266 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 Thursday, August 12, 1999, 22 commencing at 0905 23 24 VOLUME 3 25 26 27 28 267 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 MAX CANANZI 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 28 268 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 MICHAEL MILLER 10 ROGER WHITE/ Energy Cost Management 11 RICK GROULX Incorporated, ECMI 12 MARK RONAYNE/ Competition Bureau 13 J.D. SUTTON 14 KEITH RAWSON TransCanada Power 15 BRUCE CAMPBELL Ontario Power Generation 16 Inc. 17 RICHARD BATTISTA Union Gas Limited 18 BARBARA BODNER Enbridge Inc. 19 AMIR SHALABY Ontario IMO 20 DAN PASTORIC Energy Advantage 21 JIM RICHARDSON/ Upper Canada Energy Alliance 22 PAUL FERGUSON 23 MICHAEL JANIGAN Vulnerable Energy Consumers 24 Coalition 25 KEN QUESNELLE Woodstock Public Utility 26 Commission 27 28 269 1 INDEX OF PROCEEDINGS 2 PAGE 3 4 Presentation by Mr. MacOdrum 271 5 Short recess at 0940 292 6 Upon resuming at 0952 292 7 Presentation by Mr. Barnstaple 293 8 Presentation by Mr. Chuddy 299 9 Short recess at 1025 313 10 Upon resuming at 1052 313 11 Presentation by Mr. Mark 314 12 Luncheon recess at 1200 353 13 Upon resuming at 1334 353 14 Presentation by Mr. Barrett 355 15 Presentation by Mr. Raffaele 358 16 Presentation by Mr. Wiersma 368 17 Presentation by Mr. Quesnelle 389 18 Short recess at 1450 407 19 Upon resuming at 1517 407 20 Presentation by Mr. Miller 407 21 Hearing adjourned at 1540 420 22 23 24 25 26 27 28 270 1 EXHIBITS 2 NO. PAGE 3 4 F-1 Research method 292 5 F-2 Volatility paper 292 6 F-3 Copy of submission on 367 7 behalf of the Coalition 8 of Distribution Utilities 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 271 1 Toronto, Ontario 2 --- Upon resuming on Thursday, August 12, 1999 3 at 0905 4 THE CHAIRMAN: Good morning, ladies 5 and gentlemen. Welcome to the OEB. 6 Today we have a very full day, so we 7 want to get right into it. Our first presenter is 8 Toronto Hydro. 9 Mr. MacOdrum, if you would introduce 10 your colleague. 11 PRESENTATION 12 MR. MacODRUM: Thank you, Mr. Chair. 13 Mr. Chair, Board Members, my name is 14 Bruce MacOdrum, M-A-C capital O-D-R-R-U-M. I am the 15 Vice-President and General Counsel of Toronto Hydro. 16 With me is Max Cananzi, C-A-N-A-N-Z-I. Mr. Cananzi is 17 the Vice-President, Wholesale Energy Procurement, of 18 Toronto Hydro. Together we are representing Toronto 19 Hydro-Electric System Limited in this proceeding. 20 You have our written submissions, and 21 the most recent one of July 30, 1999 which basically 22 adopted as our written submission in this proceeding 23 our earlier written submission of July 5, and a letter 24 I wrote of July 3 to Mr. O'Dell, and the presentation 25 of Mr. Brooks, Ms Cassiato and myself at the Technical 26 Conference. 27 I will also be referring to, in my 28 presentation, some of the discussion I had, and others 272 MacODRUM/CANANZI, presentation 1 had, at the Technical Conference. 2 The Ontario Energy Board's decisions 3 on standard supply service will be of fundamental 4 importance in establishing Ontario's new electricity 5 supply framework. 6 Section 78 of the Ontario Energy 7 Board Act, 1998, makes one thing clear: the price 8 charged for standard supply service must be just and 9 reasonable. This Board has been familiar with these 10 words for a long time. 11 It is Toronto Hydro's view that a 12 spot price pass-through or a smooth spot price 13 pass-through mechanism will not meet this legal 14 requirement. 15 Rate regulation is mandated where a 16 substitute for market forces is required. If the 17 legislature intended that the Board abdicate its 18 responsibility for fixing just and reasonable rates by 19 plugging in a market-based formula, it would have been 20 more explicit in stating that intent. 21 Furthermore, wholesale spot prices, 22 particularly in the early years of the market opening 23 up, are more likely to reflect Ontario Power 24 Generation's bidding strategy than market forces. This 25 matter was discussed by Toronto Hydro's Paula Cassiato 26 during the Technical Conference, at pages 983, lines 19 27 to 28, and page 984, lines 1 to 20. 28 In my discussion, at the Technical 273 MacODRUM/CANANZI, presentation 1 Conference, with Dr. Dewees, on July 13, I explored 2 four aspects of the Market Design Committee's and the 3 Board Staff's proposals for standard supply service. 4 These are the four themes which we 5 believe highlight the issues that the Board should 6 address in this proceeding; and those four themes were: 7 the appropriate allocation of risks; the encouragement 8 of customer choice and the promotion of retail 9 competition; the concept of a level playing field and 10 what constitutes an unfair advantage; and, fourthly, 11 what does the customer want for her or his standard 12 supply service. 13 I wish to start with the last of 14 these themes. 15 John Brooks, the President and Chief 16 Executive Officer of Toronto Hydro, in his presentation 17 to the Technical Conference, on July 19, 1999, 18 addressed the issue of customer needs and expectations 19 and in doing so he discussed the work he is doing as a 20 member of the Minister's Transition Committee. 21 I am now going to read to you a quote 22 from what Mr. Brooks said at the Technical Conference, 23 which is found on pages 979, line 20, through page 981, 24 line 13. 25 Speaking of his work on the 26 Minister's Transition Committee and its subcommittees, 27 Mr. Brooks said: 28 "The Ministry intends to launch 274 MacODRUM/CANANZI, presentation 1 an information campaign sometime 2 in the fall in an effort to 3 educate, to some extent, the 4 electricity customer about the 5 coming competitive market. The 6 main theme of this campaign will 7 be customer choice. Customers 8 will have lots of choices, which 9 they have never had before, and 10 the freedom to choose their 11 supplier will motivate those 12 suppliers to provide better 13 prices and innovative and 14 improved services. This has 15 been the rationale for the 16 retail market since the 17 MacDonald Committee Report. 18 Toronto Hydro, for one, has 19 always supported this concept." 20 And I am continuing with Mr. Brooks' quote: 21 "I believe, as do most of us, 22 that the majority of customers 23 will not want to be bothered 24 switching suppliers, and they 25 will be assured in this upcoming 26 media campaign that they don't 27 have to. 28 I also believe that most of 275 MacODRUM/CANANZI, presentation 1 those customers will not 2 be...happy that if they choose 3 to do nothing, they will be 4 forced to accept a pricing 5 regime that could expose them to 6 the volatility of the spot 7 market. 8 The City of Toronto has a great 9 number of low income and senior 10 citizen residents whose incomes 11 do not have the flexibility to 12 weather the swings in 13 electricity prices such as would 14 have been experienced in this 15 province over the past six weeks 16 if there was already a retail 17 market here." 18 Mr. Brooks went on to say: 19 "I cannot imagine how I would 20 explain to these customers why 21 their bills had jumped so 22 dramatically. How do you 23 explain to the average customer 24 that they shouldn't worry; that 25 the spot price is ultimately the 26 lowest price they could get, and 27 that it will average out [in] 28 the long run, whatever the long 276 MacODRUM/CANANZI, presentation 1 run might be. 2 People not associated with the 3 electricity industry aren't very 4 clear as to why we are doing 5 this competition thing in 6 electricity. I believe that it 7 is critical for the industry's 8 success that the majority of 9 electricity customers see retail 10 competition in a positive light, 11 and they will only do so if they 12 are offered something as good as 13 or better than they have now. I 14 don't believe that spot price 15 pass-through fits the bill. 16 "Most of us [are] electricity 17 [customers] -- I presume all of 18 us are, actually -- and I would 19 certainly urge everyone to 20 remember that perspective when 21 it comes to determining what the 22 ultimate outcome of these 23 hearings will be. All of the 24 economic theory and 25 organizational theory aside, it 26 ultimately comes down to the 27 customer." 28 That is the end of my quotation from 277 MacODRUM/CANANZI, presentation 1 Mr. Brooks' remarks, on the 19th. 2 On July the 13th, starting at page 3 120 of the transcript of the Technical Conference, I 4 asked Dr. Dewees what customer research the MDC 5 undertook in developing its recommendation for a 6 smoothed price pass-through, and on page 122, lines 15 7 and 16, he stated that the MDC didn't commission any 8 research of that sort. 9 Later in the day, on pages 218 10 through 220, Mr. Richardson, of Innisfil Hydro -- who 11 was also on the MDC -- discussed the efforts to get 12 customer research before the MDC and the reception it 13 received. 14 The weight that Dr. Dewees himself 15 placed upon customer research appears evident from his 16 comment on page 220, lines 16 to 17, where he stated: 17 "I don't recall now the details 18 of it, but it wasn't a study 19 that we commissioned." 20 Toronto Hydro has commissioned some 21 independent customer research and this research 22 indicates that there is a statistically significant 23 preference for price stability, not volatility, in 24 electricity supply arrangements. About three times as 25 many residential customers stated a preference for a 26 fixed rate over a variable rate. 27 Does this Board, does the government, 28 want to introduce its new electricity restructuring 278 MacODRUM/CANANZI, presentation 1 later next year and receive the same cynical reception 2 the major oil companies have received in recent weeks 3 from the spike in gasoline prices. 4 Next, I want to turn to the issue of 5 the level playing field. 6 Let me indicate to you Toronto 7 Hydro's intentions with respect to the retail market. 8 We have studied the White Paper and 9 the legislation carefully. Our plans are directed at 10 supporting the government's policy objectives and 11 complying with the legislation. We have established 12 separate distribution and retail business corporations. 13 We intend that Toronto Energy Hydro 14 Services Inc. will undertake an electricity supply and 15 sale business. 16 We expect that it will fulfil the 17 standard supply obligation on behalf of the distributor 18 and that it will also offer a variety of competitive 19 products and value-added services. 20 We intend that the regulated 21 distributor, Toronto Hydro-Electric System Limited, 22 will put in place appropriate safeguards with respect 23 to customer information and cross-subsidization to meet 24 the requirements of its licences and the associated 25 affiliate relationship codes. 26 Toronto Hydro-Electric System Limited 27 will be applying for new distribution rates for 28 introduction in 2000. In the application to this 279 MacODRUM/CANANZI, presentation 1 Board, Toronto Hydro-Electric System Limited will also 2 apply for rates or prices for standard supply service. 3 We expect these rates will use, as a starting point, 4 the rates approved for Toronto Hydro-Electric 5 Commission this year and will also achieve further rate 6 harmonization within the City of Toronto as a result of 7 the amalgamation of January 1, 1998. 8 We believe that our application for 9 new rates for standard supply service for 2000 will not 10 create significant additional regulatory burden for the 11 Board. The cost of power already has to be addressed 12 in an application for PBR based distribution rates. 13 We believe our plans support the 14 government's objectives, comply with the legislation, 15 meet our shareholder's expectations and, most 16 importantly, meet our customers' needs. 17 We do believe that carrying out these 18 plans will not give us an unfair advantage and will 19 foster the introduction of retail competition. We know 20 that many other electricity suppliers are planning to 21 enter the Toronto market. Some have already been 22 talking to our customers. 