1
    
 1                                               RP-1999-0040
 2    
 3                                   THE ONTARIO ENERGY BOARD
 4    
 5    IN THE MATTER OF ss. 57 and 70 of the Ontario Energy
 6    Board Act, 1998, S.O. 1998, c. 15, Sched. B;
 7    
 8    AND IN THE MATTER OF a proposed Standard Supply Service
 9    Code for electricity distributors.
10    
11    
12    
13    
14    B E F O R E :
15    F. LAUGHREN                    Chair & Presiding Member
16    R.M. HIGGIN                                      Member
17    A. BIRCHENOUGH                                   Member
18    
19    Hearing held at:
20    2300 Yonge Street, 25th Floor, Hearing Room No. 1,
21    Toronto, Ontario on Monday, August 9, 1999,
22    commencing at 0935
23    
24                            VOLUME 1
25    
26    
27    
28    

                                                            2
    
 1                           APPEARANCES
 2    JENNIFER LEA               Counsel, Board Technical
 3                               Staff
 4    BRIAN HEWSON/              Board Technical Staff
 5    UNA O'REILLY
 6    JACK GIBBONS               Pollution Probe
 7    TOM ADAMS/                 Energy Probe
 8    MARK MATTSON               
 9    RICHARD STEPHENSON         Power Workers Union
10    ROBERT POWER/              Various Intervenors
11    PETER BUDD/
12    ALEXANDER GRIEVE
13    BRUCE MacODRUM/            Toronto Hydro Electric
14    MARK RODGER                System Limited
15    ALAN MARK                  Municipal Electric
16                               Association
17    TOM BRETT                  Independent Power Producers'
18                               Society of Ontario, IPPSO
19    ELIZABETH DEMARCO          Various interested parties
20    BRIAN McKERLIE             Municipality of Chatham-Kent
21    ROBERT WARREN              Consumers Association of
22                               Canada.
23    DICK PERDUE/               Direct Energy and Enershare
24    DAVID BROWN                Technology
25    DAVID POCH                 Green Energy Coalition, GEC
26    ZIYAAD MIA                 Coalition of Distribution
27                               Utilities et al
28    

                                                            3
    
 1                      APPEARANCES (Cont'd)
 2    ALECK DADSON               Enron Capital & Trade
 3    IAN MONDROW                Heating, Ventilation and Air
 4                               Conditioning Contractors
 5                               Coalition Inc., HVAC
 6                               Coalition
 7    MARCEL REGHELINI/          Ontario Hydro Services
 8    GRAHAM HENDERSON           Company
 9    ROGER WHITE/               Energy Cost Management
10    RICK GROULX                Incorporated, ECMI
11    MARK RONAYNE/              Competition Bureau
12    J.D. SUTTON
13    KEITH RAWSON               TransCanada Power
14    ANDREW BARRETT             Ontario Power Generation
15                               Inc.
16    RICHARD BATTISTA           Union Gas Limited
17    BARBARA BODNER             Enbridge Inc.
18    AMIR SHALABY               Ontario IMO
19    DAN PASTORIC               Energy Advantage
20    JIM RICHARDSON/            Upper Canada Energy Alliance
21    PAUL FERGUSON
22    MICHAEL JANIGAN            Vulnerable Energy Consumers
23                               Coalition
24    
25    
26    
27    
28    

                                                            4
    
 1                      INDEX OF PROCEEDINGS
 2                                                       PAGE
 3    Preliminary matters                                   1
 4    Presentation by Mr. David Brown                       3
 5    Presentation by Mr. David Poch                       35
 6    Presentation by Mr. Mark Mattson                     57
 7    Presentation by Mr. Tom Adams                        62
 8    Presentation by Mark Ronayne                         80
 9    Luncheon recess at 1242                             107
10    Upon resuming at 1410                               107
11    Presentation by Mr. Michael Janigan                 108
12    Presentation by Mr. John Todd                       115
13    Presentation by Mr. Jim Richardson                  128
14    Presentation by Mr. Paul Ferguson                   131
15    Presentation by Mr. Ian Mondrow                     142
16    
17    
18    
19    
20    
21    
22    
23    
24    
25    
26    
27    
28    

                                                            5
    
 1                                           Toronto, Ontario
 2    --- Upon commencing on Monday, August 9, 1998
 3        at 0935
 4                      THE CHAIRMAN:  Good morning,
 5    everybody.  My name is Floyd Laughren and with me today
 6    are two of my colleagues on the Energy Board.  To my
 7    left is Art Birchenough, and to my right is Roger
 8    Higgin.
 9                      We have with us this morning as well
10    some Board staff.  We have Brian Hewson, who is the
11    Manager of Energy Licensing; Una O'Reilly, who is the
12    Regulatory Officer, Energy Licensing; and we have
13    Jennifer Lea, Board staff counsel.
14                      We are sitting here today to hear
15    submissions on the Board's RP-1999-0040 proceeding on
16    the electricity Standard Supply Service Code, otherwise
17    called the "SSS Code".
18                      You should all have received copies
19    of Procedural Order No. 3.  If you haven't, copies are
20    available on the side table.  The Order lays out the
21    general time frame and the order of presentations for
22    this part of the proceeding.  As you will see, we will
23    be hearing from a number of parties over the next five
24    days.  We will be trying to meet a very tight time
25    frame.  We do appreciate your co-operation in assisting
26    us in meeting these time frames and helping us to
27    consider issues related to the Code.
28                      I am advised that the Power Workers

                                                            6
    
 1    Union wishes to make a presentation to this proceeding,
 2    but were not placed on the agenda in Procedural Order
 3    No. 3.  Their presentation will commence on Friday
 4    afternoon, following the Ontario Natural Gas
 5    Association presentation.
 6                      In the Board's original notice and in
 7    our first Procedural Order the Board asked parties to
 8    make their representations to the Board in 30-minute
 9    presentations.  You will note that we have left an hour
10    for each party to make their arguments to ensure that
11    the Board or staff who have questions or clarification,
12    that that can be dealt with within that hour. 
13    Obviously, no one has to use up either the full 30
14    minutes or the full hour, but the allowance on the
15    schedule is for that.  I would stress that you don't
16    need to take that 30 minutes.
17                      Are there any preliminary questions
18    or matters to deal with?
19                      MR. MARK:  Mr. Laughren, if I might,
20    just on a preliminary matter --
21                      THE CHAIRMAN:  Will you identify
22    yourself for the record please.
23                      MR. MARK:  Surely.  Alan Mark
24    representing Municipal Electric Association.
25                      As you are aware, sir, the Municipal
26    Electric Association has had and has expressed some
27    concerns about the process throughout this proceeding. 
28    I want to note for the record that when our previous

                                                            7
    
 1    motion was brought, and indeed our preparation for the
 2    proceeding, it was based on the assumption that the
 3    substantive evidence and particular expert witness
 4    filings were to have been filed prior to the Technical
 5    Conference so that there would have been an opportunity
 6    to have the expert witnesses appear in person and
 7    answer some questions about the basis of their papers.
 8                      We note with some considerable
 9    concern that some parties have taken the opportunity to
10    file for the first time lengthy expert witness filings
11    as part of their submission with respect to this
12    portion in the hearing in circumstances which will not
13    compel them to bring those witnesses forward and answer
14    any questions.  We want to note for the record that was
15    not our understanding of the way the process was to
16    proceed and it causes us to be concerned about the
17    process.  I just wish the Board to be aware of that
18    concern.
19                      THE CHAIRMAN:  That is noted.
20                      Are there any other comments?
21                      Then why don't we proceed directly
22    with the first presenter and that is Mr. Brown.
23    PRESENTATION
24                      MR. BROWN:  Thank you.
25                      Mr. Chair, Members of the Panel, I am
26    appearing today with Mr. Dick Perdue.  We both are
27    acting on behalf of Direct Energy Marketing Limited and
28    Enershare Technology Corporation.

                                                            8
                                          BROWN, presentation
 1                      Unfortunately, you are starting off
 2    these oral submissions with two lawyers appearing
 3    before you.  If I have heard nothing else from
 4    Ms O'Reilly over the last week and a half is that
 5    lawyers have a habit of talking too much.
 6                      THE CHAIRMAN:  That is duly noted as
 7    well.
 8    --- Laughter
 9                      MR. BROWN:  What we intend to do, you
10    have before you, sir, Members of the Panel, the written
11    submissions that we filed.  The written submissions
12    consist of two parts.  We have filed submissions in
13    response to the information that came out from the
14    Technical Conference.  To that, however, we have also
15    appended the submissions that were filed on behalf of
16    Direct and Enershare in February of 1999.  Those
17    submissions deal with some other aspects of the draft
18    Standard Service Supply Code.  We have appended them
19    because we wish to reiterate those submissions.
20                      As the Members of the Panel may be
21    aware, the two companies whom we represent, Direct and
22    Enershare, are suppliers of natural gas to
23    approximately 900,000 customers in Ontario.  Those
24    customers are primarily residential and small
25    commercial accounts.
26                      Although they only supply natural gas
27    right now to those customers, it is certainly their
28    intent to engage actively in the competitive retail

                                                            9
                                          BROWN, presentation
 1    electricity market once the market opens.
 2                      In terms of the submissions before
 3    you this morning, in simple terms, Direct and Enershare
 4    support the draft supply service code outlined in Board
 5    staff's proposal and in large part support its adoption
 6    for the reasons outlined by Board staff.
 7                      However, this morning I would like to
 8    list five reasons which in our view support the
 9    adoption of the draft supply service code by this
10    Board.
11                      We submit that the Code should be
12    submitted for these reasons.  First, the pricing
13    mechanism contained in the draft code is simple to
14    calculate and it establishes a fair or a just and
15    reasonable price for the default service which is being
16    offered.
17                      Second, the Code is consistent with
18    the statutory view of the section 29 service which LDCs
19    are required to offer.
20                      Third, the Code is consistent with
21    the established principles of rate regulation that have
22    been applied in this province for many years.
23                      The standard service supply is a
24    regulated service that is clear from the Act.  It is
25    not a profit-making service as envisaged by a number of
26    municipal utilities that appear before you in this
27    proceeding.
28                      Fourth, the Code clearly and cleanly

                                                           10
                                          BROWN, presentation
 1    separates regulated services from competitive services,
 2    and by so doing it minimizes the problems of
 3    cross-subsidization and potential abuse of market
 4    power.
 5                      Fifth, and finally, the Code requires
 6    a minimum of regulatory oversight.
 7                      Those are the five reasons which are
 8    set out in more detail in our written brief, but those
 9    five reasons are a sufficient basis, in our submission,
10    and a very persuasive basis, we submit, for this Board
11    to accept the draft service supply code.
12                      If I could deal briefly with and
13    highlight certain features in each one of those
14    components.
15                      First, the simplicity of price
16    calculations and the establishment of a fair price.  In
17    our submission, the price is simple and attractive
18    because it is transparent.  Everyone knows what is
19    being charged for the particular service, in this case
20    the commodity.
21                      Second, it is not subject to
22    after-the-fact true-ups or regulation.  You don't need
23    a variance account which will attract additional
24    regulatory cost.
25                      And, fourth, it avoids the problems
26    associated with regulated risk management of a
27    regulated commodity.  Regulated risk management always
28    involves some form of price distortion because one

                                                           11
                                          BROWN, presentation
 1    never knows until after the fact as to whether the risk
 2    management has been prudent or not and, therefore,
 3    whether all of the costs should be passed through or
 4    not.
 5                      The price mechanism contained in the
 6    draft service supply code avoids those problems and you
 7    have a very transparent wholesale market-driven price
 8    which is quite attractive, in our submission.
 9                      It is important to note, we submit,
10    that the default supply envisaged by section 29 of the
11    Code is not designed to be all things to all consumers. 
12    It is a very specific and limited offering.  It is
13    designed, as the statute has indicated, to accommodate
14    those customers who choose not to avail themselves of
15    offerings in the competitive retail market, or who
16    decide to move back to system supply.  But it is not
17    designed to serve all the wants and desires of
18    electricity consumers in this province.
19                      Of course, if any consumer is not
20    satisfied with the terms, condition or pricing
21    associated with the standard supply service, there will
22    be other offerings out there from which that customer
23    can choose, and that is what the competitive market is
24    for.
25                      The competitive market is there to
26    provide customers with a vast array of services which
27    can be tied to their particular wants and desires. 
28    Some of those desires may be the quantum of price. 

                                                           12
                                          BROWN, presentation
 1    Some of those desires may be stability of price, and
 2    there may well be other components to an offering which
 3    will appeal to particular consumers.  But that variety
 4    of offerings is there for the competitive retail market
 5    to develop and offer to consumers in this province. 
 6    The default service supply in not supposed to
 7    accomplish that.
 8                      The second submission that I made was
 9    that the Code is consistent with the statutory view of
10    the section 29 service.  In our view, the section 29
11    service has three different components.
12                      First, in a sense it is a standard
13    supply, since it will be offered and must be offered by
14    all LDCs in this province.
15                      Second, however, it is the default
16    supply.  In its primary operation it will be a default
17    in the sense that it will be used to supply consumers
18    who do not make a positive election to buy their
19    electricity from the competitive market.
20                      The third feature of the section 29
21    service is that it is transitional in nature.
22                      In our submission, the provisions of
23    section 29 make it quite clear that the section 29
24    service will not be around for all time.  We have dealt
25    with it in some detail in our written submissions.
26                      Suffice it to say that the language
27    of section 29(4) of the Electricity Act makes it clear,
28    in our submission, that at some point in time this

                                                           13
                                          BROWN, presentation
 1    service will be phased out.  That point of time will be
 2    reached when, in the words of the Act, the Board is
 3    satisfied that there is sufficient competition among
 4    retailers in the distributors' service area.
 5                      So the section 29 service is sure to
 6    take us over the hump from the opening of the
 7    competitive market until such time as the competitive
 8    market is full and robust and at that period of time,
 9    according to the statute, it will be phased out.
10                      That is a very important factor, in
11    our submission, which the Board must take into account
12    in considering the various alternative proposals which
13    have been placed before you by the municipal electric
14    utilities, in large part which envisage this service as
15    a service for all time in the electricity market.
16                      With respect to the draft service
17    supply code being consistent with the legislation, I do
18    want to also highlight that the spot price pass-through
19    mechanism which is contained in that Code, in our
20    submission, is squarely authorized by the legislation. 
21    Some have argued before you or made written submissions
22    before you that it is not, and that for you to adopt a
23    spot price mechanism somehow will result in your
24    straying beyond your statutorily authorized powers.  In
25    our submission, that is simple nonsense.  That is not
26    the case.
27                      It is quite clear -- and we deal with
28    this on pages 3 to 6 of the brief, especially in

                                                           14
                                          BROWN, presentation
 1    paragraph 11 -- that the provisions of the Ontario
 2    Energy Board Act clearly allow you to determine the
 3    method or technique of pricing for the default service
 4    supply and that is sufficient to allow you to choose
 5    whatever mechanism in your view will result in a just
 6    and reasonable price being charged to consumers for
 7    that rate.
 8                      Our third submission is that the
 9    draft supply service code is consistent with
10    established principles of rate regulation as they have
11    evolved in this province.  The Acts -- that is the
12    Electricity Act and the OEB Act, 1998 -- are enabling
13    legislation.  They are enabling legislation in the
14    sense that they give this Board powers to manage the
15    transition to a competitive electricity market in
16    Ontario.
17                      Although the Act gives the Board some
18    new powers, they do not ignore the existing
19    jurisprudence and rate-making principles which have
20    formed the Ontario markets in the past.  They do not
21    ignore existing rate-making principles.  All the Acts
22    do is that they build on those rate-making principles.
23                      Some of the submissions, as I
24    understand them, are really suggesting to the Board
25    that all that has happened in the past in terms of the
26    rate principles that one would find in Bonbright and
27    all of the other standard texts that are out there
28    should simply be thrown out the window and we start

                                                           15
                                          BROWN, presentation
 1    afresh.
 2                      That is not what the Acts are
 3    designed to do.  They are quite clear in their initial
 4    objectives that they are designed to move the market
 5    from a regulated market to a competitive market, but in
 6    the process of doing that we have to have a regulator
 7    to manage that transition and in making that transition
 8    you can be informed and be guided by the standard
 9    rate-making principles that have applied throughout
10    this continent for many, many decades.
11                      On this particular point there are
12    two subpoints that I would like to stress.
13                      The first is that the standard supply
14    service is a regulated service.  The LDCs offering
15    default supply are not competitive retailers.  They are
16    trying to make themselves out to be, but they are not.
17                      We have gone through, in pages 5
18    and 6 of our brief, especially in paragraph 10, the
19    statutory language, because some have argued that when
20    one reads the statute, particularly the OEB Act, the
21    resulting conclusion is that you must find that LDCs in
22    fact are competitive retailers when they offer the
23    section 29 function.
24                      That is not our reading of the Act. 
25    We are not going to take time to go through those
26    detailed submissions now, but we have in paragraph 10,
27    I think, endeavoured to give a fair analysis of the
28    clear language of the Act which shows that the

                                                           16
                                          BROWN, presentation
 1    legislature, when it enacted those Acts and talked
 2    about section 29 service, was not envisaging a
 3    transformation of the LDCs into competitive retailers.
 4                      It is quite obvious why they aren't.
 5                      First of all, the LDCs have to obtain
 6    an order of this Board in order to provide that
 7    service.
 8                      Second, the price or the rate that
 9    they can charge for that service is regulated by this
10    Board.
11                      Those two features, the necessity of
12    an order and the existence of a requirement of a rate,
13    mean that this is not a competitive service because
14    rate making stands in contrast to and is simply a
15    surrogate for competitive pricing.
16                      Those, in our view, are sufficient
17    answers to the suggestions that have been made that
18    somehow LDCs have now been transformed into competitive
19    retailers.
20                      The second point in this regard which
21    I wish to make is that it has been traditional in this
22    province that regulated commodities do not earn a
23    profit for the utility.  Certainly on the natural gas
24    side, in all of the rate cases that have been done for
25    many years before this Board, the cost of the
26    commodity, the cost of natural gas, is simply passed
27    through to the consumer.  The utility doesn't earn any
28    profit on that, in making its regulated offering.

                                                           17
                                          BROWN, presentation
 1                      The same principle, we submit, is
 2    true for electricity with respect to the section 29
 3    default supply, which will be the regulated electricity
 4    commodity offering.
 5                      The Acts do not intend the utilities
 6    for that offering to make a profit on the service.  You
 7    can't have a situation where on the one hand you have
 8    natural gas utilities who are required to offer their
 9    regulated service on a cost basis and then somehow have
10    electricity consumers being treated differently when
11    they decide to buy a regulated electricity offering
12    from their utility.
13                      Section 29 of the Act makes it quite
14    clear, we submit, that this is a regulated service and
15    therefore, at the end of the day, the price which is
16    charged is a regulated one and therefore not a
17    profit-making one.
18                      One of the presenters who appeared
19    before the Technical Conference that was held by this
20    Board, Ms Fiona Woolf, was fairly adamant in her
21    criticism about the draft standard supply code because
22    it was going to create a "commercially unattractive
23    business for the provider of the default supply".
24                      In our respectful submission,
25    Ms Woolf confused the nature of the section 29
26    offering.
27                      The real nature of the section 29
28    offering is a default regulated commodity offering. 

                                                           18
                                          BROWN, presentation
 1    The Act does not intend that offering to afford
 2    opportunities to develop a commercially attractive
 3    business.
 4                      The Act, I think, has pointed quite
 5    clearly to the utilities to say:  If you want to
 6    develop a commercially attractive business you can do
 7    so by setting up an affiliate and through the affiliate
 8    offer unregulated services to the market and that is
 9    where you can make your money.  But the Act does not go
10    as far as to say:  We are going to transform the
11    principles which have surrounded regulated offerings in
12    this province for decades and all of a sudden say that
13    a regulated offering is one in which you can make a lot
14    of profit.
15                      That is not what the Acts say.  That
16    is not what section 29 is designed to do.
17                      Just because the Acts do allow the
18    utilities to provide the section 29 service through an
19    affiliate, it does not, in our respectful submission,
20    change the nature of that service as a regulated
21    service.
22                      Whether the section 29 offering is
23    made through the utility directly or whether it is made
24    through a utility affiliate or whether it is made
25    through a third-party provider at the end of the day
26    its nature doesn't change:  It is a regulated service;
27    it is a default service; the price must be approved by
28    the Board; and it is a transitional service which is

                                                           19
                                          BROWN, presentation
 1    going to disappear once the retail market is fully
 2    robust.
 3                      There is one additional point in this
 4    area in terms of the consistency of the draft service
 5    supply code with traditional utility principles that I
 6    do wish to highlight.
 7                      Many objections have been made to the
 8    draft code because some have argued that it will result
 9    in a commodity price that will be characterized by
10    price volatility.  Some suggestions have been made,
11    both directly and implicitly, that a regulated service
12    should not be characterized by price volatility.
13                      All seem to agree that a spot price
14    should be offered to electricity consumers, but
15    Mr. Adamson and others have simply said that should be
16    offered on the competitive market and not through a
17    regulated utility.
18                      I was going to make two points in
19    this regard to say that in the past regulated offerings
20    on the natural gas side in the province have been
21    characterized by a degree of price volatility,
22    especially since the gas utilities moved to the indexed
23    pricing mechanism back in 1992 or 1993.
24                      We have seen through that time a
25    system evolve where one does not know at the beginning
26    of the test year what the final gas price is going to
27    be at the end of the test year because one has to take
28    into account the fluctuations that take place in the

                                                           20
                                          BROWN, presentation
 1    market.  Those are garnered in the purchase gas
 2    variance account and then there is a true-up at the end
 3    of the year.
 4                      So even on the natural gas front for
 5    a regulated offering in this province I think it is
 6    fair to say that at the beginning of any year a
 7    customer is not going to know what its actual rate
 8    would be for the entire year until the end of the year,
 9    after the Board has done its prudency and true-up
10    attempts.
11                      However, I think the best indication
12    of the prevalence of price volatility and regulated
13    commodities appears on the front page of this morning's
14    Globe and Mail where the first headline is natural gas
15    price jump hits consumers, and then there is a detailed
16    article on how strong demand has been for gas this
17    summer and therefore utilities across the country are
18    going to have to hit their consumers with an increase
19    in rates beyond what is projected.
20                      But I thought the best paragraph in
21    this particular article is one which is a quote from a
22    consumer, an elderly consumer, a chap by the name of
23    Archie Wilder.  He is 82.  He is a Calgary resident and
24    perhaps encapsulates how accustomed regulated gas
25    purchasers have become to price volatility in the
26    commodity market.
27                      The paragraph simply reads:
28                           "Calgary resident Archie Wilder,

                                                           21
                                          BROWN, presentation
 1                           82, said he's grown accustomed
 2                           to `these gas prices going up
 3                           and down like a fiddler's
 4                           elbow.'"
 5                      So to the extent of who is out there
 6    in the regulated customer market and what are their
 7    expectations, it certainly sounds like we do have
 8    people who now are becoming increasingly aware that the
 9    nature of the continental market does involve some
10    price volatility in their regulated price.  In our
11    submission, the same will be true to a certain extent
12    on the electricity side, although one of the
13    attractions of the price mechanism that is found in the
14    draft Standard Service Supply Code is that there is a
15    smoothing out over the billing period of the price that
16    will be offered.  So that should minimize, to a certain
17    degree, price volatility.
18                      The fourth reason why we submit this
19    Code should commend itself to the Board is that it
20    clearly separates the regulated commodity offerings
21    from the competitive commodity offerings.  A number of
22    alternative models have been provided or presented to
23    this Board on the way things should be according to
24    other presenters.
25                      As I have indicated in our written
26    submissions, these companies oppose those alternate
27    models for a number of reasons, but two of them are
28    very, very important.  Some of the options that have

                                                           22
                                          BROWN, presentation
 1    been proposed before you contemplate that the utilities
 2    will offer a variety of regulated energy supply
 3    services to their customers.
 4                      In our submission, a retail market
 5    characterized by a large number of regulated offerings
 6    is simply not a competitive market, and indeed will be
 7    a barrier to the development of a competitive market.
 8                      Secondly, other options envisage that
 9    the affiliate of an LDC will offer both a regulated
10    section 29 supply as well as an unregulated energy
11    supply, or unregulated energy supply offerings, a
12    multitude of them.
13                      In our submission, to allow such
14    conduct will only add another layer of regulation to
15    the retail market since affiliates would have to be
16    monitored to ensure that they are not engaged in
17    cross-subsidization or other activities which take
18    unfair advantage of their regulated offerings.
19                      To put it bluntly, the only people
20    who are going to win from a circumstance where an
21    affiliate or a utility can offer both a regulated and
22    an unregulated offering will be the lawyers in this
23    room.  We will have to come back here in rate hearing
24    after rate hearing in order to scrutinize what the
25    utility has done in respect of the regulated service
26    and what the entities have done in respect of their
27    unregulated services.
28                      Perhaps as a lawyer I shouldn't be

