARREN: If I can just follow it 12 through, then, what you are suggesting is that 13 following your bid process, a number of people 14 hopefully will bid on the LDC to provide this fixed 15 price. The LDC picks one of them. That is market 16 determined price. And that will, according to your 17 analysis, lead to more efficient consumption. Is that 18 right? 19 MR. TODD: Compared to the draft 20 proposal, yes. 21 MR. WARREN: On page 13 you indicate 22 that -- and I take it this is an issue which Mr. Mark 23 explored with you briefly -- your concern about the 24 proposal in the Board staff paper, in the draft code, 25 is that the spot price, given the volatility problems, 26 will have the effect of driving people away from 27 standard supply. Is that correct? 28 MR. TODD: That is one possible 442 TODD 1 outcome, yes. 2 MR. WARREN: Would you not agree that 3 a fixed price which is too high would have the same 4 effect? 5 MR. TODD: A fixed price that is too 6 high would imply -- I assume what you mean by too high 7 is that it is higher than the price that would be 8 offered by competitors in the marketplace. 9 MR. WARREN: Yes. 10 MR. TODD: It wouldn't even go to the 11 competitors. You can offer the same thing for less. 12 If the bidding process produced that, 13 that's what would happen. But I would be surprised if 14 the bidding process didn't produce a lower price than 15 the market alternatives. 16 MR. WARREN: What is it you mean when 17 you refer, on page 14, to an appropriate market price? 18 MR. TODD: Those paragraphs are 19 numbered. Which one are you talking about? 20 MR. WARREN: On page 14, numbered 21 paragraph 1, at the bottom of the first full paragraph. 22 MR. TODD: What I was referring to 23 there was in light of the comment earlier that the pure 24 spot price pass-through is a fixed monthly price. A 25 fixed monthly price, market determined, has a risk 26 premium factored into it. This one does not. 27 MR. WARREN: I'm sorry? Which one 28 does not? 443 TODD 1 MR. TODD: The draft proposal pure 2 spot price pass-through averaged over the month is a 3 spot price averaged over the month. It does not 4 reflect the cost of risk mitigation. That is why the 5 price is not being set in advance of the month. It is 6 after the month. That is the difference. 7 You ended up with the pure spot price 8 pass-through. You don't know what your monthly price 9 is going to be until after the fact. A market 10 established monthly price for the month in advance 11 reflects the market's expectations. The actual outcome 12 may be a higher price on average or it may be a lower 13 price on the average. It depends on weather. It 14 depends on conditions at the generating plants. 15 So a customer is taking a risk 16 relative to the floor price, if you want, that they may 17 have to pay more or less. They don't know. It depends 18 on the month. They are told the price this month was 19 way up here or down there. 20 The alternative is that you have a 21 market-determined forward price, where some time prior 22 to the month you go to the market and you establish 23 your price. You carry out secondary market or 24 intermediary market transactions, lock in a price, and 25 then get that price for that month regardless of where 26 the spot market goes. 27 MR. WARREN: But the variability 28 issue that you have just referred to, about not knowing 444 TODD 1 what they are going to pay, that is taken care of under 2 an equal billing regime, correct? 3 MR. TODD: No. While you will be 4 billed relatively equally month by month, you don't 5 know what you are going to pay over the year for any 6 month, or in total over the year, until the end of that 7 year. 8 During the term of the Market Power 9 Mitigation Agreement, there is a constraint on the 10 annual cost. That is a very artificial and temporary 11 constraint. 12 MR. WARREN: I just want to stay with 13 this for one last question. 14 Could you turn up pages 11 and 12 of 15 your paper. Particularly on page 12, the first full 16 paragraph, not numbered, begins with the words "Not 17 only will the price conscious consumer". Do you see 18 that? 19 MR. TODD: Yes, I do. 20 MR. WARREN: The second sentence 21 reads: 22 "Even the household that forgoes 23 its air conditioner in a 24 price-spike period will pay a 25 monthly price that does not 26 reflect their sacrifice." 27 What I don't understand is how that 28 is different under a fixed price regime. 445 TODD 1 MR. TODD: Under a fixed price 2 regime, take the example of a price spike similar to 3 the midwest price spike last year. Under my proposal, 4 the price for the month is established in advance. It 5 is the responsibility of the intermediary to supply the 6 power at that price. Therefore, the customer's price 7 is that pre-set price. They will not turn down their 8 air conditioning on that hot day, because it is 9 irrelevant to them. 10 In the other circumstance, if there 11 is a price spike, the amount that the customer pays for 12 the month goes up because of that price spike. They 13 are, in effect, burying the cost of the spike, but they 14 are not burying it in a way that they can avoid it. 15 MR. WARREN: I see. 16 MR. TODD: The person who has 17 locked-in in advance has avoided it by getting a 18 guaranteed price in advance. The price they ultimately 19 pay does not reflect the spike. What it reflects is 20 the risk of a spike. 21 MR. WARREN: All right. 22 Can I now turn to the proposal that 23 you have. It begins on page 16 in the first full 24 paragraph under the heading "The LDC As A `Consignment 25 Retailer'". 26 MR. TODD: Yes. 27 MR. WARREN: You indicate in that 28 paragraph that: 446 TODD 1 "Permitted SSS offerings should 2 include..." 3 When you use the word "permitted", do 4 you mean permitted by the Board? 5 MR. TODD: Yes. 6 MR. WARREN: 7 "...should include fixed annual, 8 seasonal, and possibly monthly 9 rates." 10 First of all, when does the Board 11 make a determination of what the menu of options are 12 that should be made available? Is that an annual 13 process or when? 14 MR. TODD: What I envisage is that 15 the Board would permit options that the market 16 warrants. I see it as not being arbitrarily 17 restrictive. 18 The only thing that would be not 19 allowed would be something which is not workable. 20 MR. WARREN: How does the Board do 21 this, Mr. Todd? That's what I am driving at. 22 How does the Board determine what 23 offerings should be made under your scenario? Is there 24 a hearing, for example, under which this is determined? 25 MR. TODD: I would assume that LDCs 26 that want to make such offerings would make a 27 suggestion that there be -- we have had I don't know 28 how many task forces so far. Here are things that make 447 TODD 1 sense in the marketplace. We would like these 2 offerings to be accepted. 