23 I discussed the issue of a level 24 playing field with Dr. Dewees on pages 104 to 113 of 25 the transcript of July 13. In that discussion, I 26 identified some of the potential competitors to Toronto 27 Hydro and the advantages they bring. 28 Dr. Dewees at page 105, lines 11 to 280 MacODRUM/CANANZI, presentation 1 13, said: 2 "You can have a level playing 3 field and unequal teams and the 4 playing field is still level." 5 Dr. Dewees' concept is that as long 6 as you play on a Canadian rules field, that a game 7 between a CFL team and an NFL team is a fair game. It 8 doesn't matter that the NFL teams have huge financial 9 resources, a much higher salary structure to attract 10 the best players, a much larger pool of athletes from 11 which to draft and a myriad of other advantages. To 12 him, it would still be a level playing field. His 13 answer is, well, we are all playing on a Canadian-sized 14 field. 15 Well, from Toronto Hydro's 16 perspective, as a Canadian team readying itself to go 17 head-to-head against the biggest and best financed 18 teams from the U.S. and Canada, it is not a level 19 playing field if Toronto Hydro's competitive affiliate 20 is stripped of its one advantage, its historic 21 relationship to its customers in the City of Toronto. 22 Toronto Hydro supports the opening up 23 of electricity markets in Ontario to competition from 24 across Canada, from the United States and from 25 elsewhere. But we cannot believe that it is the 26 government's intention to handicap or to strip a 27 locally owned participant of its ability to compete 28 with larger competitors from elsewhere. 281 MacODRUM/CANANZI, presentation 1 On pages 78 through 96 of the 2 transcript of July 13 I discussed the issue of the 3 appropriate allocation of risk arising from the 4 proposals for standard supply service with Dr. Dewees. 5 We believe the distributor, not the customer, should 6 bear the price risks associated with standard supply 7 service. 8 Many local utilities are not 9 intending to directly engage in wholesale purchasing 10 and retailing of electricity. A number of the local 11 municipal utilities are participating in partnerships 12 or alliances that will provide all or part of the 13 electricity purchase and sale function. Toronto Hydro 14 intends that its competitive affiliate will have the 15 ability to purchase electricity and to retail it. Our 16 shareholder was aware of the new risks of the new 17 market when it appointed its new board of directors. 18 We are undertaking training on risk management and 19 power purchasing. We are also obtaining expert advice 20 to design the necessary operational and financial 21 safeguards. We have faced numerous risks in the past 22 and we have protected our customers by sound planning 23 and prudent operation. We expect to meet these new 24 challenges in a similar fashion. 25 The Board has asked questions about 26 section 2.5.7 of the Affiliate Relationship Code. 27 This section of the Code, in my view, 28 is contrary to the Ontario Energy Board, 1998, at least 282 MacODRUM/CANANZI, presentation 1 as it applies to standard supply service and may be 2 contrary to the legislation even without that 3 qualification. 4 Distributors today retail electricity 5 to all of their customers. After section 71 of the Act 6 comes into force, they may only carry on the business 7 of distribution and transmission. 8 They are to carry on their retail 9 activities through an affiliate or a contracted third 10 party. It is also envisaged that the section 29 11 obligation would be fulfilled through an affiliate or 12 contracted third party. Subsection 70(10) of the Act 13 makes it clear that the option for distributors to 14 comply with section 29 directly is transitional and 15 this option will end. 16 If the legislature intended that the 17 distributor required written consent of each customer 18 before the responsibility for the customer was 19 transferred to the distributor's affiliate in 20 compliance with section 70, 71 and 73 of the Ontario 21 Energy Board Act, the legislation surely would have 22 required such written consent. The wording of the 23 legislation is such that it is clearly intended that 24 the retail business, including the section 29 25 obligation, are to be restructured without the written 26 agreement of each customer. 27 An aspect of the MDC's analysis, 28 which I believe the Board should view critically as it 283 MacODRUM/CANANZI, presentation 1 contemplates relying on the MDC's advice for standard 2 supply service is the effect of the MDC's 3 recommendations on new generation. Dr. Dewees said 4 that the MDC considered their proposed price/revenue 5 cap for Ontario Power Generation would result in 6 limited wholesale price competition and that this 7 proposal supported their recommendation for a smooth 8 spot price pass-through and that can be found at pages 9 93 to 96 of the transcript. 10 Dr. Dewees stated at page 102: 11 "I don't personally have 12 firsthand knowledge as to what 13 price a new generator would 14 require to build a new plant, 15 but if 3.8 cents won't do it, 16 then waiting a while before 17 those plants are built strikes 18 me as exactly the right thing to 19 do because there is no need for 20 that power right at the moment." 21 Toronto Hydro has received support 22 and encouragement from the Ontario government with 23 respect to its participation in the proposed Boralex, 24 the Lakeview and other new generation projects. Yet, 25 for the MDC, it was okay to design a system that would 26 prevent such projects from happening. 27 Toronto Hydro believes the Board must 28 reject this design and encourage soundly based new 284 MacODRUM/CANANZI, presentation 1 generation projects that will hasten the arrival of 2 real wholesale competition. 3 In conclusion, I wish to return to 4 the customer. 5 Dr. Dewees felt that with the spot 6 price pass-through option, the customer would not be 7 exposed to greater price fluctuations than those 8 experienced by variations in consumption patterns. You 9 can see page 90 of the transcript is my reference for 10 that. 11 But, customers have some control over 12 their consumption patterns. With a spot price driven 13 system the customer won't know the price she, or he, is 14 paying until some weeks after the time of consumption. 15 It's like driving into a service station to decide how 16 much gasoline you will put in your car and the sign on 17 the pump says, "Put your credit card in and we will 18 tell you the price when we send you the credit card 19 bill". 20 We know from recent experience, in a 21 city like Toronto with high air conditioning loads, 22 times of high consumption and high prices can coincide. 23 An analysis we undertook comparing a Toronto customer's 24 summer month's consumption with its spring month's 25 consumption indicated that with fixed rates, the 26 electricity bill would have increased 12 per cent due 27 to the increased consumption. If that Toronto customer 28 with the same increased consumption pattern was exposed 285 MacODRUM/CANANZI, presentation 1 to spot price increases experienced in the PJM markets 2 in July 1998, the same customer's bill would have 3 increased 42 per cent. 4 Toronto Hydro does not believe it's 5 the intent of the government of Ontario or this Board 6 to introduce a standard supply system that exposes 7 residential customers to this kind of price volatility. 8 Mr. Brooks said on July 19th at the technical 9 conference, and I quote: 10 "I did come here this morning 11 because I recognize the critical 12 importance of the Standard 13 Supply Service Code to the 14 future retail market on both the 15 supplier's side and the 16 customer's side. 17 It's my belief that the 18 imposition of a spot price 19 pass-through for standard supply 20 service will ultimately 21 jeopardize the credibility of 22 the entire effort to introduce 23 competition to the electricity 24 market." 25 That's the end of the quote, 26 Mr. Chairman, and the end of my remarks. Thank you 27 very much. 28 THE CHAIRMAN: Thank you, 286 MacODRUM/CANANZI, presentation 1 Mr. MacOdrum. 2 Any questions, Ms O'Reilly? 3 MS O'REILLY: No, thanks. 4 MEMBER HIGGIN: Yes, I do. 5 Just in terms of your views on your 6 fixed-price alternative, first of all, can you 7 articulate how that would be determined? Do you adopt 8 the approach of Mr. Adamson and his prescription, or 9 Mr. Todd? How would it be determined, how would the 10 rates for that be judged to be just and reasonable by 11 the Board, and, as a caveat there, assuming in your 12 answer that the price may be variable from one utility 13 to another? 14 MR. MacODRUM: Dr. Higgin, first of 15 all, we did look at Mr. Adamson's papers, both the 16 earlier paper he put in and what he put in in the 17 technical conference. As we said in our submission, 18 particularly in relation to the earliest paper, we find 19 there is much to commend itself in that paper. 20 We are certainly examining with great 21 interest his proposals and the proposals that others 22 have made. We are in the process of participating in 23 the PBR discussions and the discussions of the PBR 24 handbook, and, parallel to that, we have under 25 preparation our discussions as to what exactly will go 26 into our rate filing. We do accept that the onus is on 27 us to satisfy the Board that whatever rate proposal we 28 would come forward with would be just and reasonable. 287 MacODRUM/CANANZI, presentation 1 We also understand, from the 2 quotations from Mr. Brooks' comments at the Technical 3 Conference, that consumer acceptance of the changes is 4 a fundamental goal in undertaking this restructuring, 5 we believe, on the part of the government and the Board 6 and certainly on the part of Toronto Hydro. Therefore, 7 how we transition our present customers to this new 8 regime, while at the same time we continue to 9 undertake, as I mentioned in my presentation, the rate 10 harmonization, which is not complete in some customer 11 classes, is quite a challenge to us, but we are 12 addressing that and we will be coming forward with a 13 rate proposal to the Board. 14 MEMBER HIGGIN: You have indicated 15 that it's your plan to have your retail affiliate, your 16 service company, provide SSS on behalf of the wires 17 company. The question then is really: How do you see 18 differentiating the retail competitive option of a 19 fixed price for SSS from the offerings that may be 20 offered by the retail affiliate as a competitive 21 retailer? 22 MR. MacODRUM: The affiliates code, 23 as you know, the Affiliates Relationship Code, does 24 address that in some ways, and that we will have to 25 identify on whose behalf the standard supply service is 26 being offered. So I believe we will be able to 27 differentiate it for customers. 28 MEMBER HIGGIN: Do you think that the 288 MacODRUM/CANANZI, presentation 1 customer will be clear what offering he or she is being 2 offered under the regulated -- I will use that word -- 3 standard supply? Let's say it was a fixed-price 4 one-year term from other offerings that your retail 5 affiliate may want, would they be excluded -- this is 6 the key -- from offering something which is very, very 7 similar to a fixed-price one-year term offering? 8 MR. MacODRUM: We are not proposing 9 any limitations on the competitive offerings of the 10 retail affiliate. 11 MEMBER HIGGIN: They could be 12 offering the identical, in concept anyway, one-year 13 fixed-price option. 14 MR. MacODRUM: I don't understand why 15 we would do that. Certainly we have not developed the 16 price offerings for the retail affiliate and we have 17 not fully developed what the shape of our standard 18 supply rate would be, but we have determined that our 19 existing rates must be the starting point because that 20 is what our customers are faced with today. 