                                                           23
                                          BROWN, presentation
 1    saying that one of the purposes of the OEB Act and the
 2    Electricity Act is to minimize the involvement of
 3    lawyers in the energy markets in Ontario, but I think
 4    it is quite clear from those Acts that the government
 5    has intended, that the legislature has intended, that
 6    consumers will ultimately be looking to the competitive
 7    market to make their decisions.  You don't have to have
 8    a lot of lawyers involved, and you don't have to
 9    involve a lot of Board time in determining whether or
10    not people are onside or offside the rules.
11                      One of the strong attractions of the
12    draft Standard Supply Service Code that Board staff
13    have put forward is the minimal regulatory supervision
14    that is required for that.  That is not only good in
15    and of itself, but the rules which are set out in the
16    draft Code really try to draw the bright line up front
17    between regulated and unregulated services.  That
18    approach, we submit, should be commended, because then
19    you have participants in the private retail market
20    knowing in advance that the playing field is level and
21    what is permitted to the regulator and what is not
22    permitted to the regulator.
23                      In that respect, I would like to deal
24    very briefly with two aspects related to the separation
25    between regulated and unregulated commodities which
26    have arisen during these proceedings.
27                      First, the marketing restrictions
28    that are contained in the draft service supply code,

                                                           24
                                          BROWN, presentation
 1    sections 2.2.4 and 2.2.5.
 2                      Direct and Enershare regard these
 3    conditions as essential for the creation of a fair
 4    competitive retail market.  They provide clear rules
 5    which do not mix regulated and unregulated functions. 
 6    They minimize the possibility of cross-subsidization,
 7    they minimize the possibility of the misuse of
 8    confidential information, and they clearly signal to
 9    market participants that one entity should not be
10    engaging in a regulated and unregulated offering at the
11    same time.
12                      The second aspect that has arisen in
13    this proceeding relates to section 2.5.7 of the
14    Affiliates Relationship Code, and the Board has made an
15    order in respect of that.
16                      My clients consider and submit that
17    that provision of the affiliate code is necessary to
18    ensure that the initial market does not simply preserve
19    the incumbent LDC's retail monopolies.  Many have
20    characterized that section of the affiliate code as
21    preventing the LDCs from offering a section 29 service
22    from their affiliates.  It doesn't prevent it at all. 
23    What it does do is that it does require an element of
24    positive election on the part of gas customers, that
25    is, the utility has to tell its gas customers what is
26    happening to them, who is now going to be their
27    supplier.
28                      Many who oppose that section of the

                                                           25
                                          BROWN, presentation
 1    affiliate code effectively rest their case on the
 2    concept of negative option.  A number of Members of
 3    this Board can recall back when, in the natural gas
 4    side of things, a move was made to the ABC T-service,
 5    and much discussion was generated about whether
 6    existing retailers who were servicing their clients
 7    through buy/sell arrangements had to elicit a positive
 8    election from their customers if they were to now get
 9    their service through an ABC T-model.
10                      This Board clearly said that negative
11    options were not going to take place in this province. 
12    A competitive market required a consumer who understood
13    what was happening to its gas supply, and therefore
14    there should be a positive election.
15                      In our submission, that same
16    principle should apply when a utility wishes to
17    transfer its customer base to a third party, even if
18    that third party is an affiliate.  A customer should
19    know what is going on so that they, at the end of the
20    day, can have the final say.
21                      All section 2.5.7 says is that you
22    have to make sure that your customers have made a
23    positive election.  Presumably, if they like dealing
24    with the utility they will make a positive election. 
25    If they don't, they may get their offerings from the
26    competitive market, but, at the end of the day, that is
27    what competition is all about.
28                      These Acts, in our respectful

                                                           26
                                          BROWN, presentation
 1    submission, are not designed to preserve the monopoly
 2    of any existing incumbent.  What they are designed to
 3    do is to shepherd this market through to a period of
 4    time when customers in this province will receive their
 5    offerings from the competitive market.
 6                      The fifth and final point that we
 7    commend to the Board in support of the Code is that it
 8    does minimize regulatory oversight.  As I have said
 9    before, the price is transparent under the Code.  It is
10    easily calculated.  It does not require any
11    after-the-fact true-ups, and it avoids allegations of
12    cross-subsidization.
13                      Under that kind of regime market
14    participants and customers will win, because at the end
15    of the day there will be lower regulatory costs.
16                      In a nutshell, those are the five
17    principles which in our view are strong reasons why
18    this Board should adopt the draft Standard Supply
19    Service Code that is before it.
20                      Before closing my submissions, the
21    only other submission that I do wish to make is that
22    when the Board comes to considering costs in this
23    matter -- and I am not exactly sure how the Board has
24    considered that it will do that -- these intervenors
25    request that the Board grant it an order allowing it to
26    recover its reasonably incurred costs.
27                      Those are our submissions.  We are
28    now here to answer any questions that you may have of

                                                           27
                                          BROWN, presentation
 1    us.
 2                      THE CHAIRMAN:  Thank you, Mr. Brown.
 3                      Do staff or counsel have any
 4    questions at this time?
 5                      MS O'REILLY:  On page 2 and page 11
 6    of the material that you filed for your presentation,
 7    you note that it would be inappropriate for a local
 8    distribution company to offer multiple rate options as
 9    an encouragement to use the default supply.
10                      Do you include in the notion of
11    multiple rate option the establishment of distinct
12    customer classes -- residential, small commercial,
13    industrial, for example -- based on load profiles?  Do
14    you include that in the category?
15                      MR. BROWN:  No, because that is more
16    a matter of cost allocation, I would think, than it is
17    of actual -- that is more a matter of rate design than
18    establishing the nature of the system.
19                      Certainly to the extent that
20    different categories of customers have different load
21    profiles and therefore generate different costs or
22    usages of the commodity, it is certainly appropriate to
23    try and pass those costs through as accurately and
24    precisely as you can to the people who are using the
25    service.
26                      MS O'REILLY:  Experts in the
27    background paper filed by the Competition Bureau
28    suggested the possibility of establishing two types of

                                                           28
                                          BROWN, presentation
 1    standard supply service methodology that would see spot
 2    prices for larger customers and a fixed rate offering
 3    for smaller consumers.
 4                      Could you give us your views on that
 5    type of methodology or proposal?
 6                      MR. BROWN:  Well, I think it is clear
 7    from our submissions that, in our view, the default
 8    supply offering should be made simply on one basis to
 9    all customers.  There should be one kind of service and
10    that is it.  One of the reasons that we say that is
11    because it is a default service, it is a form of
12    back-up service or it is there for customers who don't
13    want to make a choice.
14                      It is also to be a transitional
15    service.  It is going to be phased out over a period of
16    time.
17                      If the service that was offered in
18    the Code was not fair, initially, then I could perhaps
19    understand some concern as to why you might want to go
20    to different offerings.  But, in our submission, the
21    MDC has looked at this, they have come up with a set of
22    reasons -- which Board staff have adopted, in large
23    part -- about why this is a fair service.  It is a fair
24    service because it allows the customer an access to the
25    wholesale market at spot price -- there is nothing
26    unfair about that -- and because it is a fair service,
27    then that is the one service that should be offered.
28                      If customers have different needs or

                                                           29
                                          BROWN, presentation
 1    desires, either because they are residential or
 2    industrial or because within those classes they have
 3    different things that they want to see from their
 4    commodity supplier, then it is up to the competitive
 5    market to come up with those different offerings.  That
 6    is where the competitive market can be creative and
 7    that is also where the competitive market probably can
 8    be less costly over time.
 9                      MS O'REILLY:  You were speaking
10    earlier about volatility.  On page 6 of your report,
11    you discussed the index pricing methodology used for
12    natural gas pricing which, as I understand it, is based
13    on an annual estimate with quarterly true-ups.
14                      Would your company support a
15    smoothing mechanism similar to that in the electricity
16    market?
17                      MR. BROWN:  Well, I think what the
18    Code has already proposed is that the smoothing take
19    place over the billing period, and we see that as the
20    appropriate point of time.  I guess in this we are
21    taking a long-term view of the market.  But the
22    quarterly rate change mechanism that has been adopted
23    on the natural gas side is really only a mid point on
24    the longer road, in our view, to a complete
25    deregulation of the commodity side of the gas business. 
26    It is better than having true-ups on an annual basis
27    but it is not as good, in my client's view, as having,
28    you know, a separation of the merchant function from

                                                           30
                                          BROWN, presentation
 1    the distribution function.
 2                      Sort of against that background, and
 3    for the same reason, we think that the default supply
 4    service should be limited to the reasonable period
 5    which, in this case, is the billing period.
 6                      The more you go down the road, the
 7    more you are increasing regulatory oversight and
 8    regulatory costs, and that is something that we think
 9    should be avoided.
10                      MS O'REILLY:  Just one last question.
11                      On page 12 of your report, you note
12    your support for the procurement conditions contained
13    in Section 2.2 of the draft Code.  A number of
14    municipal electrical utilities have sent letters of
15    comment, or are presenting in this procedure, regarding
16    existing supply contracts that the utility has
17    contracts for.  For example, Fort Francis Public
18    Utilities Commission has the contract to purchase power
19    from a local mill in the community that is much cheaper
20    than the power from Ontario Power Generation, and Sault
21    Ste. Marie has a contract with Great Lakes Power and,
22    indeed, has never purchased their power from Ontario
23    Hydro.
24                      Would you support the establishment
25    of some kind of transitional mechanism to meet the
26    concerns of these particular utilities?
27                      MR. BROWN:  Certainly where you have
28    existing contractual relations we would certainly not

                                                           31
                                          BROWN, presentation
 1    advocate that anything be done that would require a
 2    party to breach those.  So there may well be some cases
 3    where you would have to put in some grandfathering or
 4    transitional mechanism to deal with those specific
 5    circumstances.
 6                      MS O'REILLY:  Thank you.
 7                      Those are all of my questions.
 8                      THE CHAIRMAN:  Thank you,
 9    Ms O'Reilly.
10                      Do my colleagues have any questions?
11                      MEMBER HIGGIN:  Thank you,
12    Mr. Chairman.
13                      Just to ask whether you have given
14    any thought to the smoothing mechanisms that the MDC,
15    specifically, was advocating or at least leaning
16    towards in its report on the price.  That would be such
17    things as, by analogy with gas, forecasting
18    requirements forward for setting the price on a forward
19    basis, such mechanisms as the purchase power variation
20    account, as opposed to gas, and the true-up and banding
21    mechanisms for similar types of smoothing.
22                      Have you given any thought to those? 
23    I mean you are straight-line now on the pass-through
24    but have you given any thought to the practicalities of
25    those and how they affect your clients, for example,
26    from the competitors?
27                      MR. BROWN:  Well, I guess those are
28    two questions.

                                                           32
                                          BROWN, presentation
 1                      In terms of the details, no, I don't
 2    think we have given a great thought to what sort of
 3    accounts would have to be set up and exactly how they
 4    would be used.
 5                      I think we are coming at this more
 6    from a conceptual level, with our view being that the
 7    smoothing mechanism -- certainly, we don't have the
 8    mechanisms or the technology right now for most
 9    customers in this province to be able to bill on an
10    hour-by-hour basis.  You have a whole bunch of people
11    out there and the metering technology is just not
12    available yet so therefore there is going to have be
13    some period of time over which the price is smoothed or
14    averaged.
15                      In our view, the choice of that
16    period of time over which the price is smoothed should
17    be such as to minimize regulatory oversight.  It should
18    be as clean and as simple as possible.  From what we
19    can see, the shorter the period of time -- that is the
20    period of time that is consistent with the billing
21    period -- moves more in that direction.
22                      If you go down the other end and
23    begin to smooth out over a longer period of time, then
24    you necessarily are going to have to take into account
25    a larger number of variances or deviations from any
26    particular average and get into more complex profiles,
27    and that is more complex true-ups at the end of the
28    day.

                                                           33
                                          BROWN, presentation
 1                      We think, as a matter of concept,
 2    that that should be avoided and that a shorter billing
 3    period or a shorter true-up period is a move in that
 4    direction.
 5                      The second question, how does that
 6    affect our clients, I think it is certainly fair to
 7    say -- and I think it was in one of the position papers
 8    that we put in -- that the competitive retail market,
 9    initially, probably will be characterized by offerings
10    that are longer term.  That is certainly something that
11    you have seen emerge on the natural gas side where
12    competitive retailers have made offerings that go out
13    one, two, three, perhaps even five years.  I suspect
14    that similar offerings will be made once the
15    electricity market opens up.
16                      So certainly, to an extent, the
17    closer the regulated service mirrors the competitive
18    offering, potentially the more difficult it may be for
19    a competitive market to take off.  I think Professor
20    Dewees, when he was here, in the Technical Conference,
21    and perhaps in his paper as well, made precisely that
22    point.
23                      It is not that any of the competitive
24    retailers fear competition.  Indeed, they have been
25    quite successful, on the natural gas side, in competing
26    in the competitive natural gas market.  I think what
27    the competitive retailers -- or at least speaking for
28    our clients -- would like to see is a regulated service

                                                           34
                                          BROWN, presentation
 1    that is fair to the consumer in terms of the price, but
 2    is not one that is designed to be a surrogate for
 3    offerings in the competitive market, because if you
 4    move in that direction you are just going to kill any
 5    chance of a competitive market getting off the ground.
 6                      MEMBER HIGGIN:  Thank you.  Just a
 7    second question.  I would just like to make clear your
 8    submission regarding the affiliate code, section 2.5.7.
 9                      You I think made it clear that you
10    are not advocating any change to the wording of that or
11    any caveat as has been suggested that -- for example,
12    the words "except for the purposes of standard supply
13    service" has been suggested by some -- you cannot
14    transfer customers except for that purpose.
15                      Have you any comment on that; and,
16    also, the practicality of transfer if a positive
17    election is required even for standard supply service?
18                      MR. BROWN:  Well, it is no more
19    impractical, we would submit, than the requirement for
20    positive election, when competitive natural gas
21    retailers had to go back to their own customers and ask
22    them to positively elect from a buy/sell offering to an
23    ABC T-offering.  Then you had a circumstance, as well,
24    where you had entities going back to their own
25    customers and saying, "We are offering this different
26    kind of service and you have to positively elect to do
27    it."
28                      So I think the practicalities are no

                                                           35
                                          BROWN, presentation
 1    different.  The province has already seen what has been
 2    required for that.  I think the practicalities are, you
 3    know, some education of your customers but, most
 4    importantly, letting your customers know what is
 5    happening to them.  You don't keep them in the dark.
 6                      The one thing the natural gas
 7    retailers in this province have learned over the years
 8    is that an informed consumer is your best customer, and
 9    you now have competitive retailers appearing before
10    this Board as strong advocates of consumer education
11    and positive choice, because that works.  It should be
12    no different in the start-up of an electricity market.
13                      So the practicalities are there are
14    going to be some pieces of paper involved, there is
15    going to be some customer election, but we have already
16    gone through that and it is not a big hump that people
17    have to get over.
18                      In terms of the affiliate code,
19    Mr. Higgin, you are quite right.  We are submitting
20    that the language of the Code should remain as it is
21    and that an exception not be made for the default
22    service supply, in large part because I think reading
23    between the lines of the submissions that you have from
24    the various MEUs before you, they view the default
25    service supply and the ability to transfer those
26    customers as their springboard into making money off
27    the sale of electricity.
28                      I have set out in paragraph 21 of our

                                                           36
                                          BROWN, presentation
 1    submissions a very candid statement by Mr. Ceksters,
 2    and I may have mispronounced that, who made one of the
 3    presentations, and he said MEUs and groups like G-6
 4    that are interested in competitive retailing should be
 5    allowed to keep their customers and transfer them to
 6    their retail affiliate, let the market decide.
 7                      Well, we agree wholeheartedly, let
 8    the market decide, but let's have the same
 9    contestability of the customers at the beginning rather
10    than an incumbent being able to take advantage of its
11    incumbent position and its incumbent monopoly and just
12    transfer all these customers over holus bolus.
13                      MR. PERDUE:  I wonder, doctor, if I
14    could just add to that?
15                      I think the concern of the retailers,
16    in regard to section 2.5.7 the positive election
17    requirement under the Affiliates Relationship Code, is
18    that if the standard service offering is to become a
19    competitive offering or is to be undertaken by a
20    competitive retailer, then we want that requirement.
21                      The way we see it is that the MEUs
22    wish to create a competitive company using standard
23    service offering or default customers.  If it is simply
24    an outsourcing of the function itself of providing, for
25    example, customer care services or procurement and it
26    is simply a normal outsourcing, and provided that they
27    follow the same rules that the utility itself would
28    have to follow, then we don't have an objection.

                                                           37
                                          BROWN, presentation
 1                      When they move it out of the
 2    regulated wires company, the opinion of some of the MEU
 3    arguments appear to be that it automatically changes,
 4    and all the rules that would have applied if the
 5    utility itself had undertaken standard supply service
 6    offering do not apply in an affiliate.
 7                      Therefore, our objection would be
 8    considerably lessened to changing 2.5.7 if it was clear
 9    that, if you are going to move the function outside the
10    regulated utility, the same rules that would have
11    applied if you had undertaken it inside the utility
12    would still apply, and that avoided costs should be the
13    criteria for that.  It is not a money-making operation. 
14    It is a question of the avoided costs.  The utility
15    avoids some costs and if you can make money on that,
16    you want to do it through some third party outsourcing
17    offering, then we would have no objection to that, but
18    that is all, and you must follow the same rules.
19                      MR. BROWN:  Perhaps another way to
20    put it, Dr. Higgin, is we certainly acknowledge that
21    the White Paper sent a clear signal that existing
22    customers would not have to move away from their
23    current utilities if that was their choice.  That is a
24    policy decision that has been made by the government
25    and has been adopted by the legislature in the bills.
26                      However, that does not mean that when
27    the market opens what the legislature has said is that
28    the utilities will be the biggest competitive retailers

                                                           38
                                          BROWN, presentation
 1    in this province, which is essentially what they are
 2    trying to do through some of their affiliate proposals
 3    and their critique of section 2.5 of the affiliate
 4    code.
 5                      The legislature didn't say, "Board,
 6    you can start off as the biggest competitive retailer
 7    when the market opens."  All it said is that customers
 8    could still obtain a regulated service from their
 9    traditional utility.  There is a big difference, in our
10    submission, between those two.
11                      MEMBER HIGGIN:  Thank you very much,
12    gentlemen.  Thank you.
13                      THE CHAIRMAN:  There are no other
14    questions.
15                      Mr. Brown, Mr. Perdue, thank you very
16    much for you submissions.
17                      MR. BROWN:  Thank you very much,
18    Mr. Chair, Members of the Panel.
19                      MR. PERDUE:  Thank you.
20                      THE CHAIRMAN:  We were scheduled to
21    take a short break now.  I wonder if there would be any
22    objection if we moved directly to the next submission. 
23    Mr. Poch is here.  Are you okay with that, Mr. Poch?
24                      MR. POCH:  Certainly.
25                      THE CHAIRMAN:  If you would identify
26    yourself and your colleague.
27                      MR. POCH:  David Poch on behalf of
28    the Green Energy Coalition.  Mr. Stephenson is not my

                                                           39
                                          BROWN, presentation
 1    colleague.  He represents the Power Workers Union, my
 2    sworn enemy.  He is a nice guy, but --
 3                      THE CHAIRMAN:  Won't push it.
 4                      MR. POCH:  I won't comment further.
 5    PRESENTATION
 6                      MR. POCH:  Good morning,
 7    Mr. Chairman.  Good morning, Members of the Panel.
 8                      We filed a seven-page submission and
 9    I won't repeat it, but I would like to highlight a few
10    of the points.
11                      The Green Energy Coalition believes
12    that restricting standard service to spot pass-through
13    is not a good thing for the environment and customers
14    and we offer three principal reasons for that.
15                      First of all, to do so would block
16    voluntary utility support for renewables.
17                      Secondly, it would deter new entrants
18    into the generation market, and here the evidence is
19    that it would particularly deter smaller, greener
20    entrants, something we are concerned about.
21                      Third, it would preclude the Board
22    from facilitating greener supply for the majority of
23    smaller customers in the early years of the market's
24    development.  I will go on a little later, as we do in
25    our written submissions, to suggest that the Board
26    should actively encourage green power in keeping with
27    its new statutory mandate.
28                      I should say we also believe that the

                                                           40
                                           POCH, presentation
 1    spot price pass-through is an unattractive option for
 2    small customers who want to know the price of
 3    commodities before consuming them, and who do place
 4    value in price stability.  I think the newspapers'
 5    coverage of the gasoline situation in recent weeks is
 6    ample evidence for that.
 7                      You will hear lots about this risk
 8    allocation issue and the price volatility issue from
 9    others.  I won't go into that in any length.  I would
10    like to focus on the three enumerated concerns I
11    mentioned a moment ago.
12                      But I can't resist making one comment
13    in response to Mr. Brown's submissions this morning. 
14    He mentioned that allowing customers to stay with their
15    utility was a policy decision that was made.
16                      It was a policy decision.  I don't
17    think it is right to read that decision as they can
18    stay with the municipal utility, but the municipal
19    utility can only offer them an unattractive rate
20    option.  That can't be what was intended.  It has got
21    to be that SS, whatever it turns out to be, must be a
22    reasonably attractive option.
23                      I also agree they ought not to be
24    able to be across the waterfront, offering 35 different
25    rates and functioning fully as a competitor, but there
26    is some happy medium.
27                      Let me turn to those enumerated
28    concerns.  First of all, voluntary efforts.