3 It would take maybe an hour's 4 discussion to come up with a main list. If somebody 5 wanted something else, they could apply to the Board to 6 say this should be on the acceptable list. 7 Alternatively, LDCs could be able to 8 generate what they want, based on certain criteria, 9 criteria such as the offering has to be something 10 available in the marketplace where there are 11 competitive bids -- i.e., you don't get just one bidder 12 on it -- and it does not involve any risk for the LDC. 13 MR. WARREN: Mr. Todd -- 14 MR. TODD: We are moving to a 15 competitive market, so what I am trying to get toward 16 is you give the customer what the customer wants -- 17 MR. WARREN: I'm sorry, Mr. Todd, one 18 of the arguments you advanced in support of your 19 proposition is that it reduces the regulatory burden. 20 I just want to understand what the regulatory burden 21 is. 22 Do you imagine that each LDC in this 23 province will come forward and say: "This is the menu 24 of options that should be made available for this 25 period in my jurisdiction." 26 Is that what you are talking about? 27 MR. TODD: No. The Board, for 28 example, may say, "We don't want SSS to be anything 448 TODD 1 more than a one-year fixed price." That is basically 2 what I was getting at here. 3 MR. WARREN: Who says that? 4 MR. TODD: The Board, the Energy 5 Board. 6 MR. WARREN: The Energy Board decides 7 in advance for everybody that the SSS offerings are 8 going to consist of the following, with or without 9 input from 270 LDCs? 10 MR. TODD: No, no. The Energy Board 11 may decide there are certain constraints. 12 What I was saying was -- for example, 13 because of the mobility issue, which seems to be 14 important to them, they may well say, "No SSS offering 15 will have a contract term, a pricing term, of more than 16 one year. Therefore, your options include any fixed 17 term of one year or less and variable terms." 18 MR. WARREN: I apologize for being 19 obviously quite thick about this, Mr. Todd. I am not 20 understanding how this process takes place. 21 Does the Board decide in advance that 22 these will be the range of SSS offerings that will be 23 made available by all of the LDCs across the province 24 in the following 12 months? Is that what the Board 25 does? 26 MR. TODD: The Board will decide 27 which options the LDC chooses from or, more 28 realistically, would put certain constraints that 449 TODD 1 certain things may be outside of what is permitted and 2 then if the Board so desired, it could say, "At a 3 minimum, you must have these two offerings. You must 4 have a seasonal and an annual." 5 MR. WARREN: Does the Board do that 6 by way of a hearing process? 7 MR. TODD: I think the offerings are 8 simply trying to be market-responsive, so I would 9 expect -- as with a number of other task forces that 10 the Energy Board has created and I have been involved 11 in, they just give that as an issue to one of the task 12 forces and the task force would take an hour of meeting 13 time and say, "Okay, here are the parameters for the 14 offerings that would be permitted by an LDC." 15 MR. WARREN: Do you have any concern, 16 in suggesting, Mr. Todd, that that may result in some 17 unfairness for individual of the LDCs, given that they 18 are going to be bound, I take it, by whatever it is the 19 Board decides? 20 MR. TODD: Not if the objective of 21 the criteria is to make it permissive rather than 22 limiting. To say that there may be some desirable 23 restriction such as no more than one year, that would 24 not disadvantage anybody. Yes, some may want to offer 25 longer terms, but that would be contrary to the policy 26 objectives of the Board. Therefore, it is reasonable 27 for the Board to say that you can't do that. 28 MR. WARREN: The list that is in this 450 TODD 1 paragraph -- fixed annual, seasonal and possibly 2 monthly rates -- is that an exhaustive list of the 3 options that you are proposing? 4 MR. TODD: No. They are ones that I 5 am suggesting should be on the list. It would make 6 sense if those are ones that, based on my involvement 7 in the industry, that customers are likely to find 8 attractive. 9 The fixed annual is that customers 10 would like a relatively long-term fixed price contract. 11 We have certainly seen that in natural gas prices that 12 are less volatile than electricity prices. It is very 13 reasonable to expect that in looking for an annual 14 fixed price, that would be something consumers would 15 choose over the other options -- at least some 16 consumers would. 17 Personally, I think the seasonal 18 would be attractive in terms of overall allocation 19 efficiency of the marketplace. A seasonal price would 20 flow through to the customer some perception of how the 21 value of electricity changes in different seasons and 22 should lead to more efficient utilization of 23 electricity in the long run. That seems like a logical 24 thing. 25 I say possibly monthly, because 26 monthly gets into a lot of problems in terms of, as I 27 have addressed elsewhere, the billing cycle versus the 28 pricing cycle. Monthly is less attractive to me. 451 TODD 1 You also get into administrative 2 difficulties with index prices, and so on. 3 So those are the ones that I set out 4 as being the most practical and the ones most likely to 5 be attractive to customers. 6 MR. WARREN: Is it your suggestion 7 that included in the menu of offerings by the local LDC 8 as part of the SSS that the spot price pass-through, 9 smoothed or otherwise, be included in the range of 10 options? 11 MR. TODD: The simple answer is that 12 if customers wanted it, fine. But I find a lot of 13 difficulty with a mechanism that tells customers the 14 price they are paying after the fact. The start of 15 this whole thing was that I felt very uncomfortable 16 with that approach to pricing. But I am not the one 17 who is going to decide this. 18 My personal view -- and it is just a 19 personal view -- is that all the options should have a 20 known price in advance. 21 MR. WARREN: Let's suppose an LDC in 22 Rainy River, for example -- and I don't know whether 23 there is one or not, but let's suppose there is an LDC 24 based in Rainy River comes forward and says: "This is 25 the menu of options that we want." And it has seven 26 options. "We have spoken to the people and this is 27 it." 28 Is it your proposal that the Board 452 TODD 1 would say, "Great. You can have those seven options", 2 or is it that you have to agree in advance to the three 3 options we have decided on? How does it work? 4 MR. TODD: That question is not 5 essential to my proposal. The overall proposal would 6 not be compromised whether you had permitted offerings 7 and the LDC would determine which ones it wanted to 8 make available versus there could be some dictated by 9 the Board. 