21 MEMBER HIGGIN: In your criticisms of 22 the spot price pass-through or, we will say, that genre 23 of spot-based offerings, did you either, in your 24 research or in your analysis, consider the impact of 25 forward averaging, for example, or long-term averaging 26 of that price and would that, in your view, mitigate 27 against some of the concerns and criticisms that you 28 have for that type of offering? 289 MacODRUM/CANANZI, presentation 1 MR. MacODRUM: Mr. Cananzi will 2 answer that question. 3 MR. CANANZI: That type of analysis, 4 Dr. Higgin, is very difficult to do. We don't have a 5 rational market to base that kind of analysis on given 6 OPGI's market dominance. As, I believe, in the earlier 7 presentation by Paula Cassiato from Toronto Hydro, it 8 really would reflect -- any kind of analysis would 9 reflect OPGI's bidding strategy as opposed to any kind 10 of a cost analysis on price. 11 MEMBER HIGGIN: I am just really 12 trying to understand. If the volatility concern that 13 you have addressed was very high, as the customers said 14 in this survey that you did, as I interpret it, did you 15 either directly to them or in your own analysis wonder 16 whether there were some options that may mitigate that 17 type of volatility and whether you had looked at 18 options that would reduce? 19 MR. CANANZI: The answer to the 20 question is we do expect there to be significant 21 volatility in the marketplace and, with that in mind, 22 any forward averaging I believe would expose the 23 municipal utility to certain risks on recovery if those 24 arrangements weren't pre-contracted for ahead of time 25 to supply a fixed-price option. 26 MEMBER HIGGIN: Those are my 27 questions. Thank you very much. 28 THE CHAIRMAN: Thank you. 290 MacODRUM/CANANZI, presentation 1 I want to follow up on the volatility 2 aspect. I think I missed something in what you said, 3 Mr. MacOdrum. You said that if the spot price 4 pass-through was the order of the day there would have 5 been a 42 per cent increase in price, and I missed over 6 what period of time or what billing period that would 7 have been in. 8 MR. MacODRUM: I have a copy of the 9 analysis if the Board staff would like that. What we 10 did was compare a spring -- I believe it was April -- 11 month with a July month's load pattern. 12 We then just applied the flat Toronto 13 rates to the increased consumption that occurred 14 between the spring months and the summer months, the 15 increase to the summer. The result of that was a 16 12 per cent increase in the customer's bill, the 17 residential customer's bill. 18 If you, instead of using our flat 19 rate, used, for the summer months -- and we used 20 July 1998 because it was the summer months for which we 21 had full figures on -- the PJM's spot prices, the bill 22 would have increased 42 per cent. 23 THE CHAIRMAN: That was in a 24 one-month billing period? 25 MR. MacODRUM: April to July. 26 THE CHAIRMAN: Yes, okay. 27 You made reference to the preference 28 of customers for price stability. Do you have with you 291 MacODRUM/CANANZI, presentation 1 the kind of question that was put? Presumably you 2 sampled the market. 3 MR. MacODRUM: Yes. I have copies of 4 our customer research and I would be pleased to provide 5 it to the staff and to the Board. 6 THE CHAIRMAN: I think that would be 7 helpful. 8 Okay. Thank you very much. 9 I think those are all the questions 10 we have. 11 Mr. MacOdrum, Mr. Cananzi, thank you 12 for your presentation. 13 MEMBER HIGGIN: We should probably 14 give an exhibit number to that. 15 THE CHAIRMAN: Do we have an exhibit 16 number? 17 --- Pause 18 THE CHAIRMAN: Thank you for that. 19 Do we have an exhibit number? 20 MR. MacODRUM: Mr. Chairman, I have 21 given a copy of the customer research and also a copy 22 of the calculation of the price increase, which also 23 includes the commercial example as well as the 24 residential, though I just referred to the residential 25 in my remarks. 26 THE CHAIRMAN: Thank you for that. 27 MS O'REILLY: Since these are the 28 first items filed at this hearing they will get a "1" 292 MacODRUM/CANANZI, presentation 1 and "2" under the appropriate letter. 2 THE CHAIRMAN: Okay. Thank you. 3 EXHIBIT NO. F-1: Research 4 method 5 EXHIBIT NO. F-2: Volatility 6 paper 7 THE CHAIRMAN: Let's proceed to the 8 next presentation, which is from the Independent Power 9 Producers Society of Ontario. 10 Is Mr. Brett here? 11 We are about 20 minutes early. 12 Perhaps we should stand down for a few moments until 13 Mr. Brett gets here. 14 Let's stand down until 10 minutes 15 before the hour, and if Mr. Brett is here at that point 16 we will commence. If he is not, we will wait until 17 10 o'clock. We will stand down until that time. 18 --- Upon recessing at 0940 19 --- Upon resuming at 0952 20 THE CHAIRMAN: Please be seated. 21 Before we commence with IPPSO's 22 presentation, the proper exhibit numbers on the 23 research method that we were talking about is F-1 and 24 the volatility paper is F-2 for exhibit numbers. 25 Mr. Brett, welcome. I understand you 26 are on behalf of the Independent Power Producers 27 Society of Ontario. 28 We welcome you here this morning. If 293 MacODRUM/CANANZI, presentation 1 you will introduce your colleagues we can proceed. 2 MR. BRETT: Thank you very much, 3 Mr. Chairman. 4 Good morning, Panel. My name is 5 Tom Brett and I am acting for IPPSO this morning in 6 this proceeding. 7 I would like to introduce the 8 remainder of the delegation. 9 To my immediate right is 10 Al Barnstaple, who is the President of IPPSO and an 11 IPPSO Director. Mr. Barnstaple also has a 27-year 12 career with Ontario Hydro where, among other things, 13 other positions he held was the position responsible 14 for originating and administering the NUG contracts, 15 100-odd plus NUG contracts, over a period of years. 16 To his right is Mr. Barry Chuddy. 17 Mr. Chuddy is also a Director of IPPSO. He is a member 18 of the IMO Board, Chairman of the IMO Audit Committee. 19 In his real life, or paying life, is an executive with 20 TransAlta Energy Corporation and has been intimately 21 involved with the development of their past and present 22 independent power projects in Ontario. 23 This morning, of course, we are 24 giving you the views of IPPSO, of the organization. 25 With that I would like to call on 26 Al Barnstaple. 27 PRESENTATION 28 MR. BARNSTAPLE: Thank you, Tom. 294 BRETT/BARNSTAPLE/CHUDDY, presentation 1 IPPSO is pleased to appear before the 2 Board this morning to give you our views on the 3 proceedings on the Standard Supply Service Code. 4 We approached this proceeding from 5 the perspective of an organization representing the 6 competitive generation business and we think we have 7 some unique things to say in this regard. 8 We are generally prefacing our 9 remarks in terms of how our concerns for the standard 10 supply code, from a generation perspective, how those 11 in many ways mesh with the needs of the customer at the 12 other end of the standard supply code. 13 We generally put forward the view 14 that generation competition is essential to everyone in 15 the new Ontario market, not just the competitive 16 customer but the default customer or standard service 17 customer as well. 18 Customers will only benefit if there 19 is competition at the generation level in Ontario and 20 that in the early years of the market that is going to 21 be an extremely difficult proposition and it needs to 22 be nourished. 23 The Energy Board itself in these 24 proceedings needs to be cognizant of its role under the 25 Act in facilitating competition at all levels, 26 including supply as well as at the retail end of the 27 spectrum. 28 Generally we are very, very keen for 295 BRETT/BARNSTAPLE/CHUDDY, presentation 1 the standard service supply customer to be a customer 2 that is accessible to the generation business. 3 Basically we see the default supply 4 being a very large part of the market in the initial 5 market years and that the need for our members to be 6 able to deal directly or contractually in a commercial 7 way with this market segment. To be excluded from -- 8 not being able to deal in a contractual way with this 9 part of the market very much lessens our ability to 10 bring new generation into place and facilitate 11 competition in the province. 12 Further, as we see the market opening 13 in Ontario, we see that the market will be dominated by 14 one large generator for many years and that that 15 generator's position is -- the dominance is probably 16 enhanced by the proposition of having this default 17 supply source exclusively from the spot market. We 18 believe being able to contract for default supply will 19 in some way overcome the market dominance of OPGI. 20 Further, we are cognizant as well 21 that there are other proceedings going on in the 22 province, and there will be other deliberations over 23 the next few months and years, but at the current time 24 there is a deliberation on transmission tariffs. Our 25 view is if there is an equitable outcome of that 26 particular proceeding, then it further would enhance 27 our position that generators should be able to have 28 commercial contract access to the default supply in 296 BRETT/BARNSTAPLE/CHUDDY, presentation 1 that the transmission tariffs could facilitate 2 generators offering very low-priced supplies to the end 3 customer from embedded generation supplies and that the 4 default customers should be able to benefit from those 5 low prices as well as the competitive customer. 6 We put forth, in our submission to 7 the Board, a number of principles that we would like to 8 see recognized in your deliberations and in your 9 findings on standard supply service for the default 10 customers. 11 Basically, we are asking that there 12 be this commercial access to the customers via 13 contracts where prices can be fixed or specified so 14 that the risks of the spot market are lessened for both 15 the customer and the generator. Contract access is 16 important for our members in that it allows them to 17 facilitate financing for their projects and financing 18 at lower costs, which helps essentially lower commodity 19 price to the whole market. 20 We believe if there is contract 21 access to the default supply market, then it would also 22 facilitate a brisk intermediate market that would be 23 essential to managing risk both for generators, 24 retailers and end customers. Only with a broad 25 contractual market will we see a brisk intermediate 26 market. That will be essential, particularly in the 27 early years when we are trying to manage risk and at 28 the same time facilitate new generation. 297 BRETT/BARNSTAPLE/CHUDDY, presentation 1 Another aspect that we see as a 2 benefit from having contractual access to the default 3 market is that our members will be able to get price 4 signals from the market earlier than depending on just 5 the price signals that come from the spot market. 6 When parties are entering into 7 contracts, they are fairly diligent in looking at the 8 future and assessing what the future implications are 9 going to be for their service. In general, you look at 10 the supply/demand picture a lot more thoroughly than 11 the spot market would recognize, so we would tend to 12 see shortages of capacity further out than the spot 13 market would recognize. We may see these price signals 14 three, four or five years before they actually occur. 15 If you wait for the spot market, you start to see those 16 prices maybe a year, or maybe even less than a year, 17 before supply tightens. 