                                                           41
                                           POCH, presentation
 1                      We take it as given, and indeed I
 2    didn't hear any dissent throughout the Technical
 3    Conference, that there is significant inertia amongst
 4    the smaller customers.  They are going to remain with
 5    standard service so long as it is a reasonable option,
 6    in large proportions and for some time, and that is
 7    reflective of the real cost to customers of switching.
 8                      The information acquisition costs,
 9    having to make a decision, those are real costs.  We
10    shouldn't be forcing customers to bear those costs for
11    no good reason.
12                      So given that I think unanimously
13    agreed to proposition that there is this inertia, the
14    MEUs are going to have a significant role for the near
15    term.
16                      Most of those MEUs are public
17    utilities, and we believe it is the proper role for
18    them to consider more than lowest average price as the
19    only factor.  We believe this Board is clearly
20    instructed to consider more than lowest price.
21                      I saw a T-shirt the other day and I
22    will try and do it justice, something to the effect
23    that only when the last tree is gone and the last
24    species extinct and the last water undrinkable will we
25    realize that you can't eat money.
26                      There are other factors at stake
27    here.  We have for the first time a clear recognition
28    of that in the statutory framework in both Acts, in the

                                                           42
                                           POCH, presentation
 1    objectives of both -- the opening sections of both
 2    Acts, in section 1(6) in particular of the OEB Act.
 3                      So some public utilities are going to
 4    want to minimize social cost on behalf of their
 5    standard supply customers, and the spot pass-through
 6    would simply stop them from doing so.  They couldn't go
 7    out and contract for some green power in their
 8    portfolio that they are using to provide for standard
 9    service customers.
10                      We think that is entirely
11    inconsistent with section 1(6) of the Act, requiring
12    the Board to facilitate a move to cleaner generation. 
13    That is anything but a facilitation.
14                      This isn't a fictional academic
15    concern.  We have heard evidence that utilities are
16    actually trying to do this.  Toronto Hydro is
17    negotiating to be able to deliver up wind power from a
18    project on the waterfront and so on.
19                      Perhaps I can be even more crass and
20    say this is one of the few features of the new
21    legislative framework that we won in the political
22    scramble that led us to where we are today.  It is,
23    some would say, astonishing that we want it, given the
24    current paradigm in Ontario, the dominant paradigm in
25    Ontario, but we did and we have to read something into
26    that, the inclusion by the legislature of those
27    sections.
28                      Let me move to our second concern,

                                                           43
                                           POCH, presentation
 1    which is that the spot price pass-through approach
 2    would deter new entrants.
 3                      In our written brief we have cited
 4    evidence of references to Mr. Adamson's and Ms Woolf's
 5    written submissions.
 6                      I think it can be said that
 7    everybody, all the experts agree, that you need a
 8    contract market and an intermediate market to
 9    facilitate new entry in generation, especially for
10    smaller, greener technologies.  There is really no
11    debate about that.  They need to mitigate risk, that is
12    the new generators, and they need to satisfy their
13    financiers of some firmness to the market.
14                      There is also no debate that a spot
15    price pass-through will shrink that contract market.  I
16    think it is Mr. Adamson who includes in his piece an
17    observation that in England and Wales the contract
18    market is about 80 per cent of the market.
19                      If we constrain that to what
20    Dr. Dewees thinks is satisfactory at the outset, that
21    is that the 25 or 35 per cent of the market that are
22    large direct customers will go contract, we are just
23    simply doing that.  We are constraining it.  We are
24    starting at a level of a depth of contract market which
25    is not reflective of what happens out in the markets
26    once they have run for some time, as we have seen
27    elsewhere.
28                      So we will be constraining new

                                                           44
                                           POCH, presentation
 1    entrants, because people will stick with default supply
 2    for some time.
 3                      So the only debate is whether the
 4    contract market, with 25 or 35 per cent participation,
 5    is deep enough or not to get us the new entry, which
 6    seems clear everybody feels is a desirable feature of
 7    the new competitive market.
 8                      Dr. Dewees thinks it is adequate.  He
 9    doesn't offer any study, he doesn't profess to be an
10    expert in restructuring generally.  He is quite frank,
11    he says his expertise comes from sitting in the MDC for
12    the last year or so.
13                      Mr. Adamson thinks it is sub-optimal. 
14    He has had far more real world experience in
15    restructured markets.
16                      Our observation is, that suggests
17    there is some wisdom in enabling contract procurement
18    for standard service offering.
19                      If you consider the situation of
20    small green suppliers who are trying to break into the
21    market, surely a more limited contract market which is
22    providing only for larger users is not going to be a
23    lot of help.  Those large users are not going to be
24    turning, in any significant way, to green power,
25    presuming there is some premium that has to be paid
26    for it to recognize the societal benefits that come
27    with it.
28                      I would also like to be clear about

                                                           45
                                           POCH, presentation
 1    the role of green power marketing.  Very desirable.  I
 2    am delighted to see that it is going to be a feature of
 3    this new marketplace, we hope, assuming the labelling
 4    issues are dealt with.  But it is no solution.  It is
 5    not a panacea.
 6                      Dr. Dewees agreed it is going to
 7    appeal to a limited few, those with an awareness and
 8    the cash to do something about it, and that is far from
 9    adequate to recognize the social costs of the current
10    mode of generation.
11                      So what price do we pay for enabling
12    contract procurement as some portion of the standard
13    service offering portfolio?  Two suggestions have been
14    made.
15                      One is less competition on the retail
16    side.  I will let others argue about whether there are
17    any great economies to be had on the retailing of the
18    commodity that we are -- in any sense are being
19    jeopardized here.  Certainly if people want spot price
20    then somebody is going to offer it.  They can go over
21    the hump of changing -- having to elect to get that.
22                      If there are significant economies to
23    be had from the competitive retailers, presumably they
24    will be able to track the customers.
25                      I think the only real argument that
26    has been raised is that of regulatory burden.  There is
27    no question, there would be some added regulatory
28    burden to regulating supply if it is anything but spot

                                                           46
                                           POCH, presentation
 1    price pass-through.
 2                      But Mr. Adamson came and gave us yet
 3    another seminar on PBR and I think was persuasive that
 4    this notion of yardstick competition is quite
 5    applicable here.  It can be done in a light-handed way. 
 6    The Board can enable the utilities to have a fair
 7    degree of freedom in their approach.  I think that
 8    wouldn't offend Mr. Mark and the MEA's concern that you
 9    are not to be regulating procurement per se, you are
10    regulating the nature of the offering.
11                      It in effect harnesses competition on
12    the generator side, and Mr. Adamson was clear that we
13    could marry with that a green requirement or green
14    incentive, which I think is more appropriate in this
15    situation, without any difficulty, and that is
16    something I will return to.
17                      I guess that really brings me to my
18    third and primary concern, which is the need for the
19    Board to fulfil its statutory mandate to facilitate
20    cleaner generation.
21                      Two sections of our written
22    submission speak to this.  One is the regulatory gap
23    that we discussed, and then later in our submissions we
24    address why a green incentive or a requirement is
25    appropriate.  I will just highlight some of these
26    points.
27                      I think there is no debate any more,
28    in Ontario at least, that there are significant

                                                           47
                                           POCH, presentation
 1    environmental health concerns and benefits to be had --
 2    with the existing generation at the margin and benefits
 3    to be had to facilitating the move.  I have already
 4    discussed section 1(6).
 5                      In fact, one of my clients is
 6    Greenpeace and I just have this vision of a banner on
 7    the outside of this building and it would recite
 8    section 1(6).  That is all we need.  We don't have to
 9    be more radical than that.
10                      Even Dr. Dewees -- who champions the
11    spot price approach and who has done a fair amount of
12    work, I should say, in environmental economics --
13    agreed readily that somewhere in the regulatory maze
14    that is going to govern our new electricity sector we
15    have to deal with externalities.  We have to deal with
16    these social costs and either constrain or send some
17    signal to get a better answer.
18                      The MDC -- who, in a sense,
19    Dr. Dewees was speaking for here -- said the way we are
20    going to do that is we are going to do it with cap and
21    trade of all the relevant emissions, and then went
22    further and said we have to do it simultaneously with
23    the market opening.  It is vital that we have this.
24                      Then they went from there.  They
25    spent months working out these fine details about the
26    market with the comfort that they have dealt with that
27    problem, with the environmental concerns:  Because we
28    are going to have cap and trade, that will send all the

                                                           48
                                           POCH, presentation
 1    signals out that we need to.
 2                      My clients would be delighted if that
 3    occurred, so long as it is not trade without cap.  It
 4    has to be cap and trade.  There has to be some
 5    meaningful effect here.
 6                      But what we face is the reality that
 7    we are not going to have cap and trade, at least not
 8    adequately when this market opens.  We may have some
 9    extension of the current NOx and SOx constraints, they
10    may even be tradeable by market opening, but that is
11    not addressing the problem in its entirety.  It is
12    certainly not addressing the greenhouse gas emissions
13    problem, which is I think predominant at this point.
14                      Indeed, if we just have NOx and SOx
15    constraints we can have OPGI investing in "end of pipe"
16    technology to address that problem, putting in the next
17    scrubber or whatever the technology is, investing even
18    more capital, and being able to run its coal plants
19    even harder, emitting even more carbon.  That can't be
20    the right answer.
21                      So any gap in regulation -- we are
22    clearly facing a gap in regulation on the environmental
23    side for some time to come -- means we have a tilted
24    field in terms of societal costs, and it is still
25    toward dirtier generation.
26                      So our message to you is, you are
27    obliged to recognize that and deal with it by virtue of
28    section 1(6), and you don't have very many

                                                           49
                                           POCH, presentation
 1    opportunities to do that.  As I have already said,
 2    merely enabling green power is the tiniest of tweaks
 3    and is not adequate.
 4                      I did, during the Technical
 5    Conference, file a summary, a somewhat dated summary
 6    now from the U.S. Department of Energy.  It now bears a
 7    number, which is D-11.
 8                      I will just hand it up so you can
 9    have it in front of you.
10                      MS LEA:  Mr. Poch, shall we mark this
11    with a number so we can identify it later?
12                      MR. POCH:  It bears Technical
13    Conference handout No. D-11 on the sheet.
14                      MS LEA:  Okay.  Great.  Thanks.
15                      MR. POCH:  This is a table we were
16    able to download.  It is not comprehensive, but it is
17    just to get the flavour of what is occurring in other
18    regulatory jurisdictions.
19                      There are really two tables here, the
20    first of which is Financial Incentives for Renewables,
21    and the second, which you need to turn the package
22    sideways to read it, at the back is State Programs and
23    Regulatory Policies Table.  In there you will see a
24    whole ambit of regulatory techniques being used to
25    facilitate renewables, in this case, throughout the
26    United States.
27                      Even in that bastion of free
28    enterprise to ourselves, they have recognized there is

                                                           50
                                           POCH, presentation
 1    a gap here that regulators need to address.  That is
 2    starting to occur in Canada too.  I gave the reference
 3    to the file number in our written submission.  Most
 4    recently the R‚gie de l'‚nergie in Quebec has called
 5    for a renewables quota, I guess is the fairest way to
 6    speak of it, and has said that the utilities can pay up
 7    to 5.8 cents a kilowatt hour to obtain that power, the
 8    price cap for green power, if you will, the premium
 9    that can be undertaken and imposed on customers to get
10    it at 5.8 cents; I guess the difference between 5.8 and
11    whatever the marginal Hydro-Qu‚bec plant is.  So it is
12    probably something like a 3-cent premium.
13                      That 5.8 cents happens to be a number
14    that is the price that they are anticipating from the
15    large wind fund that is being developed in Quebec right
16    now.
17                      So we are not alone.  I think the
18    most recent one I read about was in Texas, where they
19    are going to have a 3 per cent renewable portfolio
20    standard.
21                      As I said a moment ago, you have very
22    few opportunities to try to address this problem.  We
23    can deal with the conservation issue at the
24    distribution level largely, but the generation issue is
25    a little trickier.  We take it that the most desirable
26    form of cleaner generation would be decentralized
27    smaller scale renewables.  By its nature, there is only
28    going to be a limited amount of that that is going to

                                                           51
                                           POCH, presentation
 1    be utilized in the transmission system, such that we
 2    could, as a regulatory route, look at transmission
 3    rates and deal with that.  It would be perhaps quite
 4    appropriate to do so.  We will deal with that in the
 5    fall.  But for the largest portion of the
 6    opportunities, they are probably not going to be on the
 7    transmission system except for some remote new water
 8    power.
 9                      I think it is incumbent to look at
10    the opportunities.  Here is one.  Here is perhaps the
11    best opportunity to enable that kind of power to come
12    on the marketplace.  It is perhaps the most consistent
13    with the overall framework that the government has
14    given us.  It is an intervention, undoubtedly, to call
15    for some green component of standard supply, but it is
16    an intervention at least with the regulated entities,
17    the distribution companies, not with the retailers and
18    the generators.  So I think it is attractive in the
19    sense if you are going to pick your targets, let's go
20    where we are already regulating.
21                      Secondly, the false supply, as we
22    have heard, seems to be something that will fade away
23    over time and ultimately be eliminated at some point in
24    time.
25                      So it is I think consistent with our
26    hope that the market will mature, there will be more
27    green options on the market, and the regulatory
28    structure, the provincial regulatory structure, will

                                                           52
                                           POCH, presentation
 1    fill the gaps over time and it won't be necessary for
 2    the Board then to be proactive.  So it measures well
 3    there.
 4                      We are calling for the Board to
 5    consider putting in place what I think would have to
 6    be, just because of the timing constraints you are
 7    facing, the constraints of this procedure, a kind of a
 8    place holder incentive or requirement for green power
 9    to be part of the standard service offering.
10                      It could be a very small proportion,
11    but it would send a nice signal.  It would send a
12    signal to the industry as to where the Board sees it is
13    appropriate to go.  It would help, in whatever limited
14    degree, alleviate the market power problem by
15    encouraging competition and more entrants.  It would
16    start to address the gap in the environmental
17    regulation, recognizing the societal costs of existing
18    generation.  It would enable the municipal utilities,
19    if we went with an incentive approach, to decide where
20    they are going to get this green power from, and go out
21    and get it, and we would have competition amongst
22    providers to provide it.  That is consistent with the
23    regulatory framework.
24                      It can be done, we think, with a
25    minimum of regulatory burden.  There has been a very
26    large scale consultation conducted for the federal
27    government by Terra Choice, which is the entity charged
28    with developing the Ecologo guidelines.  They are this

                                                           53
                                           POCH, presentation
 1    close from signing off a compendium which sets out what
 2    is green and what is not so green and what is not
 3    green.  It can simply be adopted, at least as an
 4    interim basis.  So there is no need for the Board to
 5    engage in some complicated process to decide what is
 6    green.  It makes eminent sense to use what has been
 7    developed in a collaborative process and that will be
 8    used presumably throughout the country.
 9                      We say a well-designed
10    performance-based regulatory approach to incent green
11    power won't over encourage it, won't cause distribution
12    costs to rise unduly.  We can set the incentive
13    relatively low to begin with.  The Board can come back
14    and revisit it and consider the social benefits and
15    costs as the market begins to emerge.
16                      I would just say that if we are going
17    to have PBR for -- if we are going to go off simply
18    spot and we are going to have some form of yardstick
19    regulation for distribution utilities in their supply
20    mode, then I would urge the Board to be cognizant that
21    if we are going to enable green power it maybe needs to
22    be a separate module, because I think we do anticipate
23    there is a premium to be paid, recognizing the social
24    costs of brown power and it would be inappropriate to
25    set up a disincentive to the acquisition of green
26    power.  At the very least, you need a deadband to
27    enable utilities to have some elbow room there.
28                      In short, enabling contract

                                                           54
                                           POCH, presentation
 1    procurement allows the Board to encourage green power
 2    development in a relatively non-interventionist manner,
 3    with some efficiency and in a manner that can be ramped
 4    down as the market evolves and as the provincial
 5    regulatory structure evolves.
 6                      In our written submissions I have
 7    included another section which looks very briefly at
 8    section 2.7.3, which is the constraint on marketing
 9    information inside bills.  We are a little bit
10    uncomfortable with the wording of that.  We imagine the
11    distribution utilities will be engaged in DSM, demand
12    side management, activities and as part of that will be
13    out there providing information to customers about
14    conservation opportunities.
15                      Clearly, this section is intended to
16    address the evil of municipal utilities advertising for
17    their affiliate on the commodity supply side, and we
18    don't have any problem with that.  We just think it
19    might be appropriate for the Board to be clear that it
20    is not intended to restrict DSM promotion by municipal
21    utilities.
22                      Finally, I would ask that the Board
23    consider a word of caution in this case for parties
24    such as the Green Energy Coalition who are here without
25    pecuniary interest, nor without means, without means to
26    be here in fact.  Thank you.
27                      THE CHAIRMAN:  Thank you, Mr. Poch.
28                      Are there any questions from Board

                                                           55
                                           POCH, presentation
 1    staff?
 2                      MS O'REILLY:  The Consumers
 3    Association of Canada in their submission notes that in
 4    a competitive market consumers are free to choose green
 5    power if they wish.  Your submission contends that very
 6    few individuals and companies would pay the premiums
 7    associated with green power.  Your argument is,
 8    therefore, as I understand it, that the regulator
 9    should establish a threshold for green power purchases.
10                      I was wondering if you could comment
11    on two things:  Would this not increase the price for
12    standard supply service customers; and, could you
13    comment on why standard supply service customers should
14    be forced to bear those extra costs?
15                      MR. POCH:  Yes.  Our rationale is a
16    recognition of the social costs of brown power.  When
17    this Board, should it choose to, facilitates green
18    power it is saving society.  It is creating benefits
19    for society at large, not just for any particular
20    customer.
21                      We see no reason why creating those
22    societal benefits should be some voluntary activity
23    that a few green yuppies might volunteer to take on. 
24    It is a cost of this sector, and we believe that it is
25    appropriate that the sector as a whole bear the burden
26    of alleviating that problem.
27                      In that sense, your second question
28    points out a problem with our position, which is that

                                                           56
                                           POCH, presentation
 1    we are really calling on just a part of the sector to
 2    play a role:  the default supply small customers.  We
 3    recognize that that is less than ideal.  We would
 4    prefer an all-encompassing answer, but this seems to be
 5    one of the few options available.
 6                      Will it raise price?  Slightly,
 7    presuming we are not calling for 75 per cent new
 8    renewables in the standard offering, and presumably we
 9    are talking about a pretty small percentage.
10                      Like DSM in the gas side, the Board
11    has said the companies have an obligation to go out and
12    find opportunities for energy efficiency and promote
13    them amongst their customer base.  The Board in its
14    EBO-169-3 guidelines, and subsequently in its actual
15    regulation of demand side management on the gas side,
16    has set the companies off on a course where they are
17    balancing the benefits to be obtained for customers as
18    a whole for the particular customers and the rate
19    impacts of funding this demand side management.
20                      It is constrained by rate impacts. 
21    You don't want the rate impact to be undue.  It is
22    self-defeating.  If we raise the price of standard
23    offering that high, people would flee from it in any
24    event.
25                      So there is a balancing there.  I say
26    the answer to that is start small, and we can ramp it
27    up over time.  But, yes, there is some premium to be
28    paid, hence the problem.  If there was no premium to be

                                                           57
                                           POCH, presentation
 1    paid, I guess I wouldn't be here saying the Board needs
 2    to do anything.
 3                      MS O'REILLY:  Thank you.  That was my
 4    only question.
 5                      THE CHAIRMAN:  Thank you.
 6                      MEMBER HIGGIN:  Mr. Poch, could you
 7    just comment on what you see are the effects of this on
 8    what we might call a distortion of the market with
 9    respect to the equilibrium of the market?
10                      MR. POCH:  I am going to ask, if I
11    could, for a clarification of which equilibrium, the
12    equilibrium between retailers or between spot and
13    contract or...?
14                      MEMBER HIGGIN:  I think what I am
15    trying to get at is the market will try to reach a
16    point of equilibrium between supply and demand.  That
17    would be the expectation we would all have.  How will
18    the type of premium, if we have it as a proposal from
19    you, to require a certain level of procurement of
20    certain green power -- how will that, in your view, sit
21    with the market?  Will it cause a distortion?  How
22    would we deal with those?
23                      MR. POCH:  Clearly, it would expand
24    supply slightly, presumably.  I am anticipating nothing
25    more than a gentle response here.  So it would increase
26    the generation supply.  The Board, presumably, wouldn't
27    be interested in offering an incentive to utilities
28    that is open-ended, that has them going out getting

                                                           58
                                           POCH, presentation
 1    everything green and having all these suppliers being
 2    paid a premium.  It would be moderate.
 3                      MEMBER HIGGIN:  You suggested 5 per
 4    cent, so let's use that as a talking number.
 5                      MR. POCH:  Yes.  I think that is why
 6    we are suggesting in fact a placeholder of a small
 7    number and then an evolution over time and as the Board
 8    sees what it is costing utilities, to say, first, for
 9    example, ensure that 1 per cent of its supply portfolio
10    is green.  The Board can monitor, see what kind of
11    premium is getting paid for that, decide if it is a
12    reasonable premium, given the societal benefits, that
13    warrants increasing that percentage, or if it turns out
14    to be ghastly expensive to back that off.  It would of
15    course, by its nature, bring new entrants into the
16    market and that affects the equilibrium, though,
17    between supply and demand.
18                      MEMBER HIGGIN:  Have you given any
19    thought to the relationship of your proposal to the
20    issue of emission credits or trading of emission
21    credits for "dirty power"?  How does that fit in with
22    your proposal?
23                      MR. POCH:  I think the genesis of our
24    proposal is that we don't see a broad enough emission
25    cap and trade in place at market opening.  Once we have
26    covered the waterfront on the key emissions with the
27    cap and trade proposal coming from the province at some
28    point when they finish their negotiations with the feds

                                                           59
                                           POCH, presentation
 1    and the feds finish their negotiations with, you know,
 2    the southern hemisphere, then of course I think it
 3    would be redundant, presuming it is a cap and trade
 4    that fully internalizes the societal cost.
 5                      Short of that, the evolution of value
 6    in tradeable permits, which presumably would occur in
 7    steps, may initially see some value for NOx and SOx
 8    reductions.  It is something that can either make it
 9    easier for green power producers to get into the market
10    or not and it is something that would impact on what
11    premium gets paid for green power through this
12    mechanism, for example.  To the extent that value is
13    created or recognized by a partial emissions trading
14    regime, then presumably the premium we would be paying
15    will be lower relative to the brown power that is
16    bearing that cost.
17                      MEMBER HIGGIN:  Thank you, Mr. Poch.
18                      Thank you.
19                      THE CHAIRMAN:  Mr. Poch, help me out
20    here.  I gather that your opposition to the spot price
21    pass-through isn't so much on that principle as it is
22    on the fact that you see it difficult to have
23    inadequate supply of green power in the mix, if that is
24    the case, right?
25                      MR. POCH:  Yes, it is quite
26    practical.
27                      THE CHAIRMAN:  Now, is that because
28    you don't see the green energy retailers being able to

                                                           60
                                           POCH, presentation
 1    make an appropriate dent in the market against the spot
 2    price pass-through?
 3                      MR. POCH:  Yes.
 4                      THE CHAIRMAN:  If the amount of green
 5    power in the mix was determined at the generation
 6    level, what would be your views on the spot price
 7    pass-through?
 8                      MR. POCH:  You have hit on something
 9    unstated in our presumption.  We presume the Board is
10    not going to regulate the IMO to do some kind of
11    environmental dispatch which takes into account
12    societal benefits.  That would be preferable.  If the
13    Board believes that is both within its powers and
14    consistent with the nature of the sector as it is
15    evolving, that would be more all-encompassing and I
16    think more desirable and we may not need such a
17    mechanism as the one we are proposing here in that
18    scenario.
19                      Alternatively, if we start with
20    something like this and that mechanism evolves, the
21    Board can decide to back one down -- this one,
22    presumably -- as the other evolves.
23                      THE CHAIRMAN:  I was wondering as
24    well about if the retailers, green energy retailers,
25    cannot make a dent in the market now, if eventually the
26    LDCs are out of the standard service offering, what
27    will change in that regard at that point?
28                      MR. POCH:  Our presumption is that,

                                                           61
                                           POCH, presentation
 1    over time, we will get the cap and trade regimes in
 2    place and hopefully there will be some matching, and
 3    that is something the Board can consider in deciding
 4    when it is time to say enough of standard service.
 5                      But as I think as I said earlier,
 6    certainly an all-encompassing approach, such as
 7    regulating the IMO, for example, would be preferable.
 8                      THE CHAIRMAN:  Okay.  Those are all
 9    the questions I have.
10                      Thank you, Mr. Poch, for your
11    submission.  We appreciate it.
12                      Why don't we now take a 15-minute
13    break and come back at 11:20 and we will hear from
14    Energy Probe and Mr. Adams.
15                      Thank you very much.
16    --- Upon recessing at 1105
17    --- Upon resuming at 1123
18                      THE CHAIRMAN:  Please be seated.
19                      The next presentation is from Energy
20    Probe, Mr. Adams or --
21    PRESENTATION
22                      MR. MATTSON:  Good morning,
23    Mr. Laughren.
24                      My name is Mark Mattson.  I am
25    counsel for Energy Probe.  I am here this morning with
26    Mr. Adams.
27                      I have a couple of introductory
28    remarks.  Our submissions were filed with the Board and

                                                           62
                                  MATTSON/ADAMS, presentation
 1    a cover letter was on top of some submissions by
 2    Mr. Adams, made August 3, 1999.
 3                      We note in the cover letter that
 4    Energy Probe has been a supporter of the MDC's
 5    recommendation and, accordingly, we did not file an
 6    alternative to the MDC's recommendations, so we were
 7    not making those views known at the Technical
 8    Conference.  We waited until this moment to make those
 9    comments known.
10                      In addition to that, Mr. Adams has
11    replied to a number of the alternatives which were
12    spoken to at the Technical Conference and that is why
13    there are those submissions contained behind the
14    covering letter.
15                      The second point which I will go
16    right in to address, Mr. Adams will address his
17    comments after me, but I would like to begin by
18    addressing something that appears at the bottom of the
19    covering letter, and that is, will Energy Probe
20    reiterate its concerns, which were made to you at the
21    motion day, that we see a need in these proceedings for
22    a full and formal proceeding before the Board.
23                      It may seem rather odd for the
24    Members of the Board and some of the parties to the
25    proceedings to understand why Energy Probe, who is a
26    supporter of the MDC recommendations, would at the same
27    time call for a full and formal hearing.
28                      We are aware that the MDC

                                                           63
                                  MATTSON/ADAMS, presentation
 1    recommendations are well known by the Board, well
 2    documented.  The experts were retained by the
 3    government and after many, many months of
 4    consideration, analysis and study the recommendations
 5    were made known.  We have an opportunity to present our
 6    views to you today.  They have had an opportunity to
 7    present their views.  They had an opportunity to ask
 8    Dr. Dewees questions about the MDC recommendations and
 9    so what is our concern?
10                      Why would we, an intervenor, a public
11    interest group, support a full and formal hearing when
12    it may in fact just open up the proposals that we
13    support to more attack?  It may open it up to a lengthy
14    proceeding and may cost ratepayers more money.
15                      The reason, Mr. Chairman and Members
16    of the Board, is that we see these issues as
17    controversial.  The submissions made to you are clearly
18    illustrative of the controversy that surrounds any
19    decision made as to the appropriate alternative for
20    Ontario.
21                      I do not believe that this Board's
22    decision will be the final determination of these
23    issues unless the Board accords this process and the
24    decision you are about to make with respect to the
25    appropriate alternative the ultimate in formal
26    adjudicative proceedings.
27                      In other words, if the Board does not
28    follow its past practices with respect to gas

                                                           64
                                  MATTSON/ADAMS, presentation
 1    adjudicative hearings, where it was the regulator, and
 2    offer the parties full natural justice, but chooses
 3    rather, which I agree with the CAC's submissions you
 4    have the right to do, an alternative proceeding.  If
 5    you do not accord it a full hearing or give it full due
 6    process, we have a concern that this will just be the
 7    first step in a long and protracted battle.
 8                      The Board is well aware of one of the
 9    parties' press release before the Technical Conference
10    attacking the MDC's recommendations.  Quotes were
11    already put in the paper, so we know there is going to
12    be a public battle outside of what the adjudicative
13    process would allow.
14                      We also know that there have been
15    letters from the Minister filed in this proceeding, so
16    we know that there are processes going on again outside
17    of this Board's decision-making power by government
18    ministers and representatives.
19                      Further, we know that another party
20    has threatened the process with judicial review, so
21    they would also like to challenge your decision in the
22    courts as well as the media.  We have politicians, we
23    have the courts and we have issues that are clearly,
24    clearly controversial.
25                      Our concern then is that the Ontario
26    Energy Board, which has been known and well respected
27    by all the parties for its decision-making, whether a
28    party has agreed with the decision or not, it has

                                                           65
                                  MATTSON/ADAMS, presentation
 1    always respected those decisions made by the Board. 
 2    They have been binding.  There has been no appeal,
 3    other than to the courts, and this Board has always
 4    followed full due process.  You have accorded all the
 5    rights to the parties.  They have been transparent.  We
 6    know this is the final hearing, unless someone wants to
 7    appeal on the basis of a breach of natural justice, but
 8    otherwise we know that your decisions are the final
 9    authority.
10                      People don't go to the press with
11    respect to gas issues.  They bring them to the Board. 
12    They don't go to politicians.  They bring them to the
13    Board.
14                      I am very concerned -- we have a real
15    concern that in this case we are looking at something
16    that may not be as protected from those other -- a
17    decision that may not be protected from other attacks.
18                      It is your decision.  It is your
19    discretion.  We would like to see the recommendations
20    of the MDC, as my friend Mr. Adams is going to make
21    known, we would like to see them implemented, adopted
22    by the Board and implemented in Ontario as soon as
23    possible.
24                      We don't want to see this dragged
25    out.  We are not asking for a hearing simply to be
26    heard, so we can be heard, or so that lawyers and
27    experts can get more money, as some have suggested
28    outside the hallways, never of course before you.

