168 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 Tuesday, August 10, 1999, 22 commencing at 0906 23 24 VOLUME 2 25 26 27 28 169 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 28 170 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 28 171 1 INDEX OF PROCEEDINGS 2 PAGE 3 Presentation by Mr. Aleck Dadson 172 4 Presentation by Mr. Seabron Adamson 180 5 Presentation by Mr. Robert Power 218 6 Presentation by Mr. Allen 247 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 172 1 Toronto, Ontario 2 --- Upon resuming on August 10, 1999 3 at 0906 4 THE CHAIRMAN: Good morning, ladies 5 and gentlemen. Welcome to the hearing. 6 This morning I believe there is an 7 agreement that Enron and GPU have switched places from 8 the schedule. That was an agreement? 9 MR. DADSON: Yes, Mr. Chairman. 10 THE CHAIRMAN: So we will proceed 11 with that and Enron Capital & Trade Resources Canada 12 will do the first presentation. So if you would 13 introduce yourselves, we can begin. 14 PRESENTATION 15 MR. DADSON: Thank you very much, 16 Mr. Laughren. 17 My name is Aleck Dadson. I am with 18 Enron Capital & Trade Resources Canada Corp. in 19 Toronto, and I am responsible for Enron's regulatory 20 affairs and government affairs in Canada. 21 With me today, on my left is Mark 22 Gelowitz, our counsel at Osler Hoskin & Harcourt who 23 has assisted with the legal analysis of the relevant 24 provisions of the Electricity Act and the Ontario 25 Energy Board Act that you see in our submissions. 26 On my right is Mr. Seabron Adamson, 27 President of Frontier Economics in Cambridge, 28 Massachusetts. Mr. Adamson has assisted a number of 173 DADSON/ADAMSON/GELOWITZ, presentation 1 stakeholders and participants in these proceedings, 2 including ourselves, with respect to the assessment of 3 the initial proposals from Board staff and in 4 developing an alternative which, in our view, meets the 5 objectives of a standard service supply offering and is 6 consistent with the Act. 7 Hopefully, you have Mr. Adamson's 8 reports, his CV, his presentation, or the slides he 9 used at his presentation at the Technical Conference, 10 the transcripts and our submissions. 11 Our objective in the half hour we 12 have this morning is really threefold. I want to 13 briefly review four features of the legislative 14 framework which I believe are relevant, particularly 15 relevant to the Board's determination of the issues 16 before it. 17 Secondly, we want to respond to some 18 of the comments made by other parties regarding our 19 proposal. The comments in particular to which we wish 20 to respond are those of the Vulnerable Energy Consumers 21 Coalition, the Competition Bureau and Energy Probe. 22 The third thing we wish to do is 23 revisit the steps involved in implementing the type of 24 yardstick regulation that Mr. Adamson has outlined in 25 his paper and is summarized again in our presentation. 26 I am going to deal with the first 27 issue, the issue of the legal framework and four 28 elements of that framework which I think are relevant. 174 DADSON/ADAMSON/GELOWITZ, presentation 1 The first relevant feature of the 2 framework is, I believe, the fact that the obligation 3 under section 29 to sell electricity is placed on 4 distributors. That is the incumbents. 5 Mr. Janigan, on behalf of VECC, has 6 filed, certainly, a preliminary study indicating that 7 in some jurisdictions, a number of American 8 jurisdictions, policy-makers and legislatures have made 9 a different decision. But the point is, in our 10 jurisdiction the legislature has made a decision that 11 the standard supply obligation resides with the 12 incumbent. 13 It is important to realize that where 14 other jurisdictions have taken another approach, such 15 as Ohio and Maine, that other approach is set forth in 16 the governing legislation, that is, if you look at the 17 governing legislation in Ohio and Maine you will see 18 that it provides for a type of auction mechanism as is 19 being developed in those jurisdictions. There is 20 simply nothing comparable in the governing legislation 21 here. Accordingly, our submission is the type of 22 mandated or required tender or auction process proposed 23 by VECC is simply not consistent with the Act. 24 In our view, there is certainly much 25 to commend Mr. Todd's paper, particularly the analysis 26 of the market, but in our view the particular solution 27 that he proposes is not consistent with the framework 28 of the Act. 175 DADSON/ADAMSON/GELOWITZ, presentation 1 The second feature of the legislation 2 that I think is important to recognize is that 3 distributors are given considerable flexibility about 4 the way in which they choose to discharge or comply 5 with their standard supply obligations imposed on them 6 under section 29 of the Electricity Act, and that 7 flexibility is found in section 70(9) of the Ontario 8 Energy Board Act, and our analysis of that section and 9 the implications of that section are addressed in the 10 legal memorandum that appears as Appendix A to our 11 submissions. 12 What is clear is that that section 13 gives distributors an option to discharge the 14 obligation directly through an affiliate, through a 15 third party under contract, or through a combination of 16 those methods. The choice is clearly not of the 17 distributor. 18 The point is obviously some 19 distributors may make the decision that standard supply 20 service is not a business that they wish to be in. 21 They are free to make that decision and make the 22 determination that standard supply service in their 23 territory will be provided by a third party under 24 contract. 25 The third point that I want to make 26 is in respect of the Board's jurisdiction with respect 27 to standard supply service. Our submission is that the 28 Board's jurisdiction regarding standard supply service 176 DADSON/ADAMSON/GELOWITZ, presentation 1 is first and foremost to fix rates and, if appropriate, 2 develop and specify methods or techniques to be applied 3 in doing that, that is, in fixing rates. 4 Again, there is nothing in the 5 Ontario Act comparable to the provisions we find in the 6 Maine statute, the Massachusetts statute or the Ohio 7 legislation cited in the paper filed with the 8 submissions from VECC. Again, our submission is that 9 in the absence of such a provision the model outlined 10 by Mr. Todd is simply not one that can be mandated by 11 the Act. 12 It may be that distributors may 13 determine that an auction is in fact the best way for 14 them to discharge their obligation, but they can make 15 that decision. In our view, the Board doesn't have the 16 jurisdiction to order distributors to discharge their 17 obligations in that way. 18 The fourth and final point I wish to 19 make about the legal framework is that the type of 20 regulatory model outlined by Mr. Adamson and Frontier 21 Economics in the material filed with the Board is 22 thoroughly consistent with the Act. Remember, there 23 are two features of that model. 24 The first feature is the inclusion in 25 the licences governing distributors of an economic 26 contracting obligation, that is, a provision that would 27 impose on distributors, in respect of standard supply 28 service, to contract, procure power on an economic 177 DADSON/ADAMSON/GELOWITZ, presentation 1 basis comparable to the provision in Condition 5 of the 2 licences governing the RECs in the U.K. That type of 3 provision is thoroughly consistent with 4 section 70(2)(g) of the Act which allows the Board, in 5 licences, to specify performance standards. That is 6 precisely what the economic contracting provision does, 7 it specifies a performance standard for the procurement 8 of power for the discharge of standard service supply 9 obligations. 10 The second feature of the regulatory 11 model outlined by Mr. Adamson is, of course, the 12 yardstick mechanism. It is that mechanism that 13 provides the incentive, obviously, for distributors or 14 standard service providers to pursue low-cost energy on 15 the part of their customers. Again, that provision is 16 thoroughly consistent with the Act, in particular 17 section 70(2)(e) which permits the Board to specify a 18 technique or method for the fixing of rates. 19 Again, the proposal here is really no 20 different than any of the other performance-based rate 21 types of mechanisms that the Board is proposing to use 22 in respect of other aspects of the distributor's 23 business, particularly the wires business. 24 So it is thoroughly, thoroughly 25 consistent with the Act. 26 It is worth noting in fact, while we 27 are on this topic, that the NERA paper filed by the 28 Competition Bureau conceded that the direct regulatory 178 DADSON/ADAMSON/GELOWITZ, presentation 1 cost with respect of the implementation of such a 2 model, a yardstick model, are in fact not -- they are 3 not material. 4 I want to turn briefly to the second 5 item -- that is, to respond to comments made by other 6 parties -- and this is an item in respect of which I am 7 going to seek the assistance of Mr. Adamson. 8 Mr. Adamson I am going to ask to 9 respond in particular to the paper filed by the 10 Competition Bureau from NERA. 11 I should say at the outset that it is 12 unfortunate we didn't have that paper earlier, 13 particularly at the time of the hearing, but we will do 14 the best we can in the time we have to respond to the 15 key arguments in the very limited time we have. 16 It is also worth noting, and it is 17 probably not surprising, that NERA came out in support 18 of the spot market pass-through model. Mr. Ronayne of 19 the Competition Bureau has been a longstanding advocate 20 of that model. 21 Secondly, Larry Ruff -- who was 22 really obviously one of the key consultants to the 23 Market Design Committee and one of the initial 24 proponents of that model -- is, of course, now having 25 left PHB, a senior member of that firm. 26 But I wanted to make some comments 27 before turning it over to Mr. Adamson on the comments 28 filed by Energy Probe and comment also on some other 179 DADSON/ADAMSON/GELOWITZ, presentation 1 remarks of Mr. Adams yesterday. 2 Mr. Adams yesterday made the 3 assertion that the yardstick model imposes a form of 4 double jeopardy on distributors who are outside 5 bandwidth, and that is simply not correct. I would 6 invite the Board to look at the steps involved in the 7 yardstick model that are set out on page 30 of our 8 filed submissions and in Figure 1, and there was simply 9 no double jeopardy involved. 10 Secondly, Mr. Adams, in his written 11 submissions on page 15, suggested that Mr. Adamson 12 wants retailers to offer customers a means to escape 13 stranded costs. There is no such argument. 14 Mr. Adamson has never made that type of argument, 15 either in his written material or in his submissions at 16 the Technical Conference. We simply don't understand 17 the basis for Mr. Adams comment. 18 Thirdly, Mr. Adams or Energy Probe 19 clearly misunderstood Mr. Adamson's explanation as to 20 why spot market prices were not necessarily lower than 21 fixed prices. That comment is found on page 10 of 22 Energy Probe's comments. Again, I would invite the 23 Board to look at page 10 of our comments where we set 24 forth the reasons for Mr. Adamson's proposition in that 25 respect. 26 Fourthly, Mr. Adams yesterday 27 suggested that a fixed price regime for standard supply 28 service would impose incremental costs on distributors. 180 DADSON/ADAMSON/GELOWITZ, presentation 1 Again, we would dispute that. 2 I would invite the Board in that 3 respect to look at the transcripts, at pages 823 to 4 826, where Mr. Adamson, in response to questions from 5 Mr. White, referred to the extraordinary costs, the 6 extraordinary implementation costs that the spot market 7 pass-through will impose on the Ontario market. 8 The last comment of Mr. Adams to 9 which I wish to respond is the comment found on page 16 10 of his comments where he makes what I think is the 11 preposterous assertion that Mr. Adamson is proposing to 12 sacrifice consumers to the benefit of producers. 13 In fact, that is simply nonsense. 14 There is no basis for that assertion at all. 15 I would invite Mr. Adamson to comment 16 on the NERA paper. 17 PRESENTATION 18 MR. ADAMSON: Thank you, Aleck. 19 Since the Technical Conference in 20 early-mid July, the Competition Bureau has introduced, 21 as you know, a paper by National Economic Research 22 Associates into the debate on the standard supply 23 issue. I would just like to cover over a few key 24 issues -- and I do promise to make it relatively 25 short -- there to try to clear up a few issues and 26 misconceptions that I think have been misrepresented. 27 First, and I think this is really one 28 of the critical points, is that the NERA paper suggests 181 DADSON/ADAMSON/GELOWITZ, presentation 1 that the most significant cost of the fixed-price model 2 is reliance upon regulation rather than competition for 3 standard supply service. 4 I certainly agree that my model does 5 have a regulatory aspect, but I fundamentally believe 6 that that is absolutely appropriate. The Act clearly 7 gives the responsibility for standard supply service to 8 one party, distributor or its designate. 9 In my mind, therefore, the regulator 10 there has a responsibility to ensure that discharging 11 that service is done in a fashion that serves the 12 customer's interest. 13 I don't like any extraneous 14 regulation more than anyone else, but I do disapprove 15 of the methodology that would basically leave standard 16 supply customers open to manipulation or price gauging 17 without some form of regulatory oversight. 18 All of the models, including the spot 19 price pass-through model, rely on regulation forcing 20 the distributor to pass through its spot price as a 21 form of regulating behaviour. 22 It is possible to conceive of an 23 unregulated model, and such has been attempted in some 24 jurisdictions. You could allow the incumbent 25 distributor, or whoever was obligated to discharge the 26 standard supply function -- you could let him charge 27 whatever he or she wanted for standard supply service 28 and let customers leave if they saw fit. 182 DADSON/ADAMSON/GELOWITZ, presentation 1 That is the model that has been 2 applied elsewhere -- I believe in Norway, for 3 example -- but I really don't see any enthusiasm for it 4 here. There is an objective. My understanding of the 5 policy objective is to ensure that standard supply 6 customers are protected, and that is a legitimate form 7 of regulation. 8 It is also incorrect to characterize 9 that one is regulated and one is not, because of course 10 forcing them to offer an averaged spot price is a form 11 of regulation. 12 However, in the conduct of this 13 regulated activity the purchasing of electricity for 14 standard supply service and the creation of fixed 15 prices, my yardstick model does employ competitive 16 forces to ensure that SSS providers procure electricity 17 at lowest cost for these consumers so they can't be 18 abused. 19 It is also worth noting that in all 20 cases the standard supply regime continues to exist 21 inside of a broader retail market in which customers 22 can switch if they feel that the costs of this 23 regulation are just too high to bear. 24 The second issue I would like to 25 touch on is the risk of stranded costs or strandable 26 costs, which is touched on at page 13, I believe, of 27 the NERA paper. It suggests that significant stranded 28 costs could occur from a fixed-price model. 