18 So it is essential, we think, to have 19 the broadest possible part of the market open to 20 contracts in order to facilitate pricing signals that 21 will serve to ensure that new capacity is put in place 22 in time and that it is an appropriate type of capacity 23 as well. 24 One area that is of particular 25 importance for a lot of our members is we have many 26 members who are not in the merchant plant business; 27 they are members who deal with renewable energy and 28 smaller projects, smaller cogeneration projects. Many 298 BRETT/BARNSTAPLE/CHUDDY, presentation 1 of these projects are the types that can bring 2 substantial environmental benefits to the province. 3 Without having contractual access to the default 4 market, their ability to finance would be severely 5 limited. It is virtually impossible, we think, to 6 finance those types of projects strictly from signals 7 from the spot market. 8 The other area that we are putting 9 forth as a principle is we believe that the 10 distributors in the province who are obliged to be 11 responsible for default supply should be able to deal 12 directly themselves with contracts with generators or 13 suppliers, as well as through third parties. 14 We think it is important that we 15 continue to recognize that we have in some ways an 16 advantage in Ontario in that there are a large number 17 of distribution companies, and will be for some time, 18 and that these in themselves present a diversity in the 19 market. Their ability to contract directly with 20 generators we think is a very healthy thing. 21 Our final principle is related to the 22 role of distributors in contracting for default supply, 23 and that is we are putting forward, in order to protect 24 all generators and provide a level playing field for 25 generation, that if distribution utilities are allowed 26 to contract for default supply that they be restricted 27 from self-dealing with generation facilities in which 28 they or their affiliates have a beneficial interest. 299 BRETT/BARNSTAPLE/CHUDDY, presentation 1 This is essential, we believe, for a 2 level playing field so that all generators have an 3 equal opportunity to deal with the default market 4 supplier. 5 Thank you very much. That concludes 6 my remarks. 7 PRESENTATION 8 MR. CHUDDY: If I may, Mr. Chair, I 9 would like to make a few comments in support of 10 Mr. Barnstaple's comments as well. 11 My comments will focus primarily on 12 the issues of the need for contracting in the context 13 of the development of generation. 14 The position we offer on behalf of 15 IPPSO is that we do in fact require forward contracts 16 for some of the output of the generation that we will 17 develop, certainly in the early years of the market. 18 In the review of some of the 19 documents I have seen that have been offered as a part 20 of this proceeding, I think others have raised the 21 question as to whether or not that in fact is the case. 22 We would like to bring forward some perspectives that 23 would reinforce our position. 24 The concern raised was that in fact 25 generators don't need forward contracts to develop your 26 merchant generation. I guess we believe there are some 27 differences in the Ontario market that would compel us 28 to present a position that suggests we do in fact need 300 BRETT/BARNSTAPLE/CHUDDY, presentation 1 forward contracts for some of that output. 2 I guess the positions that were 3 raised concerned the risk of above market contracts. I 4 guess today, in Ontario, it is fair to say we don't 5 really see that we have a market right now. We believe 6 that there will be a market, and we believe there will 7 be a good market, but today there isn't one, which 8 means that there is no market history. So the 9 perception of market prices is predicated on every 10 company's or firm's prediction of what those prices 11 will be. 12 We as generators are prepared to 13 enter into agreements for some of our output at or 14 below our perception of market prices as a mechanism to 15 mitigate risk. We would also expect that others that 16 might be entering into those contracts with us would 17 not enter into contracts that they believe would be 18 above market prices, that they believe would be at or 19 below market. 20 So we believe there is an opportunity 21 to establish a scenario with willing sellers and 22 willing buyers at levels that they deem to be 23 appropriate. 24 Other papers have raised examples of 25 where this merchant development without these forward 26 contracts has been done, but again some fundamental 27 differences in Ontario that compel us to bring forward 28 this position are that the objectives of the 301 BRETT/BARNSTAPLE/CHUDDY, presentation 1 restructuring in Ontario -- one of the objectives is to 2 reduce over time, I think, the dominant position of 3 OPGI in the context of their position as a generator. 4 The Market Power Mitigation 5 Agreement, we believe, goes a long way to help to do 6 that, but the Market Power Mitigation Agreement 7 requires investor confidence in order for them to 8 fulfil their obligation. In order to produce that 9 confidence, we believe you need to develop generation 10 at a relatively early point in the market so that those 11 objectives can be achieved within what I believe are 12 the 42 months of that timetable, which means that you 13 need to develop generation relatively soon in order to 14 create that confidence. 15 Again, as I mentioned earlier, 16 because of a lack of market history, in order to create 17 that confidence we as generators need some output 18 secured through forward contracts in order to have the 19 confidence that we are prudently contracting and 20 building generation here. 21 Again, with no market history, the 22 fact is we really have only our best technical guess as 23 to what those prices will be. While we do a good and 24 thorough job of that, we really need to mitigate some 25 of that risk by having agreements with customers at a 26 level that helps us to mitigate some of that forward 27 risk. 28 The other point I would make is that 302 BRETT/BARNSTAPLE/CHUDDY, presentation 1 part of the Market Power Mitigation Agreement does 2 provide what we perceive to be some constraints on the 3 prices that we can charge for power by establishing a 4 number of 3.8. This is perceived by many to be a cap 5 on what they should pay, and as a result does also 6 limit our upside. 7 So when we look forward at market 8 predictions, recognizing there are some limitations we 9 can contract, we see some limited upside and therefore 10 believe we need to have some forward contracts in place 11 to mitigate some of the risk. 12 I reinforce the point, however, that 13 certainly with some of the generators that we represent 14 we are prepared to take a degree of merchant risk, but 15 I have yet to identify a generator in Ontario that is 16 prepared to take 100 per cent merchant risk in the 17 development of new generation in Ontario, at least 18 until the market has some maturity or history to it. 19 Thank you. 20 THE CHAIRMAN: Yes, Mr. Barnstaple. 21 MR. BARNSTAPLE: Mr. Chairman, I 22 would just like to add two points. 23 One is that with respect to the size 24 of the default market, we believe that it is somewhere 25 in the range of 60 to 70 per cent of the total market. 26 We say that because the residential 27 market is about 27 per cent or so, according to the 28 numbers presented by Don Dewees at the technical 303 BRETT/BARNSTAPLE/CHUDDY, presentation 1 conference. But over and above that, there is a very 2 large middle market that is estimated to be, in total, 3 something like 50 per cent. We believe that a large 4 part of that middle market is small commercial, small 5 institutional, multi-family residential, or small 6 industrial, which should be really viewed as part of 7 the default market, because it is not going to be a 8 market that will switch in the very short run. 9 My second point is that we believe 10 that you have alternatives on the table for default 11 supply at a fixed price which would not involve a large 12 regulatory burden. 13 Firstly, you have the possibility of 14 many of the 270 MEUs aggregating in one fashion or 15 another to purchase power. You have seen that happen 16 in the gas market. You have ENERconnect. You have 17 some natural economic forces that would push them 18 together. 19 Secondly, we believe that you could 20 have the spot market as an option for default supply 21 for a particular distributor so that if you had a 22 distributor in a part of the province that wasn't, for 23 some reason, able to get an array of bids for a 24 fixed-price supply, you would have in a sense for that 25 distributor a fallback position. 26 Thirdly, you have two proposals in 27 front of you: the portfolio or contract proposal -- 28 the benchmarking proposal, I should say, on the one 304 BRETT/BARNSTAPLE/CHUDDY, presentation 1 hand; and the competitive RFP proposal by Mr. Todd on 2 the other hand. 3 Our view is that either one of those 4 could be implemented without undue regulatory burden. 5 In the case of the second one, it 6 would be the process itself that you would design and 7 specify, and LDCs or distributors that carried through 8 with that competitive process would be deemed to have 9 been in compliance with prudent consumption practices, 10 procurement practices. 11 In the case of the former method, as 12 I understand the details of it as spelled out in the 13 Enron proposal, it would largely be a self-policing 14 sort of mechanism. You would set some initial 15 guidelines in respect of how it was going to operate 16 and then it would operate and the reports would come in 17 at the end of the year and the numbers would fall out 18 of that and you would have a self-policing sort of 19 mechanism. 20 So I think in neither case would you 21 need to have a detailed regulatory regime. I don't 22 think there would be a need for you to set a fixed 23 price throughout the province. I don't think -- and 24 this is quite important -- I don't think there would be 25 a need for you to review and scrutinize the individual 26 components of the supply portfolios of each of the 27 270 MEUs. That was intimated in some of the papers 28 taking a different view, but that clearly would not be 305 BRETT/BARNSTAPLE/CHUDDY, presentation 1 the case in either the benchmarking situation or the 2 competitive RFP situation: you would not be into 3 having to analyze the details of the exact portfolios 4 of the MEUs. 5 So we see the ability to have an 6 alternative, a fixed-price default supply alternative, 7 as something that you can have without getting into a 8 particularly onerous regulatory responsibility. 9 Those are our comments, Mr. Chairman 10 and Panel, and we are open for any questions that you 11 may have. 12 THE CHAIRMAN: Thank you for that. 13 Are there any questions? 14 Dr. Higgin. 15 MEMBER HIGGIN: Yes, thank you. 16 Just in comparing your original 17 submission and your latest submission, I would like to 18 just ask about one area that you seem to have added and 19 some comments in that, that is number 2 in the new 20 submission: avoidance of price volatility risk. 21 You have, I think -- and if I am 22 mischaracterizing it, tell me -- you obviously adhere 23 to the view that prices may be volatile in the early 24 years. That's fine. What I am trying to get at is 25 your assertion that your members will likely -- and 26 that is the word -- contract for plant output at prices 27 that are below the spot price in order to reduce the 28 risk of price volatility. 306 BRETT/BARNSTAPLE/CHUDDY, presentation 1 So could you just try and expand on 2 that statement a little bit and whose risk are we 3 talking about and so on? Because we have heard that 4 one of the features of spot price is it exposes 5 customers to risk which they wouldn't have otherwise 6 with a fixed price. 7 MR. CHUDDY: If I may address that 8 question. 