                                                           66
                                  MATTSON/ADAMS, presentation
 1                      But what we really want to do is
 2    protect the legitimacy of this Board's decision-making
 3    processes and we want to ensure that it is given the
 4    respect that it deserves.  But ultimately that will be
 5    your decision.  You are going to hear from all the
 6    parties.  I just ask you to keep in mind, Mr. Poch was
 7    up here, an environmental group, saying that it is bad
 8    for the environment.
 9                      Energy Probe, Mr. Adams and others,
10    are going to say it is good for the environment.
11                      The CAC and Energy Probe, and maybe
12    the Power Workers Union, are all together in believing
13    that the MDC's recommendations are good for the
14    customer.
15                      Pollution Probe, the utilities,
16    Mr. Poch's group, are going to say it is bad for the
17    little customer.
18                      Someone has got to decide these
19    issues.  Someone has to ultimately be accountable for
20    that decision and let's hope that the decision will be
21    final and that the rhetoric and the controversy will be
22    resolved once a decision is made by this Board.
23                      So I just put that forward to you
24    today.  I will turn it over to Mr. Adams to address the
25    substantive issues with respect to our support for the
26    spot price pass-through.  Thank you.
27    PRESENTATION
28                      MR. ADAMS:  I want to make it clear

                                                           67
                                  MATTSON/ADAMS, presentation
 1    that I am making a presentation on behalf of Energy
 2    Probe only in this matter.
 3                      My submissions have a couple of
 4    parts.  I want to correct an overstatement in our
 5    written presentation.  I want to briefly summarize some
 6    of the benefits of the spot price pass-through
 7    mechanism, comment on some of the submissions of some
 8    of the other parties and particularly comment on some
 9    environmental protection matters that the Board might
10    want to consider.
11                      On the first page of my presentation
12    I make what I think is a somewhat intemperate comment
13    that there is no role for economic regulation related
14    to the commodity.  I think I want to acknowledge
15    clearly that the Competition Bureau in its presentation
16    said a similar thing but in a more balanced way,
17    pointing out that it is important to minimize the
18    economic regulation in the commodity side of the
19    market.
20                      There are legitimate occasions for
21    regulatory intervention, particularly with regard to
22    market power mitigation.  So I just correct my own
23    submissions on that point.
24                      The spot price pass-through mechanism
25    has many advantages for the Ontario electricity
26    marketplace.  Although it provides a muddy price signal
27    for customers on the average form of the spot price
28    pass-through, we are confident that it is the best

                                                           68
                                  MATTSON/ADAMS, presentation
 1    available signal given the deficiencies in metering
 2    technology that exist in the field.
 3                      In addition, our submissions explain
 4    in some detail our views on the customer mobility
 5    advantages of the spot price pass-through mechanism and
 6    the deficiencies of some of the alternatives.
 7                      In our view, spot price pass-through
 8    plays a key role in the efficient mitigation of market
 9    power.  If a party exercises market power in the
10    commodity market and using its -- by withholding
11    generation, allowing the price to rise, any measures
12    that assist customers in responding to those price
13    signals will help to mitigate the market power of those
14    that would try to influence upward the price.  So we
15    think that this is a key element of the spot price
16    pass-through mechanism that needs to be considered in
17    balancing its advantages and disadvantages.
18                      Now, one of the strengths of the
19    MDC's market design was the seamless integration of
20    wholesale and retail markets.  There is no a priori
21    distinction that ought to exist between wholesale and
22    retail electricity markets.  The spot price
23    pass-through mechanism I think is an effective bridging
24    pricing strategy that allows ordinary customers to
25    participate directly in the wholesale market, breaking
26    down any artificial distinctions between wholesale and
27    retail.
28                      For the integration between wholesale

                                                           69
                                  MATTSON/ADAMS, presentation
 1    and retail markets to work there has to be an effective
 2    settlements process.  The settlements process that has
 3    been designed to make the wholesale and retail markets
 4    work requires that LDCs, both for purposes of receipts
 5    from the IMO market and also for the purpose of
 6    settling the accounts of distribution customers on the
 7    LDC system that ought to take supply from a competitive
 8    retailer will be required for the settlements process
 9    to account for the customer's usage on a spot price
10    pass-through method.
11                      Now, that has very important
12    implications for the debate over spot price
13    pass-through as default supply because any alternative
14    to the spot price pass-through for default supply
15    purposes from an administrative cost perspective will
16    be incremental to those costs that the LDC will have to
17    bear in the normal course of its business as a
18    distributor.
19                      But unfortunately, the incremental
20    nature of the administrative costs for fixed price
21    supply has not been carefully evaluated in the
22    alternative proposals that have been put forward. 
23    There has been a great deal of hand waving about how
24    administrative costs will be small, I guess on the
25    assumption that in calculating the bill if you have got
26    only a single price it is fairly easy to calculate the
27    bill.
28                      But I am just pointing out to the

                                                           70
                                  MATTSON/ADAMS, presentation
 1    Board that there is much more to the settlement side of
 2    the market than is articulated by this simplified
 3    notion that the bill calculation will just be the
 4    volume times a single price.
 5                      I think the evidence from the
 6    Technical Conference is very clear that the generation
 7    plants that are advocated here as tied to the Board's
 8    decision, and I am particularly referring to the
 9    Lakeview new generation project, it appears very clear
10    from the record, if we believe the evidence of the
11    proponent, that that project is in fact uneconomic and
12    that those proponents are in this hearing room making
13    their entreaties to this Board to protect themselves
14    from a project that they don't think they could sell in
15    an open market.
16                      They are looking for regulatory
17    protection as a way of transferring some of their costs
18    to capped customers.
19                      There has been much commentary in the
20    submissions that were presented to the Board for
21    today's proceeding and also at the motion, suggesting
22    deficiencies in the MDC's process.
23                      I was a member of the market design
24    committee from August until the completion of its work,
25    so the last half of the MDC's life.  I was an active
26    participant in many of the retail discussions, and
27    particularly discussions around the spot price-through
28    mechanism.

                                                           71
                                  MATTSON/ADAMS, presentation
 1                      I want to make the Board aware that I
 2    consider many of the statements regarding the MDC
 3    process to be factually incorrect and many unfair as
 4    well, particularly the comment that the spot price
 5    pass-through mechanism and its alternatives were not
 6    carefully or completely considered by the MDC.  A
 7    reference for a statement to this effect is in the
 8    Power Budd submission, page 31.
 9                      Appended to the submissions that
10    Mr. Mattson and I made leading to today's presentation,
11    dated August 3, was a discussion paper that I authored
12    for a discussion at the Market Design Committee in
13    plenary session.  The reason I made that addition to
14    our remarks was to help the Board understand some of
15    the depth of the discussion that has gone on behind the
16    MDC's decision.
17                      The presentation I made to the Market
18    Design Committee, or these notes themselves, reference
19    a couple of previous papers that opponents of the spot
20    price pass-through mechanism had presented.
21                      All of this should help the Board
22    understand that there were long and detailed
23    discussions giving the proponents of fixed price
24    mechanism, I would say, every reasonable opportunity to
25    present alternatives.  In that way the MDC's process
26    has really not been unlike the Board's process in this
27    proceeding.  The proponents of fixed price mechanisms I
28    think have been given a very thorough opportunity to

                                                           72
                                  MATTSON/ADAMS, presentation
 1    present their views.
 2                      Now, any deficiencies that we might
 3    find in those views I think -- that is the views of the
 4    fixed price proponents -- cannot be set aside as the
 5    fixed proponents not having been given a fulsome
 6    opportunity in public debate to make those
 7    presentations.
 8                      At risk of making a somewhat personal
 9    remark, I want to complain about the treatment of
10    Dr. Dewees in this process as well.  There have been
11    many comments directed at Dr. Dewees and his expertise
12    that I consider to be inappropriate.
13                      I suggest that the Board has an
14    interest in defending the quality of discourse in its
15    proceedings and the Board may wish to comment in its
16    decision on how it would like to have witnesses treated
17    in its proceedings.
18                      I should also note that if the Board
19    adopts -- kind of a statement of the obvious, but if
20    the Board adopts the MDC's recommendations and the
21    recommendations of Board staff and pursues the spot
22    price pass-through mechanism, you can probably expect
23    to be treated in a similar way to that that Dr. Dewees
24    was referred to.
25                      Now, with regard to this yardstick
26    mechanism that has been presented to you, it is my
27    belief that if the yardstick mechanism had been worth
28    investigating it would have been investigated by the

                                                           73
                                  MATTSON/ADAMS, presentation
 1    MDC.  The fact that it hasn't been investigated to the
 2    MDC, to the happiness of the Power Budd client, is,
 3    I think, more a reflection on the concept than a
 4    reflection on the integrity of the MDC.
 5                      Although in his testimony Mr. Adamson
 6    was unaware of any other applications of yardstick
 7    regulation in Canada, it is my understanding that there
 8    is a single other instant of yardstick regulation in
 9    Canada and that is the regulatory regime that applies
10    to the Maritime Electric Company, which is owned by
11    Fortis.  That is a situation that is very unique, in
12    fact at the time it was introduced I believe it was one
13    of only three instances of yardstick regulation in
14    North America.
15                      In the case of the Maritime Electric
16    yardstick regulation regime, what they have done is, it
17    is an island utility that takes all its supply from
18    NB Power and the regulatory regime simply indexes the
19    rates, NB Power's rate plus 10 per cent and then
20    Maritime Electric can do whatever it wants.
21                      The concept there is that there is a
22    benchmark that is so inherently tied -- since the cost
23    of power is all derived from NB Power, the benchmark is
24    so inherently tied to the local cost of service that it
25    was considered appropriate in that case.
26                      But for the purposes of commodity
27    regulation, the idea that yardstick regulation would
28    have some application I think just defies any logic. 

                                                           74
                                  MATTSON/ADAMS, presentation
 1    This presentation by Mr. Adamson is, effectively, a
 2    double jeopardy where utilities that find themselves on
 3    the wrong side of the price are going to find
 4    themselves on the wrong side of the penalties as well.
 5                      Well, what does that do for the cost
 6    of capital in those utilities?  What does it do for the
 7    ratepayers in those utilities?  These are all matters
 8    that have no explanation on the record of this
 9    proceeding and yet they are extremely significant to
10    any decision that this Board might taken upon itself.
11                      If we go with this yardstick
12    regulation the risk, in my view, of LDCs for the
13    commodity side of the business is going to be so
14    overwhelming that I think there is a danger for the
15    retail structure of the electricity market.  I have
16    articulated some of those concerns in my paper.
17                      But basically my concern is that in
18    order to deal with this double jeopardy problem of the
19    yardstick approach LDCs will have to seek refuge in
20    buying pools so they can organize the retail side of
21    the market as a way of insulating themselves.  That
22    organization of the retail side of the market raises
23    great concerns in our mind related to the
24    competitiveness that ultimate customers will see.
25                      If the Board is so moved to adopt a
26    fixed price regime, it is very clear that a short-term
27    auction/fixed-price auction is much preferable to a
28    portfolio, any kind of portfolio method.

                                                           75
                                  MATTSON/ADAMS, presentation
 1                      I also want to make some comments
 2    about environmental protection matters.
 3                      The Board has heard submissions from
 4    many parties about environmental priorities, and I want
 5    to say Energy Probe is very concerned about the level
 6    of environmental protection requirements that are
 7    associated with this transformation of the electricity
 8    market in Ontario.
 9                      We share the view of the other
10    environmental intervenors that the level of
11    environmental protection that has been put in place so
12    far is not acceptable or adequate, but we are faced
13    with the question of whether the Board's decision on
14    standard supply ought to be coloured by these concerns
15    about environmental protection matters.
16                      My submissions to you have a couple
17    of parts.
18                      The Board has a public interest
19    mandate and it ought to attempt, in its decisions, to
20    articulate a clear definition of the public interest. 
21    I recognize that is a substantial challenge because the
22    public interest is not self-defining.
23                      Our view is that allowing subsidies
24    in rates for environmental purposes exposes the Board
25    to such intractable conflicting priorities that a clear
26    definition of the public interest will be impaired. 
27    Any environmental protection matters that rely on
28    subsidies, in our submission, are outside the Board's

                                                           76
                                  MATTSON/ADAMS, presentation
 1    mandates because of section 1(3), (4) and (5) of the
 2    new OEB Act.
 3                      The Board does not have the mandate,
 4    information or expertise to solve the environmental
 5    problems of Ontario's energy system.  Some of the key
 6    pollutants of concern common to the power system are
 7    also common to other sources of emissions that the
 8    Board has no authority over, giving rise to the concern
 9    that intervention for environmental purposes on one
10    part of the market could be an uncoordinated or
11    unbalanced intervention with regard to other emission
12    sources, a particular problem when you consider the
13    advent of cogeneration facilities where you might have
14    a cement plant that is producing emissions for the
15    purposes of the cement production and for electricity
16    production.  When you start having electricity-only
17    regulation there are inherent problems in those kinds
18    of situations.
19                      Now, recognizing that there are
20    serious concerns with environmental protection related
21    to the electricity sector but also recognizing that
22    such protection is properly the job of the Ministry of
23    Environment, the OEB might want to break with its
24    historic practice and issue an obiter dictum statement
25    to the effect that the provincial government and the
26    Ministry of Environment ought to take some initiatives
27    here, ideally supporting the Market Design Committee's
28    recommendations on a variety of environmental

                                                           77
                                  MATTSON/ADAMS, presentation
 1    protection measures that the government has recommended
 2    to adopt.
 3                      The basic point is that for
 4    environmental protection to succeed some parties must
 5    be accountable for that function.  The OEB has many
 6    accountabilities, but you are not a party that is
 7    accountable for the environmental emissions associated
 8    with the power system.
 9                      Just further to the evidentiary
10    problem that is faced by the Board, the Board is in no
11    position to judge whether regulated fixed prices,
12    although they might well assist some cogeneration
13    facilities, might also assist the rehabilitation of
14    some of OPG's aging coal plants.  We don't know that
15    that is not the case.
16                      I suggest that the Board doesn't have
17    an adequate information base on which to adopt fixed
18    prices simply as an environmental protection matter.
19                      I will close with a final remark
20    related to Dr. Dewees.
21                      In our submission, Energy Probe
22    endorsed the position of Dr. Dewees.  If the Board has
23    an interest in placing questions to Dr. Dewees, since
24    it has not had that opportunity in the public forum, we
25    would be happy to sponsor Dr. Dewees' presentation,
26    endorse his evidence and put him forward as our witness
27    if it would be of assistance to the Board.  Thank you.
28                      THE CHAIRMAN:  Thank you, Mr. Adams.

                                                           78
                                  MATTSON/ADAMS, presentation
 1                      Mr. Mattson?
 2                      MR. MATTSON:  No more comments.  We
 3    are available for questions, Mr. Chairman.
 4                      THE CHAIRMAN:  Ms O'Reilly?
 5                      MS O'REILLY:  I have two short
 6    questions for you.
 7                      First, on page 4 of your submission,
 8    you note that LDCs should provide only one SSS offer. 
 9    Do you include in the notion of a single offer the
10    establishment of distinct customer classes, for
11    example, residential, commercial and industrial?
12                      MR. ADAMS:  Yes.  It may be necessary
13    to have class distinctions and appropriate to have an
14    SSS offer for each particular class.  My concern is
15    that we don't want to have any question about the type
16    of service that a default customer is entitled to and
17    is served with.
18                      MS O'REILLY:  The second question,
19    which is simply something that I don't understand, is
20    on page 6 of your submission, where you have a
21    recommendation about minimizing the costs for billing
22    systems, and I am not sure I understand how it relates
23    to SSS exactly.
24                      MR. ADAMS:  Perhaps it is not fully
25    articulated here.  The concern is that there might be
26    many barriers to customer mobility.  One of them would
27    be in the event that an LDC had high fixed costs
28    associated with SSS provision, provision of SSS

                                                           79
                                  MATTSON/ADAMS, presentation
 1    service, the LDC would have potentially an interest in
 2    keeping customers on service for the purposes of
 3    recovering those fixed costs.
 4                      The LDC might be in a conflicting
 5    position, where it has a duty to facilitate competition
 6    under Bill 35 and to allow customers to be mobile.  On
 7    the other hand, it has the interests of its shareholder
 8    at stake in ensuring that it has a large enough
 9    customer base under SSS service.
10                      In order to minimize the extent of
11    this type of barrier to customer mobility, we are
12    suggesting that the fixed costs associated with SSS
13    service borne by the LDC be minimized to the extent
14    possible and be flexible so that those costs are
15    manageable.  If customers seek alternative supply, the
16    LDC should not have a large cost penalty associated
17    with that.
18                      MS O'REILLY:  Thank you.
19                      THE CHAIRMAN:  Thank you.
20                      MEMBER HIGGIN:  Mr. Adams, could you
21    give us your views regarding the desirability or not of
22    the smoothing mechanism and relate that to (a) price
23    volatility, and (b) to your characterization that there
24    might be an SSS offer separately for say general
25    service and residential customers?
26                      Could you then give your views on
27    that in a nutshell?
28                      MR. ADAMS:  Yes.  For the purposes of

                                                           80
                                  MATTSON/ADAMS, presentation
 1    ensuring an efficient price signal to consumers, the
 2    smoothing interval ought to be as short as possible.
 3                      From the perspective of assisting
 4    customers with cost planning, an alternative that meets
 5    the advantages or serves the advantages of an efficient
 6    price signal and also assists the customer with the
 7    budgeting problem of variable electricity bills is a
 8    seasonal or annual smoothing program.  The design of
 9    such a program could ensure that the customer receives
10    regular notice of where they are on track with their
11    annual budget billing, so that the customer is aware of
12    their usage and the cost implications of that usage but
13    also has the ability to transfer their costs over a
14    time period.
15                      The problem of volatility is inherent
16    to this new marketplace.  It is a problem that
17    customers will see.  One of the costs of this
18    electricity system restructuring that we are going
19    through in Ontario is that customers are going to be
20    exposed to volatility where previously they were not.
21                      It is incorrect to suggest that
22    volatility is only borne by customers.  Of course, the
23    volatility is borne by producers as well.
24                      In considering questions of
25    volatility, we want to ensure that the regulated
26    options are as efficient as possible in assisting the
27    customer in managing their own electricity costs.  We
28    don't want to be in a situation where customers are

                                                           81
                                  MATTSON/ADAMS, presentation
 1    consuming high cost supply without being notified and
 2    then having a bundling procedure basically ramping up
 3    their aggregate costs.
 4                      MEMBER HIGGIN:  Do you see any role
 5    for the LDCs, given that they are involved in the
 6    wholesale settlement process, in smoothing, such as the
 7    type of purchase gas, purchase electricity accounts and
 8    these types of things which they would use their
 9    greater financial function and strength to provide some
10    smoothing?
11                      MR. ADAMS:  We are very nervous about
12    the proposal.  We have seen that proposal in gas and
13    seen the results of it where LDCs have purchased
14    portfolios.  We have had PGBA corrective balancing
15    accounts that are visited on the customer long after
16    the consumption period.  It is very difficult to
17    explain to customers.  Customers become upset about
18    them.
19                      Another problem that we have with
20    LDCs purchasing for risk mitigation purposes is
21    potential barriers to customer mobility, as we saw in
22    the early 1990s with the whole problem of return to
23    system.
24                      The concept of LDCs participating in
25    the commodity side of the market under regulation is
26    inherently fraught with inefficiencies, in our view.
27                      MEMBER HIGGIN:  Thank you very much,
28    Mr. Adams.

                                                           82
                                  MATTSON/ADAMS, presentation
 1                      THE CHAIRMAN:  My question more has
 2    to do with my lack of comprehension on something you
 3    said, and I wonder if you could expand on it a bit.
 4                      It had to do with the use of
 5    yardstick regulation for supply.  You made reference to
 6    double jeopardy for the LDCs.  I didn't quite
 7    understand that.
 8                      MR. ADAMS:  As I understand the
 9    yardstick proposal of Mr. Adamson, he would have a
10    deadband around a median price.  Utilities finding
11    themselves on the bad side of the deadband with price
12    of acquisition above the deadband safe zone, those
13    utilities would find themselves in a lot of trouble.
14                      First of all, their customers would
15    be wondering why the utility for some community is
16    charging a high commodity price relative to other
17    communities, and that is enough of a problem.
18                      In addition, Mr. Adamson's proposal
19    sees compensation payments, a credit to the account of
20    the utilities that do better on the good side of the
21    deadband paid by the utilities on the bad side of the
22    deadband.
23                      There you have an LDC with two
24    problems.  If for some reason they contract at prices
25    above the median, they have high prices and a penalty
26    to pay.  That is what I was referring to as this double
27    jeopardy.
28                      THE CHAIRMAN:  Okay.  Thank you.

                                                           83
                                  MATTSON/ADAMS, presentation
 1                      Are there any other questions?
 2                      If not, Mr. Adams, Mr. Mattson, thank
 3    you very much for your submission.
 4                      That concludes the morning's
 5    submissions.  We will reconvene again this afternoon. 
 6    We are running ahead of schedule, and I --
 7                      MS LEA:  Mr. Chairman, if I could
 8    just interrupt?
 9                      Mr. Sutton from the Competition
10    Bureau is here.  He has indicated to me that he is
11    ready to proceed at any time, either now or after
12    lunch.
13                      MR. SUTTON:  We think we can be
14    finished by your regularly scheduled lunch time,
15    Mr. Chairman.
16                      THE CHAIRMAN:  Does that meet with
17    general approval?  Nobody is going to get bent out of
18    shape too badly if we proceed that way?
19                      Why don't we do that then and move
20    right into that.  Thank you for that.
21                      I can tell you are anxious to get
22    back to Ottawa.
23                      If you will introduce yourselves, we
24    can proceed.
25                      MR. SUTTON:  Thank you, Mr. Chairman,
26    Members of the Panel.
27                      My name is Sutton, initials J.D.  I
28    am counsel to the Commissioner for Competition.