10 Personally, I would prefer the option 11 of giving flexibility to the LDCs to be responsive to 12 their customer base, put in what they think their 13 customers want. If the Board sees in the first year or 14 two that that flexibility is being utilized is a 15 problem, then they may want to step in. 16 MR. WARREN: Does the Board oversee 17 the bid process itself? 18 MR. TODD: Not oversee in the sense 19 of looking at each one. They would set the rules and 20 they do have the power to go in and look at the 21 documentation to make sure that each LDC adhered to the 22 rules. 23 MR. WARREN: But you don't envisage 24 that the Board would do that, under your scheme, for 25 each of the LDCs for each of their contract bid 26 processes? 27 MR. TODD: No. 28 MR. WARREN: Issues with respect, for 453 TODD 1 example, to -- and I take it that under your proposal 2 the Board does not have regard to the prices for each 3 of the options that are being made? It doesn't 4 actually approve a price which is paid under each of 5 the options, in each of the LDCs? 6 MR. TODD: Not if they -- they would 7 not review the price for reasonableness if the bidding 8 process had adhered to all the rules. 9 MR. WARREN: What do we do with the 10 circumstance where there isn't -- for example, in a 11 remote LDC or relatively remote LDC, there aren't bids 12 that are received for each of the options? 13 Just to carry it through, if you have 14 adjoining LDCs, one of which has three options and the 15 next-door neighbour has one, is that a problem? If so, 16 how is it addressed, under your scheme? 17 MR. TODD: Personally, I consider 18 that as a bit of a red herring, in that the LDCs are 19 forming groups -- the smaller ones, in particular -- 20 and you would probably not have an individual, tiny 21 LDC -- there are some very, very small ones around -- 22 that would be going through this process on its own. I 23 mean I have sat on committees with them; they are not 24 dumb people. They would put together a package that 25 would attract potential suppliers. You know, the only 26 issue of a potential supplier is, you know, we are 27 talking about bidding on a block of power. When you 28 put together a few small utilities to be a bigger 454 TODD 1 block, you know, it is equivalent to bidding on an 2 industrial customer. The players in the marketplace 3 are going to be interested in that opportunity. 4 Maybe I have too much faith in the 5 players, but I don't see that as a problem. 6 MR. WARREN: Is it a concern of 7 yours, for example, that there might be one or two, for 8 example, intermediaries who would bid on all of these 9 contracts and all of the LDCs across the province? If 10 so, how would you deal with that? 11 MR. TODD: I'm sure they would. I'm 12 sure if they get the best price in every location they 13 would, for that period of time, be supplying most of 14 Ontario. 15 MR. WARREN: That is not a concern of 16 yours? 17 MR. TODD: It is a contracted price. 18 I don't see why I would be concerned. That doesn't 19 give them any market power the following year. 20 MR. WARREN: When you talk about 21 restrictions on mobility, as you do at page 17 of your 22 paper, what restrictions are you talking about? 23 MR. TODD: The only restriction is 24 that if you have a one-year contract, you would stick 25 with that source of supply for the year. 26 MR. WARREN: These restrictions on 27 mobility, do I understand you correctly that these 28 restrictions on mobility are necessary in order to make 455 TODD 1 your scheme work which in turn is necessary to help 2 promote the development of a competitive market? Have 3 I got the syllogism correct? 4 MR. TODD: The logic is that wherever 5 you are getting it from, if you have a fixed price 6 contract for a term, you have to have the contractual 7 obligation for that term. Whether it is a retail 8 competitor, whether it is an LDC, that is a matter of 9 avoiding gaming on the price. 10 MR. WARREN: Now, can we not agree 11 that one of the advantages of a spot price pass-through 12 is that it allows for mobility? 13 MR. TODD: Yes. It allows for 14 complete mobility. If that is your number one 15 priority, then, you would have to -- you know, that may 16 be an attractive option. But there are other 17 considerations, in my view. 18 MR. WARREN: So the loss of mobility 19 is a trade-off which you are prepared to make, in order 20 to develop this competitive market. Have I got that 21 fair? 22 MR. TODD: The purpose of the 23 trade-off is not to develop the competitive market. It 24 is to allow the customers to choose the terms and 25 conditions that they prefer. If a customer would 26 rather have a fixed price for one year, instead of 27 having the uncertainty of a spot price pass-through, 28 they should be able to choose that. 456 TODD 1 MR. WARREN: Now, on page 15 of your 2 paper, you make the observation -- it is in numbered 3 paragraph 6, on page 15. 4 MR. TODD: Yes. 5 MR. WARREN: In the middle of that 6 paragraph, it says: 7 "Furthermore, there can be no 8 assurance that alternate retail 9 market participants will be 10 interested in marketing in every 11 region of the province, even 12 where volumes are small and 13 customer densities low. As a 14 consequence, there is a risk 15 that the market for fixed price 16 alternatives to the SSS will not 17 be competitive and many 18 customers will pay an excessive 19 price for the pricing terms that 20 they prefer." 21 How is it, under your scheme, that 22 you propose to deal with that danger? 23 MR. TODD: This is in the section 24 talking about the draft proposal. 25 My concern is that we are taking 26 outlying areas, that there is going to be nobody going 27 out there and targeting that market if you have to go 28 person by person, or household by household, and what I 457 TODD 1 am saying is that these outlying areas would be much 2 more attractive to a potential suppliers if they can 3 simply go in and, in effect, be on a ballot from the 4 LDC to the customers. It's no muss, no fuss. 5 If you can offer a good price for 6 very little marketing cost you can pick up a block of 7 customers. It may be that what you are doing is your 8 are going to a block of 10 or 20 or 200 MEUs that are 9 saying, "We have a standard set of offerings. If you 10 have the best price for a one-year contract, you will 11 be the option available to the customers throughout the 12 200 MEUs", if they wanted to all get together into that 13 big a group. 14 MR. WARREN: Now, I want to turn to 15 the question of who can be players in the marketplace. 