9 I guess, in terms of putting a 10 contract in place, that would typically happen in 11 advance of some date; and I guess by talking about a 12 forward contract with some fixed price associated with 13 it, doing that today would put us in a position where 14 we would be putting that agreement in place based on 15 our prediction of what those market prices are. 16 Our intent here was to refer to, I 17 think, average annual spot prices, recognizing that we 18 do expect a fair degree of volatility on the market. 19 But it is certainly, in the case of -- many of our 20 members are looking at their market forecast for spot 21 prices and then looking at a resulting annual or 22 monthly average of those prices, and, in the context of 23 some of those generators, looking at putting in place a 24 forward contract that in some cases is at or below that 25 prediction as a mechanism to mitigate risk. 26 On the other side of that contracting 27 equation, the customers, similarly, have their view of 28 spot prices and then would generate their view of 307 BRETT/BARNSTAPLE/CHUDDY, presentation 1 average annual spot prices. I guess, in the 2 experiences that I have had, those customers will 3 typically not contract with a generator for any prices 4 that are above their annual average prediction of spot 5 but typically are at or below, recognizing that they 6 may have different degrees of sensitivity to 7 volatility. 8 So, just to clarify, I think the 9 clarification that might address your question is that 10 when we speak of spot prices in a contract, we are 11 speaking of our forward-looking annual average 12 prediction of spot prices. It is fair to say that any 13 point in any day, or the year, the contract price may 14 very well be above or below the spot price at the time, 15 but in the context of a generator contract with a 16 purchaser it would be taking a much broader view and a 17 broader assessment of those prices over time. 18 MEMBER HIGGIN: Just as a follow-up, 19 then, do you view that, in order for that to happen, 20 there is going to have to be forecasting mechanisms 21 regarding the forward spot market that will allow that 22 to happen and how are they, in your view, going to 23 develop? Is every generator going to have their own 24 mechanism? That is question number one. 25 Question number two: Do you see 26 there will be an index or other sort of benchmark for 27 the spot price that will be developed and will become a 28 guide to the contracting, both by the generators and 308 BRETT/BARNSTAPLE/CHUDDY, presentation 1 their customers? 2 If you have any views on that. 3 MR. CHUDDY: In the context of the 4 forecast, I think the reality of will there be 5 generator-by-generator forecasts will always be the 6 case, although there may be some widely-accepted 7 forecasts that might be available to a broader base of 8 stakeholders. Most generators, when faced with the 9 prospect of investing several hundred million dollars, 10 will do it, certainly on the basis of considering other 11 forecasts, but, typically, will require their own 12 forecasts in order to get a level of comfort on the 13 portion of that investment that will be subjected to 14 merchant prices. 15 I don't think you will ever get away 16 from the need for individual firms to have their own 17 forecasts, but I think that there may be over time 18 industry-accepted forecasts that may be publicly 19 available. I don't know that there are too many 20 available today, but I think that may evolve over time. 21 That is an answer to your first 22 question. 23 In answer to your second question, 24 will there be an index developed, I think that the 25 history generated by the spot market prices will likely 26 over time generate some form of index against which we 27 can look, and may in fact form the basis for some 28 agreements which may be based on those indices. 309 BRETT/BARNSTAPLE/CHUDDY, presentation 1 I don't know the specifics of any 2 that would be available in Ontario today, but I would 3 predict that there will be in fact some indices 4 developed that would allow people to put their foot 5 against a number. 6 MEMBER HIGGIN: Just as one follow 7 up. Have you any information or are you aware that the 8 IMO might be planning to develop forecasts on a forward 9 basis based on its -- I would expect they might but we 10 haven't heard that, specifically. Are you aware of 11 that? 12 MR. CHUDDY: I am not aware of that. 13 MR. BARNSTAPLE: I believe the IMO is 14 intending to develop a forward market price. Others 15 may, as well. 16 MEMBER HIGGIN: Just one other 17 question, then. 18 If we could turn to your submission, 19 item number 8, paragraph article 8, "The Regulatory 20 Approach". In there, you refer to Mr. Adamson's and 21 Mr. Todd's papers, as you did in your presentation. I 22 guess the question that I am trying to get to is 23 whether you have a view on what will be the risks that 24 may be associated with regulation within a band that 25 would be a risk, first of all, to the LDC -- i.e., your 26 customer -- and how will they impact on you? 27 For example, if an LDC contracts for 28 a portion of supply and they are an outlier, right, and 310 BRETT/BARNSTAPLE/CHUDDY, presentation 1 they may or may not get regulatory approval for that 2 price, how do you see that affecting you and your 3 clients in that? 4 MR. BRETT: I take it that we are 5 talking here about a situation where an LDC would, 6 under the Adamson scheme, benchmarking scheme, have 7 entered into a portfolio of contracts and, it would 8 appear, at the very, very high end of all of the 9 distributors in the province with, let's say, the 10 highest price or close to the highest price of the 270 11 distributors. When they bring that under the 12 benchmarking scheme the Board would say, "You are going 13 to be penalized for this. There will be a penalty 14 applicable to you because you have done relatively 15 poorly relative to your peers." 16 So the question then is: How does 17 that impact the LDC in terms of how is that risk dealt 18 with by the distributor and how is it also dealt with 19 by the producer selling to that distributor, just 20 contractually how that might be dealt with? 21 I guess one issue is how does the 22 contract between the distributor -- in that situation, 23 I suppose one way of putting it is: Does the producer 24 then take that risk of -- who bears that risk of a 25 penalty in that kind of a scenario? 26 MEMBER HIGGIN: That's really the 27 question to you, the generator. 28 MR. CHUDDY: Maybe if I can just add 311 BRETT/BARNSTAPLE/CHUDDY, presentation 1 one or two thoughts there. 2 I guess in the context of most of the 3 power contracts that many of our members would look at 4 there is typically, in fact I would say probably 5 always, a risk assessment done of the ability for the 6 other party to meet their financial obligations under 7 that contract. 8 I guess to the extent that a scenario 9 develops that you have mentioned, that perhaps a 10 utility will have entered into a contract where the 11 price exceeds a threshold and as such the right to 12 collect that may be disallowed -- 13 MEMBER HIGGIN: It happened in gas 14 many times. 15 MR. CHUDDY: the issue is the risk 16 then that might fall on the generator and the municipal 17 utility. That typically is a contract-by-contract 18 assessment that, quite frankly, is also related to the 19 price that one might charge. The higher the price you 20 might be able to get for the power the greater the 21 degree of risk you might have to take to get that 22 higher price; and, conversely, the lower price you 23 charge the less risky the arrangement would be seen. 24 It wouldn't be uncommon, however, to 25 look for some degree of security for the purchase 26 obligation for the other entity and to identify with 27 the MEU some mechanism to secure the ability to pay for 28 the power in that event. 312 BRETT/BARNSTAPLE/CHUDDY, presentation 1 There are many different ways to do 2 that. I am not a lawyer and so I can't speak to the 3 correct legal terms, but ways to secure that purchase 4 obligation do exist, some of which do shift risks to 5 some extent and leave some risk with the MEU. 6 MEMBER HIGGIN: Thank you. 7 A final question would be in the area 8 of self-dealing by LDCs. You have cited and I think 9 you adopt, seem to adopt shall we say, the 15 per cent 10 number that you identify as being England and Wales. I 11 wondered whether you are comfortable with that or 12 whether you think that things should be a lot tougher 13 here in terms of self-dealing, given the initial state 14 of the market, should I say, of the generation market? 15 MR. BARNSTABLE: Actually, IPPSO has 16 not adopted 15 per cent. We referenced that that is 17 the practice in England and Wales. 18 We thought about this and we decided 19 not to try and quantify it. Our position would 20 probably be that it should be zero per cent, but we are 21 not the only party here. We think if there is prudency 22 exercised here it would be a very low number. 23 MEMBER HIGGIN: Thank you for your 24 answers, gentlemen. 25 THE CHAIRMAN: Thank you. 26 In that regard, section 9 of your 27 brief on that matter states that IPPSO would propose 28 that the constraint not be applied to generation 313 BRETT/BARNSTAPLE/CHUDDY, presentation 1 already in service that is owned by distributors. Are 2 you saying that that would be true for the default 3 supply portion as well? 4 MR. BRETT: Yes. 5 THE CHAIRMAN: That you stay right 6 away from the -- that's already owned, not just the 7 total? 8 MR. BARNSTABLE: No. What we are 9 interested in is having a level playing field for new 10 investment, so we recognize there is generation in 11 place that is owned by distributors, that shouldn't be 12 affected; and it is possible as well that some existing 13 private generation in the province may be reinvented in 14 some other form, put that capacity in its place, and we 15 may be seeking that that be exempt from certain things 16 as well in the future. 17 THE CHAIRMAN: Thank you. 18 If there are no more questions, 19 Mr. Chuddy, Mr. Barnstable and Mr. Brett, thank you 20 very much for your presentation. 21 MR. BRETT: Thank you, Mr. Chairman. 22 THE CHAIRMAN: Let us take a 23 15-minute break and come back at -- I think the MEA 24 is -- I know they are here and I expect they would be 25 prepared to go at a quarter to. 26 Thank you. 27 --- Upon recessing at 1025 28 --- Upon resuming at 1052 314 BRETT/BARNSTAPLE/CHUDDY, presentation 1 THE CHAIRMAN: We are now prepared to 2 proceed with the next submission, which is from the 3 Municipal Electric Association. 4 Gentlemen, if you would introduce 5 yourself for the record we can proceed. 6 PRESENTATION 7 MR. MARK: Thank you, Mr. Chair. 8 I am Alan Mark, appearing as counsel 9 for the Municipal Electric Association. With me is 10 Mr. Jennings, the CEO of the Municipal Electric 11 Association. 12 Mr. Chair, the Panel has our written 13 submission and what I do not want to do is utilize the 14 time here today simply to review that in all of its 15 detail. 16 It struck us in observing the hearing 17 that perhaps there was developing a tendency to have 18 undue focus on the details and perhaps there was 19 insufficient focus on the broader picture. By "the 20 broader picture" we mean take step back, look at the 21 legislation and ask the question: Where does the 22 legislation see this industry going -- in other words, 23 what's the desired end state on the one hand -- and, 24 secondly, what does the legislation tell us in broad 25 terms about the role of the MEUs and their successors 26 in that new reality? 27 So take a step back, recognize of 28 course that the precursor of the present draft SSSC 315 MARK/JENNINGS, presentation 1 proposal originated with the MDC and was proposed by 2 the MDC prior to Bill 35 being introduced in the 3 legislature. 4 So the version that we see of the 5 SSSC was not developed in an environment of paying 6 attention to legislation or constrained by legislation 7 but, as Dr. Dewees himself said, was originally 8 intended by the MDC to assist the government in 9 drafting legislation. 