                                                           84
                                  MATTSON/ADAMS, presentation
 1                      Mr. Mark Ronayne is with me, who has
 2    appeared before you on previous occasions.  You should,
 3    I think, know him.
 4                      Mr. Chairman, you should have the
 5    Commissioner's written submission filed August the 3rd,
 6    filed by him pursuant to his mandate under section 126
 7    of the Competition Act.  With that, you have the
 8    background paper prepared for the Commissioner by
 9    Mr. Meehan and Ms Selting of the National Economic
10    Research Association that was filed pursuant to your
11    Procedural Order No. 1, paragraph 5, asking for backup
12    information.
13                      Mr. Ronayne this morning is going to
14    speak to the written submission and respond to any
15    questions you have about it.
16                      I will turn it over to him.
17                      THE CHAIRMAN:  Thank you.
18    PRESENTATION
19                      MR. RONAYNE:  Mr. Chairman and
20    Members of the Panel, this is the oral submission of
21    the Competition Commissioner appointed under the
22    Competition Act for the Standard Supply Service Code
23    hearing.
24                      On behalf of the Commissioner, I
25    would like to thank the Board for this opportunity to
26    appear today.  Promoting and supporting pro-competitive
27    restructuring of the electricity in Ontario, as well as
28    in other provinces, is one of the key objectives that

                                                           85
                                        RONAYNE, presentation
 1    the Commissioner has established for the Competition
 2    Bureau.
 3                      One of the central issues in this
 4    restructuring will be properly resolving issues around
 5    standard supply service.  It can be expected that this
 6    service will initially be selected by many consumers,
 7    particularly at the household level.  Getting the
 8    service right will be essential for protecting their
 9    interests during the transition to competition.
10                      Standard supply service, moreover,
11    will provide the initial benchmark for the retail
12    market.  It will be the service offering that
13    competitors will have to beat in order to obtain retail
14    customers.  If it does not provide the right market
15    signal, retail competition cannot be expected to
16    develop efficiently.
17                      The Competition Bureau's interest in
18    the Standard Supply Service hearing, consistent with
19    the objectives of the Competition Act which we enforce,
20    is to promote effective and efficient electricity
21    competition and the benefits it can be expected to
22    deliver.
23                      With this in mind, I would like to
24    explain in a bit more detail the analytical
25    underpinnings for the position we have adopted for the
26    hearing, particularly in regard to the pricing of
27    standard supply service.
28                      As indicated in our written

                                                           86
                                        RONAYNE, presentation
 1    submission, we believe that a monthly spot price
 2    pass-through mechanism for standard supply service,
 3    possibly with budget billing permitted to ease
 4    month-to-month volatility, is the best among the
 5    proposed options.  This approach, in our view, has a
 6    number of desirable features for promoting efficient
 7    and effective retail competition in Ontario.
 8                      First, it directly passes through the
 9    benefits of spot market competition to the consumer
10    without adding unnecessary cost.
11                      In this regard, the spot market is an
12    essential feature of the electricity and market design
13    in Ontario.  For consumers, this spot market will
14    deliver electricity in its finished form, at the
15    outlet, on demand.  Competition to be dispatched in the
16    spot market is therefore competition to provide a
17    finished product to consumers.  With a competitive spot
18    market and a spot price pass-through mechanism, retail
19    competition is not needed to pass these benefits on to
20    consumers.  Rather, retail competition is properly
21    focused on providing value-added to basic electricity
22    service.
23                      Second, a spot market price
24    pass-through mechanism avoids inherent competition, and
25    regulatory and level playing field concerns associated
26    with standard supply service options in which the
27    service provider has a large financial stake in keeping
28    these customers.

                                                           87
                                        RONAYNE, presentation
 1                      Under the spot market price
 2    pass-through mechanism, the provider does not take
 3    ownership of the electricity it is providing, nor does
 4    it contract for this electricity.  Rather, it merely
 5    passes on power from the spot market.  Risk to the
 6    provider is limited to non-payment for service -- a
 7    risk that exists under any approach for standard supply
 8    service.
 9                      Third, a spot market price
10    pass-through mechanism leaves consumers mobile to move
11    to unregulated services when they desire.
12                      There is no need to tie standard
13    supply service customers into term contracts to protect
14    providers from any costs or arrangements they have
15    undertaken on these customers' behalf.
16                      A related point is that a spot market
17    price pass-through mechanism does not create potential
18    stranded cost issues for the standard supply service
19    provider.
20                      Fourth, an important benefit of a
21    spot price pass-through mechanism is that it provides
22    efficient price signals.
23                      By allowing prices to vary with
24    market conditions, the mechanism provides incentive for
25    consumers to adjust demand, both as an efficient
26    reaction to changing generation cost conditions and as
27    a possible means to mitigate Ontario Power Generation's
28    market power.  Critics of the monthly spot price

                                                           88
                                        RONAYNE, presentation
 1    pass-through mechanism have correctly indicated that
 2    the price signals it provides will not be as timely nor
 3    as strong as they would be if real-time meters were in
 4    place.
 5                      This is not to say, however, that
 6    they will not be of value.  Even monthly price signals
 7    will make consumers more aware of the actual cost of
 8    electricity that they are consuming.  This will be an
 9    important step in assisting these customers to adjust
10    to the reality of the new competitive electricity
11    market structure.  It will also help in the development
12    of energy service options to promote more efficient
13    electricity use.
14                      Under a monthly spot price
15    pass-through mechanism, there will be predictable
16    seasonal and month-to-month price fluctuations.  These
17    may provide the basis for beneficial demand side
18    responses by businesses as well as households.
19                      Fifth, a spot price pass-through
20    mechanism can be expected to be provide an average
21    price for electricity that is at least as low or lower
22    than that provided by any other proposed standard
23    supply service option.
24                      The spot market, as has been
25    acknowledge, I believe, by all, will be the principal
26    price reference point for futures contracts and
27    decisions whether or not to build new generation. 
28    Given this, the assertion that it can be beaten is

                                                           89
                                        RONAYNE, presentation
 1    saying, really, one of three things is happening:  that
 2    risk is being absorbed by the standard supply service
 3    provider at less than its market value; that owners of
 4    generation, or contractors for generation, are selling
 5    electricity for standard supply service for less than
 6    its market value; or that standard supply service
 7    providers are more efficient contractors for
 8    electricity than other market participants.  None of
 9    these circumstances seems likely as a permanent part of
10    the electricity market.
11                      Finally, a major benefit of the spot
12    market price pass-through mechanism is that it promotes
13    the development of unregulated retail competition.
14                      It does this by providing companies
15    with commercial opportunities to provide value-added to
16    basic electricity supply.  This value-added can include
17    providing power at a fixed price, bundling electricity
18    supply with related energy services or bundling
19    electricity with other services.
20                      There has been a great deal of
21    criticism of the spot price pass-through mechanism in
22    the hearing, but when these criticisms are put
23    together, we believe that they can be distilled down to
24    three main areas of concern, from a competition and
25    efficiency perspective.
26                      The first is that under a spot price
27    pass-through mechanism consumers will efficiently
28    remain on or move off of standard supply service.  This

                                                           90
                                        RONAYNE, presentation
 1    will be the result of imperfect information and
 2    transactions cost.
 3                      The second is that a spot market
 4    price pass-through mechanism will prevent efficient,
 5    new generation from being built.  It will do this by
 6    restricting a development of intermediate, forward and
 7    contract markets.
 8                      The third area encompasses a number
 9    of alleged problems with using a spot price
10    pass-through mechanism given Ontario Power Generation's
11    dominance over generation and the market power
12    mitigation agreement.
13                      On the first of these areas of
14    concern, there are two divergent views being put
15    forward.  One is that consumers will be too immobile
16    under the spot price pass-through mechanism.  As a
17    consequence, they will remain on what is to them an
18    inherently inferior supply offer.  The other is that
19    consumers will be too mobile.  Because of perceived
20    shortcomings in a spot price pass-through mechanism,
21    they will move too quickly to unregulated service
22    offerings.  Both of the points of view are asserted, in
23    the end, to warrant the use of a fixed-price approach
24    for standard supply service.  While we agree that there
25    is intuitive appeal for the consumer benefits of a
26    fixed-price service, its underpinnings require careful
27    consideration.
28                      Both arguments in favour of a fixed

                                                           91
                                        RONAYNE, presentation
 1    price standard supply service start from the assertion
 2    that a spot price pass-through mechanism will expose
 3    consumers to much price volatility and risk and that
 4    consumers are, by nature, highly adverse to such risks.
 5                      These assertions, however, are not as
 6    robust as they might at first seem.  A thorough
 7    analysis of the volatility and risk consumers will or
 8    will not face under a spot price pass-through mechanism
 9    is provided in Part 4 of the background report prepared
10    for us by Eugene Meehan and Anne Selting of National
11    Economic Research Associates.
12                      At the risk of oversimplifying their
13    analysis, I will try to paraphrase its key points.
14                      They include that much of the
15    volatility observed in month-to-month electricity
16    prices and bills is seasonal and predictable. 
17    Accordingly, hardships that these fluctuations may
18    create for some consumers can be mitigated by budget
19    billing.
20                      A spot market mechanism for standard
21    supply service also entails longer term price risks
22    related to periodic cycles of demand and supply
23    imbalance.  These risks, however, can only be managed
24    by multi-year fixed-price contracts.  Such contracts
25    are not envisioned under the alternative standard
26    supply service approaches being imposed and, in any
27    event, are themselves risky.
28                      What remains is average price risk

                                                           92
                                        RONAYNE, presentation
 1    due to deviations from normal conditions, such as
 2    unexpected weather conditions and shutdowns.  It is not
 3    clear that this level of risk will be substantial and
 4    of major concern to consumers.  In any event, the
 5    potential impact of this risk will be reduced by the
 6    price cap guaranteed under the market power mitigation
 7    agreement.  A further mitigating factor is that risk
 8    will be confined only to the commodity portion of the
 9    consumer's bill.
10                      From this point, the reasons
11    suggested for the fixed-price standard supply service
12    diverge.  On one hand, it is asserted that consumers,
13    because they are mobile, off standard supply service
14    will inefficiently bear risk under the spot price
15    pass-through mechanism.  This assertion also warrants
16    careful consideration.  The actual cost for consumers
17    to switch to unregulated fixed-price offers are
18    actually minimal.  All that you would have to do is
19    sign a contract with another supplier.
20                      Also, the potential significance of
21    the alleged problem declines with the amount of
22    electricity purchased by the consumer.  It is likely to
23    be a significant concern only in regard to small-volume
24    consumers, mostly likely households.  More even, among
25    households, there will be mobile consumers.
26                      Finally, unlikely, some markets that
27    have made the transition to competition, the Ontario
28    electricity market will have an organization, the

                                                           93
                                        RONAYNE, presentation
 1    Ontario Energy Board, with the mandate and authority to
 2    promote awareness among consumers.
 3                      On the other hand, it is asserted
 4    that consumers, because they are risk-averse and
 5    uninformed, will move too quickly off a spot price
 6    pass-through mechanism to inferior unregulated
 7    electricity services.  To prevent this, an
 8    easy-to-understand fixed-price supply service or menu
 9    of such services is said to be needed as a benchmark
10    for measuring unregulated electricity offers.  This
11    assertion should also be qualified.
12                      It, too, has the potential to be a
13    major problem only among small consumers.  In addition,
14    a budget billing approach with a spot price
15    pass-through mechanism could go a long way toward
16    mitigating the desire of consumers to move to inferior
17    fixed-price offers.
18                      Also, the Ontario Energy Board Act
19    provides clear powers for the Board both to control
20    unfair or misleading business practices and to promote
21    awareness among standard supply service customers.
22                      These conditions, we would argue,
23    mitigate but do not eliminate the case for providing a
24    fixed-price standard supply service.
25                      Accordingly, making the case for or
26    against this service will also require a careful
27    accounting of its potential costs in relation to its
28    potential incremental benefits -- and I stress that --

                                                           94
                                        RONAYNE, presentation
 1    to consumers.
 2                      At the first step to this assessment,
 3    from a competition and efficiency perspective, we
 4    believe that there is a clear choice to be made among
 5    the competing alternatives for providing a fixed-price
 6    service:  it is through a competitive bidding process. 
 7    This approach has a number of fundamental advantages
 8    when compared to the main alternative approach
 9    proposed:  yardstick regulation.
10                      The main advantages of a competitive
11    bidding process include the following.  As compared to
12    the proposed yardstick mechanism, it does not create
13    potential stranded cost concerns for the standard
14    supply service provider.
15                      In addition, a competitive bidding
16    approach, unlike a yardstick mechanism, provides a
17    transparent and open process to supply standard supply
18    service customers.  If the objective of the service is
19    to give consumers a low-cost fixed-price electricity
20    supply option, competition to do this should not be
21    confined to the local distribution company disciplined
22    only by an indirectly regulatory yardstick.  Rather, it
23    should be open to all potential suppliers through an
24    open and competitive bidding process.  Such competition
25    would ultimately provide the best yardstick for
26    standard supply service providers by those making the
27    best offer would provide the service.
28                      One of the main alleged benefits of a

                                                           95
                                        RONAYNE, presentation
 1    yardstick approach is that it would give the designated
 2    provider an ongoing incentive to get the best deal for
 3    customers.  This is in fact a weakness of the approach. 
 4    A competitive bidding process gives all potential
 5    standard supply service providers this incentive not
 6    just the local distribution company.
 7                      A further concern with the proposed
 8    yardstick approach for standard supply service is that
 9    it would tilt the unregulated side of the retail market
10    heavily in favour of the providers of the service. 
11    They alone would be permitted to develop their
12    competitive market capabilities relying on expertise,
13    contracts and capabilities they developed to provide
14    standard supply service.  This is an opportunity that
15    should not be confined to a subset of the potential
16    competitors.
17                      In addition, as compared to the
18    proposed yardstick approach, a competitive bidding
19    process is likely to involve less expense and
20    regulatory costs.
21                      Both approaches will require
22    difficult and possibly contentious matters first to
23    be -- excuse me -- difficult and possibly contentious
24    matters first be resolved in setting up the mechanism.
25                      The proposed yardstick approach,
26    however, would also create a number of additional
27    regulatory difficulties, specifically:  ongoing
28    oversight of the providers; contracting practices would

                                                           96
                                        RONAYNE, presentation
 1    be needed to ensure that they are prudent; oversight
 2    would also be needed to ensure proper assignment of
 3    costs and contracts between the providers to standard
 4    supply service activities and their unregulated
 5    activities.
 6                      Under a yardstick approach, the Board
 7    would also be required to examine the service
 8    providers' portfolio of contracts annually for the
 9    purpose of setting a benchmark price.
10                      For these reasons, a competitive
11    bidding process for a standard supply service we
12    believe is clearly preferred.  Saying that process is
13    preferred is not the same as saying however that a
14    fixed-price offer should be made.  Rather, a careful
15    accounting of the likely costs and potential benefits
16    of this approach is also needed.
17                      In this regard, there are competition
18    and efficiency costs inherent in any fixed-price
19    approach for standard supply service that should be
20    taken into account.  Any fixed-price approach will
21    require that an explicit tradeoff be made between
22    restricting the mobility of standard supply service
23    customers or having these customers face higher
24    electricity costs.  These added costs would be to cover
25    the additional risk that standard supply service
26    providers will face in order to support the ability of
27    some consumers to move strategically on and off the
28    service.

                                                           97
                                        RONAYNE, presentation
 1                      A fixed-price standard supply service
 2    will also impede beneficial price signals and the
 3    potential for the demand side response associated with
 4    a spot price pass-through mechanism.  A further cost of
 5    any fixed-price standard supply service approach is
 6    that it would impede the development of unregulated
 7    retail market offerings.  Providing a fixed-price
 8    standard supply service may not so much provide a
 9    measure for unregulated supply service offerings as
10    prevent any such offerings from being made.
11                      Finally, setting up and operating a
12    competitive option process for standard supply service
13    would involve significant incremental costs and
14    complexities.
15                      On the potential incremental benefits
16    of a fixed price standard supply service, as I
17    discussed previously, it is not clear that these will
18    be substantial when weighed against the potential
19    costs.  However, the case for such benefits is further
20    weakened when considered in the specific context of the
21    Ontario market for generation.
22                      A competitive process to provide
23    standard supply service will not alter the fact that
24    the generation market on which bids will be based is
25    not competitive.  If a substantial amount of demand is
26    being bid out, competitors will be required to obtain
27    some or all of their power needs from Ontario power
28    generation.

                                                           98
                                        RONAYNE, presentation
 1                      As provided in the Market Power
 2    Mitigation Agreement, a projected 9 per cent of this
 3    power will be price capped at 3.8 cents.  Having
 4    competing retailers contracting for this power for the
 5    purposes of a competitive process may only add
 6    unnecessary costs, as compared to allowing the price
 7    cap benefits to be passed on to consumers through the
 8    spot market.
 9                      A secondary area of alleged concern
10    regarding the use of a spot price pass-through
11    mechanism is that it will prevent sufficient new
12    generation from being built.  The basis for this view
13    is that it will not sufficiently promote the
14    development of intermediate contract and futures
15    markets as too many consumers will be purchasing from
16    the spot market.  We see no substantive basis for this
17    argument.  It relies on consumers being immobile off a
18    standard supply service based on the spot market.
19                      As I discussed previously, this
20    assertion applies only to a subset of consumers,
21    principally small households.
22                      The argument also relies on the view
23    that the spot market will not support efficient
24    intermediate contracts.  Fixed price retailed supply
25    contracts, however, are not needed to support such
26    contracting and the development of new generation. 
27    Hedging around the spot market can achieve the same
28    end.

                                                           99
                                        RONAYNE, presentation
 1                      Moreover, as stated in the background
 2    analysis prepared for the Competition Bureau, for the
 3    hearing, at page 26, if I can quote:
 4                           "Of all the markets for
 5                           electricity, intermediate
 6                           markets are the most resilient
 7                           and innovative.  Generators with
 8                           substantial assets to protect
 9                           have the incentive to develop
10                           innovative contractual forms. 
11                           Financial agents consisting of
12                           large financial institutions and
13                           energy trading organizations are
14                           well able to develop products
15                           suitable for the contract
16                           market."  (As read)
17                      We concur with this statement and
18    note that it is supported by electricity developments
19    elsewhere.
20                      As indicated in the background
21    analysis prepared on behalf of the Bureau, and
22    acknowledged during the technical conference, there is
23    much merchant power generation being established in
24    electricity markets in the U.S., even in areas where
25    the market structure is less well defined than in
26    Ontario.  This indicates that generators, financial
27    institutions and energy trading organizations are,
28    indeed, adapting well to the new reality of competitive

                                                          100
                                        RONAYNE, presentation
 1    electricity markets.
 2                      The third alleged area of economic
 3    concern pertaining to a spot price pass-through
 4    mechanism consists of a number of assertions raised in
 5    relation to Ontario Power Generation's dominance over
 6    electricity generation and market power mitigation.
 7                      These assertions include the
 8    following.  Other standard supply service options will
 9    better promote entry as a way to mitigate Ontario Power
10    Generation's market power.  The Market Power Mitigation
11    Agreement allows Ontario Power Generate to discriminate
12    among customer groups while meeting its 3.8 per cent
13    price cap.
14                      Under a spot price pass-through
15    mechanism, standard supply customers are likely to be
16    on the negative end of such price discrimination.
17                      A third assertion, the Market Power
18    Mitigation Agreement will create excessive price
19    volatility for standard supply service customers under
20    a spot market price pass-through mechanism.
21                      On the first of these assertions,
22    entry or the threat of it can indeed be an effective
23    constraint against the exercise of market power. 
24    Moreover, removing inefficient or unnecessary
25    impediments to entry is in general a good thing to do. 
26    Ontario has in fact made good progress in this
27    direction by providing a regulatory regime to allow all
28    generators access to the provincial electricity system.

                                                          101
                                        RONAYNE, presentation
 1                      However, promoting entry merely for
 2    the purpose of mitigating market power is an
 3    inefficient way to deal with the problem.  Falsely
 4    making entry easy by removing the risk that should be
 5    borne by entrants and financial intermediaries is more
 6    likely to lead to inefficient investment and higher
 7    costs than significant pro-competitive benefits.
 8                      The second of these issues, we do not
 9    see a compelling reason why standard supply service
10    under a spot market price pass-through mechanism would
11    result in a significantly higher average price for
12    consumers on standard supply service.  Nevertheless, if
13    a compelling argument can be put forward that this
14    would happen, it should not be dealt with through the
15    use of a less efficient standard supply service option. 
16    Rather, it should be managed through other available
17    mechanisms, such as related restrictions in Ontario
18    Power Generation's licence.
19                      On the third issue, it is possible,
20    but not necessarily the case, that spot market based
21    standard supply service will result in greater price
22    volatility under market power.  However, if it does,
23    reliance on a fixed price standard supply service will
24    eliminate one possible means to counter this market
25    power, demand-side response.
26                      One final point I would like to make
27    in regard to this part of my presentation is in regard
28    to the view that a major benefit of a fixed price

                                                          102
                                        RONAYNE, presentation
 1    standard supply service, especially a yardstick
 2    approach, is that it would provide an effective
 3    mechanism for achieving environmental objectives.
 4                      The Competition Bureau concurs that
 5    environmental imperatives should be a key factor in the
 6    electricity restructuring process.  However, adopting
 7    an inefficient mechanism for providing standard supply
 8    service would be a costly way to achieve these
 9    imperatives.
10                      To sum up this part of my
11    presentation, we believe that when the arguments for
12    and against using the spot market price pass-through
13    mechanism as a basis for standard supply service are
14    weighed up, they support the approach as the best
15    available in the current Ontario electricity market
16    framework.
17                      However, if the Board believes that a
18    fixed price option should be made available, it should
19    be limited to small volume consumers and based on a
20    competitive option approach.
21                      Regarding our position then on the
22    remaining issues under consideration, I will rely
23    principally on the written material in our earlier
24    submission.  I would like to emphasize, however, that
25    the underlying concern for these positions is to ensure
26    that there is effective structural separation between
27    competitive and regulated activities.  Businesses
28    should not gain an undue competitive advantage in the

                                                          103
                                        RONAYNE, presentation
 1    supply of competitive products, merely as a result of
 2    them also supplying a legislatively required and
 3    regulated service.
 4                      We believe that the restrictions in
 5    the Standard Supply Service Code, on the basis of
 6    available information, are consistent with this
 7    viewpoint.
 8                      This concludes my oral presentation. 
 9    I would be happy to respond to any questions the Board
10    or staff may have.
11                      Thank you.
12                      THE CHAIRMAN:  Thank you,
13    Mr. Ronayne.
14                      Questions from staff?
15                      MS O'REILLY:  I have just one
16    question.  I hope it is not unfair.  It is based on the
17    background reports that accompanied your submission.
18                      On page 22 of that report, just at
19    the end of the first paragraph, it says:
20                           "Under the spot price mechanism,
21                           customers will see actual
22                           average market prices, and to
23                           the extent that small customers
24                           have consumption patterns
25                           similar to their class load
26                           profiles, these prices will
27                           reflect their consumption
28                           choices." (As read)

                                                          104
                                        RONAYNE, presentation
 1                      I was wondering if that statement
 2    meant that the establishment of load profiles based on
 3    customer classes is a necessary condition to ensure
 4    that the spot market pass-through mechanism is a fair
 5    mechanism?
 6                      MR. RONAYNE:  I can't speak for Gene
 7    Meehan and Anne Selting on this particular point, but I
 8    will give you the benefit of my level of knowledge, if
 9    that's okay.
10                      Load profiling, if I can understand
11    the question there, it's whether load profiling is
12    necessary for a spot price pass-through mechanism to
13    work well?
14                      MS O'REILLY:  Whether that would be
15    the appropriate way, I guess, for small customers to be
16    able to understand their own average consumption.
17                      MR. RONAYNE:  I would say that, yes,
18    understanding what your own load profile would be would
19    be something that would be of use to consumers.  They
20    would be able to understand perhaps that at peak during
21    your average day, say when everybody is coming home and
22    turning on all the appliances and the lights and
23    everything else, that your electricity -- that the
24    actual price of electricity is going to be higher at
25    that particular point in time.
26                      The difficulty is load profiling and
27    all of these things have their greatest benefit in the
28    context of a real time metering situation, where you

                                                          105
                                        RONAYNE, presentation
 1    can actually see what the prices are that you are
 2    providing, or that you are actually paying at any
 3    particular point in time.
 4                      The benefits tend to decline as you
 5    move further and further away from that particular
 6    signal.  Now, there is one level of movement away,
 7    which is moving to a monthly spot price pass-through
 8    mechanism, and then there are other movements away
 9    which are going to fixed price options.  These
10    provide -- while you may have some kind of incentive as
11    a conscientious consumer of energy, knowing what your
12    load profile is to try to cut down during peak periods
13    in order to lower overall costs, there is no direct
14    incentive to do that under any of these mechanisms. 
15    But that's not a fault of spot price pass-through
16    mechanism monthly based.  That's just the realities of
17    the existing metering capabilities.
18                      So I guess I am making a short answer
19    long.  I think there are benefits certainly in
20    providing the load profiles, but the financial
21    incentives don't necessarily match up directly with
22    that under any of these proposals.
23                      MS O'REILLY:  I am not sure that I
24    understood what you mean by your very last statement. 
25    What I meant by "load profiling methodology" is
26    something that as a residential consumer is consistent
27    with other residential consumers.  Some would show,
28    generally, when I would be using my power, as opposed