16 As I understood your answers to 17 Mr. Mark, the bidders to be intermediaries can include 18 the retail affiliates of the LDC. Is that right? 19 MR. TODD: Yes. 20 MR. WARREN: The protection, for 21 example, against -- I take it you would share a concern 22 about cost subsidy from one from the -- one side of the 23 monopoly side to the non-monopoly side. That would be 24 taken place by the -- taken care of, I take it, by 25 licensed provisions and code restrictions. Is that 26 right? 27 MR. TODD: Yes. 28 MR. WARREN: Does the Board need to 458 TODD 1 oversee that as part of this process? 2 MR. TODD: It would be no different 3 here than any other -- you know, they have to oversee 4 their codes generally. Certainly, if it was pointed 5 out to them that some party had bid 3.7 cents and the 6 affiliate had bid 3.9 cents and the affiliate had got 7 it, that would cause some concern to the Board. 8 MR. WARREN: I take it also under 9 your scenario that a retail competitor, not the 10 affiliate of the LDC, can win the bid to supply an SSS 11 service and can continue in the same market to be 12 competing for alternate services. Is that right? 13 MR. TODD: Yes. 14 MR. WARREN: Do you have a concern 15 about the fairness of that process when they are 16 competing, in effect, against themselves in the 17 provision of services, particularly within very small 18 markets? 19 MR. TODD: They have competing 20 products. You know, they are trying to access the 21 customer in multiple ways. Presumably, since their 22 offer to the LDC for an SSS supply is something they 23 have entered into voluntarily they feel it is a 24 reasonable price for them. If they have been accepted, 25 it is the best price that anybody has offered, which is 26 why they are the one buying the supply. If they want 27 to attack customers in a different way, with a 28 different offering, that is normal behaviour in 459 TODD 1 competitive markets. 2 MR. WARREN: Would these bids take 3 place at one time, across the province annually? 4 MR. TODD: I didn't envisage the 5 Board setting a date, but I think, since they are our 6 annual contracts, there will probably be a period of 7 time where these tend to happen. 8 From a practical perspective, I would 9 expect that municipal electrics will get together and 10 there will be relatively few bidding processes going on 11 in the province. But they probably would happen 12 roughly simultaneously. 13 MR. WARREN: If, as a result of the 14 bid process, there were significantly different prices 15 paid across the province from one jurisdiction to the 16 other, is that a concern? And if so, does the Board 17 retain a residual right to intervene, in those 18 circumstances? 19 MR. TODD: That is fairly 20 hypothetical. What you are suggesting, I guess, is 21 that the bidding process really isn't working and what 22 you have is maybe somebody comes in and does a high bid 23 everywhere and somebody else comes in with a low bid 24 and wins it in some places. The high bidder gets it in 25 the more remote place. 26 If it were a public policy 27 perspective, that would be a concern. From a reality 28 perspective -- you know, the utility presumably is not 460 TODD 1 out there to hurt its customers. If it knows it's 2 small and it's remote, it is probably going to form 3 part of a group so that it is going to get a reasonable 4 competitive bid. 5 If the system is not producing what 6 is transparently not effective competitive bids, yes, 7 it is a problem. 8 MR. WARREN: But, Mr. Todd, it 9 strikes me that the only way to assure that there is a 10 relatively equal and fair competitive process across 11 the province is for the Board to oversee each of the 12 bidding processes. Is that not the way to assure it? 13 MR. TODD: The government has decreed 14 that we shall move to competitive markets. Surely, if 15 we are going to competitive markets, it is incumbent 16 upon the OEB, in setting up mechanisms, to have a 17 little bit of faith in those competitive markets and to 18 structure things so that it happens and to -- when you 19 say "assure", you know, I think what has to happen is 20 that there will be oversight to identify failures, to 21 set up a complex regulatory system in advance. 22 When what you have done is create a 23 bidding process which, in my view at least, has every 24 promise of producing effective competitive bids, it is 25 not that hard to get effective competitive bids. 26 Certainly in the first few years, because of the whole 27 structure of the marketplace, what we can probably do 28 is get a lot of people bidding pretty close to 3.8 461 TODD 1 cents. 2 MR. WARREN: In your model, are there 3 any restrictions on who can be bidders? For example, 4 can generators be bidders? 5 MR. TODD: There are restrictions. 6 Generators could be bidders. 7 MR. WARREN: I'm sorry. I didn't 8 hear -- 9 MR. TODD: There are restrictions. 10 Generators could be bidders. 11 MR. WARREN: Generators could be 12 bidders. 13 The issue of the competitive fairness 14 of this is controlled by whom? The Board? 15 MR. TODD: What do you mean by the 16 "competitive fairness"? 17 MR. WARREN: Well, if it is, for 18 example, is unfair for a generator to compete against 19 another intermediary. Is that an issue the Board 20 determines? If so, in advance or after the fact? 21 MR. TODD: If the unfairness is a 22 matter of competitive advantage, that is a normal 23 marketplace. The customers should get their supply 24 from the person who can provide the lowest bid. If a 25 generator that may have some limitations on diversity 26 can provide the lowest bid, despite that diversity, 27 fine. If somebody else has more ability to mitigate 28 their costs and provide a fixed price, then the other 462 TODD 1 person will win the bid. There shouldn't be artificial 2 restrictions on the competition marketplace if your 3 objective is to get the lowest price for those terms 4 and conditions. 5 MR. WARREN: Who, under your system, 6 bills the customer? Is it the LDC that bills the 7 customers? Or is it the intermediary? 8 MR. TODD: The LDC. 9 MR. WARREN: Have you assessed the 10 impact of your proposal on the settlement systems of 11 the LDC? Do you know if it will be more costly, for 12 example, for them? 13 MR. TODD: I haven't explicitly put a 14 cost on it. There is a settlement task force 15 deliberating right now. From looking at what is 16 happening in there, there are significant challenges in 17 that billing systems are going to have to be modified 18 and re-written anyway. It is just a matter of how they 19 have to be re-written. 