183 DADSON/ADAMSON/GELOWITZ, presentation 1 From the reading of the document, I 2 think they are clearly trying to raise the spectre, for 3 example, of the high-cost, long-term qualifying 4 facility contracts in the United States, which, as they 5 indicate, have indeed raised current costs in some U.S. 6 jurisdictions, notably in California and New York. 7 I can see why you would argue this to 8 try to scare people, but in general, let's be 9 realistic. We are talking about one year or so of 10 commercially-based commercial purchase contracts, not 11 20-year long-term qualifying facility contracts to 12 support the building of windmills in California or 13 geothermal plants or cogeneration units in upstate New 14 York. We are not talking about very long-term 15 obligations here, so the volumes and the uncertainty 16 over those much shorter time horizons is of course 17 much, much limited. 18 The QF contracts again, which they 19 appear to be referencing, came out because of a law 20 called PURPA in the late 1970s, the Public Utility 21 Regulatory Policies Act, which was one of Jimmy 22 Carter's enthusiasms. 23 Unlike the PURPA contracts, again we 24 are talking about much shorter traded-for contracts. 25 Also unlike the PURPA model, which they are basically 26 referencing, under my model the standard supply service 27 provider actually has an incentive to lower costs, and 28 that is the real difference. The utilities under PURPA 184 DADSON/ADAMSON/GELOWITZ, presentation 1 were forced to buy power at avoided cost under a 2 regulatory framework for very long-term obligations. 3 This is a completely different type mechanism that we 4 are talking about here. 5 Another issue that they raise is 6 quantity risk, and that is one I would like to touch on 7 for a minute. 8 The NERA piece indicates that since 9 customers can move away from standard supply under the 10 terms of the Act, these contracts are therefore even 11 more strandable. 12 Certainly, there are always quantity 13 risk issues when you have complete customer mobility, 14 but I think actually if you are really going to think 15 about this industry this is not really likely to be a 16 very significant issue in the context of one year. 17 That is really because, overall, the demand for 18 electricity in a region, say Ontario, is pretty much a 19 fixed number, and it is really driven only by things 20 primarily like GDP growth and the weather. 21 If that demand moves out of standard 22 supply, it is kind of by default moving into the retail 23 market. It is not like moving into the retail market, 24 everyone all of a sudden is going to use a lot more 25 electricity. 26 Really the total demand for these 27 contracts is actually relatively fixed, so a clear 28 hedging strategy for an SSS provider under my kind of 185 DADSON/ADAMSON/GELOWITZ, presentation 1 model is that, effectively, if you had excess 2 contracts, you could either team up or sell them over 3 to a competitive retailer. 4 Because the total fixed demand for 5 electricity, and therefore the total fixed demand for 6 contracts, is likely to be relatively fixed, again the 7 basic demand for electricity doesn't really change by 8 whether you buy it competitively or under standard 9 supply. Then it is also relatively costless for 10 generators to offer fixed price variable quantity 11 contracts. The electricity is going to get consumed by 12 someone somewhere. 13 I would also like to touch on the 14 next question which they argue, that really a standard 15 offer type mechanism is really the way to go. 16 I guess if you want a page reference 17 you could look at page 24 of the NERA paper on this. 18 On that page they admit that there 19 may be a plausible public policy argument for a fixed 20 price standard supply. They in the Bureau go on to 21 recommend, however, that the only appropriate mechanism 22 for implementing such a fixed-price method for standard 23 supply is a bid-based auction. 24 Now, I mean auctions clearly are one 25 potential competitive mechanism for procurement, 26 although it is also noteworthy that we don't buy 27 everything we need at auctions. So auctions are 28 obviously more usable in some economic situations than 186 DADSON/ADAMSON/GELOWITZ, presentation 1 in others. That is because auctions actually have, in 2 their context, some limitations as well. 3 First off, a standard supply auction, 4 which I take is the method that they are considering, 5 is basically a fundamentally passive exercise. The 6 utility really need no more than say it held an 7 auction, the design of the auction met the Board's 8 requirements to have done a good job, and to 9 effectively walk away. 10 There is no kind of incentive 11 mechanism there. 12 Secondly, the regulator will have to 13 oversee the auction, and the piece I think submitted by 14 VECC reviews the role of the regulator in staging the 15 standard offer auctions in the United States. 16 I was actually kind of a participant 17 in the Massachusetts standard offer auction on behalf 18 of a bidder, and it was really quite a process. 19 Actually, some fairly significant resources went into 20 designing and overseeing that auction by the 21 Massachusetts Department of Telecommunications and 22 Energy. 23 So although an auction sounds like a 24 very simple concept, there are some regulatory costs 25 here as well in actually implementing one and 26 overseeing that it has been done properly. 27 My final point on this is the reason 28 that they need this auction, this "disinterested 187 DADSON/ADAMSON/GELOWITZ, presentation 1 auction", is because they have no incentives under this 2 type of mechanism to actually get the provider to be 3 interested in procuring at lowest cost. 4 If a comparative competition 5 mechanism can create incentives for those standard 6 supply service providers to purchase and pass through 7 the lowest cost fixed-price electricity to consumers it 8 can find, everything becomes really a great deal 9 simpler. 10 For example, if an auction -- which 11 are used in all sorts of contexts -- if an auction is 12 the way to go in order to procure that lowest cost 13 electricity, then nothing under my model would prevent 14 a standard supply service provider from saying: "Well, 15 I want to design an auction and I want to run an 16 auction." There are people who you can pay to actually 17 run one for you. It is probably a great deal cheaper 18 than having a centrally determined one. 19 So, if that is the way to get the 20 lowest cost, in dollars, per megawatt hour for the 21 electricity procured, then my model actually says, 22 "Well, okay, have an auction". 23 The great thing, though, about having 24 an incentive mechanism is it reduces the amount of 25 oversight of the design of the auction, how the bids 26 were assessed, so on and so forth, a great deal. That 27 is because basically it is an argument of incentive 28 compatibility that, under a yardstick mechanism, the 188 DADSON/ADAMSON/GELOWITZ, presentation 1 standard supply service provider actually has the 2 incentive to get the electricity purchased at the 3 lowest cost, which is also the regulator's incentive. 4 That, in my mind, actually really helps lower the 5 regulatory burden a great deal of any of these 6 mechanisms. 7 I also want to touch on very briefly 8 some of the comments made by NERA as regards to price 9 signals, the importance of spot price signals. 10 Now, in the right context, it is hard 11 to argue with some of their comments about spot price 12 signals, that they are important, sort of motherhood 13 and apple pie like, however I would really note that, 14 for the most part, standard supply, we are generally 15 talking about smaller customers without hourly meters, 16 without very sophisticated energy consumption patterns, 17 and I simply don't see how they are going to respond to 18 these price signals. 19 Even more importantly, how can anyone 20 respond to a price signal which they actually get after 21 the fact? If I get the average from last month, what 22 am I supposed to do about it? What am I supposed to 23 have done about a high price signal given to me that 24 tells me I should have turned down my air conditioner 25 in July because it was very hot in Boston? You know, I 26 can kick myself for not having stayed at home and 27 turned off the air conditioner, but that doesn't really 28 help very much. 189 DADSON/ADAMSON/GELOWITZ, presentation 1 I mean the fact is the most useful 2 price signals for consumption are forward-looking, or 3 in real time for those who can react to those such 4 things -- and there are certainly customers who can. I 5 am not dismissing that. I am just saying that for the 6 majority of smaller customers the important price 7 signals are actually kind of looking ahead. 8 A fixed-price standard supply system 9 could have the retail prices paid by consumers, 10 sculpted by seasons, and therefore give a price that 11 consumers could respond to sensibly and that was cost 12 reflective. Always an important objective of economic 13 efficiency here. 14 Since contract prices are likely to 15 vary by season, because generators' -- in fact, costs 16 vary by season, the gas prices and other costs -- you 17 know, there is a clear way to make the connection 18 between contract portfolio costs and these 19 forward-looking price signals. 20 In summary, passing through an 21 average after the fact, I just don't understand how 22 anyone is meant to respond to that at all. 23 For those of you who have had a 24 chance to look at my original paper on this subject, I 25 stated that one of the original objectives in designing 26 this system was to ensure that the Ontario market 27 develops some reasonably effective forward price 28 signals, and really spot price signals of 10, 190 DADSON/ADAMSON/GELOWITZ, presentation 1 15 minutes or an hour are really just not worth much 2 for choosing some of the key -- making some of the key 3 decisions which impact the efficient production of 4 electricity. Investment in new generating plants, 5 scheduling of maintenance decisions, outages, 6 mothballing, you name it, very short-term hourly prices 7 in that hour don't really tell me very much about the 8 actual economic decisions that I need to make. 9 So what we really want in one of 10 these markets, and something that I think most people 11 who design these markets have agreed on, is that it is 12 always useful to have forward prices that generators 13 and others can respond to in order to make those 14 decisions efficiently. 15 Now, the NERA piece sort of suggests 16 that people, in making these investment decisions, they 17 don't really need energy prices and suggests that the 18 announcement of large amounts of new merchant 19 generation in the United States show that these signals 20 are not needed. 21 There is a large amount of announced 22 generation in the United States. I agree. But I also 23 warn you that you should look before you count on this 24 as the only mechanism. 25 A pure spot mechanism is the only 26 mechanism in Ontario without some form of good 27 intermediate price signals, and a lot of that merchant 28 generation has really come into a few areas of the 191 DADSON/ADAMSON/GELOWITZ, presentation 1 country, in New England, one or two other areas, where 2 the margin over existing generation is very high. 3 Other markets, like the mid-western 4 United States, have seen proportionally very little 5 entries and are facing, right now, a major capacity 6 crisis -- you may have seen the comments in the 7 newspaper about the City of Chicago in this recent heat 8 wave. 9 So before you go with too many broad 10 comparisons about the U.S. market, I would stop and 11 consider which of these regional markets has been 12 successful with merchant development and which of these 13 markets you feel provides the best analogy with 14 Ontario. 15 So at the Technical Conference a 16 month or so ago, I suggested that of course people can 17 build a merchant generating plant if basic economics 18 support it. I think the real question is: What is the 19 importance of even these shorter intermediate-term 20 price signals in helping people judge their risk, 21 assess the actual state of the market and attract 22 financing? Because that really determines what type of 23 risk do they perceive and what return on capital do 24 they require. 25 As the NERA report suggests, the use 26 of the spot price pass-through mechanism will tend to 27 renew volume from these forward markets, although in 28 their opinion this is not important. 192 DADSON/ADAMSON/GELOWITZ, presentation 1 My model will tend to increase volume 2 in these intermediate forward markets and, in my mind, 3 that is important, because I think that that is one of 4 the things that people look at in doing merchant plant 5 financings. I have been involved with those before and 6 there is no stronger signal -- rather than a price 7 forecast generated by a consultant, there is no 8 stronger signal to a financial institution that a 9 project has viable economics than the fact that the 10 market trading forward actually believes that the 11 prices out there are strong enough to support the 12 financing of the plant. 13 So, in my mind, a market with only 14 20 per cent of the total volume is likely to be quite 15 illiquid -- this is a forward market, or a contract 16 market, like California. Now, this means that project 17 developers get very weak forward price signals. I 18 would suggest that although those forward price signals 19 are not an absolute requirement, they are not 20 necessary, it can happen without them, but that the 21 capital markets do place some value on those price 22 signals when they do occur, and that in turn leads to 23 lower perceived risk, or lower required return on 24 equity and, over time, lower new entry costs. 25 Now, remember, the real question is 26 not can entry occur but is what is the cost of capital 27 that is going to be built into new entry trigger 28 prices, and that higher cost of capital inevitably come 193 DADSON/ADAMSON/GELOWITZ, presentation 1 out over time in the form of higher wholesale prices. 2 I don't want to run over our total 3 half an hour, so I will keep my final remarks very 4 brief. 5 Finally, I would just like to touch 6 on some of the kind of regulatory burden issues. 7 Again, in my opinion, clearly as the design of this, 8 they didn't strike me as being particularly high, and I 9 think, as I had noted on page 31, that, in their paper, 10 the NERA consultants acknowledge that it is unlikely 11 they would be material in relation to the dollar volume 12 of the SSS market. 13 So we really have to, you know, count 14 on what mechanism do we think meets customers' 15 requirements best. 16 In my sort of final few minutes I 17 would ask you to note, on page 30, as Aleck mentioned, 18 I have kind of prepared a little seven-step menu of the 19 implementation of such a model. Yardstick mechanisms 20 are in place in quite a few parts of the world and has 21 not been proved difficult to do for a whole range of 22 different regulating type activities, so I won't really 23 go through any more time sort of running through those 24 points, but I would be happy to answer any questions if 25 anyone has any about what was intended in that sort of 26 seven-step program for the implementation of a 27 yardstick model for fixed price standard supply. 28 Thanks for your attention. 194 DADSON/ADAMSON/GELOWITZ, presentation 1 MR. DADSON: Those are our comments, 2 Mr. Laughren. 3 THE CHAIRMAN: Okay. Thank you very 4 much. 5 Are there questions from Board staff? 6 MS LEA: Thank you. 7 I have one legally-related question, 8 that I think probably Mr. Dadson can help me with. 9 MR. DADSON: I may pass it to 10 Mr. Gelowitz. 11 --- Laughter 12 MS LEA: Well, whoever. Just for 13 clarification. 