                                                          106
                                        RONAYNE, presentation
 1    to just one price for all customers.
 2                      MR. RONAYNE:  I think for any --
 3                      MS O'REILLY:  Or one load profile for
 4    all customers.
 5                      MR. RONAYNE:  I think load profiling
 6    to some extent is just a fundamental requirement for
 7    restructuring if you are going to start putting price
 8    signals in place.
 9                      You will have to do a certain amount
10    of load profiling, otherwise you will just have a lot
11    of issues around essentially cross-subsidization. 
12    Those that have good load profiles, they tend not to be
13    I guess "peaky," if you want to call it, will end up
14    paying the same amount of power as those who are -- the
15    same price as though who are "peaky".  If you want to
16    do this right and if you want to start having people
17    paying the proper price for power, then you have to
18    start load profiles.
19                      MS O'REILLY:  Thank you.
20                      MEMBER HIGGIN:  I would just like to
21    ask you your views and I guess your assumptions
22    regarding the Market Power Mitigation Agreement and how
23    that relates to your views on the spot price
24    pass-through mechanism.
25                      First of all, dealing with what
26    assumptions are you making regarding both the cap,
27    shall we call that, and also what kind of volatility
28    may occur within the cap over the period of the year

                                                          107
                                        RONAYNE, presentation
 1    and then there is other, quotes, "10 per cent" which is
 2    not subject to the cap, and how that may impact on the
 3    spot price mechanism and on consumers.  Can I just try
 4    to get your assumptions.
 5                      It is on pages 29 and 30 of your
 6    submission.  This is the basic views, but if I could
 7    just get the benefit of your views on those issues.
 8                      MR. RONAYNE:  I think 29 and 30 would
 9    be Gene Meehan and Anne Selting's background report,
10    which I can't say for sure the way they viewed this is
11    exactly the same as I do.  This was developed as
12    background information analysis for our position, very
13    good background analysis.
14                      My own view is this and there was a
15    discussion in the Technical Conference, and if you have
16    read the transcript I went through actually a series of
17    questions with Seabron Adamson around what could happen
18    as far as volatility in the spot market price
19    pass-through under the market power mitigation
20    agreement.
21                      One of the points brought up there
22    was that if there are some periods of time during which
23    Ontario Power Generation has market power, and there
24    are other times when they don't have market power, in
25    order to get to the 3.8 cent average they may exercise
26    that market power in let's say a stronger fashion
27    during those periods when they have more market power.
28                      It is not clear, however, that that

                                                          108
                                        RONAYNE, presentation
 1    will happen.  To determine whether they will just have
 2    market power just about at any time they want, or
 3    whether it will be at particular points in time, would
 4    require a very careful analysis of the actual market
 5    conditions.
 6                      So I don't really have an assumption
 7    about how that is going to play out in the market down
 8    the road.  But what we are saying here is that either
 9    way that doesn't -- whether they take average prices,
10    in which case the spot market price is going to be
11    level and it is not going to be volatile, or whether
12    they in fact have to take higher prices during periods
13    when they have very strong market power, there is a
14    good argument for a spot price pass-through mechanism,
15    or at least in one instance the arguments for a
16    fixed-price mechanism are weaker.
17                      In the other instance you have an
18    argument in favour of a spot market price pass-through
19    mechanism, which is that some demand side response can
20    act as a constraint against the exercise of market
21    power during those periods.
22                      MEMBER HIGGIN:  Do you have any
23    comments on the, quotes, "10 per cent," the other 10
24    per cent and how much volatility could occur with that
25    portion of the IMO administered market?
26                      MR. RONAYNE:  I think there has been
27    a lot of discussion around the market power mitigation
28    agreement and not a real good analysis of what exactly

                                                          109
                                        RONAYNE, presentation
 1    it will do.
 2                      The 10 per cent is a projected 10 per
 3    cent.  It is not a fixed 10 per cent.
 4                      To say that Ontario Power Generation
 5    will have an incentive, will always get 10 per cent
 6    from -- will always have 10 per cent of its supply
 7    unregulated is really not the case.
 8                      It may actually be zero per cent and
 9    it may actually be 20 per cent, depending on what
10    happens in the marketplace.
11                      A key part that maybe is
12    misrepresented or not understood in the market power
13    mitigation agreement is that 90 per cent is estimated
14    beforehand.  So in a sense you can take that out of the
15    equation.  If Ontario Power Generation tries to take
16    too much power out of the marketplace, they are still
17    responsible for 90 per cent projected at 3.8 cents. 
18    They will have to pay the higher market price in order
19    to obtain that.
20                      So in a sense there has been an
21    argument that the market power mitigation agreement is
22    not going to work and prices will be high, particularly
23    for that 10 per cent, or whatever it is and for other
24    market service providers.
25                      I don't think that is necessarily the
26    case and I would like to see a really good analysis to
27    establish that.
28                      But on back of that, I don't see how

                                                          110
                                        RONAYNE, presentation
 1    providing a fixed price approach is really going to
 2    deal with that market power.  If it exists and Ontario
 3    Power Generation has that market power, it is kind of
 4    difficult for me to see how a fixed price approach is
 5    somehow going to get rid of it.
 6                      Really, you should address it in a
 7    more direct fashion.
 8                      MEMBER HIGGIN:  Thank you very much,
 9    Mr. Ronayne.
10                      THE CHAIRMAN:  I had a question, in
11    the last page of your short brief, or at least the
12    concluding remarks.  You refer to the price volatility
13    and there is concern about that that could be managed
14    by allowing budget billing.
15                      Help me understand, if you will, the
16    difference between budget billing and smoothing of spot
17    market prices.
18                      MR. RONAYNE:  The key difference is
19    that the price that you pay for the commodity under
20    budget billing is the monthly price pass-through and
21    that's what you see.  That's the price signal that you
22    get.  If you economize you can economize on that
23    monthly price.
24                      With a smoothing mechanism the price
25    signals become more jumbled.  This is my understanding. 
26    You are losing the benefit really of a clearer price
27    signal, a monthly price signal, by going to, say, a
28    three month smoothing mechanism, as opposed to relying

                                                          111
                                        RONAYNE, presentation
 1    on budget billing and not interfering with that monthly
 2    price signal.
 3                      THE CHAIRMAN:  Thank you.
 4                      I think that concludes the
 5    questioning.
 6                      Thank you, gentlemen, for your
 7    submissions this morning.
 8                      MR. RONAYNE:  Thank you.
 9                      THE CHAIRMAN:  Is Mr. Janigan in the
10    audience?
11                      MR. JANIGAN:  Yes, I am,
12    Mr. Chairman.
13                      Certainly we would be prepared to go
14    after lunch.  If it is possible that we could have
15    until 2:15 on that.  Would that be unreasonable?
16                      MS O'REILLY:  Could you make it by
17    2:00?
18                      MR. JANIGAN:  We will compromise at
19    2:00.  That would be fine.
20                      THE CHAIRMAN:  Agreed.  Thank you.
21                      Then we will convene once again at
22    two o'clock this afternoon.
23                      Thank you very much.
24    --- Lunch recess at 1242
25    --- Upon resuming at 1410
26                      THE CHAIRMAN:  Good afternoon. 
27    Please be seated.
28                      We are here this afternoon to hear

                                                          112
                                        RONAYNE, presentation
 1    first from the Vulnerable Energy Consumers Coalition.
 2                      Mr. Janigan, do you want to lead it
 3    off and introduce your colleagues?
 4    PRESENTATION
 5                      MR. JANIGAN:  Yes.  Thank you very
 6    much, Mr. Chair.
 7                      I am present here today with John
 8    Todd of Econalysis Consulting who has presented the
 9    alternate proposal that is before the Board today.
10                      In dealing with this presentation I
11    was struck by the similarity in my position to one
12    which Alan Fotheringham frequently -- or a line that
13    Alan Fotheringham frequently uses that he feels like
14    Zsa Zsa Gabor's eighth husband:  I know what I'm
15    supposed to do but I don't know if I can make it
16    interesting.
17                      However, given that stricture, we
18    believe that this exercise is primarily in conformity
19    and in furtherance with the Electricity Act's
20    objectives that are contained in section 1, in
21    particular section 1(a), (c) and (d) of the Electricity
22    Act.  In particular:
23                           "to facilitate competition in
24                           the generation and sale of
25                           electricity and to facilitate a
26                           smooth transition to
27                           competition".  (As read)
28                      We have some very practical concerns

                                                          113
                                   JANIGAN/TODD, presentation
 1    in light of the necessity to facilitate a smooth
 2    transition to competition.  We have been to school in
 3    some respects on the experience in telecommunications,
 4    particularly in the encouragement or the opening up of
 5    the long distance market for competition, particularly
 6    among low volume residential consumers.
 7                      Our centre recently did a study on
 8    the impact of the introduction of long distance
 9    competition among residential consumers and found that
10    over five years after long distance competition was
11    introduced most residential customers had stayed with
12    the incumbent supplier, notwithstanding that most of
13    them were paying rates that were in excess of what was
14    offered -- substantially in excess of what was offered
15    by the competitors and, in fact, most of those
16    customers that had stayed -- and this was approximately
17    87 per cent of the residential market -- had seen no
18    discounts.
19                      This situation only began to change
20    in 1998, primarily as a result of competitive pressures
21    to market a range of the telecom services to the
22    customer.  We have seen over the last year or so in
23    telecommunications a rapid decline in long distance
24    rates, to the effect that long distance service is now
25    a loss leader among telecommunication services.
26                      However, this is illustrative of the
27    fact that market power of an established incumbent is
28    real, it is a real phenomenon, and customer inertia is

                                                          114
                                   JANIGAN/TODD, presentation
 1    real, particularly with an established player.  It must
 2    be recognized that a significant majority of customers
 3    in this particular circumstance will elect to stay with
 4    their current distributor.
 5                      Customers also appear to value the
 6    choice to stay with their old supplier.  In a survey
 7    that was done for our centre by Angus Reid in June of
 8    this year of 1,500 Canadians, 93 per cent agreed that
 9    customers should be allowed to stay with their existing
10    supplier if they want to.
11                      The restructuring of the electricity
12    industry has largely gone forward as a result of
13    government and industry-driven pressures.  There has
14    been little impetus from the residential market, with
15    the exception, perhaps, of the consumer elites for
16    change.  The expectations among the consumer market
17    that had been raised are largely that the change will
18    be beneficial and we will see that change in terms of
19    prices.
20                      In the survey I recently referred to,
21    69 per cent of respondents in the survey stated,
22    however, they were not well informed to make decisions
23    about switching companies offering electrical service. 
24    Notwithstanding that fact, 71 per cent felt that the
25    issue of choice was important.
26                      We are concerned with this very
27    confusing picture that is presented by the views of
28    customers.  We are concerned that any process put in

                                                          115
                                   JANIGAN/TODD, presentation
 1    place to provide standard supply not add to the
 2    confusion or provoke resentment over the end results.
 3                      We are not anxious to see the
 4    consumer participation concerns and the
 5    misrepresentation in part that have accompanied the
 6    penetration of competition in natural gas repeated in
 7    the electricity field.
 8                      Interestingly enough, the survey
 9    results for the reasons why respondents have switched
10    natural gas suppliers report that 6 per cent said they
11    were misled and 8 per cent said they weren't informed. 
12    These kinds of results will not be acceptable for
13    electricity.
14                      Now, before we discuss the proposals
15    before the Board there are some general questions, some
16    of a collateral nature, some going to the heart of this
17    proceeding, that we would like to address.
18                      We would ask you not to go down the
19    road of revising the terms of the Affiliates
20    Relationship Code.  There are important consumer
21    protection principles that are implicit in the ARC that
22    will be unravelled by any process that does not give
23    primacy to consumer protection and privacy.
24                      Principally we are referring to
25    section 2.5.7 involving the transfer of customers to
26    affiliate without written consent.  The provision
27    associated with written consent reflects basic -- very
28    basic thinking on privacy codes, including the CSA

                                                          116
                                   JANIGAN/TODD, presentation
 1    model code which has been incorporated into Bill C-54
 2    which is before the Parliament today.
 3                      It should not be compromised, nor
 4    should there be any attempt to compromise those
 5    sections that involve the levelling of the playing
 6    field.
 7                      Secondly, we have read and commented
 8    upon the submissions previously made in this proceeding
 9    by Municipal Electric Association, submissions to the
10    effect that the Board is without jurisdiction to
11    approve this Code.
12                      The argument involves the
13    manipulation of section 29 and section 78 to arrive at
14    a result that the 250 MEUs must propose any rate before
15    the Board can approve it.
16                      We have read this analysis and we
17    would suggest that this is a dog chasing its own tail. 
18    We believe that the Board's actions in this matter
19    constitute a code-making under section 73 of the
20    OEB Act and, in any event, section 129(1)(b) provides
21    for an interim order that is not time limited as
22    suggested by the MEA.
23                      To submit that the legislation is not
24    concerned with default customers we believe is flawed
25    given the wording of section 29(1) and, further, the
26    wording of section 78(4) and section 78(3) on its face
27    emphasizes the difference between rate-setting
28    customers under a section 29 order.

                                                          117
                                   JANIGAN/TODD, presentation
 1                      We suggest that the jurisdictional
 2    challenge accordingly be dismissed.
 3                      Further with respect to the proposals
 4    that are before the Board, the Board staff, a so-called
 5    straw man spot price pass-through proposal, has been
 6    presented and, in fairness, it is a model which has
 7    several commendable features.
 8                      Number one, it is market based.
 9                      Number two, it is easily calculated
10    and can be implemented without much regulatory to-do.
11                      However, in all fairness to it, it
12    is -- and in all fairness, I suppose, to the current
13    leader of the Progressive Conservative Party -- it is
14    the Joe Clark of proposals.  It is, no one is extremely
15    wild about it, but it appears to have the least
16    detrimental qualities and commends itself accordingly.
17                      We are concerned about what it
18    doesn't do.  It is not transparent and sends no price
19    signal to the customer.  The customer pays after the
20    event occurs -- after the monthly price events occur.
21                      There are potential volatility
22    problems.
23                      A study by Econalysis in June of 1999
24    that was filed in this proceeding by ENERconnect shows
25    that electricity prices are much more volatile than
26    gasoline prices.  Customers currently buy gas in what
27    is, in effect, a spot market for gasoline at the pump. 
28    Study after study have shown that the pump price

                                                          118
                                   JANIGAN/TODD, presentation
 1    changes effectively mirror the commodity price changes.
 2                      Notwithstanding this fact there have
 3    been at least five investigations triggered by
 4    political and consumer pressure by the Competition
 5    Bureau, and recently, as recently as last year, a call
 6    to arms by that noted market interventionist, the
 7    current Premier of Ontario, in reaction to a gasoline
 8    price spike.
 9                      We are concerned that a similar
10    problem may occur with respect to electricity pricing
11    which may have a similar if not more strenuous outcry
12    if in fact the effects of price volatility are not
13    muted.
14                      Yes, as we have noted, the problem
15    may be mitigated in part with monthly averaging and
16    bill payment programs, but the likelihood of consumer
17    dissatisfaction with price spikes is high.
18                      You may note that in the recent
19    outcry the consumer complaints did not seem to be
20    mollified by the fact that lockstep decreases in
21    gasoline prices had proceeded the current increases.
22                      As well, the spot price pass-through
23    does nothing to develop an intermediate market for
24    electricity, as we have outlined in our paper, which we
25    believe is important enabling consumers to allocate
26    price risk.
27                      Our proposal involves a bidding
28    process which the utility would operate and would ask

                                                          119
                                   JANIGAN/TODD, presentation
 1    for bids on a number of options to supply standard
 2    supply.  There is no risk for the distributor, it
 3    enables the customers to know what price they are
 4    paying in advance, and it sends a forward price signal
 5    that enables customers to modify behaviour.  In
 6    addition, it may offer an opportunity for customers to
 7    get a better price or deal through the bidding process,
 8    particularly if there is co-ordination between
 9    utilities and the bidding process.
10                      There have been a number of
11    criticisms that have been levelled at this proposal
12    during the course of the proceedings and I would ask
13    Mr. Todd to deal with some of the more trenchant of
14    those criticisms.  They include problems associated
15    with -- anticipated problems associated with regulatory
16    oversight; lack of homogeneity among different
17    utilities offering the SSS offering; as well, what
18    happens if nobody bids or the bid is problematic.
19                      I will ask Mr. Todd to deal with this
20    section.
21    PRESENTATION
22                      MR. TODD:  Good afternoon.
23                      Firstly, to comment on the regulatory
24    burden issue or oversight required, I would submit that
25    there in fact is not much regulatory burden involved.
26                      The bidding process would be the test
27    of reasonableness of the prices being charged.  They
28    would not require explicit oversight of the Board,

                                                          120
                                   JANIGAN/TODD, presentation
 1    except to establish, within the Code presumably,
 2    requirements for the bidding process to ensure that it
 3    is well publicized so there can be a number of
 4    competitive bids come in; to ensure that sufficient
 5    information is available to potential bidders regarding
 6    load profiles of the municipality in which they are
 7    bidding; and other information so they can make a
 8    competitive bid, that type of thing.
 9                      By providing a reasonable opportunity
10    for the competitive bids to come in, the market will
11    determine the price and there will be no more need to
12    regulate the price itself than there would be for the
13    Board to regulate the direct purchase market.
14                      In essence, the proposal is giving
15    customers access to the competitive marketplace in a
16    more cost-effective way than having to rely on
17    door-to-door sales or large advertising campaigns.
18                      In conclusion, my view is that the
19    regulatory burden issue is not an issue at all in this
20    proceeding.
21                      Second, there have been suggestions
22    that prices may differ across MEUs.
23                      I would like to point out that under
24    the spot price pass-through the price that customers of
25    any MEU will pay will depend on the average load
26    profile of customers in that particular MEU.  So an MEU
27    that has a large proportion of electric customers --
28    electric heating customers, for example, because there

                                                          121
                                   JANIGAN/TODD, presentation
 1    is no natural gas in the area -- would have a different
 2    load profile than, say, the City of Toronto or other
 3    areas where gas service is available.
 4                      Customers consume electricity
 5    differently in different jurisdictions.  Therefore the
 6    profile of the purchases from the spot market of an MEU
 7    will differ for different MEUs and, therefore, the
 8    average price that they are passing through to
 9    customers will differ across MEUs.
10                      So the issue of prices varying across
11    MEUs is there regardless of the approach being taken.
12                      Similarly, with the bidding process
13    proposed one of the relevant factors in making bids
14    will be the average load profile of customers in a
15    particular MEU area and therefore bids, one would
16    expect, will differ.
17                      Third, there has been an issue raised
18    with respect to the timing of when bids would be made. 
19    There is concern, obviously, that if every MEU in the
20    province is looking at the same entry date, the
21    intermediate market could be overloaded in terms of
22    trying to accommodate that, and that would cause
23    failures probably of the secondary market.
24                      Clearly, there should be some
25    flexibility within the MEUs in terms of the timing of
26    introducing the bidding process and making offers
27    available to the customers spread through the year.
28                      Fourth, there has been some

                                                          122
                                   JANIGAN/TODD, presentation
 1    suggestion that there might be a risk that there would
 2    be no bids.
 3                      First of all, I should say that is
 4    probably unlikely in the Ontario case.  There are a
 5    number of parties, coalitions of municipal electric
 6    utilities, OBGI, other external bodies such as
 7    Hydro-Qu‚bec, that display some interest in the
 8    marketplace, as well as existing marketers and a number
 9    of international trading companies, all of whom would
10    see this as an opportunity to establish themselves in
11    the Ontario market.
12                      If there is in fact nobody who is
13    prepared to make offers to customers through this
14    vehicle, which is a very low cost way to make a product
15    offering to customers, it would say something about
16    competition in the market generally.  I would be rather
17    fearful that if a high cost way of marketing is the
18    only way to bring competitive alternatives to the
19    marketplace, there would be even fewer alternatives
20    available.
21                      In the worst case alternative,
22    clearly there would have to be a failsafe, if you want,
23    given the Market Power Mitigation Agreement.  It would
24    be quite reasonable to have a failsafe which would have
25    a fixed price offered by the utilities, such as 3.8
26    cents, with a variance account.  That gets into some of
27    the administrative complexities that would best be
28    avoided.

                                                          123
                                   JANIGAN/TODD, presentation
 1                      As I say, this would be envisaged as
 2    a failsafe only, which is very unlikely to have to be
 3    called upon.
 4                      That addresses the four issues raised
 5    by Mr. Janigan.
 6                      MR. JANIGAN:  Thank you. 
 7    Mr. Chairman.  That in essence concludes our
 8    presentation.  We think our model both meets the
 9    criteria that was set out by Board staff in the paper,
10    as well as the objectives set out in the Act.
11                      We would be happy to entertain any
12    questions on our proposal.
13                      THE CHAIRMAN:  Thank you very much.
14                      Questions?
15                      MS O'REILLY:  I have some very short
16    questions.
17                      In your model, Mr. Todd, you have the
18    distributor acting as a consignment retailer, choosing
19    certain suppliers.  Once they have chosen, would other
20    suppliers or other retailers be able to compete in that
21    market?  What value would you see them providing, other
22    new retailers providing, that wouldn't be provided
23    through the distributor?
24                      MR. TODD:  There would be no
25    prohibition on other marketers coming in offering
26    alternatives.  In order not to shut out the competitive
27    non-SSS marketplace, my suggestion was that the SSS
28    offers would be limited to one-year time frames.

                                                          124
                                   JANIGAN/TODD, presentation
 1                      If this market were to go the route
 2    of the natural gas market, alterative suppliers could
 3    have two-, three-, five-year pricing arrangements, not
 4    necessarily fixed for that term, but could be pre-set
 5    rates for each year within that term.  So they would be
 6    able to offer distinct products to the marketplace and
 7    attempt to compete.
 8                      Clearly, just looking at marketing
 9    costs, comparing marketing costs, it would be difficult
10    to compete with this form of SSS offer head-on, a
11    one-year price versus a one-year price.  That is one of
12    the attractions from the customer's perspective.
13                      If the goal of this exercise is to
14    bring value to customers, price advantages, we should
15    be giving them access to the competitive market in the
16    most cost-effective way.  We believe that this does
17    that and at the same time allows marketers to solicit
18    customers at any time with other pricing mechanisms.
19                      MS O'REILLY:  The experts engaged by
20    the Competition Bureau suggested the possibility of two
21    types of standard supply methodology where the larger
22    customers would see the spot price pass-through and
23    smaller customers would be offered a fixed rate.
24                      I wondered if you could comment on
25    that type of proposal.
26                      MR. TODD:  I think it would be quite
27    reasonable to have a standard supply service for
28    residential customers as a fixed rate and a spot price

                                                          125
                                   JANIGAN/TODD, presentation
 1    for the large volume market.  Experience in other
 2    jurisdictions with electricity, as well as experience
 3    with gas in Ontario and elsewhere and in
 4    telecommunications, suggests that for larger volume
 5    customers it was worth investing more in getting
 6    knowledgeable in the marketplace, in understanding the
 7    options.  There is less confusion in that end of the
 8    market.
 9                      Therefore, a first implication of
10    that is that there is a much higher tendency to go to
11    direct purchase options in any case and making the SSS
12    kind of irrelevant for large volume customers.
13    Secondly, they would be better able to deal with a spot
14    price pass-through, understand what it is, and seek
15    alternatives if they don't like it.
16                      MS O'REILLY:  Thank you.
17                      MEMBER HIGGIN:  Did you relate your
18    options to the options that the LDC has to provide
19    standard supply service directly, affiliate and third
20    party?
21                      I take it that your bidding process
22    would be a direct mechanism; i.e., the LDC would look
23    for a third party.  Is that bypassing or not the
24    affiliate?  That is the question.
25                      MR. TODD:  As far as I am concerned,
26    there is no requirement to bypass the affiliate.  The
27    affiliate presumably could be entitled to bid along
28    with anybody else, provided the bidding process was

                                                          126
                                   JANIGAN/TODD, presentation
 1    fully transparent and that there was no opportunity for
 2    skewing the result in favour of the affiliate.  The
 3    lowest price is the lowest price.
 4                      MEMBER HIGGIN:  I presume in your
 5    model the ultimate supply is from the wholesale market
 6    by whoever is going to be the supplier, right?
 7                      That is the source.  It will come
 8    from the wholesale market?
 9                      MR. TODD:  Yes, which could be
10    ultimately from the IMO or --
11                      MEMBER HIGGIN:  Or bilateral or any
12    other arrangement.
13                      MR. TODD:  Yes.  It could be a new
14    generation plant.
15                      MEMBER HIGGIN:  Where in your model
16    does the co-operative buying approach -- if we talk
17    about ENERconnect, for example, as a co-operative for a
18    number of utilities.  How does that fit with your
19    process and the procurement process, the bidding and
20    the approval of the bidding process?
21                      MR. TODD:  It would not fit tidily
22    with all of the arrangements that ENERconnect appears
23    to have that basically buying groups could sponsor the
24    bidding process and co-ordinate it.
25                      For example, they could put out a
26    single set of RFPs in a way that they feel would work
27    best.
28                      One thing I mentioned earlier was the

                                                          127
                                   JANIGAN/TODD, presentation
 1    staggering of the bids for different municipalities.  A
 2    buying group might say:  "Okay, what we are going to do
 3    is take our 100 members and we will spread those out
 4    through the year in order to enable the secondary
 5    market to serve it as efficiently as possible."
 6                      So the ENERconnect organization as a
 7    partnership would be in a position to manage that
 8    process.  They could prepare the bidding documents on a
 9    standardized basis for everybody.  They could make the
10    whole process much more efficient, ensure that it
11    complies with any Board directives, and implement the
12    entire process in an efficient way.
13                      It clearly could not serve as a
14    procurement organization itself except through, in
15    effect, an affiliate of the group in terms of supplying
16    power to the individual members because we can't
17    designate who procures the power.  It would be done
18    through the bidding process.
19                      MEMBER HIGGIN:  Just come back then
20    to the regulatory burden, we will call it, associated
21    with your model.  In a nutshell, what can you see as
22    being the key elements or the key parts of the
23    regulatory approval process?
24                      You seem to suggest, for example,
25    standard terms and conditions of contracting as
26    something that the Board should "approve" as part of
27    the model.  Are we only, in your view, looking
28    retrospectively at the result?  Does one regulate based

                                                          128
                                   JANIGAN/TODD, presentation
 1    on following a process or on the result?
 2                      MR. TODD:  It would be regulated on
 3    the basis of the process, which would be perhaps
 4    contained in the relevant code or codes.  Bidding is a
 5    very standard form.  There are lots of government
 6    requirements for bidding processes in terms of
 7    disclosure of relevant information, making sure that
 8    parties are fully aware of it, publicizing how to find
 9    out about it.
10                      There may be certain protection
11    clauses that should be in, such as reserving the right
12    to reject all the bids if they all come in at 10 cents
13    a kilowatt-hour, or if they are unreasonable or if
14    there are hints of any bid rigging that has gone on. 
15    You know, those types of --
16                      MEMBER HIGGIN:  One would expect the
17    3.8 cents --
18                      MR. TODD:  One would expect it would
19    probably be pretty close to the 3.8 cents in the first
20    three years, which is one of the treats or advantages
21    that we have.  In effect, we have three years of a
22    transition to evolve into a competitive pricing
23    structure.
24                      This mechanism might help get players
25    into the marketplace and get, shall we say, any
26    problems in the procedure worked out over that
27    three-year period before the markets really opened up
28    to wider variances in prices.