20 Frankly, they have two or three 21 options. Known in advance, prices in advance -- I 22 would expect that having been priced it would introduce 23 a lot less complexity. Having to figure out the price 24 after the fact, plugging it into the billing system and 25 getting bills out to customers, dealing with the 26 mismatch between the billing cycle and the meter 27 reading cycle and the pricing cycle, those kinds of 28 things -- to be honest, it is called a wash, and there 463 TODD 1 is no reason that I can see that would make it more 2 expensive or more difficult from a billing system 3 perspective. 4 MR. WARREN: You refer -- and this is 5 on page 20 of your paper, in numbered paragraph 4 -- to 6 the regulated mark-up. What are you referring to? 7 MR. TODD: That would be similar to 8 the mark-up under the draft code, which says that in 9 addition to the actual cost of power there are costs 10 incurred by the utility. Therefore, the utilities 11 would require a mark-up to cover the cost that they 12 bear in passing through the power. But that will be 13 set by OEB regulation. 14 MR. WARREN: I have one final area 15 with respect to the practical implications of your 16 proposal. 17 Some years ago in the natural gas 18 industry there was a proposal for something called 19 retail commodity options, RCOs, which, if memory serves 20 me, had the natural gas utilities offering a range of 21 alternate ways of buying gas in the marketplace. Again 22 if memory serves me correctly, the marketers went 23 berserk about this proposal. Such was the level of 24 their anguish that the thing never saw the light of day 25 for the approval of the Board. 26 Do you remember the retail commodity 27 option, its brief shelf life? 28 MR. TODD: That was a Consumers Gas 464 TODD 1 proposal. Yes, I remember it. 2 MR. WARREN: Can you tell me how it 3 is what you are talking about is different from the 4 retail commodity option? 5 MR. TODD: The difference is that in 6 that case Consumers Gas was going to procure and put 7 together the product itself, which would shut alternate 8 players out of the market of providing that. The 9 proposal is letting the other players in the market 10 make an offering through the utility at a competitive 11 price. 12 So the difference is who can play the 13 game. 14 MR. WARREN: Isn't it the case under 15 your scenario that the LDC may come to the Board and 16 say: "These are the two options which we think are 17 appropriate for our jurisdiction this year"? Doesn't 18 that have the practical effect of their deciding what 19 offerings are going to be made in their marketplace? 20 And I want to get to the point. Isn't that exactly the 21 same as the retail commodity option, is the LDCs 22 deciding what options are going to be made available in 23 the marketplace that year? 24 MR. TODD: No, it is not the same. 25 In the Consumers Gas case, Consumers Gas would have 26 been going out and procuring gas on the market, doing 27 its own management risk and doing all of the 28 transactions in order to then provide a fixed price 465 TODD 1 contractor the various things. But it was assembling 2 the product itself. That is quite different than a 3 pass-through of somebody else's product. 4 MR. WARREN: One of Professor Dewees' 5 concerns about your proposal is that it will have the 6 effect -- and this is directly contrary, I take it, to 7 your assertion -- it will have the effect of actually 8 stifling competition because marketers will not be able 9 to compete with the SSS offerings that are ultimately 10 approved. Do you disagree with that? 11 MR. TODD: That is a possible 12 outcome, that you will not get the alternatives to the 13 standard service supply. But I have advanced in the 14 past that this model is a good model because what it 15 does is it provides marketers a way to reach customers 16 with a very low marketing cost. 17 MR. WARREN: So do I take it, just 18 following up on that point, that one of the benefits of 19 your proposal is that it advances the interests of 20 marketers by allowing them to make at relatively low 21 cost an impact on the market in each of the 22 jurisdictions across the province? Is that not fair? 23 MR. TODD: No, I don't think that is 24 fair. 25 What it does is, it says that what 26 the customer pays is the cost of the commodity plus the 27 marketing costs. If you lower the marketing costs the 28 competitive price goes down. The marketer doesn't end 466 TODD 1 up any better off. They just have lower marketing 2 costs and the price is lower. The customer is the one 3 who benefits because they are paying less for marketing 4 than they would be in the alternative. 5 MR. WARREN: Just one final point. 6 If a marketer wins a bid and is offering one of your 7 SSS options, can that same marketer go to the same 8 customer and offer an alternative? 9 MR. TODD: If the customer is free to 10 move, and when they are free to move, they would 11 probably not realize they are doing it because it is 12 the LDC's SSS customer and the marketer is providing 13 power in a block. So, yes, probably, if this marketer 14 was going around and knocking on doors, they would be 15 knocking on the doors of some of their own customers, 16 and the price of the product they offer at the door 17 would reflect the cost of marketing door to door. The 18 price of the product they are selling through the SSS 19 would represent the cost of preparing a bid. If all of 20 this were certain, all things being equal, the price 21 through the SSS would be a lower price. 22 MR. WARREN: If the marketer had 23 exclusive access to the customer? 24 MR. TODD: No. They don't even know 25 who the customer is. 26 MR. WARREN: Thank you, Mr. Todd. 27 MS LEA: Thank you very much, 28 Mr. Warren. 467 TODD 1 Mr. Mia. 2 MR. MIA: I have just a couple of 3 questions. I will keep it short. 4 Are you aware of any other 5 jurisdictions and how they have protected vulnerable 6 consumers? 7 MR. TODD: How they have protected -- 8 MR. MIA: Yes, I am just -- 9 MR. TODD: Other jurisdictions, 10 particularly in the U.S., have programs that 11 specifically try to address the needs of vulnerable 12 consumers. 13 MR. MIA: Are they using fixed price 14 regimes? 15 MR. TODD: Mechanisms that protect 16 vulnerable consumers are mechanisms that provide 17 subsidies for low income households. Those have been 18 adopted in certain U.S. jurisdictions. That is not 19 something we are talking about here. 20 The fixed price is not targeted at 21 helping vulnerable consumers, per se. 22 MR. MIA: The MDC recommended the 23 smoothed price to dampen volatility. In your opinion, 24 does the standard supply service, as it is now drafted, 25 meet this goal? 26 MR. TODD: It does dampen volatility, 27 but it leaves uncertainty as to what the price will be. 28 I mean, it is less volatile, clearly, then the hourly 468 TODD 1 price. 