14 I read with great interest the 15 appendix to your submissions, and I listened somewhat 16 in absentia to your comments this morning. As I 17 understand it, your interpretation of the legislation 18 allows distributors some flexibility, some considerable 19 flexibility, in performing their obligations under 20 section 29, as I understand your submission. 21 We are also all aware that under 22 section 78(2) of the Ontario Energy Board Act a 23 distributor cannot meet its obligations except in 24 accordance with an order of the Board, that is, a rate 25 order of the Board. 26 I am trying to understand how to make 27 these various sections of the Act fit together. What 28 are the limits on a municipal electric utility or the 195 DADSON/ADAMSON/GELOWITZ, presentation 1 corporations that follow, what are the limits on their 2 discretions with respect to this service and what are 3 the limits on the Board's ability to impose, through 4 its rate orders or through some other method, its views 5 upon the electric utility? 6 Can someone help me with that? 7 MR. GELOWITZ: Perhaps we can just 8 have a moment. 9 MS LEA: Please. Yes. 10 --- Pause 11 MR. GELOWITZ: I guess I will address 12 that. 13 I think our position on that is 14 simply that the Board does have a very broad 15 discretion, under section 78, to fix rates, that is the 16 function in relation to distributors. In our 17 submission, that discretion has to take account of the 18 flexibility that is open to distributors under 19 section 70(9). So it is of course open to the Board to 20 fix rates in differential ways depending on the manner 21 in which a distributor performs its section 29 function 22 against the background of the flexibility that is 23 provided for in section 70(9). 24 MS LEA: So, I guess -- 25 MR. DADSON: If I can just make one 26 further comment? 27 MS LEA: Yes, please. 28 MR. DADSON: I mean the flexibility 196 DADSON/ADAMSON/GELOWITZ, presentation 1 under 70(9) is really the flexibility or the option to 2 a distributor to say, "Look, section 29 of the 3 Electricity Act gives me this obligation." The 4 distributor may make its own determination. This is 5 not a business that I want to engage in. So it is 6 free, I would suggest, pursuant to section 70(9), for 7 it to make the decision, "I don't want to engage in 8 this business. I am going to arrange for some third 9 party to do it." 10 MS LEA: Okay. So I think we are 11 agreed, then, that the Board can set the rate that is 12 charged to customers for section 29 service. I don't 13 think there is any disagreement about that. Tell me if 14 there is. 15 Okay. Taking it, then, to sort of 16 the other end, could the Board, in its rate-setting 17 function and the review of prudency of the utility's 18 acquisitions or purchases, say, "You were imprudent in 19 the way that you arranged for your section 29 20 obligation to be delivered, serviced, whatever, and, 21 therefore, we are going to say that you cannot collect 22 the revenue for that", or impose some regulatory 23 disincentive to the way the utility has chosen to 24 satisfy its section 29 obligations. As I understand 25 your submissions that would not be possible, but I 26 wonder if you could just comment on that. Could it be 27 done sort of through the rate-setting function? 28 MR. ADAMSON: I'm not a lawyer. 197 DADSON/ADAMSON/GELOWITZ, presentation 1 --- Laughter 2 MR. ADAMSON: I mean I think there is 3 a clear intent of having a mechanism sought. Who gets 4 to do that I don't know. Speaking of course as an 5 economist -- I'm not a lawyer -- I mean, I think 6 they -- 7 MS LEA: You can say what should 8 happen, if that is -- 9 MR. ADAMSON: All right. All right. 10 I think my big concern, obviously, 11 would be any perception of perceived regulatory risk. 12 Essentially, I'm certainly thinking about the positions 13 taken by some of the parties in having, you know, in 14 their estimates done what the methodology said that it 15 was meant to do, that then there is a perception of a 16 perceived regulatory risk that gets revisited. Now, 17 that could be any methodology presumably. 18 MS LEA: I guess that presumes the 19 approval of the Board of the method that the utility 20 has proposed, because once the Board approves it, then 21 you get to the question of, "Well, if the Board then 22 denies it, that is unacceptable regulatory risk." 23 Am I understanding you correctly? 24 MR. ADAMSON: Well, I mean, clearly, 25 I think regulators always need some flexibility to 26 intervene in the circumstances where, you know, the 27 train is truly jumping off the track. But what you 28 want to do is to minimize the perceived regulatory risk 198 DADSON/ADAMSON/GELOWITZ, presentation 1 that, having done it to the best of -- having fulfilled 2 the requirements of whatever methodology was approved 3 that it then wouldn't get revisited. 4 MR. DADSON: Maybe one further 5 comment. 6 For instance, if a distributor wanted 7 to pursue the option of discharging this obligation 8 through a third party, I would think it thoroughly 9 appropriate for the Board to develop, you know, 10 financial standards, or whatever, with which a third 11 party would be obliged to comply. Certainly, if you 12 look at the types of models that are set forth in the 13 paper, a preliminary paper, attached to Mr. Janigan's 14 submissions, even in the context of an auction-type 15 model, generally the regulatory body has established 16 sort of financial prudent standards with which bidders 17 must comply in order to qualify for the auction. 18 I could certainly see the Board 19 having a legitimate public policy interest in wanting 20 to establish comparable standards in respect of third 21 parties who were assuming this obligation on the part 22 of a distributor. 23 MS LEA: Thank you very much, 24 gentlemen. That's very helpful. 25 I think Ms O'Reilly has some 26 questions. 27 MS O'REILLY: I was interested to 28 hear your responses to the NERA paper. One of the 199 DADSON/ADAMSON/GELOWITZ, presentation 1 things that they criticized about your model is a 2 potential weakness related to the length of contracts 3 of generators. You may have addressed this and I may 4 just not have understood. 5 MR. ADAMSON: No. I probably covered 6 over my -- 7 MS O'REILLY: Could you comment on 8 this criticism and in particular whether in your model 9 contracts with generators for longer than a year, for 10 example, would be permitted? 11 MR. ADAMSON: Typically, I believe 12 that the implementation of a model like this would 13 focus on significantly shorter-term contracts. I don't 14 know exactly how people are thinking what the kind of 15 regulatory year or period year is going to be. 16 Certainly, I think a year is probably an appropriate 17 level. 18 I am not considering a mechanism that 19 would allow a standard supply service provider to sign 20 up a very long-term obligation and then assign all of 21 that to their standard supply service. 22 Whether exactly it is a year or not I 23 think is a bit more open, but I am certainly not 24 talking about very, very long term life-of-plant type 25 contracts. 26 The real question is of course that, 27 whatever mechanism -- and again I admit that this is a 28 preliminary design, that is what I was asked to do, but 200 DADSON/ADAMSON/GELOWITZ, presentation 1 whatever mechanism, it needs to ensure that the 2 standard supply service provider has the correct 3 incentive under the yardstick mechanism in order to 4 ensure that cost minimizing behaviour is conducted. 5 I think a very critical part of that 6 would be restrictions against sort of self-dealing, for 7 example, because the last thing I want is a mechanism 8 by which a standard service supply provider could sort 9 of sign up a sweetheart deal with someone on the side 10 for which they had a financial interest. I think that 11 would clearly have to be -- those types of cases would 12 clearly have to be minimized. 13 So I am not guaranteeing absolutely 14 12 months, although I think that's a reasonable length 15 of term, but I suggest that that probably is the sort 16 of length of term that I have in mind. 17 MS O'REILLY: Would a contract of 18 12 months or around there be sufficient to I guess 19 mitigate a generator's risk such that their cost of 20 capital would be lowered? 21 MR. ADAMSON: We are not talking 22 about mitigating risk to the level of the old style 23 kind of captive ITP contracts, which effectively 24 mitigated all market risk and left them one with 25 effectively only credit risk against the utility. We 26 are certainly not mitigating risk to that length 27 because we are obviously not taking on that type of 28 risk obligation. 201 DADSON/ADAMSON/GELOWITZ, presentation 1 The risk minimization I am talking 2 about is actually a bit more subtle than that. The 3 generator has a couple of different types of risk in 4 the conduct of its business. 5 One risk, for example, is a cash flow 6 risk, simply that the pattern of its earnings 7 reflecting patterns of prices may be hard to predict 8 over time and may not match its, for example, debt 9 payment and interest payment structure. 10 So there is clearly a value for 11 generators having the ability to manage cash flow risk 12 even within a year. 13 So we are not talking about very 14 long-term contracts here for which someone completely 15 signs up a captive ITP-type project. What we are 16 talking about is having in the market prices that go 17 forward for a year or at least a year and how do you 18 use that in the financing context. 19 Typically, one of these merchant 20 plant financings, they basically pay some set of 21 consultants like me to do forecasts of prices, say, for 22 the State of New York as a market which is just 23 starting. One feature of those forecasts is that they 24 really are based on kind of modelling results. Take a 25 big kind of dispatch model and try to forecast all the 26 kind of supply and demand factors that you can think 27 of. 28 An excellent check on the type of 202 DADSON/ADAMSON/GELOWITZ, presentation 1 analysis that people do in these merchant plant 2 financings is, for some period of time, even if it is 3 only the first year, even if it is only the first 18 4 months, whatever, the type of revenue analysis that one 5 does in one of these forecasting exercises is 6 consistent with what the market thinks that the forward 7 prices are and if people are really willing to put 8 their money where their mouth is and actually trade at 9 those prices. 10 So it is not just, "Oh yeah, well, we 11 paid a consultant and if he is wrong we have lost 50 12 million bucks"; no, the answer is somebody is really 13 willing to trade at that price. 14 So that is the kind of forward price 15 signal I am talking about, not very, very long term 16 15 years out type price signals. I think that is the 17 characterization in the NERA paper, but that is simply 18 their idea and not mine. 19 MS O'REILLY: I was wondering whether 20 or not giving local distribution companies an incentive 21 to purchase, how does that keep them indifferent to 22 whether or not they keep SSS customers? Is it 23 compatible with non-discriminatory access and the 24 notion of an LDC being indifferent to their laws? 25 MR. ADAMSON: Let me make sure I have 26 understood exactly what you said. I want to make sure 27 I am interpreting your question right. The question 28 is: If I am the standard supply service provider, 203 DADSON/ADAMSON/GELOWITZ, presentation 1 which may or may not be an LDC, as we have discussed, 2 am I trying desperately to keep everyone from changing 3 somehow or another by refusing to process their request 4 to change or something? 5 MS O'REILLY: You are close. 6 MR. ADAMSON: Conveniently throwing 7 this in the bin or something. 8 Well, remember the prices that I am 9 setting under my mechanism are forward-looking prices 10 for standard supply service providers. 11 If you turn to page 30 of this 12 document, the ETT Canada document, the pricing in the 13 contracts have to be specified up front because that is 14 pretty much how we have set fixed price standard supply 15 service. I have already fixed in fact my purchase 16 costs on behalf of those customers in advance, so if 17 they leave I am hard to see how I am desperately 18 disadvantaged by Rob, if he is one of my customers, 19 leaving, unless there is some very, very significant 20 quantity risk associated which I thought I would have 21 to bear. 22 Remember the price cap mechanism, 23 however, the competition is effectively on the 24 yardstick of prices set in advance. So the outcome in 25 terms of my incentives is rather fixed at the time in 26 which I have signed my contract portfolio. 27 The only conceivable question is is 28 there any kind of quantity risk, which again I think I 204 DADSON/ADAMSON/GELOWITZ, presentation 1 would deal with by actually moving those upstream to 2 generators where they really belong. 3 MR. DADSON: May I make an additional 4 comment in that respect. 5 I think it is important also to 6 recognize what I see as being one of the policies 7 embedded in the Act or the policy decisions made, and 8 that is the policy decision we find in section 70(10) 9 of the Ontario Energy Board Act, which I read as 10 suggesting that we may soon be in a state where there 11 will be a regulation stipulating that LDCs will not be 12 able to discharge standard supply service obligation 13 directly. It has to do with what I consider an 14 affiliate or third party. 15 MS O'REILLY: I just have one more 16 question which -- 17 MR. ADAMSON: I'm sorry, if I can 18 just add one more thing. 19 For example, the yardstick mechanism 20 is one that was applied for England and Wales -- one 21 that was considered for England and Wales, but the 22 consideration of the contract portfolio and whether or 23 not it provided some incentive for, in that case, the 24 incumbent distributor to hold onto customers, that has 25 actually been running since 1990 for various types of 26 customer classes in England and Wales. I have never 27 really heard a significant regulatory issue develop 28 over whether somebody was hiding the bits of paper 205 DADSON/ADAMSON/GELOWITZ, presentation 1 somewhere saying that they wanted to switch off it. 2 MR. DADSON: Could I just make one 3 further comment, speaking further about Ms Lea's 4 question about the regulatory framework. 5 I think it is important to recognize 6 that the economic contracting stipulation will be a 7 provision of the licence. So the Board is going to 8 have not simply the opportunity to regulate rates, but 9 are also going to have an opportunity, pursuant to the 10 provisions of licence -- if it has any real concern 11 about the distributor's discharge of that obligation, 12 it is obviously going to have a basis pursuant in the 13 licence for intervention. Certainly one's hope would 14 be that the need for such intervention would be very 15 rare. 16 I think Mr. Adamson may want to 17 comment on this, but he certainly, in some of our 18 initial discussions, indicated that in fact that 19 provision in the licence for the RECs in the U.K. did 20 in fact occasionally form the basis for the regulator 21 in the U.K. to sort of call one or more of the RECs in 22 for a chat about what they were up to in terms of the 23 provision of service to their franchise customers. 24 So I think it is important also to 25 think of not merely the fixing of rates, but also the 26 regulatory oversight which the Board is going to have 27 pursuant to the licence provisions. 28 MR. ADAMSON: Effectively, the value 206 DADSON/ADAMSON/GELOWITZ, presentation 1 of a retail customer is just not high enough in order 2 to get into the regulatory trouble to try to finagle 3 the system in order to prevent them from switching. 