                                                          129
                                   JANIGAN/TODD, presentation
 1                      MEMBER HIGGIN:  The advocates of the
 2    spot price or the spot market say that it is if not
 3    necessarily the lowest available price, it is an
 4    available and reasonably low priced.  What do you think
 5    will be the difference relative to that criterion?
 6                      MR. TODD:  One would expect,
 7    according to economic principles, that the spot price
 8    will average out to be the lowest price in the long
 9    run.  In any particular year, it may or may not be the
10    lowest price.
11                      Over the long haul, there should be a
12    premium paid for removing the risk of having a fixed
13    price.  Customers don't like risk, and by and large
14    customers are prepared to pay for the removal of their
15    risk or the reduction of their risk.
16                      I would say that certainly we cannot
17    know in advance for any particular year that the spot
18    price would be lower.  We would expect it to be lower
19    in the long run, but they are different products: spot
20    price versus a fixed price product.
21                      The important thing is that whatever
22    fixed price products are out there have a competitively
23    determined price.  One concern we have is that by
24    market mechanisms on their own, there may be few
25    competitors in many regions of the province that are
26    actively out there trying to sell their product to
27    customers, and there may not be enough competitive
28    behaviour to ensure that the pricing itself is really a

                                                          130
                                   JANIGAN/TODD, presentation
 1    competitively determined price.
 2                      This bidding process comes as close
 3    as you can to being assured that at least one fixed
 4    price product that is made available to customers will
 5    be priced through effective competition.  And that will
 6    serve as a good reference point for all fixed price
 7    pricing.
 8                      MEMBER HIGGIN:  Thank you very much.
 9                      THE CHAIRMAN:  Thank you.
10                      Mr. Todd, do you think that if you
11    had the bidding process as opposed to the spot price
12    pass-through, there would be greater variance in the
13    price that ratepayers would pay in different parts of
14    the province under the bidding process rather than the
15    pass-through?
16                      The reason I asked the question is
17    whether or not the size of the utility would give the
18    kind of buying power that a smaller utility would not
19    have.
20                      MR. TODD:  Well, first of all, in
21    entering the secondary market, the intermediate market,
22    it may actually be an advantage to being smaller in
23    that there will be less risk for the supplier in taking
24    on a relatively small block of power, and there may be
25    a larger risk premium if somebody was going to serve
26    Toronto Hydro and was required to accept all customers
27    that accepted their bid.
28                      In fact, when you get to extremely

                                                          131
                                   JANIGAN/TODD, presentation
 1    large entities like that, it may be necessary to have
 2    the right to limit the number of people who accept an
 3    offer.  But I would not expect that the buying power
 4    issue would be significant because of the role of
 5    ENERconnect and other such organizations that would be
 6    able to, in effect, put together a number of smaller
 7    MEUs, if they wanted to, into a package and perhaps let
 8    market producers bid on them as a block if they are
 9    cohesive.
10                      In addition, I think that market
11    players will at least be coming in and looking at the
12    market as a whole and they will probably be approaching
13    Ontario as a single market and instead of knocking on
14    single doors of customers, they will be knocking on
15    single doors of MEUs and picking up, you know, 100 or a
16    1,000 or 10,000 customers at a shot.
17                      THE CHAIRMAN:  That is assuming it
18    was the MEU that would be receiving the bits?
19                      MR. TODD:  They are receiving the
20    bits, but the issue is the people who will be making
21    the bids are going to be knocking on the doors of the
22    MEUs, in effect, as access to the customers, but I
23    think they are still going to be pricing fairly
24    consistently, and I would expect the price to be driven
25    primarily by load profile differences across MEUs. 
26    There is no guarantee of that, but that would be my
27    expectation of behaviour in the marketplace.
28                      THE CHAIRMAN:  Thank you.

                                                          132
                                   JANIGAN/TODD, presentation
 1                      There are no more questions,
 2    Mr. Todd, Mr. Janigan.  Thank you very much.
 3                      MR. JANIGAN:  My pleasure.
 4                      Are we to make submissions with
 5    respect to costs at a later date in the proceeding or
 6    should we make them now?
 7                      THE CHAIRMAN:  Let me talk to my
 8    colleagues here, for a minute.
 9    --- Pause
10                      THE CHAIRMAN:  Yes, we think that,
11    because we haven't got all the "T's" crossed and "I's"
12    on that issue, yet, ourselves, you document your costs
13    and get it on the record that it is your intention to
14    apply for costs.
15                      MR. JANIGAN:  Thank you, Mr. Chair.
16                      On behalf of the Vulnerable Energy
17    Consumers Coalition, we would then make the application
18    for an award of costs associated with our participation
19    in this proceeding.  We believe that our participation
20    has been responsible and we hope that it is of
21    assistance to the Board in making its decision.
22                      THE CHAIRMAN:  Thank you very much.
23                      Is the Upper Canada Energy Alliance
24    prepared to forge ahead?  Would you introduce
25    yourselves, please.
26    PRESENTATION
27                      MR. RICHARDSON:  Yes.  My name is Jim
28    Richardson.  I am representing the Upper Canada Energy

                                                          133
                            RICHARDSON/FERGUSON, presentation
 1    Alliance, along with my colleague, Mr. Paul Ferguson.
 2                      Before we get started, I am going to
 3    hand out a copy of some slides that we prepared which
 4    is based on the paper that we presented to the Board on
 5    July 5th.  There are copies of the slides on the
 6    sideboard and I will now pass these to the Board.
 7    --- Pause
 8                      MR. RICHARDSON:  We are just going to
 9    use these slides to guide our discussion through the
10    paper.
11                      I just want to give a bit of
12    background into myself and Mr. Ferguson.
13                      We have been in the utility business
14    for a number of years:  personally, myself, 13 years as
15    a general manager of a municipal electric utility.  I
16    was a member of the Market Design Committee and I am
17    currently a member of the IMO's technical panel.
18                      Mr. Ferguson has had 22 years in the
19    business:  12 years with Ontario Hydro; he then came
20    over from the "dark side" to "the force" and has had 10
21    years with Newmarket Hydro; he has been involved at
22    FERC, led a delegation down to FERC; and a former
23    associate member of MPCC.  So, certainly, members of
24    the Alliance have significant background in the
25    electricity industry.
26                      We have always felt, as municipal
27    electric utilities, that we represent the consumers of
28    the province, especially the residential and the small

                                                          134
                            RICHARDSON/FERGUSON, presentation
 1    commercial customers.  Most of the decisions we have
 2    been making over the last years and the decisions we
 3    are making today we feel to be in the best interest of
 4    the customers.  In fact, most of us, certainly Paul and
 5    myself, and the people we report to, were elected by
 6    the customers in the areas that we served to represent
 7    those customers and those are the bases of the
 8    decisions we make, in the best interests of the
 9    customers.
10                      The Upper Canada Energy Alliance was
11    formed in 1998.  It currently has a membership of
12    Markham, Vaughn, Richmond Hill, Newmarket, Aurora,
13    Innisfil, North Bay, Orillia, Georgina and
14    Whitchurch-Stouffeville Hydro Electric Commission.  The
15    group was established to position itself to capture
16    scale benefits for its member LDCs in all aspects of
17    the new electricity market.
18                      We are a formal group.  We are not an
19    ad hoc group that have been put together for this
20    specific purpose.  It is a formal group.  This group
21    currently has negotiated some contracts with suppliers,
22    and they are signed.
23                      The primary focus is to provide wider
24    services -- standard supply is certainly one of them;
25    standard supply administration is another -- and any
26    other services which exhibit some scale benefits for
27    the members.
28                      A secondary focus would be to provide

                                                          135
                            RICHARDSON/FERGUSON, presentation
 1    modest retail offerings, such as green offering -- one
 2    of our members has a green generating facility -- and a
 3    fixed-rate offering if that is not available in a
 4    standard service supply.
 5                      My colleague Mr. Ferguson will talk
 6    about three issues, this afternoon:  electricity
 7    pricing, supply procurement, and third-party
 8    limitations.
 9                      I will now turn this over to
10    Mr. Ferguson to make those presentations.
11    PRESENTATION
12                      MR. FERGUSON:  Thank you.
13                      I guess the main point in electricity
14    is we look at it as a bit different, a commodity, and
15    maybe that's right or wrong, being in the business, but
16    it is truly intangible.  You can't store it, you can't
17    see it.  Basically, the difference is with electricity
18    it's like no other:  by the time you need it you have
19    already used it.
20                      For that reason, we find that people
21    really relate to how they use it and the cost for the
22    use.  I don't think they appreciate they are buying
23    electricity; they are buying to keep the television or
24    the lights on or to cook a meal.  They relate, then, to
25    the cost for the use, how much it costs them to do a
26    particular task.  For that reason, we feel that it is
27    really the load shape or how you use it that is the
28    prime driver in the market pricing.

                                                          136
                            RICHARDSON/FERGUSON, presentation
 1                      For that reason we don't believe that
 2    consumers will relate to a single standard price
 3    offering based on provincial usage or the spot market. 
 4    We can't see, under spot market pass-through, how
 5    consumers -- that they just won't become education in
 6    the nature of the commodity price mechanism.  The
 7    events that created the price will be long gone by the
 8    time they receive the price signal.  Pricing should
 9    account for habitual and acquired usage patterns.  Many
10    customers have changed their usage patterns to fit new
11    rate regimes and adapted to those; and under spot
12    pass-through, they might find that all that work they
13    did to adopt to a new price regime will have been
14    basically worthless, that they will lose their
15    indicator on the price.
16                      I guess the thing is the lights will
17    always stay on, it is just how much you had to pay for
18    it at the end of the day.
19                      In terms of the consumer, we strongly
20    feel that deregulation should not result in any
21    withdrawal of services that people presently enjoy.  I
22    guess the one I like to use is telecommunications where
23    when they deregulated -- I have a Scottish mother that
24    was phoning home Sunday night when it was the cheapest,
25    and you could always count on that even after
26    deregulation.  What we found was the competition was
27    expected to improve on existing services and pricing.
28                      For this reason, we come back to the

                                                          137
                            RICHARDSON/FERGUSON, presentation
 1    idea that usage patterns are the prime factor in
 2    electricity cost.  If you only use in the off-peak, you
 3    have low cost.  All but the very largest of electric
 4    consumers have adapted to fixed-rate rather than spot
 5    market usage patterns.  There are some that have
 6    adopted alternative rate regimes and modified their use
 7    to match.  An example would be residential time of use
 8    and thermal storage heating.
 9                      The basic idea, thought, is consumers
10    must be able to relate their use of their electric
11    bill.  They can't relate anybody else's use or anybody
12    else's bill.  It is how they used it and what they had
13    to pay for it.
14                      I think it has been a common theme,
15    through the technical conference, that consumer
16    education and commodity pricing is essential to a
17    successful retail market.  This is also a point that
18    comes up in spot pass-through where it is felt it sends
19    some type of a price signal to the consumers.
20                      We feel that education can only be
21    achieved by sending very basic, read-simple price
22    signals to all consumers, and they have to be very
23    basic to understand.  We also feel that consumers are
24    entitled to continuance of the electric pricing and
25    related services they enjoy today without active market
26    participation.
27                      In terms of the spot pricing, we
28    believe it should be an option for those requesting it. 

                                                          138
                            RICHARDSON/FERGUSON, presentation
 1    There will be active market participants of all sizes
 2    who will expect to be able to see spot pricing, if you
 3    like, fixed-rate regimes, our insurance for the
 4    inability or disinterest in modifying usage patterns
 5    and market volatility, but there will be
 6    non-participants, and there will be non-participants by
 7    choice.  If you like, the increase in cost is an
 8    insurance premium that has to be paid if you want that
 9    insurance.  We strongly feel, though, only the consumer
10    should decide their level of market participation.
11                      In terms of supply procurement, there
12    is a number of different strategies laid out in the
13    technical conference -- we will save time and not go
14    through them here.  I guess the bottom line is we feel
15    the Alliance is capable of this function, in whatever
16    form was brought out by the technical conference, and
17    we are preparing to shop the wholesale electric market,
18    if not for our standard supply needs, then for our
19    retail needs.
20                      One of our concerns with the standard
21    supply code is the third-party limitations.  In terms
22    of transfer of consumers, we feel there are other
23    sections of the draft standard supply code, there are
24    conditions in the distribution licences and the
25    Affiliates Relationship Code intended to deal with just
26    this issue and we would recommend a lighter-handed
27    approach in the standard supply.
28                      With respect to confidentiality of

                                                          139
                            RICHARDSON/FERGUSON, presentation
 1    consumer information, our concern is we are sorting out
 2    what information needs to be confidential, be it
 3    consumption history, the payment history, addresses and
 4    phone numbers or the nature of the consumer.
 5                      We feel that consumption history is
 6    only valuable to the consumer.  It goes back to the
 7    idea of it being a commodity price to use.  The
 8    consumer who knows their use, through their
 9    consumption, has valuable information.  The payment
10    history is, of course, truly confidential.  Any other
11    data is already readily available, through a phone book
12    or a Chamber of Commerce.
13                      In terms of a level playing field,
14    then, we believe that the payment history should, and
15    must, be confidential.  However, we are unaware of what
16    valuable marketing information we have as an LDC.
17                      In terms of cross-subsidies, given
18    that the standard supply is at a regulated rate, we
19    don't see significant opportunity for a cross-subsidy.
20                      The result that we see from the
21    third-party limitations contained in the draft Code is
22    really no better consumer protection resulting.  The
23    other thing it will do is create a general reluctance,
24    or even inability, for third parties to provide
25    standard supply service and generate the scale
26    economies envisaged by the OEB staff.
27                      Ultimately, standard supply is a
28    declining business opportunity.  Be it one year, three

                                                          140
                            RICHARDSON/FERGUSON, presentation
 1    years, or five years, it is a declining opportunity. 
 2    The regulatory limitations proposed on other
 3    electric-related business opportunities may be too
 4    significant to overcome and, as a third party, you may
 5    not be able to generate a viable business plan because
 6    you would simply be limited to a declining business
 7    opportunity.
 8                      In closing, I guess under the
 9    previous monopoly structure, Ontario Hydro and the MEUs
10    we felt we were responsible for public policy and
11    generally did a good job of it.
12                      In the new market we fully recognize
13    that it is this Board's responsibility, and that public
14    policy is one of the key issues in standard supply. 
15    This is probably the one issue that everybody will hear
16    about, whereas an affiliate code or a distributor's
17    licence, I haven't seen any articles in the paper on
18    that yet and don't expect to.
19                      We feel, though, we do bring some
20    valid customer perspectives and we trust they are
21    valuable in your deliberations.  If you have got any
22    money left over at the end of the day we will take that
23    too, being new capital.  Thank you.
24                      THE CHAIRMAN:  Thank you very much
25    for your presentation.
26                      Questions from staff?
27                      MS O'REILLY:  I just have one
28    question and that's about, I guess, the number of rates

                                                          141
                            RICHARDSON/FERGUSON, presentation
 1    that you are proposing.
 2                      I think it might be clearer in your
 3    slide presentation than it was in the initial thing,
 4    but are you looking at essentially two rates, that an
 5    LDC would have one that's fixed and then an optional,
 6    if someone asks, spot price, or are you talking about a
 7    whole series of different rates?  I am not sure.
 8                      MR. FERGUSON:  From our perspective
 9    the ideal would be the rate options that exist today,
10    which would be a fixed residential and a fixed general
11    service rate.
12                      I guess people do have time of use,
13    which we would relate to spot pricing today.  I would
14    see no value in a separate or a fixed time of use rate. 
15    You would move people on the spot, but probably in
16    those two areas.  Large users we are indifferent to at
17    this point anyway.
18                      MS O'REILLY:  Thank you.
19                      THE CHAIRMAN:  If the local utility
20    offers the fixed price, which is quite a raging debate,
21    how do you see the competitive market burgeoning, if
22    you will, outside the LDCs for the retail of
23    electricity?
24                      MR. RICHARDSON:  Certainly, if the
25    LDC is offering a fixed price, and we would see it more
26    as an annual fixed price, the customer is, of course,
27    free to leave at their choice.  We see the retail
28    market offering different options for them, some longer

                                                          142
                            RICHARDSON/FERGUSON, presentation
 1    term deals, three years, two years, five years,
 2    whatever, at a fixed price, so the customer knows that
 3    I can be locked in for a longer period of time.
 4                      Certainly green power would be a
 5    retailing option, maybe different forms of time of use
 6    rates or some different spins on the spot prices or
 7    something like that just packaged together with other
 8    types of services.
 9                      THE CHAIRMAN:  But would you put
10    restrictions on the offerings of the --
11                      MR. RICHARDSON:  What do you mean by
12    restrictions on it?
13                      THE CHAIRMAN:  Length of contract,
14    other services that they would offer with it as a
15    package.
16                      MR. RICHARDSON:  Yes.  We see the LDC
17    in the standard supply as just electricity.
18                      THE CHAIRMAN:  Only.
19                      MR. FERGUSON:  I guess to add to
20    that, personally, if I was a retailer I would like to
21    see the LDC's offer a fixed price because that gives me
22    a bogey to shoot at.
23                      THE CHAIRMAN:  Okay.  Any other
24    questions?
25                      Dr. Higgin.
26                      MEMBER HIGGIN:  Just on questions of
27    procurement policies dealing with the price options.
28                      Do you feel there should be or should

                                                          143
                            RICHARDSON/FERGUSON, presentation
 1    not be any restrictions on procurement by the LDCs as
 2    to where and how and, if so, where are the bounds with
 3    respect to procurement?
 4                      Also, just as a subset of that, if
 5    you happen to have local generation, as some of your
 6    members do, for example, how do you fit that into the
 7    overall picture on the procurement side?
 8                      MR. FERGUSON:  I think in terms
 9    of --  the Alliance is looking at provision of standard
10    supply on behalf of the LDC.
11                      In terms of procurement by the LDC, I
12    think we would share the concerns expressed by many of
13    the risk and such.  Unless there is a portfolio
14    management services or some way to deal with it, I
15    think it was explained at the Technical Conference,
16    where you would have to be very aware of risk in terms
17    of the actual LDC.
18                      In terms of the third party, I
19    believe as long as they can satisfy requirements that
20    the LDC would have to place on them to ensure they are
21    getting a reliable supply, the third party should be
22    free to source that in whatever manner they see fit.
23                      But clearly, the LDC, I would expect
24    that the Board would have to set some definite
25    guidelines on the amount of risk and such that they
26    could ever take because they are ultimately providing
27    that service.
28                      I am not even going to attempt to

                                                          144
                            RICHARDSON/FERGUSON, presentation
 1    discuss the local generation issue because, quite
 2    frankly, I haven't followed it closely.  That is one
 3    member the Alliance has looked at using that generation
 4    in a retail sense, not in a standard supply sense.  I
 5    guess from an Alliance perspective we feel that is the
 6    best fit for that generation, to bring it into the
 7    retail market.
 8                      MEMBER HIGGIN:  Okay.  I assume that
 9    answers.  Thank you very much.
10                      THE CHAIRMAN:  Mr. Richardson and
11    Mr. Ferguson, thank you for your submission on behalf
12    of Upper Canada Energy.  We appreciate it.  I did
13    assume that your comment about costs was meant to be on
14    the record.
15                      MR. RICHARDSON:  A formal request,
16    yes.
17                      THE CHAIRMAN:  Thank you.
18                      Next we have the HVAC Coalition,
19    Mr. Mondrow.  Welcome to the hearing.  We look forward
20    to your comments.
21                      MR. MONDROW:  Thank you,
22    Mr. Chairman.  Good afternoon, Panel Members.
23                      Ms Lea just stepped next door to pull
24    me out.  I was just in the JDR where I have been,
25    although I have had one ear open to this room and,
26    obviously, I have been watching your schedule today as
27    it has collapsed somewhat.
28                      Martin Limus, who is HVAC Coalition's

                                                          145
                            RICHARDSON/FERGUSON, presentation
 1    case manager had, as of yesterday at least, intended to
 2    be here this afternoon and a bit early vis-a-vis the
 3    initial schedule, but he is not here yet.
 4                      My request is simply whether it might
 5    be appropriate to take a short break, and I apologize
 6    for that delay, just five minutes.  I will call and
 7    find out where he is and if he is not imminently
 8    arriving I am certainly prepared to proceed.  I will
 9    get my stuff from the other room and be ready to go
10    when you get back, if that would be acceptable.
11                      THE CHAIRMAN:  Yes.
12                      MS LEA:  The other thing,
13    Mr. Chairman, which might be possible, depending on how
14    much inconvenience it will cause to other persons, is
15    if there is anyone who wishes to proceed early who is
16    present and able to do so, perhaps they could make
17    themselves known to Board staff.  Thank you.
18                      THE CHAIRMAN:  I am a little nervous
19    about moving tomorrow's into today because of people's
20    schedules and other people who might want to be here
21    for them, that's all.
22                      MS LEA:  That's very true.
23                      MR. MONDROW:  I should say,
24    Mr. Chairman, that Mr. Limus didn't have an active role
25    to play in the primary submission.  He was simply going
26    to be on hand in the event that the members had any
27    questions specifically related to the HVAC industry
28    which he might be better placed to answer, but I think