2 MR. MIA: Let me rephrase that. I 3 was just trying to draw a distinction between the 4 smoothed pass-through and the code as it is drafted 5 now, which is the spot price pass-through. 6 MR. TODD: The spot price 7 pass-through and the code is a smoothed price. 8 I am missing your question. 9 MR. MIA: I'm sorry, sir. The 10 smoothed price over a longer period? 11 MR. TODD: Oh, okay. The smoothing 12 which would take that monthly price and not recover it 13 all in that month would smooth it over, yes. Sorry. 14 So does the draft do that? 15 MR. MIA: Does it meet the 16 MDC's -- if I took the MDC goal to mean that, it would 17 dampen the price over a longer term? 18 MR. TODD: No, it is a month-by-month 19 thing, fully recovered each month. 20 MR. MIA: Thank you. 21 MS LEA: Thank you, Mr. Mia. 22 Mr. White, please. 23 MR. WHITE: I would like to go to 24 your recommendation on page 5, under the criteria. No. 25 8 says: 26 "The SSS should be 27 understandable to the average 28 customer (simplicity). 469 TODD 1 Confusion about the pricing 2 regime will dilute the price 3 signals that it provides." 4 How important is that among the 5 criteria that you have identified? 6 MR. TODD: You know, I haven't 7 weighted them on a different scale. Basically, I think 8 that simplicity is very important to the customer. We 9 could look at the telecommunications market, long 10 distance. People have migrated to simple billing 11 plans. Therefore, in a trade-off situation it is tough 12 to answer that, but I think that to be understandable 13 is almost a threshold criterion. Some of the people 14 who don't understand -- it is inherently a bad idea. 15 MR. WHITE: In the gas 16 industry -- and this is slightly an aversion because I 17 understand that you have been around the gas industry 18 some time -- what is it that the customer buys? 19 MR. TODD: You are talking about 20 Ontario now? 21 MR. WHITE: I am talking about 22 vulnerable customers, the group we are looking at here. 23 MR. TODD: I am not sure exactly what 24 you are asking, but what they buy is gas, natural gas. 25 If they are in the direct purchase market buying ABC 26 service, typically they are buying gas at a fixed unit 27 cost. 28 MR. WHITE: What is the end product 470 TODD 1 from the consumer's perspective? 2 MR. TODD: Energy. 3 MR. WHITE: All right. How does the 4 customer use the energy? 5 MR. TODD: It is -- 6 MR. WHITE: Let me lead you -- 7 MS LEA: The question is just a 8 little obscure. 9 MR. WHITE: Yes. Let me lead you a 10 little bit. 11 In the residential and the very, very 12 small commercial market isn't natural gas used 13 basically for water heating and space heating? 14 MR. TODD: Yes. 15 MR. WHITE: Is electricity the same? 16 MR. TODD: No. There are many 17 applications for electricity. We don't have natural 18 gas-fired TVs. We do have some natural gas-fired 19 lights, but they are very rare. 20 MR. WHITE: From that perspective, 21 and based on your knowledge of customers, do customers 22 have any idea where the kilowatt hours go that they 23 purchase from a supplier? 24 MR. TODD: Fortunately you have 25 worded that in a broad way with "any idea". I think 26 the average customer knows that air conditioning is a 27 relatively heavy load. A computer is a very light 28 load, unless you have a super-duper -- you know, those 471 TODD 1 kinds of things. They have some idea. If they read 2 the light bulb, then they know what the light bulb is 3 and it means something to them, but they don't really 4 have a good idea. 5 MR. WHITE: For the customer who 6 doesn't have central air conditioning, you would feel 7 that the majority of customers could identify, which 8 would be the majority of consumers -- and I guess we 9 should also pull water heating out of that, because 10 customers who have water heating may be a little more 11 sensitive in that area as well. 12 MR. TODD: Certainly with the heavy 13 loads there are ways to moderate usage. But if we look 14 across countries with different prices or prices 15 relative to income for electricity, we see different 16 behaviour. Perhaps it is my economics training, but I 17 would suggest that that is a reflection of the 18 affordability of power in those jurisdictions, and 19 while a change in price hour to hour, day to day or 20 month to month probably won't have much impact on how 21 well I train my kids to turn off lights when they leave 22 the room, the high price of power is going to make them 23 a little more of a disciplinarian when it comes to 24 turning off the lights. You know, there are long-term 25 behavioral responses. We know that long-term 26 elasticity is higher than short-term elasticity. 27 MR. WHITE: If price clarity is truly 28 important -- cost causality is some other language that 472 TODD 1 is sometimes used in this kind of a situation -- even 2 when electricity is, for the most part, invisible and 3 travels at the speed of light, customers largely have 4 very little idea where most of the energy they consume 5 in a residential dwelling goes. Would you say that 6 without an education scheme that your item 8 criterion 7 can be effectively met by this scheme? 8 MR. TODD: Without education, the 9 criteria to be met for my proposal? 10 MR. WHITE: Yes. 11 MR. TODD: I consider my proposal 12 fairly simple because, in general, customers will know 13 the price they are paying in advance, and that's it. 14 So it is simple. It essentially is 15 the current regime. 16 MR. WHITE: I would like to go back 17 to the LDC if it is involved in a bilateral contract to 18 fulfil its default obligations under the statute. If 19 that supplier defaults, goes bankrupt, leaves the 20 market, whatever, and is unable to fulfil those 21 obligations, then you are comfortable that that risk 22 should be passed on to the end use customers that that 23 local distributing company suppliers? 24 MR. TODD: The only concern that you 25 are saying is passed on to the end-use customer is that 26 it may not -- that rule would not encourage the LDC to 27 minimize that risk. He may want to have at least some, 28 in effect, penalty, some cost borne by the LDC of that 473 TODD 1 risk because through their contractual terms -- unless 2 it's all mandated by the Board. It may be that the 3 contract terms and conditions that provide for 4 backstopping are there. 5 You definitely want the utility to 6 make every effort to avoid a situation where those 7 costs are revisited on the customer and you certainly 8 want the utility to exercise due diligence, but, 9 frankly, with that due diligence undertaken, with the 10 kinds of players that we have in the electricity 11 marketplace -- let's step back from abstracting this 12 and say: Who is out there with the ability to be the 13 supplier? 