4 MS LEA: Thanks. 5 Mr. Dadson, then, when on pages 5 6 and 6 of Appendix A you say that a licence under part 5 7 shall record the manner in which such compliance will 8 occur, leaving it open to the distributor to arrange 9 its affairs in a manner satisfactory to it, and so on, 10 you are envisioning some ability in the Board to deal 11 with situations where that is truly a problem? 12 MR. DADSON: It's like the X factor, 13 I suppose, in sort of a PBR, yes. 14 MS LEA: Thank you. 15 MS O'REILLY: I just have one last 16 question which relates to the double jeopardy issue 17 that you raised with Energy Probe and it was also 18 raised by the Consumers Association of Canada. 19 Essentially, I think the argument is 20 that if you impose a system of incentives and penalties 21 on a distribution company and a distribution company 22 has purchase power that is too expensive so they are on 23 the penalty side of the system, it is actually the 24 ratepayers who will be having to pay for both the 25 penalty and the higher cost of power. I wondered if 26 you could speak to that. 27 MR. ADAMSON: We finally get to the 28 origin of this question. 207 DADSON/ADAMSON/GELOWITZ, presentation 1 First off, no incentive mechanism is 2 going to work where the incentive is paid by the 3 ratepayer. I mean I think that is a no-brainer. The 4 incentive mechanism has to fall on the standard supply 5 service provider, not get back through rates. 6 So I agree that in any incentive 7 mechanism, up or down, there is some form of jeopardy, 8 but it is certainly not a double jeopardy from the 9 consumer side because there is really no value in an 10 incentive scheme that would allow any disincentive to 11 be passed through to standard supply service 12 ratepayers. That I think is a misapprehension about 13 what is being talked about. 14 MR. O'REILLY: In Ontario the 15 distribution utilities are largely owned municipally or 16 provincially, publicly owned. Could you speak to the 17 notion of I guess a penalty that would go to a 18 shareholder when that shareholder is a municipality or 19 the province and gets its funding essentially from the 20 public? 21 MR. ADAMSON: First off, the 22 magnitudes required here to create incentive are really 23 not very large compared to the flow-through volume of 24 money through a distribution utility, so, first off, 25 let's get our thinking about scale correct here. 26 Number two, it is my understanding -- 27 and I will defer to those who have a better 28 understanding of the complete policy practice here -- 208 DADSON/ADAMSON/GELOWITZ, presentation 1 that an objective is the commercialization of the 2 distribution sector, that they are to be run as 3 enterprises with all the interests and some ability, 4 subject to their oversight by their own boards, to do 5 better or worse. 6 I guess we can have an argument about 7 whether the boards appointed to run these 8 institutions -- you know, perhaps it sounds like some 9 are trying to say, basically, they are not going to be 10 able to undertake any of the normal activities of the 11 business. First off, these are not huge volumes. We 12 are not talking about -- any kind of incentive payment 13 here is not something that makes or breaks a municipal 14 electric utility. Second off, I think it is profoundly 15 consistent with the idea that these are to be 16 commercialized and to effectively face normal 17 commercial incentives. 18 MR. DADSON: In fact, I think it is 19 to be emphasized that the Board is already 20 contemplating a form of performance-based rate 21 mechanism for the wires side of the business whereby 22 these businesses, what Mr. Adamson described as 23 commercial enterprises, are going to be exposed to 24 risk. What we are contemplating for the regulation of 25 their procurement function under standard service 26 supply is really very little different from what is 27 already being contemplated for the wires business. 28 MR. ADAMSON: And I would suggest 209 DADSON/ADAMSON/GELOWITZ, presentation 1 probably also of a significantly lower magnitude of 2 risk on the differences -- the magnitudes of dollars 3 involved from year to year for distribution utility and 4 the types of incentives that I think would be required 5 for this type of system in comparison to the risks that 6 they are going to face under the PBR mechanism, as 7 currently described, is an entirely different ball 8 game. 9 MR. DADSON: Could I just maybe pick 10 up and emphasize one other point that Mr. Adamson made, 11 and that is with respect to the transformation of MEUs. 12 I think it's very clear that under the new legislation 13 we have to start viewing MEUs who are obviously going 14 to constitute the majority of the incumbent 15 distributors, we have to start thinking of them as 16 commercial enterprises. It's really inappropriate in 17 the new world to have the old paternalism towards them 18 that I think underlies a lot of the submissions about 19 standard supply. 20 There clearly is a policy embedded in 21 the legislation that these are going to be commercial 22 enterprises, are going to be free to pursue commercial 23 activity, they are going to act under normal commercial 24 incentives. You know, MEUs have to start thinking 25 about themselves. I think that is the way we and the 26 regulator also have to start thinking about the MEUs. 27 MS O'REILLY: Thank you. 28 THE CHAIRMAN: Thank you. 210 DADSON/ADAMSON/GELOWITZ, presentation 1 We have about five minutes left. 2 Mr. Higgin? 3 MEMBER HIGGIN: Thank you. 4 Could I try and quickly look at your 5 "prescription" on page 30 for regulation of your model 6 of the SSS, just to clarify some points on that? 7 The first one we have touched on a 8 little bit, but let's go back to it, and that is the 9 question of how do you see the allocation of risk 10 associated with your model and, also related to risk, 11 the question of compensation or return for that risk. 12 Where does that go in your model? 13 MR. ADAMSON: I will try to answer 14 and you can tell me if I am not answering your 15 question. 16 Compensation of which risk, I guess, 17 is my question. 18 MEMBER HIGGIN: The risk of 19 procurement of the standard supply -- 20 MR. ADAMSON: Right. 21 MEMBER HIGGIN: -- as opposed to a 22 spot pass-through. The risk associated with that 23 portfolio and management of it and everything else. 24 MR. ADAMSON: Okay. The fundamental 25 risk allocation, which as I have state in my paper I am 26 trying to improve, is the risk allocation that leaves 27 all the price risk with the consumer. The reason that 28 that struck me as inefficient is that, unlike in said 211 DADSON/ADAMSON/GELOWITZ, presentation 1 markets, here we actually have multiple parties. We 2 have natural counter-parties for a great deal of this 3 risk. 4 We have price risk under the spot 5 price pass-through mechanism being absorbed only by 6 consumers, but there are other people in this game who 7 are facing risks as well, specifically generators, and 8 in a normal arrangement in a market, one might expect 9 that some form of risk-sharing mechanism would evolve 10 that would allow that risk allocation to be 11 inefficient. 12 After all, if you are a purchaser and 13 facing this price risk, well, if I am a generator I am 14 facing a great deal of price risk as well. Remember 15 that most of my costs are either fixed or completely 16 sunk, financing costs, for example, so I am the sort of 17 natural counter-party in this transaction that could 18 basically allocate this risk out a little better. I 19 think that is normally what we would expect to see in a 20 lot of the markets. 21 So that is the primary risk 22 reallocation mechanism that I am trying to sort of take 23 advantage of which I think the spot price pass-through 24 blocks. Normally, in these markets there are two 25 people who ought to get together because they are 26 sitting on the opposite sides of the same risk. Those, 27 ultimately, are consumers and, ultimately, generators. 28 MEMBER HIGGIN: In your model, how do 212 DADSON/ADAMSON/GELOWITZ, presentation 1 you assess the risk to the LDC as opposed to the 2 supplier, the generator and the -- 3 MR. ADAMSON: How do I assess the 4 risk to the standard supply service provider? 5 MEMBER HIGGIN: How is the return -- 6 this is the key -- that is allowed, if there is to be 7 one, allocated or associated with that risk? 8 MR. ADAMSON: How would I go about 9 assessing the risk that people are -- that a standard 10 supply service provider -- 11 MEMBER HIGGIN: No, no. 12 MR. ADAMSON: I'm sorry, I am not -- 13 MEMBER HIGGIN: The LDC is exposed to 14 a certain risk from the procurement and management of 15 the supply portfolio contracts, okay, under your model 16 of a fixed price. 17 MR. ADAMSON: The provider, whether 18 it's an LDC or a designate, procures contracts, right, 19 and effectively passes through the prices under those 20 fixed-price contracts to consumers. So his or her 21 fundamental risk, in this methodology, is driven by the 22 magnitude of the incentives that are placed upon them, 23 right? 24 So stepping back, the next question 25 is -- because otherwise the basic contract portfolios 26 are effectively fixed price and are pretty much back to 27 back, right? Now, we can assume that the standard 28 supply service providers probably have a very strong 213 DADSON/ADAMSON/GELOWITZ, presentation 1 incentive not to sign up with just anyone who claims 2 they can sell a contract -- oh, yes, I will sell 1,000 3 megawatts but I don't seem to have any plants and no 4 credit rating or anything like that. So that 5 fundamental portfolio risk, at least in one case, is 6 actually minimal. 7 So the real risk remaining is: What 8 is the magnitude of the incentive payments required in 9 order to give the standard supply service provider, LDC 10 or not, the incentive to actually do this at lowest 11 cost? That is effectively the residual risk to the LDC 12 or whoever the standard supply service provider is. 13 MEMBER HIGGIN: Under your model, you 14 interpret that the yardstick is to try and develop "a 15 standard reference portfolio", which would be something 16 that the Board would find was reasonable for the 17 purpose of setting the tariff. Is that my 18 understanding of your -- 19 MR. ADAMSON: Yes. I mean I think 20 the principle of all yardstick regulation -- 21 MEMBER HIGGIN: No. 5. You are on 22 Step 5? 23 MR. ADAMSON: Yes. 24 Clearly, we want a yardstick which is 25 simple, but it also needs to reflect how well the party 26 is discharging this function, right? That is why I was 27 thinking about using a -- for example, I think 28 traditionally one would look at using a demand-weighted 214 DADSON/ADAMSON/GELOWITZ, presentation 1 price as being most relevant to consumers, because that 2 is what we are trying to create incentive on, is for 3 them to minimize consumers purchase cost. 4 Now, if there is only one class of 5 standard supply service this gets to be very, very 6 simple indeed. If there are multiple classes, 7 obviously then there is the question of you have to 8 have a mechanism. If you are not going to have one 9 contract portfolio against industrial customers and one 10 contract portfolio against residential consumers, then 11 you need an allocation, then you need an allocation 12 mechanism: (a) I would reckon that there are probably 13 some pretty good allocation mechanisms out there 14 already; and, (b) you are going to kind of have that 15 problem anyway. If you have multiple sets of standard 16 supply customers, then you have multiple prices to be 17 charged one way or the other. 18 One, I think relatively powerful 19 argument in terms of this system, is that the final 20 pricing that whoever this person is has to send out the 21 bills for gets to work like normally. We don't have to 22 match up all the variations between billing cycles and 23 average prices. 24 This came up at the Technical 25 Conference, and the more I kind of went back and 26 thought about it and the more I talked to someone I 27 knew who had quite a bit of experience with some of 28 these billing system implementations and restructuring, 215 DADSON/ADAMSON/GELOWITZ, presentation 1 the more powerful that seemed, you know, because the 2 last thing you want to be doing is changing the billing 3 systems at the time you are changing everything else. 4 MEMBER HIGGIN: What use, if any, to 5 the regulator would be the Market Power Mitigation 6 Agreement and the 3.8 cents that is the price that is 7 taken, if you like, by OPGI under that Agreement? 8 For example, could you see that being 9 one limit on the band? Could you see it being used as 10 a price cap? 11 MR. ADAMSON: As a reference. 12 MEMBER HIGGIN: As a reference or as 13 a cap? 14 MR. ADAMSON: I think it has a 15 referent value. 16 I think under the arrangement as 17 described -- and I noted some points about this a month 18 ago -- one needs to be very careful to think that 19 because of the mechanism they have described that the 20 price is always 3.8 cents. Those two don't exactly 21 follow. It is a revenue cap, not a price cap. 22 So the next stage of that is: What 23 indeed are the incentives on OPGI in order for what 24 type of market prices we expect to come out? If they 25 are, are the incentives on the remaining amounts not 26 covered under the MPMA strong enough to get them to try 27 to push prices up significantly above that, I wouldn't 28 really want to comment on that because I really haven't 216 DADSON/ADAMSON/GELOWITZ, presentation 1 done the kind of market power analysis which I think is 2 actually needed for that. 3 That certainly can be a kind of, I 4 think, a referent price. But given that it is a 5 revenue cap on OPGI, it's not a price cap on the market 6 as a whole, I don't know how to incorporate it. I 7 would certainly have to think about it, but I certainly 8 don't know how to incorporate it as a kind of a "Oh 9 yes, yes, it will be under 3.8", you know, that's the 10 kind of set price. 11 If it was a vesting contract 12 mechanism, then obviously there would be a price 13 fixing, but it is my understanding of the mechanisms it 14 is not. 15 MEMBER HIGGIN: Does your model have 16 sufficient flexibility to deal with LDCs that have 17 embedded generation and how do you treat that in your 18 model from setting rates specifically as opposed to 19 just the procurement aspect? 20 MR. ADAMSON: Right. 21 The point I brought up earlier was 22 every form of procurement model, whether it involves an 23 auction, whether it involves an incentive mechanism, or 24 whatever, one is always worried about any kind of 25 self-dealing. The implementation of kind of 26 procurement mechanisms, at least some of the ones that 27 I am aware of, have all included some form of -- not 28 outright ban but it did include regulatory restrictions 217 DADSON/ADAMSON/GELOWITZ, presentation 1 on self-dealing arrangements. 2 So, for example, the RECs in the U.K. 3 were only able to buy a relatively small proportion of 4 electricity from projects in which they had any kind of 5 interest. That actually did prove quite controversial 6 and quite problematic. So you certainly want to make 7 sure that there is not an incentive to try to kind of 8 get a sweetheart deal passed through. 9 Now, the fact that there is a cost 10 yardstick mechanism helps blunt, in some ways -- 11 because I may be losing (a) under the incentive scheme 12 by effectively raising the price that I'm getting paid 13 to my other hand over here which is running a 14 generating project. 