10 So we know it wasn't formulated with 11 the purpose of being true to the legislation in the 12 form we have it and, therefore, what we want to do at 13 this point in time is take that step back and see what 14 the legislation says in broad terms about where the 15 industry and the participants in the industry are to go 16 and see if this proposal that is before the Board in 17 terms of the draft SSSC is consistent with it. 18 The government has made it very, very 19 clear in the legislation in several places that the 20 objective of the legislation is to achieve fully 21 competitive wholesale and retail energy markets in 22 which there is no need for any regulation of either of 23 these markets. That is the desired end state and 24 purpose of the legislation. That purpose is not only 25 clear from the White Paper and the government 26 pronouncements, but it is clear from the provisions of 27 the legislation itself. 28 There are two provisions which are of 316 MARK/JENNINGS, presentation 1 critical importance. For example, there is section 2 29(4) of the Electricity Act itself, which is the 3 section which provides that the Board may exempt a 4 distributor from the obligation imposed by section 29 5 once the Board is satisfied that there is sufficient 6 competition amongst retailers in the distributor's 7 service area. 8 So there the government is clearly 9 saying that there is only a role for a regulated form 10 of service until and only until there is a developed 11 retail market and then the regulator bows out. 12 Dissimilar, although a broader effect 13 indeed, is section 29(1) of the Ontario Energy Board 14 Act, which in describing the jurisdiction of this Board 15 makes it clear, and indeed obliges the Board, to 16 refrain from exercising any power or performing any 17 duty under the Act if it finds as a question of fact 18 that a licensee, person, product, class or product, 19 service, or class of services, is or will be subject to 20 competition sufficient to protect the public interest. 21 So the government has spoken very 22 loudly. Your role with respect to retail service to 23 section 29 customers is limited and temporary. 24 The end state, which the government 25 expects and desires, which the legislature indicated 26 the industry is to move to is to have every customer 27 served in a competitive retail environment with no 28 expectation that there will be any form of regulated 317 MARK/JENNINGS, presentation 1 standard service. 2 The conclusion from that of course is 3 that section 29 is indeed merely transitional. Members 4 of the Board will want to keep that in mind when 5 considering the proposals because many of the arguments 6 in favour of the draft SSSC, as it is presently before 7 you, frankly contemplate some long, almost permanent 8 notion or a notion of a permanent standard service 9 offering. 10 The legislation, in our respectful 11 view, is clear that there is no such thing as a 12 standard supply offering in the longer term. There is 13 no expectation on the part of the legislature that 14 consumers may in the future elect to receive a form of 15 rate which, no matter how beneficial it may be for 16 them, would not be a rate which is available to them in 17 a competitive market. 18 In other words, if the rate would not 19 be offered -- if the customer would not be offered a 20 non-profit billing option for spot price pass-through 21 in a competitive market, there is no mandate for the 22 regulator to provide that. And that should guide you 23 in making an assessment of what form the section 29 24 supply should take on an interim basis. 25 If there is no role for such a rate 26 on a permanent basis, in our respectful submission, 27 then there shouldn't be a large role for it on an 28 interim basis, and rather what the Board should be 318 MARK/JENNINGS, presentation 1 doing is trying to make available, under the temporary 2 provisions of section 29, supply which will be akin to 3 the supply which customers will receive when the market 4 is competitive. The implication is, further, that 5 there is no such thing really in the longer term as a 6 default customer. 7 Again the draft SSSC and many of the 8 submissions to you in support of it speak of this 9 notion of a default customer as some permanent 10 long-term institution, that we will always be saddled 11 with the customer who makes no choice. 12 Well, respectfully, the legislation 13 and the provisions I have referred you to have made it 14 abundantly clear that there is no expectation that in 15 the longer term any customer will be entitled to sit on 16 their hands and do nothing. The expectation is and the 17 end state will be that every customer must choose. 18 Therefore, the legislation is clear. There is no role 19 for the Board, in our respectful view, to fashion a 20 regulatory regime which has as a primary objective the 21 designing of a rate for the benefit of the customer who 22 will not choose. 23 The Board has no mandate to ensure 24 that customers can sit back and do nothing. Rather, 25 the mandate of the Board, in our submission, should be 26 to ensure that customers understand as soon as possible 27 that what this legislation entails from them is the 28 obligation to choose. If that is the message to be 319 MARK/JENNINGS, presentation 1 sent, then clearly the choices the customers ought to 2 be faced with are choices that resemble what they will 3 be faced with in the competitive market. 4 The evidence, in our submission, is 5 clear beyond any doubt that the rate options that 6 consumers will have in a competitive market do not 7 include a non-profit billing function for pass-through 8 of a volatile spot market price. That's simply not 9 what they will be offering. To offer that to them and 10 offer that to them as the exclusive choice under the 11 interim transitional provisions, in that context, in 12 our respectful submission, makes no sense and is 13 inconsistent with the clear objectives of the 14 legislation. 15 That the legislation contemplates 16 this is reinforced, in our view, by the fact that there 17 is no mandatory payment obligations set out in the 18 legislation. The legislature couldn't simply have 19 forgotten that. If it was the legislature's intention 20 that there should be some long-term regime available to 21 a large number of customers for them to receive supply 22 without making an election, without contracting for it, 23 then surely the legislature would have told the 24 industry and the Board how payment from those customers 25 is to be secured. 26 The fact that the government has not 27 done that -- and I note that there were submissions to 28 the government after the initial bill was tabled which 320 MARK/JENNINGS, presentation 1 noted that omission -- so the government not having put 2 it in has made it clear again that the expectation is 3 that every customer, sooner rather than later, will be 4 making contract elections. 5 There is, Mr. Chair, a rich irony, in 6 fact, in the draft SSSC as it presently is and in the 7 submissions of those who support it, and the irony is 8 this. The municipal electric utilities in this 9 province at one time, a few years ago, argued 10 vigorously to postpone introduction of retail 11 competition. It was their position that benefits of 12 competition are only going to be realized when you have 13 competition in generation, that without competition in 14 generation you could have retail competition coming out 15 your ears and in fact there would be no such thing as 16 retail competition. 17 The focus initially had to be on the 18 wholesale markets and the proposal was that during the 19 initial stage of restructuring the province ought to 20 retain the public power system at the retail level, 21 that is, a system where certain large customers had 22 access to the wholesale markets directly, but for most 23 customers the MEU would function as a non-profit agency 24 to pass through wholesale market rates and distribution 25 costs on a cost-recovery basis. 26 What I have just described is 27 precisely what the draft SSSC is: Having the LDC act 28 as, if you will, a public-service agency merely passing 321 MARK/JENNINGS, presentation 1 through the wholesale market rate and distribution 2 costs on a cost recovery basis. That's what the 3 municipal electric utilities proposed to the government 4 and the government said no. 5 It clearly said no. There can't be 6 any doubt that when the government issued the 7 legislation it said no to that proposal. We know from 8 the White Paper and all the pronouncements that the 9 government says: No, we will not do that. We will 10 have retail competition today. 11 We find ourselves back here before 12 the Board in your deliberations of the very first 13 significant decision you have to make about retail 14 service and those same parties -- for example, Energy 15 Probe -- who argued so vigorously that the municipal 16 utilities were wrong-headed and wanting this public 17 service function to continue at the retail level now 18 argue equally as vigorously that you should do 19 precisely that. It's a rich irony, indeed. 20 In that context, in our submission, 21 the purpose of section 29 is clear. It is simply, and 22 no more than, an obligation to ensure that until the 23 mature competitive markets develop there will be at 24 least one retailer. The government was careful in 25 describing the function to be performed under 26 section 29 as retailing. It could have described it as 27 something else, but it has described it with the same 28 word that is used to describe every function that every 322 MARK/JENNINGS, presentation 1 retailer will perform in tomorrow's market whether it 2 is a municipally-owned or a private entity. 3 So the scope of section 29 is, in our 4 submission, clear and simple. It contemplates that 5 what is permissible, and indeed what is preferred, is 6 to have that retail service performed by the retail 7 affiliate or a third-party retailer. 8 If it was the intention of the 9 legislature that the section 29 function should be 10 something as risk-free and sterile as is proposed under 11 the draft SSSC, the government would not have put a 12 requirement in the legislation that the function not be 13 performed by the LDC but it be performed by an 14 affiliate or a third party. 15 If the government had thought that 16 section 29 supply would be this billing function spot 17 price pass-through with no risk, then, in my 18 submission, they would not have put in section 70(10) 19 of the OEB Act, which is going to require at some 20 future date that the section 29 function be contracted 21 out to the affiliate or to the third party. Clearly, 22 this is a temporary window only for the LDC to perform 23 the function itself. That is reflected in the 24 provision of the legislation which prevents Ontario 25 Hydro Services Corporation from performing the section 26 29 obligation itself. 27 In the case of the successors to 28 Ontario Hydro, they haven't even been given that window 323 MARK/JENNINGS, presentation 1 for transition. They have been told from day one by 2 the legislature that we expect the nature of the 3 section 29 supply function will be such that it's 4 inappropriate for it to be done by the regulated 5 entity. It should be done by the unregulated entity. 6 That is consistent only with a conception of section 29 7 service which has it akin to an unregulated retail 8 service. 9 The second large or broad picture 10 that we see when we take a step back and look at the 11 legislation is that the government clearly 12 contemplated, in enacting the legislation, that the 13 municipal electric utilities and their successors are 14 to be legitimate electricity retailers and are to be 15 allowed to continue that business, and customers should 16 have the right to choose to take supply from the MEU's 17 successor without disadvantage. 