                                                          146
                            RICHARDSON/FERGUSON, presentation
 1    I know enough about it to handle those.  I will
 2    certainly try as best I can, so we are not prejudiced
 3    at all by his not being here.
 4                      THE CHAIRMAN:  Let's take a short
 5    break now then and we will come back in at 3:15.
 6                      MR. MONDROW:  Thank you very much,
 7    sir.
 8                      THE CHAIRMAN:  Thank you.
 9    --- Upon recessing at 1505
10    --- Upon resuming at 1517
11                      THE CHAIRMAN:  Please be seated.
12                      Mr. Mondrow, are you in good shape?
13    PRESENTATION
14                      MR. MONDROW:  I am in good shape.
15                      Thank you, Mr. Chair, for your
16    indulgence.
17                      Martin Limus is still behind his desk
18    I am informed, so I flagged him not to get on the road
19    and I will certainly be happy to deal with any
20    questions that might come up.
21                      Thank you very much for slotting
22    HVAC Coalition into this proceeding.
23                      We have kept a relatively low profile
24    in this proceeding so far in keeping, in our view, with
25    our -- I will use the word limited ability to add to
26    the debate, and I will expand on that in a moment.
27                      We really have a very specific focus
28    and it might assist if I just put on the record at this

                                                          147
                                        MONDROW, presentation
 1    point who HVAC Coalition is in describing its interest
 2    in the proceedings.  Now, the Board will be aware of
 3    most of this so I will be, of course, very brief.
 4                      As noted in our Notice of
 5    Intervention, HVAC Coalition represents wholesalers and
 6    manufacturers of what I will term "HVAC appliances" --
 7    heating ventilation and air conditioning -- and the
 8    contractors who sell and support those appliances and
 9    related energy services.  I will come back to the
10    concept of energy services in a moment.
11                      HVAC Coalition's concerns in
12    proceedings before this Board in general over the past
13    number of years have focussed on the impacts of the
14    activities of regulated utilities on the energy
15    services marketplace, and in particular on the
16    competitive implications of the utilities and their
17    affiliates engaging in the provision of goods and
18    services into the energy services marketplace in
19    Ontario.
20                      The Standard Supply Service Code will
21    govern the association between competitive businesses,
22    both those of affiliates and non-affiliates of the LDCs
23    and a regulated supply of electricity to the extent
24    that there are third party suppliers.  I realize that
25    is a live issue in the proceeding, but it is from that
26    context that HVAC Coalition's interest arises.
27                      The potential standard supply service
28    third party providers are and will increasingly, in our

                                                          148
                                        MONDROW, presentation
 1    view, be selling competitive energy services in the
 2    broader sense of the word -- again, I will come back to
 3    that word in a moment -- but, if nothing else, in our
 4    view energy services that will be sold by these third
 5    parties will include HVAC goods and services sold into
 6    the marketplace in Ontario.
 7                      HVAC Coalition is concerned with the
 8    rules to preclude cross-subsidies, and we will outline
 9    cross-subsidies both direct and indirect -- and I will
10    come back to that as well in a moment --
11    cross-subsidies between the regulated standard supply
12    service and the competitive energy services
13    marketplace.
14                      Now, HVAC Coalition has not reviewed
15    the positions and submissions of other participants
16    with respect to the detailed mechanics of a standard
17    supply service.  We are not best placed to design
18    alternatives.  There are others before you who are very
19    interested and very knowledgeable about those types of
20    mechanics, so we will not make submissions on those
21    detailed mechanical issues.
22                      We are here today to urge the Board
23    to, in their consideration of those detailed mechanical
24    issues and the suggestions of the other parties
25    involved, bear in mind a principle that HVAC Coalition
26    submits is essential to preclude cross-subsidy, both
27    direct and indirect.  That principle I will state
28    colloquially as follows:  The mechanics of standard

                                                          149
                                        MONDROW, presentation
 1    supply service procurement and provision should be a
 2    matter internal to the LDC.  I will explain what we
 3    mean by that.
 4                      To start the explanation, in our
 5    submission there are two parts or sides, if you will,
 6    to application of that principle.  Both go to a third
 7    party supplier's appropriate role in the context of
 8    standard supply service.
 9                      One side is that a third party
10    standard supply service supplier should be masked from
11    the utility customer.
12                      The other side is that the utility
13    customer who is on standard supply service should be
14    masked from the third party supplier.
15                      The first part, the masking of the
16    supplier from the customer, precludes, for example,
17    cross-subsidy of the third party supplier through
18    access to LDC customer information.
19                      The second part, the masking of the
20    customer from supplier precludes what I have referred
21    to and will now talk about as indirect cross-subsidy.
22                      In a nutshell, indirect
23    cross-subsidy, in our view, arises from imparting a
24    false customer perception that the third party supplier
25    is, by virtue of affiliation with a regulated supply
26    alternative, is better qualified than other competitive
27    suppliers in the marketplace or subject somehow to
28    regulatory oversight or simply a better supplier of

                                                          150
                                        MONDROW, presentation
 1    what are competitive energy goods and services in
 2    addition to the standard supply service.
 3                      Central to HVAC Coalition's concerns
 4    in the process going on before you today are concepts
 5    that are crystallized in two oft used, perhaps almost
 6    over used terms, "competition" and "convergence".  It
 7    is trite to say that competition is a central tenant of
 8    the restructuring of Ontario's electricity market and
 9    the objective of enhancing competition, of course, has
10    also driven the natural gas market restructuring and
11    continues to drive developments in that marketplace.
12                      Of course, there is much talk of
13    convergence of these two related markets, electricity
14    and natural gas, into what is beginning to be termed an
15    energy services marketplace.
16                      Most other parties have dealt with
17    the issue of competition in their submissions.  There
18    is much on the record on the issue of competition in
19    the generation and retailing of the commodity.  There
20    is the pricing issue, spot pass-through versus fixed
21    pricing leading to or precluding, in some parties'
22    views, competition in generation, and there is
23    restriction on third party suppliers of standard supply
24    service competing in the retail end of the market.  It
25    is the latter concern that HVAC Coalition is here to
26    talk about today.
27                      Now, when I refer to competition I
28    would like to adopt a part of the submission of the

                                                          151
                                        MONDROW, presentation
 1    Commissioner of Competition.  At page 5 of that
 2    submission the Commissioner refers to this concept of
 3    the level playing field.  I think the first paragraph
 4    under that heading on page 5 of the submission
 5    crystallizes the issue very nicely.  I will just take a
 6    moment to read that.
 7                      The Commissioner writes:
 8                           "In all markets there will be
 9                           some businesses that are more
10                           effective competitors than
11                           others.  Providing a level
12                           playing field should not be
13                           about establishing equality
14                           among them, rather it should
15                           concern providing a market
16                           framework within which all firms
17                           thrive or fail on the basis of
18                           their ability to meet consumers
19                           demand at the best combination
20                           of price and product terms. 
21                           Only where such conditions exist
22                           will the efficient allocation of
23                           output among competing suppliers
24                           be possible and consumer
25                           benefits be maximized." 
26                           (As read)
27                      HVAC Coalition would like to adopt
28    and endorse the Commissioner's characterization of the

                                                          152
                                        MONDROW, presentation
 1    level playing field issue.  Crucial to that, in our
 2    view, is not that all parties be treated equally, but
 3    rather that all parties thrive or fail on the basis of
 4    their ability to meet customer's demands.
 5                      I have referred a couple of times to
 6    the energy services marketplace and I would just like
 7    to spend a moment on that term and then, once I am
 8    through the terms, I will be able to, hopefully,
 9    succinctly put the principle that we are espousing in
10    the proceedings.
11                      As noted in our alternative proposal
12    submitted for the purposes of the Technical Conference
13    discussion and, as well, in our summary submission
14    before you today, HVAC Coalition believes that the
15    market is not simply the commodity market but rather is
16    an energy services market.
17                      HVAC Coalition would urge the Board
18    to broaden application of the principle that it is
19    presenting today -- again the principle being mechanics
20    of standard supply service procurement and provision
21    should be a matter internal the LDC -- to apply that
22    principle to the full range of energy goods and
23    services.
24                      In the Affiliates Relationship Code
25    of the Board energy services are defined through the
26    definition of an energy service provider.  That
27    definition in that Code means:
28                           "a person other than a utility

                                                          153
                                        MONDROW, presentation
 1                           involved in the supply of
 2                           electricity and gas and related
 3                           activities, including retailing
 4                           of electricity, marketing of
 5                           natural gas, generation of
 6                           electricity, energy management
 7                           services, demand side management
 8                           programs an appliance sales,
 9                           service and rentals."  (As read)
10                      It is that definition as a spring
11    point that HVAC Coalition intends in its proposed
12    broadening of provision 2.2.5 in the Standard Supply
13    Service Code.
14                      As our summary submission urges,
15    HVAC Coalition would see provision 2.2.5 of the
16    Standard Supply Service Code broadened by addition at
17    the end of the provision of wording to include:
18                           "...any other energy related
19                           goods or services."  (As read)
20                      So that the preclusion of the third
21    party standard supply service provider would be
22    engaging in marketing of electricity or gas or any
23    other energy related goods or services in the
24    distributor's licensed service territory.
25                      So energy services in that context
26    would include not only the energy commodity, which
27    really is the output from one or more fuel inputs, but
28    also HVAC goods and services and energy management

                                                          154
                                        MONDROW, presentation
 1    services and related goods which, in turn, spring from
 2    the essential HVAC appliances.
 3                      It should be clear by now, I hope,
 4    what HVAC's interest is in the proceedings and why we
 5    are urging the extension that we are.
 6                      I would like to come back to the
 7    issue of cross-subsidies for a moment.
 8                      The parties in this proceeding have
 9    focussed on the cross-subsidy risk posed by the
10    association of regulated and competitive activities in
11    two respects.
12                      Parties have talked about direct
13    monetary cross-subsidy of marketplace competitors,
14    including LDC affiliates providing standard supply
15    service, the shifting of costs dilemma or potential.
16                      Parties have also talked about
17    informational cross-subsidy of third party standard
18    service providers, essentially through preferential
19    access to LDC customer information by the third party
20    provider.
21                      HVAC Coalition shares both of these
22    concerns, but wishes to highlight a third area of
23    concern with respect to the third party supplier, and
24    this is what I have termed "indirect cross-subsidy".
25                      Essentially the concept that we are
26    trying to relate hinges on the matter of a customer's
27    perception.
28                      More specifically, we are concerned

                                                          155
                                        MONDROW, presentation
 1    about the potentially anti-competitive implications of
 2    a lack of information and/or a misinformation on the
 3    part of the customer or in the customer's mind on the
 4    status and role of a third party standard supply
 5    service provider.  The concern is that there will be a
 6    perceived affiliation or identity with the LDC, subject
 7    to certain safeguards, which affiliation or identity
 8    perception connotes an implicit endorsement by the
 9    regulated entity and, indeed, in the minds of
10    customers, potentially even by the regulator of the
11    third party, not only with respect to standard supply
12    service but with respect to other energy marketplace
13    goods and services.
14                      This is what I am referring to as an
15    indirect cross-subsidy, that is an implicit
16    preferential direction of customers essentially by the
17    LDC.  That, of course, if it were a danger, which we
18    believe it is, would compromise the issue of the
19    customer remaining contestable, which is central to the
20    restructuring the Market Design Committee's report and
21    the legislation around that.
22                      So let me try to bring this back to
23    the principle which HVAC Coalition is putting before
24    you, which is that standard supply service procurement
25    and provision to end users should be a matter internal
26    to the LDC.
27                      Again I refer you to the submissions
28    of the Commissioner of Competition in respect of this

                                                          156
                                        MONDROW, presentation
 1    issue of masking of the third party, preventing this
 2    indirect cross-subsidy.  This time I would like to read
 3    one paragraph from page 9 of the Commissioner's
 4    submissions.
 5                      The Commissioner offers these
 6    comments in the context of third party billing for
 7    standard supply service, and the Commissioner's
 8    submissions include the following:
 9                           "The Competition Bureau concurs
10                           with the concern expressed in
11                           the Board Staff discussion paper
12                           at page 9 that companies billing
13                           activities for regulated
14                           standard supply service not
15                           cross-subsidize or discriminate
16                           in favour of their competitive
17                           activities.  For this reason the
18                           Bureau generally supports the
19                           restriction in the Standard
20                           Supply Service Code requiring
21                           standard supply service
22                           providers to restrict
23                           references, if any, to retailers
24                           in related bills to the relevant
25                           distributor.  This restriction
26                           is consistent with the statutory
27                           responsibility for the provision
28                           of standard supply service which

                                                          157
                                        MONDROW, presentation
 1                           rests with the distributor." 
 2                           (As read)
 3                      In our submission, Mr. Chair and
 4    Members of the Panel, the danger that the Commissioner
 5    is here referring to is what I have been called this
 6    "indirect cross-subsidy issue".  It is the issue of a
 7    customer's perception of exactly who this third party
 8    standard supply service provider is who, is in the end,
 9    providing to them what is essentially a regulated
10    service.
11                      Now, there are a number of draft
12    Standard Supply Service Code provisions that attempt to
13    address the principle that the standard supply service
14    procurement and provision to end users should be a
15    matter internal the LDC.
16                      The draft starts with this in the
17    "Purpose" section, section 1.1, which makes it clear
18    that the conditions in the Code apply to distributors,
19    that is, this is a utility service, and that must be
20    borne in mind.
21                      Then section 1.5 of the Standard
22    Supply Service Code, which deals with the hierarchy of
23    codes, underscores -- this is the draft Code, of
24    course -- the preeminence of the Affiliates
25    Relationship Code.
26                      Just turning for a moment to the
27    Affiliates Relationship Code, in section 1.5 of that
28    Code, under the heading Hierarchy, the Affiliates

                                                          158
                                        MONDROW, presentation
 1    Relationship Code provides that:
 2                           "The Affiliates Relationship
 3                           Code shall prevail over any
 4                           other code established by the
 5                           Board where there is a conflict,
 6                           subject to any specific
 7                           conditions of a distributor's or
 8                           transmitter's licence."
 9                           (As read)
10                      The Board has already seen fit to
11    protect preeminently the danger posed by a relationship
12    between a regulated service and a competitive service,
13    and that is precisely what we are talking about here. 
14    I think the hierarchy specified in the Affiliates
15    Relationship Code and cross-referenced in the other
16    codes, including the draft Code before you, underscores
17    the importance of that that the Board has already
18    adopted.
19                      Further in the Affiliates
20    Relationship Code -- and I won't go through each of
21    these -- sections 2.5.1 through 2.5.3 deal with this
22    issue of essentially direction or preferential
23    direction of customers by an LDC expressly or
24    implicitly to an affiliate.  In this case, potentially
25    to a non-affiliated standard supply service third party
26    provider.
27                      Those sections preclude the
28    endorsement of an energy services affiliate and

                                                          159
                                        MONDROW, presentation
 1    preclude the direction, implied or direct, of customers
 2    to that affiliate.
 3                      Those principles, as is recognized in
 4    both codes, should, in our view, remain preeminent when
 5    the Board is considering the submissions of other
 6    parties with respect to the Code before it today.
 7                      Coming back then to the Standard
 8    Supply Service Code, there are the marketing
 9    restrictions which you have heard about and will hear
10    about from other parties, sections 2.2.4 and 2.2.5,
11    which also aim at protection of the principle that HVAC
12    Coalition has put before you.
13                      Further, there is the confidentiality
14    of customer information provision, provision 2.4.2; and
15    there are the billing provisions which preclude
16    reference to the retailer, the third party retailer,
17    2.7.2, and preclude the inclusion of any marketing
18    information in the bill, provision 2.7.3.
19                      We flag these issues at this point to
20    urge the Board, when considering the submissions of
21    other parties with respect to each of these provisions,
22    which in our view are inserted to protect the principle
23    that we are concerned with, to consider that principle
24    as we are positing it before you in evaluating whether
25    any alteration to the draft Code is warranted.
26                      There are pricing and procurement
27    issues as well, of course, centrally dealt with in the
28    draft Code.  They are complex issues, and as stated at

                                                          160
                                        MONDROW, presentation
 1    the outset we will leave these issues to other parties. 
 2    There are a lot of other interests at play.
 3                      We would ask the Board to bear in
 4    mind the principle that we have posited in evaluating
 5    the options put forward by the parties.
 6                      I would like to leave you with three
 7    additional comments on the substance of the matters
 8    before you:  first of all, the marketing restriction
 9    proposed in the Code with respect to the LDC's licensed
10    territory.
11                      There is no limitation proposed in
12    the Code on retailing a full range of energy, goods and
13    services by the standard supply service provider in
14    other territories, of course.  So that should be
15    considered as somewhat mitigating any disadvantage that
16    might accrue to a third party standard supply service
17    provider from the restriction.
18                      Further to that, and as pointed out
19    again by the Commissioner of Competition, the
20    restrictions on the third party standard supply service
21    provider might well be, and perhaps should be, intended
22    as an interim measure, that is, protection of the
23    market as it develops, as the transitions occur.
24                      The Commissioner has in fact
25    recommended that these measures be adopted and retained
26    pending establishment of a fully competitive market. 
27    So if there is any disadvantage accruing to the third
28    party standard service provider, it is presumably one

                                                          161
                                        MONDROW, presentation
 1    that is limited in time.
 2                      Thirdly, in our view the perceptual
 3    problem that we have been attempting to crystallize is
 4    most acute with residential and small commercial
 5    customers.  Large institutional and industrial
 6    customers have a lot more resources, and there is a lot
 7    more at stake for them in investigating ultimate
 8    suppliers, and are likely to discern in the end the
 9    distinctions between a third party even supplying on
10    contract a utility service and the utility itself.
11                      So it may be quite appropriate for
12    this Board to consider, if it deems that a marketing
13    restriction is appropriate, limiting that restriction
14    as it were to the most vulnerable -- in terms of lack
15    of information or lack of resources to track down
16    further information -- of customers, who in our view
17    are the residential and small commercial customers.
18                      I would conclude then, Members of the
19    Board, with an adoption of the last paragraph in the
20    Commissioner's submissions before you, which is found
21    at page 10.  HVAC Coalition would like to endorse these
22    words as well.
23                      The Commissioner submits that a key
24    consideration in the transition to open and effective
25    electricity sector competition in Ontario will be in
26    ensuring that businesses do not obtain undue
27    competitive advantages merely through their role in
28    providing standard supply service.  To prevent this

                                                          162
                                        MONDROW, presentation
 1    possibility, the Competition Bureau supports the
 2    proposed Standard Supply Service Code marketing
 3    restrictions on standard supply service providers and
 4    provisions on third party billing.
 5                      HVAC Coalition feels the same way and
 6    submits that the mechanics of standard supply service
 7    procurement and provision should be a matter internal
 8    to the LDC, and submits that provision 2.2.5 of the
 9    draft Code should be broadened to include other energy
10    related goods or services, as those goods or services
11    are currently contemplated in the Affiliates
12    Relationship Code for electricity LDCs.
13                      If you have any questions, I would be
14    happy to address them.  I thank the Board very much for
15    giving us the time to address them.
16                      THE CHAIRMAN:  Thank you,
17    Mr. Mondrow.
18                      Are there any questions?
19                      Ms O'Reilly.
20                      MS O'REILLY:  I have just one, which
21    is related to the notion of energy services.  I
22    wondered if you could tell me whether you would
23    consider demand management that would be mandated by
24    the Board to be a utility service.
25                      MR. MONDROW:  I think the best answer
26    to that that I can give is again with reference to the
27    Affiliates Relationship Code, which includes demand
28    side management programs in the concept of energy

                                                          163
                                        MONDROW, presentation
 1    services as defined through the definition of energy
 2    service provider.
 3                      I think that demand side management
 4    actually highlights the issue that HVAC Coalition is
 5    attempting to crystallize here.  Demand side management
 6    is perhaps something, in some respects, different from
 7    the other energy services provided in the marketplace. 
 8    When mandated by the Board, they are activities that
 9    require a push and so presumably require a lot of
10    contact and convincing of the customer to do something
11    that is not immediately apparently of financial benefit
12    to the customer.
13                      In that context, the highlighting of
14    the provision of this service on behalf of the LDC, and
15    with the mandating of the Board, is perhaps not so
16    injurious to competition as with a much broader
17    provision of standard supply service to really the
18    lion's share of customers at the time of market
19    opening.
20                      I think DSM presents the same
21    concerns.  Perhaps it is easier to deal with them on a
22    one-off basis.  But I think the default rules should be
23    yes, demand side management programs should be caught
24    in the restriction, subject to specific direction from
25    the Board in the DSM context with respect to customer
26    education and content.
27                      MS O'REILLY:  Thank you.
28                      THE CHAIRMAN:  If there are no

                                                          164
                                        MONDROW, presentation
 1    questions -- I'm sorry, Dr. Higgin has one.
 2                      MEMBER HIGGIN:  You were here I think
 3    when Canada Alliance made their presentation.  They
 4    didn't explicitly talk about their internal relations.
 5                      Basically, how do you view then some
 6    of these restrictions on, let's talk about, marketing
 7    of energy services in an LDC when in fact you can have
 8    a group of utilities that provide those services,
 9    perhaps as a group, to the ten -- we can use that as a
10    number -- territories and the restriction is very
11    specific to the LDC?
12                      MR. MONDROW:  I haven't examined the
13    proposal in detail, but it strikes me that to be true
14    to the principle that HVAC Coalition is espousing, the
15    marketing or public representations in any specific
16    service territory would have to exclude the member of
17    the coalition or the group, as it were, that is
18    licensed in that territory.
19                      That would be the approach that we
20    would, as a matter of concept, urge.  How that would
21    work in terms of the mechanics of the group, I haven't
22    thought through, but it would present a problem.
23                      The staff has limited the proposed
24    marketing restriction to the licensed territory, which
25    we believe gets precisely at the problem, which is this
26    customer perception.
27                      So I don't think that problem is
28    solved by having five or ten names of LDCs, when one of

                                                          165
                                        MONDROW, presentation
 1    the names is still the LDC in the service territory.
 2                      MEMBER HIGGIN:  It could fall on the
 3    collective energy service company amongst the ten of
 4    them.
 5                      MR. MONDROW:  Yes.
 6                      MEMBER HIGGIN:  Would it create a
 7    rather unique situation in how the Code would apply to
 8    that group?
 9                      MR. MONDROW:  It would.  Frankly, I
10    would have to think through the mechanical implications
11    of that.  I guess the public perception concern has to
12    do with advertising or making a public show of the
13    relationship using the LDC's name.  If this group were
14    to adopt another name and not publicize this
15    relationship to the licensed distributor in a
16    particular area, the principle that we are espousing
17    wouldn't be offended.
18                      There are internal affiliate
19    relationship issues of course to deal with, but the
20    external principle would be preserved in that case.  So
21    it is really a question of how this consortium would
22    market, and precluding it from advertising or making it
23    known that it provides standard supply service.  It
24    provides the utility servicing in the territory where
25    it is doing the marketing.
26                      The combination of the utilities for
27    the purposes of being an efficient and economic energy
28    service provider in itself isn't offensive.  It is

                                                          166
                                        MONDROW, presentation
 1    merely the way it is publicized in connection with any
 2    standard supply.
 3                      I don't know if that addresses the
 4    question.  I would certainly review that proposal
 5    again.
 6                      MEMBER HIGGIN:  Anyway, I just think
 7    we will probably expect some unique groupings,
 8    particularly for standard service, we know, and then
 9    also probably for energy service provisions: water
10    heater rentals and others.
11                      It seems to me that extending the
12    restrictions beyond the service territory gets into
13    those difficulties.  Boundaries are across the road,
14    you know.
15                      MR. MONDROW:  Yes.  It is certainly
16    not HVAC's proposal to extend the restriction beyond
17    the service territory, but I suppose the suggestion
18    that is being made is that a coalition of any use would
19    potentially in effect extend that restriction beyond
20    the service territory -- although presumably that is a
21    matter that they could attempt to deal with in
22    structuring how they are going to carry on their
23    business as well.
24                      It is really up to the third party
25    provider coming forward to be cognizant of at least the
26    interim restrictions on their activities and make an
27    economic choice about whether standard supply is better
28    for them or retail marketing is better for them.

                                                          167
                                        MONDROW, presentation
 1                      I am not sure that the Code should be
 2    moulded to fit those desires so much as the plan should
 3    be moulded to fit the appropriate rules.
 4                      MEMBER HIGGIN:  Thank you.
 5                      THE CHAIRMAN:  Mr. Mondrow, thank you
 6    for your submission and for your flexibility in
 7    presenting it earlier than had originally been
 8    scheduled.  We appreciate it.
 9                      MR. MONDROW:  It was my pleasure. 
10    Thank you, sir.
11                      THE CHAIRMAN:  That is the final
12    presentation for today.  Tomorrow morning we are
13    scheduled to start at 9:00 with GPU, and then at 10:00
14    with Enron Capital.
15                      Those two parties have requested the
16    right to switch their presentations, so that coming
17    first would be Enron Capital and Trade Resources, and
18    secondly would be GPU, representing a number of
19    clients.  We will proceed in that way tomorrow morning,
20    starting at 9:00 a.m.
21                      Thank you all very much for your
22    attendance today and your presentations.  We are
23    adjourned.
24    --- Whereupon the hearing adjourned at 1550,
25        to resume on Tuesday, August 10, 1999
26        at 0900