15 I would assume, however, that you 16 would have quite stringent restrictions on the ability 17 of standard supply service providers to engage in kind 18 of self-dealing. I think that is an absolute necessity 19 in any type of one of these models. 20 MEMBER HIGGIN: Okay. Thank you very 21 much. 22 THE CHAIRMAN: Thank you very much 23 for your presentation. 24 I can see that you have stimulated 25 consumer interest in the Board and the Board Staff -- 26 MR. DADSON: Thank you. 27 THE CHAIRMAN: -- Mr. Dadson, 28 Mr. Adamson and Mr. Gelowitz, in your presentation. 218 DADSON/ADAMSON/GELOWITZ, presentation 1 The next presentation is from GPU, 2 representing a number of clients. We have Mr. Power 3 here with us this morning. 4 Mr. Power, if you are ready to 5 proceed, please do. 6 MR. POWER: Thank you. 7 I would throw one thing out to you. 8 I don't intend to go the full 30 minutes. If you feel 9 it is appropriate for a break now, it doesn't bother 10 me. I suspect it will be fairly efficient afterwards, 11 or it can go now, whatever fits. 12 THE CHAIRMAN: Why don't we go ahead 13 then. 14 PRESENTATION 15 MR. POWER: Okay. Thank you very 16 much. 17 There have been some fairly extensive 18 comments already on the spot market pass-through 19 mechanism at a fixed price. I do not intend to repeat 20 or go over that ground, our comments in our written 21 submission stand as they are. 22 What I would like to do, though, is 23 focus on some other aspects of this hearing which have 24 not received as much attention. 25 In particular, I would like to focus 26 on the Affiliates Relationship Code 2.5.7; the 27 restrictions contained in the Standard Supply 28 Code 2.2.4 and 2.2.5, which are the third party 219 POWER, presentation 1 standard service providers regarding the electricity or 2 marketing constraints that may occur; and, finally, 3 Standard Supply Code 2.5.1 regarding the charging of an 4 administrative fee. 5 Particular to these three areas of 6 the two Codes, the only conclusion that we can reach on 7 the evidence that we have had to date is that the 8 constraints proposed in those Codes are unnecessary and 9 that there are alternative means which already deal 10 with the underlying policy issues and, in fact, they 11 are already well drafted in other sections of the Codes 12 which we do not object to. 13 If I might add one other thing: If 14 there is something that we have all learned out of this 15 process over certainly the last couple of months since 16 the draft Codes came out and certainly since the 17 Technical Committees is, in our submission, the issues 18 that these address go far beyond a Code of Conduct. 19 My suggestion to you is, one of the 20 things that would help all of us at the end of the day 21 in whatever decision you write is to give some 22 definition to what a Code of Conduct is. 23 In our view, the issues which are 24 raised through these sections of the Codes are 25 fundamental market restructuring mechanisms, they go 26 far beyond regulating how a distributor may conduct 27 itself in relation to a third party or an affiliate. 28 In my mind, these go beyond to fundamentally affect the 220 POWER, presentation 1 business which may be carried out which is much 2 broader. 3 Let me elaborate on that a bit 4 further. 5 My submissions are not going to 6 follow the written materials as laid out. I am going 7 to break this down much more closely. 8 One, I want to speak to who should 9 bear the burden of proof. In my mind there are two 10 types of proof, there is the legal burden in terms of 11 the legislation and what it permits, but there is also 12 a regulator's burden in a broader policy sense. 13 The second issue I wish to talk to 14 is, what evidence do we have there to support the 15 regulatory restrictions that I have identified in the 16 two Codes. 17 Then, third, to look to what the 18 alternative proposal is here today based upon the work 19 which my clients have developed through Ms Woolf and 20 others and presented to you and conclude, quite 21 frankly, that we think there are other ways to deal 22 with this which address the issues. 23 This burden of proof issue is sort of 24 interesting, because when we came into this proceeding 25 a question that was constantly raised was: Is it the 26 obligation of the parties who are coming here to 27 comment on the Codes to do all of the work to prove an 28 alternative, or is the obligation of the parties here 221 POWER, presentation 1 to assist in the debate and identify the pros and the 2 cons, and also to assist in understanding where this 3 straw man documentation fits within the legislation. 4 In our view, there are some legal 5 issues in terms of whether these sections of the 6 proposed Code can properly fit within the legislation. 7 I note that section 70(2)(d) talks 8 about the conditions of a licence which may include 9 provisions regarding Codes: 10 "...including Codes which govern 11 the conduct of 12 (a) a transmitter or distributor 13 as that conduct relates to the 14 affiliates; and... 15 (ii) a distributor as that 16 conduct relates to its 17 affiliates." (As read) 18 There is no further guidance on what 19 a Code is, although it is patently clear that a Code is 20 the lowest and narrowest form of regulation. It is 21 something less than a licence, something less than the 22 legislative framework, is something less than the 23 regulations. It is a very narrow matter which is 24 limited in what it can constrain. 25 In our view, a Code only governs 26 conduct and in the narrowest sense: how one acts 27 around another party. In this case that is how one 28 acts around or in a relationship with the affiliates 222 POWER, presentation 1 and the retailers, but it doesn't go beyond to 2 fundamentally affect the business. 3 Now, the Codes here, when we put them 4 in the context of these proceedings, seek to regulate a 5 standard service supply essentially. 6 I refer to section 70(9) which has 7 been addressed here. Section 70(9) indicates that the 8 distributors may comply with their obligation directly 9 through the affiliate or through another person under a 10 contract. 11 Importantly, the transitional 12 distribution licence, which is higher up in the 13 hierarchy of regulatory instruments, states in 14 section 14(2): 15 "a licensee may fulfil its 16 obligation to supply through an 17 affiliate or through another 18 person or contract." (As read) 19 I put importance on the "may" which 20 implies the discretion to the licensee to fulfil its 21 obligation either though an affiliate or through a 22 person under the contract. 23 So within this context we then look 24 at 2.5.7. 25 I have to ask: How does a Code of 26 Conduct expand to fundamentally prohibit a transfer or 27 assignment of customers to an affiliate in light of 28 what the legislation says under section 70(9) and under 223 POWER, presentation 1 what the language says in the transitional distribution 2 licence? 3 You have heard the evidence of 4 Ms Woolf which, in her view, it is fundamentally 5 incompatible. It is fundamentally incompatible with 6 the intent of the legislation and it is fundamentally 7 incompatible with the practical language of 8 section 14(2), which is: 9 "a licensee may choose to fulfil 10 its obligation through one or 11 another mechanism." (As read) 12 In our view, the Code cannot override 13 those provisions. The only thing the Code can do is 14 give further definition within what has been said, and 15 as presently drafted we think it goes beyond the ambit 16 of 14(2) in the legislation. 17 Regarding section 2.5.1 of the 18 Standard Supply Code we ask the question whether a code 19 of conduct should dictate the administrative fees for 20 the standard supply service. 21 In our view, this is a rates issue, 22 it is not a code of conduct issue. In other words, it 23 dictates or addresses what costs form part of the rate 24 which will be passed on to the ultimate customer. 25 Rates are, for a very good reason, governed by other 26 parts of the legislation, and we don't see any guidance 27 in the legislation that talks about Codes also being 28 involved in the rate-setting and making pieces of the 224 POWER, presentation 1 legislation. 2 So in our view there is no authority 3 for the Codes of Conduct to govern rates. If you were 4 to choose to do that as a Board, which is your right, 5 then I think it has to be done through the licence or 6 another mechanism at a higher level. But as the 7 legislation is drafted it doesn't appear to us that the 8 Code is the proper means to do it. 9 I also raise a very practical issue, 10 which is fundamental to the marketplace, about 2.5.1 11 and this issue of the administrative charge. This new 12 electricity market is going to be based largely on 13 commercial market incentives. Whether we like it or 14 not, we are moving out of an old world and very much 15 into a world where everybody who participates in the 16 supply of electricity to the ultimate customer is going 17 to be making commercially based decisions. 18 We don't understand how, if the 19 intent of this is simply a pass-through of costs plus 20 an administrative fee, you will ever be able to 21 incentivize somebody to build the infrastructure, find 22 the capital, et cetera, et cetera, to carry out this 23 type of business. 24 We heard evidence throughout the 25 hearing that nobody, certainly not the Municipal 26 Electric Utilities, is going to go to the 27 municipalities and say, "There is no value in providing 28 this standard service supply. So, Dear Municipality, 225 POWER, presentation 1 give me $2 million to start it up, 30 per cent of my 2 staff, and in return you will get no rate of return." 3 I can tell you that I cannot look any 4 of my clients, or their shareholders to be, in the eye 5 and say that this is a business to be in. I cannot 6 look them in the eye and say, "This is a good, wise, 7 and prudent investment of your taxpayers' dollars." It 8 is a very difficult issue, and that is the way it is 9 seen, rightly or not. 10 So there is a practical issue, 11 whether we like it or not. I don't think anybody is 12 going to be rushing out to offer this service, which is 13 fundamental to the market and is required by the 14 legislation, if there is only an administrative fee on 15 it. 16 The third issue that the Code seeks 17 to deal with, the 2.2.4 and 2.2.5 of the Code, the 18 geographic restrictions, we ask: Should a code of 19 conduct prohibit outright business activities for 20 standard service providers? 21 This is undoubtedly a fundamental 22 policy issue. Similar restrictions were originally 23 proposed in the draft legislation and were debated 24 extensively and ultimately rejected by the legislature 25 at the end of the day, if you remember the debates. 26 The legislative committee heard 27 extensive submissions on how the business activities of 28 LDCs and their affiliates should or should not be 226 POWER, presentation 1 constrained. They rejected similar provisions outright 2 that many parties had submitted. This is actually 3 recycling back to debate that we had two years ago, 4 which has already been resolved. I would suggest to 5 you that the legislation was very clear when it was 6 drafted in not seeking to further limit the business 7 activities that LDCs or their affiliates can engage in. 8 So in our view, this goes well beyond 9 the pale of what a code of conduct is, in fact flies in 10 light of the legislative decision of some year and a 11 half ago. 12 I might add that 2.2.4 and 2.2.5 put 13 the distributor in the role of a policeman and 14 regulator, because really this licence and code of 15 conduct is going to attach to the distributor, and it 16 is going to seek to compel the distributor to review on 17 an ongoing basis the business activities of a third 18 party or competitive affiliate with respect to engaging 19 in the offering of services within the service area 20 that they are not permitted to do. 21 I raised some interesting questions 22 for your consideration. I am not confident that the 23 geographic service area, from a commercial perspective, 24 has any relevance or consideration to an LDC's service 25 territory. 26 For example, if you take out an 27 advertisement in the Toronto Star and it just happens 28 to end up in Mississauga, has the licence now been 227 POWER, presentation 1 violated? 2 If your standard service provider 3 offers services in many parts of the province, yet it 4 is told it cannot engage in any activities within this 5 artificial geographic area in the new commercial world, 6 how is the LDC going to police that? It is going to be 7 impossible, fundamentally impossible. 8 Now, I suspect there will be some 9 areas of grey, but you have a practical problem. The 10 commercial world is simply not going to recognize these 11 artificial old school boundaries. I think that is a 12 difficulty that you have to deal with, and I think it 13 is a difficulty that has not been addressed in these 14 geographic constraints. 15 I had earlier mentioned there are two 16 burdens, if I may. One is to ensure that the 17 legislation is complied with, and I have touched on 18 those issues. The other one I had mentioned is what I 19 characterized as the regulator's burden, which perhaps 20 goes beyond, or is in addition to, the legislative 21 framework. 22 I note that at page 16 of the Woolf 23 paper there is an excellent quote there from some of 24 your regulatory colleagues who have gone before you 25 last year elsewhere. This is a quote from the Illinois 26 Commission of last year dealing with substantively the 27 same issues that are before you here. At the end the 28 Commission agreed with the arguments made by the 228 POWER, presentation 1 utilities there that a light-handed approach to 2 regulating affiliate transactions is warranted, and I 3 quote: 4 "At this point, in the evolution 5 of competition in the Illinois 6 energy market, an approach which 7 imposes fewer, rather than 8 greater, controls on the 9 utilities and their affiliated 10 interests is warranted. The 11 only real way to test the market 12 is to observe it over a 13 reasonable period of time and to 14 draw conclusions based upon 15 empirical observations. 16 Further, by keeping regulation 17 at a minimum at the outset of 18 competition, the empirical 19 observations are more reliable 20 because market forces have had 21 an opportunity to work. 22 Further, if the Commission 23 initially adopted a heavy-handed 24 regulatory regime, it would be 25 unable to evaluate the 26 possibility that a competitive 27 market would have developed 28 under a light-handed regime." 229 POWER, presentation 1 (As read) 2 There are some significant pearls of 3 wisdom in that particular decision of the Commission. 4 This is a commission that obviously had confidence in 5 the future. It didn't feel a need to presume the worst 6 and intervene intermediately. It felt that there was 7 probably some goodwill in the participants in the 8 marketplace, and there was some time to act. They 9 chose to do what is often the wise thing to do: take 10 some time to act. 11 What is being urged upon you is the 12 contrary. Act now without the evidence. Act now 13 before the marketplace even begins. Act now before we 14 even know who the participants ultimately will be when 15 the market opens. 16 You don't have the answers to many of 17 these questions. 18 Similar types of arguments were 19 debated before the Illinois Commission, and I commend 20 that decision and that particular quote to you to think 21 about. 22 In essence, I would suggest that the 23 role of the regulator is to monitor market power 24 predominantly. Only if the Board actually finds abuse 25 of that market power, which is highly likely or certain 26 if we are looking to the future, should the Board feel 27 empowered to intervene in the marketplace and impose 28 restrictions. 