18 In short, the legislation fully 19 envisions that municipal electric utilities and their 20 successors, indeed preferably through the retail 21 affiliates, can continue to serve customers and there 22 is no reason to conclude that that form of service must 23 be artificially constrained so as to no longer resemble 24 the service that customers presently receive, and no 25 doubt would want to continue to receive. 26 The government could have said that 27 the municipal utilities should not be in the retail 28 business, but they didn't say that. The legislatures 324 MARK/JENNINGS, presentation 1 clearly said very loudly that the municipal utilities 2 may elect to continue in that business without any 3 restriction or qualification whatsoever. 4 There is only one restriction or 5 qualification in the legislation, and that is 6 section 29 itself. 7 Section 29, if looked at in the 8 broader context of the MEUs being entitled to decide to 9 be in retail or out of retail, section 29 is merely a 10 qualifier on that which says "You may want to get out 11 of retail, with one exception: For a limited time you 12 must, either yourself or by contract with some other 13 party, ensure that there is at least one retailer 14 available for every customer in your service 15 territory." 16 So when you look at section 29 in the 17 context of the Act, which clearly says to the utilities 18 "Go and make your choices", it says to their 19 shareholders and directors "You can be in the business 20 of retailing if you want, you can be out of the 21 business of retailing if you want, and we are not 22 putting any restrictions on you." 23 Section 29 in that context is clearly 24 but a narrow exception which says, "But for a limited 25 period of time, until there is competition, you can't 26 get out of the business without making arrangements to 27 have somebody provide retail service to every 28 customer." 325 MARK/JENNINGS, presentation 1 In that context, section 29 should be 2 viewed as but a narrow restriction on the utility's 3 right to carry on or not carry on retail if it wishes 4 and how it wishes and should not be viewed as a 5 springboard for implementation of a very broad and 6 deep-reaching regulatory regime of rates. It is a 7 narrow function for a limited time and the regulatory 8 approach to it should be similar. 9 The Board's function, in our 10 submission, under section 78 of the Act in this context 11 is clear: It is to ensure that the rates charged by 12 utilities under the section 29 function are just and 13 reasonable, that is, that in the absence of additional 14 or sufficient retail competition at this point in time 15 the Board still has a general supervisory jurisdiction 16 to ensure that what is being offered by the utility 17 under section 29 is not abusive of the market, that it 18 is not unjust or unreasonable. 19 The Board should take that view of 20 its power under section 29 and not transform a just and 21 reasonable supervisory power into a bottom-up effort to 22 regulate the utilities in terms of how they procure 23 their power and how they sell it to the customers. 24 The Board, in our respectful view, 25 should consider that its mandate under section 29 is, 26 at the end of the day, to look at the rates proposed by 27 the MEUs and determine whether, because of the absence 28 of mature competition in the service territory, there 326 MARK/JENNINGS, presentation 1 is anything abusive about the rates. If not, in our 2 submission, in the context of the legislation as a 3 whole, the Board should approve those rates as 4 submitted. 5 Lastly, Mr. Chair, I want to deal 6 with the question of what the legislation tells us in 7 broad terms about the customers, because they are, 8 after all, the objects of the exercise. It is for them 9 that the industry has been restructured. 10 There is nothing in the legislation, 11 in our submission, to support the conclusion that the 12 LDC or its affiliate in providing section 29 service 13 should be prevented from providing service which is 14 most advantageous to its customers. 15 There is no reason to suppose that 16 the government intended that section 29 service should 17 preclude a utility from considering and implementing 18 that type of service which is best for its customers 19 and its local conditions. There is no basis in the 20 legislation to conclude that a section 29 customer 21 should be deprived of the opportunity to have the 22 utility provide him or her with a rate structure which 23 is best suited to that customer's conditions of 24 service. 25 Take, for example, the northern 26 utilities in Ontario where there has always been a 27 recognition that the unique conditions of service, both 28 in terms of climate and in terms of the unfortunately 327 MARK/JENNINGS, presentation 1 large penetration rates of electric space heating, have 2 always required somewhat different rate structures. 3 Under the draft SSSC proposal, the 4 utility would have no flexibility to offer northern 5 customers rates which are most appropriately suited to 6 their conditions of service. 7 In our submission, there is nothing 8 in the legislation which entitles one to read into it 9 an obligation or even a power on the Board to deprive 10 customers across the province of those types of rate 11 structures which their local utility, using their 12 experience and discretion, consider is most appropriate 13 for the prevailing service conditions. 14 We ask the Board in this regard to 15 keep in mind that the fundamental argument of the 16 proponents of the draft SSSC in its present form always 17 answer the criticisms by saying: Well, other retailers 18 can provide that service. But there has been precious 19 little discussion of whether and when those alternative 20 retail offerings will be available, if ever. 21 There is no evidence before the Board 22 that when the market opens up there are going to be 23 competitive retailers in places such as Cochrane, 24 Ontario. Cochrane is the town in Ontario where the 25 local electric utility, the local Public Utilities 26 Commission had to undertake the function of offering 27 cellular telephone service because none of the 28 commercial cellular telephone firms would offer service 328 MARK/JENNINGS, presentation 1 in that territory. 2 There is no reason to suppose, in our 3 view, that this perfect competitive retail environment 4 will emerge immediately to offer this relief. 5 In short, Mr. Chairman, the 6 legislation contemplates that if the customer wants the 7 status quo the customer is entitled to the status quo. 8 If the customer wants to continue taking service from 9 its present service provider, it can do so. If the 10 customer wants to continue to have service on a 11 fixed-price basis which resembles the service it is 12 presently getting, it is entitled to do so. 13 I will just refer you to -- I could 14 have said it no better myself than the Enbridge 15 submission which came in last night. 16 Enbridge is the party that wasn't 17 here during the proceedings. Everybody says, "Well, 18 where is this competitor which all of this is designed 19 to protect? Where is the competitor for which the 20 draft SSC was designed to protect?" He has finally 21 come forward. 22 Enbridge says, on the very first page 23 of its submission: 24 "The Standard Supply Service 25 Code should not create any bias 26 which necessitates that a 27 customer must exit the utility 28 to obtain a purchase option 329 MARK/JENNINGS, presentation 1 other than one based on the spot 2 market. System supply should be 3 available from the utility if 4 the utility is prepared to 5 market this option. Freedom of 6 choice, including freedom to 7 maintain the status quo, should 8 be upheld in the fullest sense." 9 (As read) 10 Enbridge doesn't consider that it 11 will be unduly disadvantaged in the competitive arena 12 by such a system, nor do we. 13 Mr. Chairman, it is against those 14 broad or in light of those broad objectives of the 15 legislation that the proposal is put forward. 16 In closing, I want, though, to refer 17 the Board to one other aspect of the legislation which 18 the Board must bear in mind, and that is this: that 19 section 78 of the legislation, in our respectful view, 20 does not permit the Board to impose upon a utility the 21 spot price pass-through regime. 22 Section 78 is very clear in making a 23 distinction between two regulatory authorities that the 24 Board has. It can approve or fix rates -- and it is 25 stated that way to be disjunctive -- except when one 26 gets to section 78(3), which talks about the Board's 27 powers when the Board does not agree, does not care to 28 approve the submission of the applicant utility. 330 MARK/JENNINGS, presentation 1 Pardon me, this is subsection 7. 2 Section 78(7) says: 3 "Upon an application for an 4 order approving or fixing rates, 5 the Board may, if it is not 6 satisfied that the rates applied 7 for are just and reasonable, fix 8 such other rates as it finds to 9 be just and reasonable." 10 (As read) 11 So the Board's powers, in my 12 respectful submission, are carefully constrained by 13 section 7, that when you do decide not to approve the 14 filing of the applicant the sole regulatory authority 15 that the Board has is to fix the rates -- and "fix" 16 means fix as it does in ordinary parlance. It means 17 establish a fixed rate; it does not mean put in place a 18 spot price pass-through regime. 19 So while it would be open to the 20 utility to apply for approval of a spot price 21 pass-through -- and some may for some classes of 22 customers -- the Board, in our view, does not have the 23 authority to impose a spot price pass-through against 24 the wishes of an applicant MEU. 25 Lastly, on the question of the 26 statutory authority, section 2.5.7 of the Affiliates 27 Relationship Code, in our submission, is beyond the 28 authority of the Board. The legislation is clear and 331 MARK/JENNINGS, presentation 1 express in section 70 in directing the Board that in 2 setting licence conditions the Board cannot require a 3 reorganization of the applicant or divestiture of 4 assets. 5 In our respectful view, using the 6 Code provisions to effectively require a reorganization 7 and a divestiture of customers, which are assets, the 8 Board would be exceeding its jurisdictions. 9 Mr. Chairman, it is against those 10 principles, and others that are mentioned in the 11 detailed submission, that the proposal is advanced. 12 Mr. Jennings and I are available to answer any 13 questions you may have. Thank you for your attention. 14 THE CHAIRMAN: Thank you very much. 15 And questions from counsel? 16 MS LEA: Yes, thank you. 17 I think I am elected to ask these 18 since they have a bit of a legal component involved 19 with them. 20 Mr. Mark, I would like to understand 21 fully your submission with respect to section 78(7), 22 which I believe is discussed at page 19 of your 23 submission. Frankly, I am interested in the 24 distinction between "approve" and "fix" that you 25 mention in paragraph 44 of that submission. 26 Do I understand, then, that the Board 27 can approve a formula-based or flexible rate that an 28 MEU or an LDC proposes, but it cannot impose a flexible 332 MARK/JENNINGS, presentation 1 or formula-based rate in your understanding of 78(7)? 2 MR. MARK: That is the essence of our 3 submission on that, yes. The legislation clearly makes 4 the distinction between approving or fixing. It 5 doesn't say approve and fix; it says approve or fix. 6 The Board in subsection 3 says: 7 "The Board may make orders 8 approving or fixing just and 9 reasonable rates for the 10 transmitting or distributing of 11 electricity and for the 12 retailing of electricity in 13 order to meet the obligations 14 under section 29." (As read) 15 When you get to subsection 7, which 16 deals with the specific situation where the Board is 17 not satisfied that what is applied for is just and 18 reasonable, its only authority is to fix such other 19 rates as it finds to be just and reasonable. 