14 While a marketer, in many cases a 15 small organization, they are not doing their 16 procurement of power themselves. There is somebody 17 behind them. Essentially, there are a very small 18 number -- 10 or so, I think -- of players who are going 19 to be out there in the marketplace that are actually 20 procuring and providing services to the marketers or 21 they will be doing it themselves. 22 I think that the chances of a 23 contractual failure -- and when I say "contractual 24 failure", that means that there is a failure both for 25 the power to be delivered and for the commitments to 26 pay for backstopping would not be fulfilled. The 27 chances of that are very low. In that circumstance, I 28 guess, it comes down to a simple matter of 474 TODD 1 practicality. 2 Those costs probably are going to get 3 passed through to the customer. When we say "passed 4 through to the customer", what that means is, in 5 effect, for the balance of the contract term, which is 6 a few months, the customer would be paying presumably 7 the current spot price or some market equivalent. 8 MR. WHITE: I guess one of the other 9 options that you might provide was if the LDC was in 10 default, then perhaps the customer could go elsewhere 11 in meeting its price. 12 MR. TODD: Yes, the customer could go 13 to an alternate resale supplier. 14 MR. WHITE: Notwithstanding the 15 contract. 16 MR. TODD: In that period, yes, if 17 it's not being fulfilled, but I think it's important to 18 recognize that we are not talking about the ability of 19 a supplier to say, "My goodness, the spot price has 20 gone to $1,000, I am going to not supply any power 21 today." 22 MR. WHITE: I understand that. 23 MR. TODD: That's not the issue. 24 MR. WHITE: No. 25 MR. TODD: The issue is it is gone 26 for the remainder of the term of the contract. 27 MR. WHITE: Under the proposals that 28 you put forth, if the LDC has the option of deciding 475 TODD 1 which alternatives it is going to choose to make 2 available to its end-use customers under its supply 3 obligation and if you had an interval-metered customer 4 who was eager to fully embrace the spot market price, 5 unless the default supplier offered that price as one 6 of their options, then is there a potential that the 7 customer could be precluded from arriving at that 8 option? 9 MR. TODD: By and large, it is not 10 going to be practical. 11 Are you suggesting that a 12 small-volume customer has an interval meter? 13 MR. WHITE: There are a number that 14 are -- 15 MR. TODD: Yes. 16 MR. WHITE: Yes. 17 MR. TODD: Where I think you are 18 going is if there happens to be a half dozen -- a small 19 number, a few hundred, customers with interval meters, 20 it would be, I guess, a decision of the utility whether 21 it's worth providing a default option to them. My 22 personal sense would be it's not worth creating an 23 option for those rare and exceptional cases. They 24 would shop the market. 25 But certainly there is a possibility 26 where perhaps the most frequent appearance of interval 27 meters is where customers have participated in special 28 experimental programs. If you are talking about the 476 TODD 1 continuation of experimental programs, I guess there is 2 no reason that that couldn't be done. It wouldn't be 3 inconsistent with this proposal if that was considered 4 to be good public policy. 5 MR. WHITE: I don't think I need to 6 torture you any more. Thank you. 7 MR. TODD: There will be somebody 8 else to torture me. 9 MS LEA: Thank you, Mr. White. 10 I think we have at least one other 11 person to torture you. 12 Mr. Power? 13 MR. POWER: No questions, sorry. 14 MS LEA: No questions. 15 Thank you very much, Mr. Power. You 16 have declined to torture the presenter. 17 Are there any other questioners? 18 Mr. Ronayne? 19 MR. RONAYNE: I was going to ask a 20 few questions, but I wasn't on the list. 21 MS LEA: Please come forward. 22 I can indicate while Mr. Ronayne is 23 coming forward that the questions that Board staff had 24 have been asked by others, so we have no questions. 25 MR. TODD: You can see the 26 Competition Bureau couldn't resist torturing me. 27 MS LEA: Well, you know what they are 28 like! 477 TODD 1 MR. TODD: Yes, any opportunity. 2 MR. RONAYNE: It comes from being, by 3 nature, an investigator. 4 I have a couple of questions. One is 5 that you have an interpretation of the 3.8 cent price 6 cap on Ontario Hydro. I seem to get the sense that you 7 see it as only an annual rebate. Is that established 8 somewhere in the Market Design Committee proposal on 9 that or is that your interpretation? 10 MR. TODD: My understanding is that 11 is enshrined in the Market Power Mitigation Agreement. 12 MR. RONAYNE: It's an annual basis, 13 but that rebates are going to be calculated only on an 14 annual basis and that's it? 15 MR. TODD: Yes. 16 MR. RONAYNE: Okay, thank you. 17 MR. TODD: They won't know until the 18 end of the year whether the average price is above 3.8 19 or not. 20 MR. RONAYNE: Thank you. 21 I wanted to get a bit about what you 22 see really is the value of the LDCs in this process. 23 Is it that they are creating another market in the 24 marketplace that wouldn't develop, anyway, by its own 25 nature? 26 MR. TODD: The market may develop on 27 its own, but my suggestion is that if it did, the cost 28 of providing the equivalent terms and conditions 478 TODD 1 through customer-by-customer contracting would be a 2 much higher transaction cost. Therefore, this is a 3 vehicle for, in essence, giving customers access to 4 alternatives that will be lower cost. 5 MR. RONAYNE: So it is avoiding 6 marketing costs. Is that correct, that is a big part 7 of it? 8 MR. TODD: Well, it's two things. 9 One is it avoids marketing costs. It also, through the 10 bidding process, makes sure that what is put in front 11 of the customer is a highly-competitive bid. It is a 12 result of the bidding process for the right to sort of 13 access a lot of customers and one would expect that 14 potential suppliers will sharpen their pencils much 15 more in that scenario than they will if they are 16 knocking on doors and saying, "Have I got a deal for 17 you." 18 MR. RONAYNE: Is there also a sense 19 in what you are saying that consumers want to have 20 supply from their distribution company, that somehow 21 there is some comfort attached to that? 22 MR. TODD: Some consumers do. I sat 23 in on a focus group run by Consumers Gas a couple of 24 years ago and participated in conducting a survey for 25 them which looked at customer attitudes and there 26 certainly were those customers who basically said, 27 "Utilities are expensive and I will take my chances 28 with anybody else because probably they can do it 479 TODD 1 better." There is the other classic customer that 2 says, "The utility is my known supplier, I trust them, 3 I feel safer in the hands of my local utility", and 4 those customers want to deal with the utility, all 5 other things being equal. 