230 POWER, presentation 1 The Illinois Commission clearly 2 concluded that in the early days of competition, the 3 light-handed approach is appropriate. 4 I look at, in the context of Illinois 5 and their wisdom there, the evidence that we have 6 before all of us in these proceedings. 7 I have the evidence of Professor 8 Dewees, who says, quite honestly, that section 2.5.7 of 9 the Affiliates Relationship Code was never examined as 10 part of the studies of the MDC. They did have a 11 contentious debate on it. That debate resulted in an 12 affirmation of the legislation, but it was very clear 13 that the MDC process was short on time and resources 14 and didn't get to this. 15 Mr. Dewees was also very honest about 16 the PHB study which spoke for itself, which we 17 referenced to you on the motion. PHB, the lead 18 consultants to the MDC, and the Board's own 19 consultants, examined the standard supply options and 20 in so doing clearly stated that the transfer of 21 customers is a key issue which has not been studied. 22 It clearly flagged it as a fundamental issue to which 23 they do not have answers yet. 24 Minister Wilson, in his letter to the 25 Board of some time ago, clearly stated that the 26 proposed 2.5.7 of the Affiliates Relationship Code was 27 causing serious reservations and did not approve that 28 section of the Affiliates Relationship Code until we 231 POWER, presentation 1 went through these proceedings. 2 Board staff themselves, unless I 3 heard incorrectly, have advised that they themselves 4 have undertaken no further work beyond that which the 5 MDC has done. So we do not have the benefit of any 6 further work from when the MDC's work was completed. 7 In my mind, there is an absolute 8 paucity of evidence for this Board, following the 9 Illinois approach, to impose section 2.5.7 of the 10 Affiliates Relationship Code and the other sections 11 which I have referred to. 12 On the other side of the scales of 13 the evidence which you are being asked to weigh, not 14 just of the Illinois decision, I refer you to the paper 15 of Fiona Woolf and the evidence that she gave here. 16 On pages 26 to 30 of her paper, she 17 reviewed several other jurisdictions which have begun 18 to grapple with these types of issues. 19 She begins with, I guess, one of the 20 leading jurisdictions which has the most experience in 21 these matters, the New England and Wales experience. 22 They have 10 years of some experience on this and 23 extensive reviews and debated. 24 In her paper she notes that there is 25 no particular evidence of the problems of concern in 26 these proceedings here from the past conduct of the 27 participants in the New England and Wales marketplace. 28 Basically, the proposals of the 232 POWER, presentation 1 regulator there, OFGEM, do deal comprehensively with 2 the issues that the ARC here seeks to address, but 3 there the regulator did not think it necessary to, one, 4 prohibit the transfer of customers to affiliates. 5 There is no equivalent to the ARC-2.5.7 there. Two, 6 they did not feel it necessary to place restrictions on 7 soliciting, selling or marketing to default customers. 8 And, three, they did not place geographic restrictions 9 on the areas in which the affiliate could compete to 10 supply customers. 11 That is the jurisdiction which has 12 the most experience in these matters. I think we can 13 learn something from that. 14 She goes on to talk about the 15 Northern Ireland model, somewhat different in terms of 16 you have a large dominant utility there, highly 17 vertically integrated, and actually should give cause 18 to even greater policy concerns about competition in 19 the marketplace. In Northern Ireland, it is notable 20 there that the regulator also felt it was not necessary 21 to impose restrictions on transferring customers and 22 soliciting default customers. 23 She goes on to review the evidence of 24 what the regulator has done in Norway. Again, there 25 the regulator is very active in Norway, somewhat 26 similar to Ontario, in that they have 326 separate 27 utilities. So they have a large apparent regulatory 28 burden. 233 POWER, presentation 1 There the utilities appear to have 2 complete freedom as to how they use their customer 3 lists. The utilities can market their default supply 4 customers, and there are no geographic restrictions. 5 In fact, they are enabled to sell their customers 6 outright, and Oslo Energy recently sold its customer 7 base to a Swedish supplier. 8 So there is an abundance of evidence 9 of other jurisdictions which have said, "We have no 10 need to do these things which are being proposed in the 11 Affiliates Relationship Code and the Standard Service 12 Supply Code." 13 California, which is not a model of 14 excellence in moving to competition, and has many 15 problems which have been touched on here, and is 16 probably more complicated and difficult to draw 17 analogies from -- I note, as an aside, that even in the 18 California model where there is some attempt to make 19 something equivalent to the Affiliates Relationship 20 Code 2.5.7, even that provision, which is considered 21 more onerous than anywhere else, is far less 22 restrictive than we have here. 23 That is the only one that we can find 24 that is similar to the language here. 25 Again, I look at the weighing of the 26 evidence before us as a regulator and the need to 27 intervene in the marketplace before it even opens up. 28 I can only come to the conclusion that there are many 234 POWER, presentation 1 of your fellow regulators out there who have had the 2 opportunity to be years in advance of you in this, and 3 they have concluded that there is no need to intervene. 4 I think that you should take some 5 notice and some comfort from that, that you have time 6 to deal with these things, because obviously they felt 7 they had time to deal with these things. 8 If the Standard Supply Code and the 9 Affiliates Relationship Code provisions which I speak 10 to, in conjunction with the other ones of concern -- 11 not the broader ones which the parties don't take issue 12 with here, but these key ones -- do go forward, I note 13 on page 30 of the Woolf paper it succinctly outlines 14 the downsides of all this, particularly to the issues 15 which I am talking about. 16 Her conclusion is that there is 17 little international evidence of the serious mischief 18 materializing of the type that Board staff's straw man 19 document talks about. There is little international 20 evidence of the accounting separation auditing not 21 achieving a desired result. 22 I notice that the codes propose to 23 have these types of accounting separations as a safety 24 check. 25 There are no difficulties in 26 obtaining non-discriminatory access. There has not 27 been evidence of voluminous complaints relating to 28 unfair competition, competitive advantages, and there 235 POWER, presentation 1 has not been real difficulties arising over the misuse 2 or release of confidential information. 3 So in addition to the experience of 4 what the regulators have done, we have a complete 5 absence of practical problems in those jurisdictions. 6 I suspect highly that if there was, 7 PHB or somebody else would have produced the 8 appropriate regulatory reports to you or in these 9 proceedings, given how creative and energetic many of 10 the parties are, you would probably have stacks and 11 stacks of reports highly documenting these concerns. 12 The absence of those reports should give you some 13 comfort. 14 I guess, in conclusion, my clients 15 and I would urge you to follow the wise path of those 16 who have gone before you. I have confidence, and I 17 would suggest others have confidence, that these 18 issues, if they should arise in the Ontario context, 19 can be dealt with later if and when the problems 20 emerge. 21 You will then have the benefit of the 22 actual evidence before you to act at that time, and you 23 will understand the true implications of what the 24 concerns are. 25 The flip side, I am afraid, is the 26 evidence of lack of new generation investments, which 27 is fundamental to driving down price, obviously, a lack 28 of a significant number of competitors in the new 236 POWER, presentation 1 retail world, and all the other issues which we have 2 heard about and I won't repeat here. But I would 3 suggest to you you have time, you can act cautiously 4 and you can always reconvene or reconsider this issue 5 in the next few years. 6 Thank you very much. Those are my 7 submissions. 8 THE CHAIRMAN: Thank you, Mr. Power. 9 Questions from Board staff? 10 MS LEA: One moment, please. 11 --- Pause 12 MS LEA: Ms O'Reilly and I were just 13 attempting to come up with a coherent question that 14 relates to -- if the Board accepts your argument that 15 they should not now attempt to impose these 16 restrictions, what are the risks that the Board 17 would -- or what regulatory risks would they impose on 18 the market if they decided, at a later date, that 19 circumstances are such that they had to start 20 exercising some controls, that some regulatory 21 intervention was necessary? Are we facing more 22 potential problems down the road if we tried to impose 23 controls later or are we facing more potential problems 24 now if we impose controls now? I am trying to 25 understand that balance. 26 MR. POWER: There are a couple of 27 things, I guess. 28 I guess, honestly, we don't know how 237 POWER, presentation 1 the world is going to unfold. I can speculate. But I 2 do know one thing right now: when I am told that the 3 number one project for decontrol for Ontario Hydro, the 4 Lakeview Project, which has had two years of investment 5 in it, is basically saying, "I can't proceed under this 6 new world", then I have a very serious concern -- and 7 we heard that evidence of all the new generation -- or 8 if I am told by many of the potential new players in 9 the retail market right now that "I can't participate" 10 or "I won't invest the money", more accurately, "I am 11 just not going to do it", then I think we have a very 12 serious problem now. 13 What might be the down sides of not 14 acting on these things now? One issue, I guess, is 15 whether the customers hang around the LDCs forever and 16 we don't get a full and proper separation. This is a 17 concern that has been echoed in gas and elsewhere. 18 I note that some of the other 19 jurisdictions have dealt with this by suggesting, after 20 watching this for a period of time, they have a sunset 21 date, a sunset date all their customers must move from 22 the LDC. In fact, that is what is contemplated in the 23 legislation: at some point time, a regulation is going 24 to come down that says, "The LDC can no longer directly 25 provide the standard service offering", and that 26 provision was written with the awareness of these other 27 mechanisms that have been contemplated elsewhere. 28 So I think that you have got some 238 POWER, presentation 1 tools if your interest is moving this out of the LDC 2 and any risk around the LDC which are already 3 contemplated in the legislation and I don't think it 4 will be a big surprise to anybody and there will be a 5 natural evolution. 6 MS LEA: So your assessment, then, of 7 the situation in Ontario is that there would be more 8 inhibition or artificial constraints placed on the 9 investments in capital going into generation if these 10 restrictions were imposed now than if the market was 11 allowed to evolve as it would and restrictions were 12 placed later? 13 MR. POWER: Certainly. On the 14 evidence we have before us, I don't see how you can 15 reach any other conclusion. 16 MS LEA: Thank you very much. 17 THE CHAIRMAN: Dr. Higgin? 18 MEMBER HIGGIN: Thank you. 19 Just, first of all, a clarification 20 that you could help me with, just a reference that I am 21 trying to determine whether it relates to the material 22 filed at the technical conference or whether it is your 23 final submission. If you could look at Appendix C of 24 the final submission -- it is actually Appendix B, 25 which is then Appendix C, I think, from the -- is that 26 right? 27 MR. POWER: Yes. Correct. 28 MEMBER HIGGIN: Okay. Now, the 239 POWER, presentation 1 clarification I am looking for is on page 3 of that 2 appendix. It says, in effect, in an effort to be 3 constructive, the stakeholders are prepared to live 4 with the majority of these restrictions and 5 requirements provided a small number of changes of 6 fundamental importance to them -- which are set out in 7 section 6 of this paper -- are made, and then there is 8 a list of them. 9 Could you just clarify whether that 10 reference relates to, as opposed to your final 11 submissions which you addressed, many of the same 12 things plus 2.5.7? I am just trying to clarify if you 13 could. 14 MR. POWER: I believe that is -- I am 15 just checking -- Appendix C to the Fiona Woolf paper 16 and documents. 17 MEMBER HIGGIN: Yes. 18 MR. POWER: That excerpt should be 19 from there. 20 MEMBER HIGGIN: Okay. Because the 21 context, as I just read it, is that you are able to 22 live with some of the restrictions, with the exception 23 of, then, the list that follows, and I didn't interpret 24 your position to be along those lines. You are so 25 aggrieved by several other provisions more than just 26 that way. Am I -- 27 MR. POWER: If I could take you 28 back -- I don't suppose you have the Fiona Woolf paper 240 POWER, presentation 1 there, do you, because that sets the framework for 2 that. 3 MEMBER HIGGIN: It is in here, yes. 4 MR. POWER: If I could refer you to 5 the top of page 2 of her document, she outlines, in 6 five bullet points, the fundamental ones, in her view. 7 Then I think this context will make sense, then, after 8 you have had a look at that. 9 What I have really done is 10 highlighted those bullets and the five which are 11 identified in the Woolf paper that don't relate to the 12 standard spot price pass-through because others have 13 dealt with it. 14 I do note, though, attached to our 15 submissions -- I guess what we are trying to do in 16 Appendix C is to note that there are quite a number of 17 other burdens, through the codes and interpretation 18 issues. 19 In terms of the burdens, they will go 20 a long way in and of their own right to address many of 21 the policy concerns, you know, the three fundamentals: 22 protection of customer information, equal access, et 23 cetera, et cetera. 24 But if you choose, if anybody should 25 ever choose to rewrite this down the road, we thought 26 it might be helpful to reflect upon some of the 27 ambiguities and just give that as an additional list. 28 MEMBER HIGGIN: So, basically, you 241 POWER, presentation 1 and your clients are adopting the things that you would 2 like to see repaired, as in the first 30 pages or 34 3 pages of this final submission, as opposed to that list 4 in -- 5 MR. POWER: I must say I had not gone 6 back through and checked it all, but my intent is that 7 the two act together. 8 MEMBER HIGGIN: So we will take it 9 that, given your final submissions on those -- the only 10 question I think I have asked before, regarding the 11 practicality issues, as you see them, related to the 12 transfer of customers under 2.5.7. I mean your 13 principal submission is, "Let's abandon that", but if 14 that is not -- or if it were to be modified, what do 15 you see are the practical constraints that need to be 16 applied to the implementation of amendment of 2.5.7? 17 MR. POWER: Well, I think you have to 18 stand back now and ask yourself the big picture policy 19 objective, which is, you know, one, if the White Paper 20 is to be lived up to and the municipal electric 21 utilities have some right to carry on in this new 22 world. 23 The new world is going to be a 24 competitive commercial world, so for them to be able to 25 do this, given who they are competing against, there 26 must be some reasonable assurance of a customer base 27 and there must be some reasonable assurance of some 28 revenue stream. Now, that is the big picture. Within 242 POWER, presentation 1 that, we have the standard service supply, which is a 2 more regulated concept. It doesn't have the broader 3 commercial constraints. 4 I think you have to find a mechanism 5 that is going to instill business confidence to assure 6 people that in this retail world they should invest in 7 providing the standard service supply, in the same way 8 that you have to find a mechanism to instill confidence 9 in the generating market that they should invest in new 10 generation. So I would phrase this in terms of: What 11 is the objective? The objective is we want to have 12 people who will undertake the standard service supply 13 and who will be there when the regulation comes down 14 which terminates the continued involvements in the 15 LDCs. 16 Now, to do that there has to be some 17 reasonable rate of return in return for taking on a 18 business risk of this issue, for rolling the capital, 19 for rolling the investment and these sorts of things, 20 and it is, by its very nature, a public service. 21 So, given that it is a public 22 service, I think there is a balancing between 23 incentivizing people to offer it and carry it out, but 24 also assuring it does not become a mechanism -- and 25 nobody is suggesting this -- for either gouging 26 customers or somehow inappropriately manipulating the 27 market to the disadvantage of others in the 28 marketplace. 243 POWER, presentation 1 So that would be the broad sorts of 2 issues that I would see as the tug and the pull. 3 I would suggest, though, you are in a 4 very difficult position with whatever you redraft 5 because it is being looked at very closely over the 6 next year, as the municipalities and others are looking 7 at what businesses they are getting into, and at 8 present it instills no confidence. So if it is viewed 9 as just a variation on the theme, I think you will find 10 the same reaction. If anything, if I could find a way 11 to deal with it, I would try and characterize it more 12 in a positive light than a wholly negative light, if 13 that is helpful. 14 MEMBER HIGGIN: I guess since we 15 talked last during the motion, the issue of how the 16 mechanism -- you have now clarified in your own mind 17 the mechanism that is open to the Board, as opposed to 18 the licence, the transitional licence -- 19 MR. POWER: If the Affiliate 20 Relationship Code 2.5.7 doesn't carry forward, in my 21 view, then, as I read -- are you talking about 14.2, 22 the transitional distribution licence? 23 MEMBER HIGGIN: Yes. 24 MR. POWER: There would be no need to 25 amend that because all it does is essentially enshrine, 26 as I recall, section 70(9) I guess of the legislation, 27 and says that the -- I am just looking for my licence 28 right here. 244 POWER, presentation 1 But it basically provides, as I 2 recall, the opportunity of carrying out the Standard 3 Service Supply Code, either through the LDC or through 4 an affiliate or through a third party. Is that 5 correct? 6 MEMBER HIGGIN: Yes, but 14 is not 7 the relevant one I was thinking about. 8 MR. POWER: That's what I am 9 wondering. 10 MEMBER HIGGIN: It was section 17, 11 which sets out the process for amending any condition 12 of the licence which would, of course -- 13 MR. POWER: I would have to pull out 14 the Act, but, if I remember correctly, there are a 15 couple of ways to go at this. One is I think you have 16 a right to, if necessary, go so far as having a written 17 hearing, as opposed to a full hearing, to amend these 18 things. 19 Two, is I can't help but note that 20 this is a transitional distribution licence and that 21 you have some greater flexibility to amend it at a 22 later point. 23 It may well be that an Order of this 24 Board can deal with this issue without amending the 25 transitional distribution licence at this time, but 26 gives notice that it will be so amended at the 27 appropriate point in time. That might be another way 28 to approach this. 245 POWER, presentation 1 MEMBER HIGGIN: Thank you. Thank you 2 very much. 3 THE CHAIRMAN: In the scenario you 4 envision, what would be the role of the private sector 5 retail marketers if the changes that you suggest were 6 made? 7 MR. POWER: Well, they are going to 8 do what they do best, aren't they? Regardless of who 9 provides the standard service supply, they are going to 10 fight hook, tooth and nail, as they should, to try and 11 persuade those people to get off of the standard 12 service supply, which I think is a policy objective of 13 the legislation. 14 I actually believe that a number of 15 them, in fact some of the bigger players are noted by 16 their absence here, would like to actually partner up 17 with municipal electric utilities and in fact not 18 compete but rather try and achieve the efficiencies of 19 infrastructure and customer lists that the Woolf Paper 20 and the Adamson Paper talked about, because certainly 21 the experience in other jurisdictions, particularly 22 California, is that it's going to be grossly expensive 23 to compete on a customer-by-customer basis in terms of 24 a big picture marketing. 25 If you intend to get market share 26 immediately, so that you can then use that to do 27 bilateral contracts with generators, I expect that the 28 retailers will go out. Certain ones will automatically 246 POWER, presentation 1 target the large industrials. The large industrials we 2 know are already out there shopping around. I think 3 they will take care of themselves as well. They are 4 fairly sophisticated. 5 I think at the small residential/ 6 commercial you are going to see the similar types of 7 activities that you saw on the gas side. 8 THE CHAIRMAN: Are there any other 9 questions? 10 Mr. Power, thank you very much for 11 your presentation this morning. 12 MR. POWER: Thank you. I appreciate 13 it. 14 THE CHAIRMAN: Let us take a 15 15-minute break and come back at ten after eleven. 16 Thank you very much. 17 --- Upon recessing at 1055 18 --- Upon resuming at 1115 19 THE CHAIRMAN: Good morning, 20 gentlemen. 21 MR. ALLEN: Good morning. 22 THE CHAIRMAN: We are now going to 23 hear from the Sault Ste. Marie Public Utilities 24 Commission and if you would introduce yourselves. 25 MR. ALLEN: My name is Kim Allen. I 26 am the President of DTE/Probyn Energy Solutions. 27 MR. FREDERICK: Allan Frederick, 28 Manager of Finance, Sault Ste. Marie PUC. 247 POWER, presentation 1 PRESENTATION 2 MR. ALLEN: I am here today to 3 represent the Public Utility Commissioner of the City 4 of Sault Ste. Marie. We referred to it all the way 5 through our presentation as the PUC, concerning the 6 Standard Supply Service Code. 7 In this hearing, DTE/Probyn Energy 8 Solutions submits its evidence before you concerning 9 two issues for your consideration and decision. The 10 first issue, restrictions on energy procurement by 11 Sault Ste. Marie PUC for standard supply service, and 12 the second issue, the impact of the competitive 13 transition charge in the pricing mechanism for standard 14 supply service. 15 These two issues will significantly 16 affect the City of Sault Ste. Marie, its citizens and 17 its businesses and the customers that are served by the 18 Public Utilities Commission of Sault Ste. Marie. 19 I would like to provide you with some 20 background information on this matter before I bring 21 the issues to your attention. 22 Sault Ste. Marie is a northern 23 Ontario community with a population of approximately 24 81,000 people. The PUC was established by City Council 25 in 1917 and has been responsible for the electric and 26 water supply to the citizens of the city. The electric 27 utility serves approximately 32,000 customers. 28 The PUC purchases its electricity 248 ALLEN/FREDERICK, presentation 1 from Great Lakes Power Limited, a privately-owned 2 company with hydroelectric generating stations located 3 throughout the Algoma District. Great Lakes Power has 4 provide the PUC with electrical service and supply over 5 the last 70 years. Their rates have been historically 6 15 to 20 per cent below those rates charged by Ontario 7 Hydro to comparable municipal utilities. 8 In a referendum held by the City of 9 Sault Ste. Marie in January of 1928, residents and 10 industrial customers decided that Great Lakes Power 11 would be the principal supplier of electricity, rather 12 than the provincially owned Hydro Electric Power 13 Commission, which was Ontario Hydro's predecessor. 14 This uniqueness of relationship 15 between Great Lakes Power, the city and the PUC relates 16 fundamentally to the residents and customers who have 17 opted out of the Ontario market and reaffirming their 18 separateness from it over the years, most recently 19 extending Great Lakes' franchise to supply the city 20 until the year 2008. 21 The current electricity supply 22 contract ends December 31, 2008, with a rate reopener 23 in the year 2003. 24 The PUC has one of the lowest 25 industrial power rates in Ontario, with comparable 26 communities surveyed in Ontario Hydro's Monthly Rates 27 and Comparative Bills in March of 1997. Compared with 28 communities listed in the same manual in July of 1993, 249 ALLEN/FREDERICK, presentation 1 the city has the lowest residential power rates in the 2 province, with an average monthly bill of $68.40 for 3 1,000 kilowatt hours. 4 The original contract for supply to 5 the PUC by Great Lakes Power dated back to that 6 decision, the referendum in 1928, and has been 7 reaffirmed year in an year out and the current contract 8 is a 10-year contract. 9 The city and the PUC are in the 10 process of restructuring the utility to comply with the 11 Energy Competition Act. DTE/Probyn Energy Solutions is 12 assisting them in this process. The city and the PUC 13 are examining the options to form retail affiliates 14 and/or set up an LDC company to best meet the needs of 15 the citizens and customers of Sault Ste. Marie. The 16 PUC has not finalized how it will fulfil its standard 17 supply obligation. 18 During phase one of the PUC's 19 restructuring, we conducted an elaborate stakeholder 20 involvement process. With respect to the PUC's 21 existing performance concerning rates, the responses 22 were consistently positive. Almost every participant 23 was very satisfied with the PUC's performance in the 24 area of rates. 25 When asked to rate their overall 26 satisfaction with all the utilities, comparing them 27 with natural gas, electricity, water, local and long 28 distance telephone and cable TV, electric service was 250 ALLEN/FREDERICK, presentation 1 rated the highest by both residential and business 2 customers. 3 When we asked the stakeholders for 4 their perceptions on the introduction of competition 5 into the marketplace in their city, a majority of the 6 stakeholders envisioned that prices might possibly be 7 lower. 8 On July 12, 1999, the City Council of 9 Sault Ste. Marie unanimously voted in favour of 10 retaining the PUC to achieve the following objectives 11 for the shareholders: To promote growth and 12 opportunities for the city; to maximize job 13 opportunities within the city; to maximize shareholder 14 value; to maintain customer service excellence and to 15 maintain environmental and safety leadership. 16 The city's interest in retaining the 17 PUC is directly linked to the economic development of 18 Sault Ste. Marie. The PUC has been seen as a catalyst 19 for growth. This is extremely vital to a community 20 with unemployment currently running at about 15 per 21 cent. 22 Mr. Chairman, the above information 23 was part of the evidence that I wish to submit. 24 A number of issues are related to the 25 restrictions on energy procurement by the new utility 26 of the City of Sault Ste. Marie and the pricing 27 mechanisms for standard supply. 28 We are responding to the above Notice 251 ALLEN/FREDERICK, presentation 1 of Hearing with the intention for the PUC to intervene 2 in the Technical Conference and to participate in the 3 Technical Conferences. 4 As an introduction to the White 5 Paper, "Direction for Change - Charting a Course for 6 Competitive Electricity and Jobs in Ontario", The 7 Honourable Jim Wilson, Minister of Energy, Science and 8 Technology announced the following message to 9 Ontarians: 10 "Fellow Ontarians: Within 11 months of taking office, the 12 Government initiated a process 13 of intensive study and 14 consultations aimed at ensuring 15 a competitive, reliable, 16 affordable and safe supply of 17 electricity for all Ontarians. 18 I am now pleased to announce a 19 proposal for restructuring 20 Ontario's electricity system 21 that would meet these objectives 22 and build on the momentum of 23 increased investment and job 24 creation opportunities evident 25 throughout the Province. 26 We believe that a competitive 27 electricity system will deliver 28 significant benefits to all 252 ALLEN/FREDERICK, presentation 1 power consumers in the 2 province -- from homeowners to 3 large institutions, commercial 4 businesses, and major 5 industries -- as well as to 6 Ontario taxpayers. In 7 particular, the Government 8 believes that the move to a 9 competitive electricity market 10 is the key to: 11 creating jobs and a robust 12 economy that is competitive and 13 attractive investors; 14 providing the lowest possible 15 costs while safeguarding a 16 reliable, safe, environmentally 17 sound electricity supply; 18 restoring the vitality and 19 financial soundness of Ontario's 20 electricity system; and 21 ensuring a level playing field 22 for all participants with an 23 independent regulator." 24 The overall goal of energy reform in 25 Ontario by the government is to create a fair, open, 26 competitive electricity market for all investors and to 27 ensure affordable prices and security of supply. 28 Protection of Ontario's consumer interests was 253 ALLEN/FREDERICK, presentation 1 emphasized in the legislation through reasonable and 2 fair prices. One of the purposes of the Energy 3 Competition Act is: 4 "...to protect the interests of 5 consumers with respect to the 6 prices and reliability and 7 quality of electricity 8 [supply]." 9 Mr. Chairman, I would like to 10 particularly emphasize on these objectives throughout 11 our discussions today. 12 The issues and proposals. The first 13 issue is restrictions on energy procurement by Sault 14 Ste. Marie PUC for standard service supply. The PUC is 15 currently procuring its entire energy power needs from 16 Great Lakes Power. The issue that the PUC wishes to 17 address relates to the ability of the local 18 distribution company or an affiliate of the local 19 distribution company to obtain power at below spot 20 prices and sell it to its customers at the averaged 21 spot prices. 22 The Standard Supply Code, which is in 23 draft form, suggests that the LDC must buy from the 24 independent market operator at spot price and sell to 25 its customers at spot. However, the Code does not 26 address the issues as to whether the provider of the 27 standard or default supply is able to procure power at 28 a price less than the average spot and pass along these 254 ALLEN/FREDERICK, presentation 1 savings to the customers. The average spot price is 2 the price that would be the maximum price charged to 3 customers under the proposal we are putting forth. 