6 MR. RONAYNE: In this process then 7 you see, I think -- correct me if I am wrong on this -- 8 there will be intermediaries and retailers that will be 9 marketing to the first standard supply service that 10 will also be going to consumers as well and making 11 offers outside of that process. Would there be a lot 12 of overlap between the two? 13 MR. TODD: It's hard to speculate. I 14 expect that there are certainly going to be some 15 players in the market who would be interested in this 16 SSS, but would not be interested in signing up 17 individual customers. 18 MR. RONAYNE: Fair enough. 19 MR. TODD: There are others who may 20 well focus on the door-to-door sign-ups. They wouldn't 21 bother even trying to compete for this SSS option. 22 There are others who may find it attractive to do both. 23 They may feel positioned well to do both, but there are 24 a lot of different players with different strengths and 25 weaknesses in the market. Each one will go the way 26 that suits its strengths best. 27 MR. RONAYNE: I have one final 28 question. Where do you think bidders are going to come 480 TODD 1 from in this market -- if you answered this question 2 already, then I haven't been listening carefully 3 enough -- and what if there aren't a lot of bidders in 4 this marketplace? I am thinking starting from day one. 5 Who is going to oversee what is going on in this 6 process to make sure that people are actually getting a 7 good deal? Is this part of it going to be that there 8 is a 3.8 cent price cap on Ontario Hydro and is that 9 critical to protecting consumer interests? 10 MR. TODD: I am comforted in the 11 interim period with the Market Power Mitigation 12 Agreement that power will be available in the spot 13 market at 3.8 cents. It won't be hard for some players 14 to come into the marketplace and offer a price in that 15 range. It would be pretty hard for somebody to bid 16 successfully at a price much higher than that. 17 MR. RONAYNE: I said I wouldn't ask 18 one more, but -- 19 MR. TODD: If we -- 20 MR. RONAYNE: Sorry. 21 MR. TODD: If we implement the 22 mechanisms, it will kind of get the ball rolling and by 23 the time the MPMA is terminated, yes, I would expect 24 that -- well, if we don't have a number of parties 25 prepared to play in the marketplace at that point, it 26 means that our experiment of competition in Ontario has 27 failed and we may want to reconsider where we are 28 going. 481 TODD 1 MR. RONAYNE: Sorry, I misspoke. One 2 final question, if I may. 3 You mentioned that you had looked at 4 the Alberta marketplace and price volatility in the 5 Alberta marketplace. In your view, is the Alberta 6 marketplace, as far as the tightness of capacity 7 available on the system in relation to demand, similar 8 to what you observed in Ontario or have you not 9 examined that in Ontario? I am thinking of this as the 10 reason why there have been a lot of price spikes in 11 Alberta. 12 MR. TODD: There is constrained 13 supply in Alberta. There certainly is a view that that 14 is at least in part attributable -- and I subscribe to 15 the view -- to the regime that was in place prior to 16 the last round of legislative change and even now there 17 is a kind of awkward market, not a normal competitive 18 market. 19 In Ontario, there are some 20 uncertainties about what nuclear plants will be coming 21 back on stream and how much demand will grow. 22 Therefore, it is uncertain as to whether we will be in 23 a constrained supply situation domestically or not. 24 There is a possibility that we will be in a similar 25 situation in a couple of years. 26 MS LEA: Thank you very much, 27 Mr. Ronayne. 28 Thank you very much, Mr. Todd, for 482 TODD 1 testifying this afternoon under what were obviously 2 adverse circumstances. Thank you very much for your 3 assistance in this matter. 4 I have four brief administrative 5 matters. 6 First, the transcripts are appearing 7 on our Web site -- 8 I'm sorry, Mr. Janigan. 9 MR. JANIGAN: Ms Lea, just a small 10 point. I indicated to Mr. Mark during the course of 11 his examination that Mr. Todd would be available on 12 Monday to answer questions on his resume. I was under 13 the assumption that he would have had to return on 14 Monday. 15 I wonder if Mr. Mark still intends to 16 ask any questions on that square. 17 MR. MARK: There is a limit to even 18 how much I will torture a witness. 19 MS LEA: We are glad to hear it, 20 Mr. Mark. Thank you. 21 MR. JANIGAN: Thank you. 22 MS LEA: So, Mr. Todd, you don't have 23 to come back. Thank you very much. 24 Thank you, Mr. Janigan. 25 First, the transcripts are appearing 26 on our Web site at approximately noon of the day after 27 testimony. For instance, the first day's transcript is 28 there. 483 TODD 1 You will find them by going into the 2 Web site and going under documents available from the 3 Board, sub directory transcripts. 4 Secondly, Mr. Power, I don't think 5 you were in the room earlier when I talked about the 6 order of panels for tomorrow. I am assuming you are 7 consenting to Mr. Mark and Mr. Jennings starting the 8 day at 9:00 a.m.? 9 MR. POWER: Certainly. 10 MS LEA: Thank you. And unless 11 anybody has any serious objections, we will be taking 12 the lunch break a little earlier tomorrow, at noon 13 rather than 12:30. So let me know if you have any 14 serious objections. 15 Fourthly, we have found a law firm 16 Calling Card dropped by someone. Tempted as I am to 17 retain it, I wonder if anybody could claim it or guide 18 me to the owner. Let us know if you know who that 19 belongs to. 20 Thank you very much. 21 MR. POWER: One last thing, if I may. 22 MS LEA: Certainly, 23 MR. POWER: In light of the 24 reorganization of the parties, I am concerned about 25 Mr. Adamson having flown up and the need to get him 26 flown out the night after. 27 Could we possibly have him come on 28 before the Fiona Woolf panel? 484 TODD 1 MS LEA: You can call them in 2 whatever order you like, as far as I am concerned, 3 however you want to present those folk, unless anybody 4 else has an objection. 5 Mr. Mark? 6 MR. MARK: At 9 o'clock? 7 MS LEA: Yes, we will begin at 8 9 o'clock with Mr. Mark and Mr. Jennings. 9 Anything further? 10 Mr. Warren? 11 MR. WARREN: Just one question, 12 Mr. Power. The INNERConnect study that we referred to, 13 that is going to be here tomorrow? 14 MR. POWER: I will ensure it is, yes. 15 MR. WARREN: Thanks very much. 16 MS LEA: Thank you very much. 17 We will reconvene at 9:00 a.m. 18 tomorrow. 19 --- Whereupon the hearing adjourned at 4:55 p.m., 20 to resume on Thursday, July 15, 1999 at 9:00 a.m.