4 The LDC desires to purchase power 5 from its affiliate to meet the standard supply 6 obligations. Our proposal is that we revise clause 7 2.2.2 of the draft Standard Supply Service Code to 8 read: 9 "A distributor that chooses to 10 fulfil its standard supply 11 service obligation directly 12 shall purchase electricity 13 required to fulfil its 14 obligation to sell electricity 15 to consumers under standard 16 supply service at price not 17 exceeding the spot market 18 price." 19 We will need to ensure that the new 20 restructured electricity system delivers significant 21 benefits to all power consumers in the province, from 22 the homeowners to the large institutions and commercial 23 businesses, as well as to the taxpayers. 24 The second issue relates to the 25 impact of the competitive transition charged in the 26 pricing mechanism for standard supply service. The CTC 27 is provided for under the Electricity Competition Act, 28 whereby generators and consumers can be required to pay 255 ALLEN/FREDERICK, presentation 1 a charge to the Ontario Hydro Financial Corporation for 2 the purpose of retiring a portion of the stranded debt 3 of Ontario Hydro, the residual debt. 4 The businesses and citizens of Sault 5 Ste. Marie have enjoyed very low rates because of the 6 unique positioning in the province. It's interesting 7 that the city's motto is that the city is naturally 8 gifted and I think this applies certainly to their 9 position in the generation market. 10 The PUC has never been a customer of 11 Ontario Hydro and the PUC has been a customer of Great 12 Lakes Power for more than 70 years. Great Lakes Power 13 provides the rates again at 15 to 20 per cent below the 14 rates charged by Ontario Hydro. The investment and 15 financing of Great Lakes Power's generation has been 16 done through the raising of private funds and the rates 17 it charges to its customers. 18 Any requirement for the PUC to pay 19 the CTC would be most unfortunate and unfair because 20 the PUC has historically had all its power supplies met 21 by Great Lakes Power. The customers of the PUC should 22 not bear any responsibility for repaying debt incurred 23 by Ontario Hydro. 24 It is expected that the introduction 25 of competition will lead to reduced prices and cost 26 pressures on electricity providers and encouraging 27 savings for customers. Transmission and local 28 distribution prices will be regulated to ensure that 256 ALLEN/FREDERICK, presentation 1 they are as low as possible, keeping the total 2 electricity prices down and protecting the reliability 3 and security of the power system. 4 However, the application of the CTC 5 charge will lead to rate increases for the businesses 6 and citizens of Sault Ste. Marie. This is contrary to 7 the objectives of the Energy Competition Act, which is 8 intended to enable customers to receive lower prices 9 for their energy needs. 10 Our proposal is that PUC customers be 11 exempt from the CTC for energy purchased under the 12 existing contractual agreements with Great Lakes Power 13 on the basis that much, if not most, of its historic 14 supply has not been provided by Ontario Hydro. If the 15 PUC were served by Ontario Hydro, then it would have to 16 pay its fair share of Ontario Hydro's stranded costs. 17 The application of the CTC will lead to higher prices 18 and increased rates for the citizens, customers and 19 businesses of Sault Ste. Marie and, thus, would not be 20 fair. 21 In this case, we consider the PUC 22 meets a statutory exemption from the CTC in seeking to 23 obtain a provider of electricity from other than 24 Ontario Hydro. The PUC contends that by being supplied 25 directly by Great Lakes Power, it has not been included 26 in Ontario Hydro's service territory and, therefore, 27 has no obligation to pay CTC under these circumstances. 28 We indicated about the perceptions of 257 ALLEN/FREDERICK, presentation 1 the citizens, customers and businesses of the city of 2 Sault Ste. Marie concerning the major impact of 3 deregulation on their city through reduced electricity 4 prices. With the passage of the Energy Competition 5 Act, the OEB has been charged with a number of 6 significant responsibilities in relation to electricity 7 guided by a number of objectives, including to protect 8 the interest of the consumers of the city of Sault Ste. 9 Marie with respect to the price of electrical services. 10 We are seeking for your position to provide protection 11 to the PUC and its customers in terms of transition, 12 cost collection and associated charges. 13 Mr. Chairman, the citizens, customers 14 and businesses of the City of Sault Ste. Marie expect 15 you to protect them from any unfair price increase that 16 affects their city and will affect their economy. Your 17 decision is very important to the future of the city, 18 which retained the PUC as a vehicle to maintain the 19 lowest possible distribution wires charges for the 20 customers and the citizens within the city and its 21 neighbouring townships and communities, to support the 22 city's economic development objectives, to maintain 23 higher customer satisfaction and strong community 24 support for the PUC's performance, and to create jobs 25 and attract investment to the city. 26 Bearing in mind any responsibility 27 for repaying Ontario Hydro's debt by customers of the 28 PUC not supplied by the provincial utility and who are 258 ALLEN/FREDERICK, presentation 1 not in their service territory will be unfair. We 2 believe that not being a customer of Ontario Hydro and 3 in their service territory constitutes an exemption 4 from the CTC charge responsibilities for the city of 5 Sault Ste. Marie. Thus, we are seeking an order to 6 ensure that no CTC will be collected from the citizens, 7 customers or businesses of the city of Sault Ste. Marie 8 and its neighbouring townships served by the PUC. 9 This morning there were three issues 10 that were brought forward and I would just like to 11 comment on some of the questions in the earlier 12 presentations. There was the question of who would 13 assume the risk -- the LDC assuming the risk under the 14 proposal and under our proposal the LDC, through the 15 contract that is negotiated with the other supplier or 16 the marketer, whoever is going to hold the contract, 17 would negotiate out the risk and it would be a 18 load-following contract. So the LDC would not be 19 assuming any risk in it. 20 The second issue, I think, that was 21 relevant that came up this morning was the whole issue 22 of incentives and who drives the incentives. The whole 23 thrust of this has been driven by the city as the 24 shareholder of the PUC in its interest of keeping the 25 electricity prices down and using the lower electricity 26 rates as a tool for economic development within the 27 PUC. So the incentives are really -- any of the 28 reductions from standard supply pricing really come 259 ALLEN/FREDERICK, presentation 1 back to support the city as the shareholders' interest. 2 The third issue, I think, that came 3 up was mentioning the issue of dealing with fixed 4 prices and dealing with customers on billing systems is 5 certainly far more administratively effective and we 6 fully support that type of notion, that this type of 7 one would allow Sault Ste. Marie not to incur a number 8 of the transition costs they would have to incur if we 9 went on to a spot following price mechanism. 10 Thank you, Mr. Chairman. We would be 11 happy to respond to any questions. 12 THE CHAIRMAN: Thank you, Mr. Allen. 13 Ms O'Reilly? 14 MS O'REILLY: I just really have one 15 question for you. 16 Have you approached the provincial 17 government with respect to an exemption from the CTC in 18 terms of your special circumstances, never having been 19 customers of Ontario Hydro? 20 MR. ALLEN: We haven't formally 21 approached the Minister of Finance. We are in that 22 stage of putting everything together. In every 23 representation, any time there were comments out, 24 whether it was to Energy or to Finance, we have 25 certainly been trying to make that point on those ones. 26 We wanted to approach the Board to link in to the 27 standard supply because our sense is that the citizens 28 and businesses may be back to the Board looking at that 260 ALLEN/FREDERICK, presentation 1 as their vehicle for protection against those rates and 2 that's why we want to raise the issue with the Board. 3 But we will be talking also with Finance. 4 MS O'REILLY: Thank you. 5 THE CHAIRMAN: Thank you. 6 Just a couple, again, of 7 clarification questions, if you could. 8 You are advocating some revised 9 wording of the draft Standard Supply Code to ensure 10 that, in your view, the price to be charged shall not 11 exceed the spot market price, as I interpret that 12 proposal. Am I correct? 13 MR. ALLEN: Yes. 14 MEMBER HIGGIN: Now, in your view, in 15 the Code, is it permissive that, as currently worded, 16 you can charge less or not? 17 MR. ALLEN: No. How we read the Code 18 is that it should be a spot market pass-through and 19 that there is some flexibility to charge less than what 20 the spot market pass-through is. 21 In our proposal, we believe that the 22 customers who are receiving the standard supply should 23 not be penalized. That is why we put on the notion of 24 having that price cap in that they would in any case be 25 no worse off than they would under the proposed regime. 26 MEMBER HIGGIN: You have heard about 27 the alternative proposal from several parties which, in 28 a nutshell, we might characterize as a fixed price with 261 ALLEN/FREDERICK, presentation 1 a procurement mechanism which is overseen in some way 2 by the Board. 3 So in terms of your proposal, how do 4 you see your proposal fitting with the mechanism that 5 is proposed, for example, by Seabron Adamson in his 6 prescription that he had this morning. Can you give me 7 a bit of help there? 8 MR. ALLEN: Yes. I guess we are 9 certainly trying to contain some concerns about having 10 it as one big overseer of all of those -- I guess of 11 all of the fixed price dealings. We can see some 12 notion that there is some flexibility in allowing a 13 number of small ones to happen with the same type of 14 structure. I think there is some alignment with the 15 proposal we are putting forward. 16 I guess my sense on the proposal is 17 that there still needs to be some type of price cap 18 protection on whatever that overseeing is done. 19 Whether it is done by a single body or multiple bodies 20 living to the same type of upper limit, I'm not sure if 21 there is much difference with it. 22 MEMBER HIGGIN: You stated earlier 23 that at this point Sault Ste. Marie PUC had not 24 determined how it would fulfil it's standard supply 25 option. 26 Given your relationship with Great 27 Lakes Power, I am somewhat surprised that there might 28 be any alternative, other than the pricing issues which 262 ALLEN/FREDERICK, presentation 1 of course will be sorted out, how would you not see a 2 continuation of the current relationship? 3 MR. ALLEN: Well, we would see the 4 current relationship. 5 What I guess isn't well defined is 6 whether or not it is advantageous for the utilities 7 retail affiliates to perhaps hold the contract and be 8 the supplier to the LDC or whether the LDC should hold 9 the contract. 10 So when we talk about fulfilling the 11 obligations, I think depending on the outcomes of your 12 deliberations, there are certain advantages and 13 disadvantages to who holds the contract. 14 The full intent of the PUC is to 15 carry on with the Great Lakes Power contract, given, I 16 think, its obvious advantages and carrying on that type 17 of relationship. It is just a matter of how that 18 relationship is best struck. 19 MEMBER HIGGIN: On the other hand, 20 Great Lakes Power may have some options to serve the 21 customers directly should those customers chose the 22 alternative of going to the competitive market. Is 23 that another factor in your decision as well? 24 MR. ALLEN: There are some other 25 discussions and negotiations with Great Lakes Power on 26 protecting the local market on how those types of 27 things would happen in Sault Ste. Marie. 28 Great Lakes Power's interest beyond 263 ALLEN/FREDERICK, presentation 1 Sault Ste. Marie are probably best discussed with Great 2 Lakes Power, but the contract is in place. So the 3 window is another nine and-a-half years left on the 4 contract that's in place. 5 MEMBER HIGGIN: On the other hand, 6 the flip side of that is if the PUC doesn't have the 7 load because the load has migrated to direct purchase, 8 then you would want to get out of some of those 9 provisions of the contract I would assume. 10 MR. ALLEN: No. The contract is a 11 load following contract -- 12 MEMBER HIGGIN: Is it? 13 MR. ALLEN: -- so the provisions of 14 the contract, if some of it is lost to other 15 competitors, as very well may happen, then Great Lakes 16 is serving a lesser load to the PUC and perhaps serving 17 it someone else. 18 We believe that it would be the 19 scenario that you are putting forth that the utility, 20 particularly the standard supply ones, will be very 21 likely to lose a great number of their customers if 22 they don't have the ability to offer something less 23 than spot to the default customers. It would be very 24 attractive to -- that gap of the 15 to 20 per cent less 25 would be very attractive for a number of people to pick 26 up on it. 27 MEMBER HIGGIN: In terms of rates 28 approval and looking at the alternative of the 264 ALLEN/FREDERICK, presentation 1 yardstick proposal, or some variant of that which has 2 been proposed, just to understand, you would find that 3 you would be an outlier really basically. Therefore, 4 leaving aside the other considerations, the rates 5 themselves, there would have to be some special 6 consideration probably because of that factor that you 7 were an outlier? 8 MR. ALLEN: Yes. 9 MEMBER HIGGIN: Okay. 10 MR. ALLEN: No, we perceived that 11 simply because of the uniqueness of the situation. It 12 would be an outlier and there will have to be special 13 rate provisions and we will be talking about those in 14 subsequent hearings. 15 MEMBER HIGGIN: Okay. Thank you very 16 much. 17 THE CHAIRMAN: I have a clarification 18 for me too. 19 Great Lakes Power, besides servicing 20 your PUC customers, also sells into the grid? 21 MR. ALLEN: Great Lakes Power -- the 22 PUC represents but one-third of Great Lakes Power's 23 load. They provide about one-third of it direct to 24 Algoma and then they have a number of their own retail 25 customers that they are providing power to. 26 They do from time to time sell into 27 the grid, I think depending on time of year and 28 generating conditions, but there are times that they 265 ALLEN/FREDERICK, presentation 1 are acquiring power now from Ontario Hydro, but again, 2 it is on a daily basis and the flows can go either way. 3 THE CHAIRMAN: You own the local 4 wires, right, the PUC? 5 MR. ALLEN: Yes. 6 THE CHAIRMAN: Thank you very much 7 for your presentation. 8 I think the question by Ms O'Reilly 9 was appropriate on the -- that you need to deal with 10 the -- balance of the problem is in our hands at this 11 point. 12 MR. ALLEN: Okay. 13 THE CHAIRMAN: So thank you very much 14 for your presentation. 15 MR. ALLEN: Thank you very much. 16 THE CHAIRMAN: This completes the 17 presentations for today. 18 We will be back on Thursday morning 19 at 9:00 a.m. when we will begin again. 20 Thank you very much. 21 We are adjourned. 22 --- Whereupon the hearing adjourned at 1145, 23 to resume on Thursday, August 12, 1999 at 0900