20 Unless one wants to put a very 21 tortured interpretation on the word "fix", which I 22 think is reasonably clear and is certainly reasonably 23 clear when juxtaposed to "approve" -- the government, 24 the legislature would not have used two different words 25 to describe the same function -- it is clear, in our 26 submission, that the Board's authority is limited. 27 MS LEA: Obviously under 28 subsection 7, if the Board doesn't like what is 333 MARK/JENNINGS, presentation 1 proposed it is not going to be approving them. So if 2 the legislature wanted to give the Board some ability 3 to not fix but set out some other rate that might be 4 more flexible, in your view they would have had to add 5 a word to subsection 7 such as "set" or "impose", or 6 something other than "fix". It is the nature of the 7 word "fix". 8 MR. MARK: I think that is right. It 9 seems to be a reasonably clear indication that what the 10 government had in mind was fixing. 11 MS LEA: The CAC in its submission 12 points out that the Board has been setting -- and I 13 will use that fairly neutral term -- rates for gas LDCs 14 that do involve some flexibility -- range rates, for 15 example, or formula-based rates -- under the precisely 16 similar power of section 36(5) of the legislation. 17 Do you see there being a difference 18 between the authority of the Board in rate setting for 19 gas and electricity? Do you see that their submission 20 has merit? 21 MR. MARK: I haven't done, and I 22 don't propose to do, a comparison of the legislative 23 provisions which are the basis of the words "regulatory 24 authority" on the gas side. I am not going there. 25 If your question is, from a practical 26 point of view does a reading of subsection 7 permit 27 some flexible approaches, I think it probably does. I 28 haven't discerned any particular scheme, but if you 334 MARK/JENNINGS, presentation 1 fix, for example, a maximum price -- fixing a maximum 2 price with flexibility under a price cap, which is 3 certainly consistent with the Board's general PBR 4 approach, I think would be something that would be 5 permissable under subsection 7. 6 MS LEA: Okay, that is helpful, 7 because I had not understood your original submission 8 to be that there was any room at all. 9 Now I understand that a price cap 10 scheme, for example, that fixed the top but allowed the 11 utility to move within a band, for example, at its 12 discretion, you would say that that could constitute 13 fixing a rate? 14 MR. MARK: If the Board were to fix a 15 maximum rate and then through application of its 16 general PBR principles, or whatever, say "If you can 17 charge less than that, if you want to charge less than 18 that, God bless you", I think that falls within 19 subsection 7. 20 MS LEA: Okay, that is helpful. 21 Thank you. 22 The last -- 23 MR. JENNINGS: I'm sorry. From a 24 practical standpoint -- I don't know whether it is 25 worth looking to some of the other jurisdictions, but 26 Professor Dewees mentioned Venezuela, for instance, as 27 one where spot pass-through was used. 28 Take a look at what they have done, 335 MARK/JENNINGS, presentation 1 in fact. Although it is relatively short term, they 2 have expressly given the regulator the authority to 3 forecast the spot, and then that is what the 4 distributors may pass through to their rates. Then 5 there is a correction in the next quarter. 6 They have come close to allowing 7 rates that people know in advance, even in their 8 supposed smooth spot pass-through. 9 MS LEA: Thank you. That is helpful. 10 My last query on this topic has to do 11 with section 78(6). 12 Do you have the Act before you so 13 that you can look at it? 14 MR. MARK: Yes. 15 MS LEA: Section 78(6) reads: 16 "An order under this section..." 17 Which is a rate order, and that would 18 include section 78(7): 19 "...may include conditions, 20 classifications or practices 21 applicable to the transmission, 22 distribution or retailing of 23 electricity, including rules 24 respecting the calculation of 25 rates." (As read) 26 Do you think that subsection gives 27 the Board some measure of flexibility in terms of what 28 rates it can impose on an LDC? Can you comment on that 336 MARK/JENNINGS, presentation 1 section? 2 MR. MARK: I am not sure which aspect 3 of the section you are asking us. 4 It is certainly consistent with our 5 position that section 29 rates should permit 6 distinctions between classes of customers, which seemed 7 to us to be an intuitive proposition. There just 8 doesn't seem to be any logical reason why, just because 9 it is section 29 supply -- even if you take the most 10 extreme view of section 29 supply that it is standard 11 supply -- there doesn't seem to be any good reason why 12 you shouldn't be able to have traditional class 13 distinctions that reflect costs or conditions of 14 service. And while this section is not mandatory, it 15 is certainly permissive and would be consistent with 16 our suggestion that there is not one -- or that you can 17 have some variations between customer classes. 18 MS LEA: I guess what I was trying to 19 get at is, if the Board is making an order under 20 subsection 78(7), presuming for a moment it hasn't 21 approved exactly what the utility has asked for, could 22 it -- using the authority of the phrase in sub (6) 23 including rules respecting the calculation of rates -- 24 have a formula base rate either very similar to what 25 the utility proposed or something it came up with on 26 its own? Could it have a calculated rate, if I can put 27 it that way, where you don't know what it is until you 28 plug the numbers -- and the numbers may be index 337 MARK/JENNINGS, presentation 1 numbers or derived from some independent source than 2 the Board? Is that sort of thing permissible, in your 3 view, under 78(7)? 4 MR. MARK: I think you have to 5 distinguish, again, between sub (7) and sub (6). Sub 6 (7) is the one that deals with the particular situation 7 where the Board is not satisfied that the rate approved 8 or applied for is just and reasonable, and in that 9 situation it can only fix. 10 You may be right, not necessarily, 11 but you certainly may be right that under subsection 12 (6), in circumstances other than when you have that 13 conflict between the Board and the MEU, the MEU's 14 approved application may be on a formula basis. This 15 Board could impose a spot price pass-through if that is 16 what the MEU applied for. 17 But it seems to me that section (7) 18 is specific, and it says that when the MEU and the 19 Board are butting heads the Board has one remedy, which 20 is not to impose a formulaic approach. 21 MR. JENNINGS: I am not a lawyer so I 22 may be wrong, but the reading of that section talks 23 about methods used in calculating rates. I would think 24 you would use some other formulation if in fact the 25 method was going to produce the rate itself and be an 26 unknown rate. I think that part of the issue is: What 27 is a rate? Something you know in advance. 28 MS LEA: Okay. Thanks very much for 338 MARK/JENNINGS, presentation 1 your comments on that. 2 I had one other issue to ask you 3 about, and that has to do with limitations on 4 procurement. You discussed this in your submission, 5 starting at page 21, and I think you spoke to it also 6 today. 7 As you are aware, under the old 8 cost-of-service regime that was in existence for gas, 9 the Board on occasion reviewed the prudency of 10 procurement as part of its rate-setting function. We 11 are not, I don't think, talking about that kind of 12 thing in relation to the electric LDCs, but do you see 13 the Board having any obligation to consider the 14 prudency of procurement, if I can put it that way, 15 under its obligations to consider the financial 16 viability of the electric industry in Ontario, the 17 financial health of LDCs that might be part of that? 18 MR. MARK: There is no question that 19 the Board simply can't turn a blind eye to how an LDC 20 acquires its input to its product and, in determining 21 whether a specific output or rate is just and 22 reasonable, the Board will want to have regard to at 23 what cost could this product or the inputs for this 24 product be procured in the marketplace. If it sees 25 that, you know, the inputs could be procured for price 26 "X" and the utility is charging "2X" for the end 27 product, the Board, using a PBR regulatory scheme or 28 any regulatory scheme, can say, "No, your retail rates 339 MARK/JENNINGS, presentation 1 have to be lower". 2 But as we said in the submission, and 3 as is clear -- if the Board has any confusion about our 4 submission -- the Board has no power to regulate 5 procurement. If there is an administrative law 6 principle which is clear it is that unless the 7 regulatory powers are bestowed upon the Board by 8 express words of legislation it doesn't exist. The 9 Board, in exercising its other powers, while it may 10 consider the procurement practice as being relevant in 11 the exercise of its other powers, the Board clearly has 12 no power, in our view, to actually regulate procurement 13 practices. 14 MR. JENNINGS: Ms Lea, let me come at 15 the same issue from a different standpoint because your 16 wording was, I think, very instructive. 17 I think the Board has a very 18 important responsibility to look at the financial 19 health of the distributors. That is an ongoing 20 regulatory function. But as we are proposing, the 21 distributors' ability to be in the retail business is 22 very limited. It isn't even just the idea that 23 section 29 is limited; there can be a separate decision 24 to say, "You can't do it through your distributor, 25 tomorrow". 26 Our understanding in our discussions 27 with the government was that the MEUs were given a 28 couple of advantages. One was that they had a couple 340 MARK/JENNINGS, presentation 1 of years to get their decisions together to become OBCA 2 incorporated and they can continue to operate as MEUs, 3 in the meantime, being, as they are today, both the 4 distributor and the retailer in one function. That's 5 what they are today, and that is -- their, albeit 6 today, implied customer contract -- as Mr. Mark said, 7 an asset. 8 As they move forward, they are 9 required to split those into two companies and the two 10 companies are affiliated but they are two separate 11 companies, and if they are run properly the liabilities 12 of one don't move over to the other. 13 That I think makes sense of why the 14 government would prefer to see all of this done through 15 the retailer, or a third party, so that the LDC that 16 the Board has some concern about the financial health 17 of isn't exposed and, in that, it doesn't move through 18 to any taxpayer dollars, as has been suggested by other 19 people. I think that is important: the financial 20 health concern is about the LDC, not about the 21 retailer. 22 MS LEA: Thank you. 23 One moment. 24 --- Pause 25 MS LEA: Thank you very much, 26 gentlemen, for your answers. 27 Thank you, Mr. Chairman. 28 THE CHAIRMAN: Thank you. 341 MARK/JENNINGS, presentation 1 I want to follow up on Ms Lea's first 2 series of questions to you. 3 You are proposing a proposal in your 4 appendix, Appendix A of your submission. 5 MR. MARK: Yes. 6 THE CHAIRMAN: At page 4, you state: 7 "With respect to subsection 8 29(1) rates, each LDC (or, more 9 likely, each group of LDCs) 10 should be permitted to propose 11 to the OEB whether the 29(1) 12 customers in each customer 13 class..." 14 And you specify: 15 "...(residential, small 16 business, general service, large 17 industrial) in its service 18 territory are to receive 19 electricity at a fixed rate..." 20 I understand that, and you go on to 21 explain a bit about that, about having administrative 22 costs and so forth: 23 "...or..." 24 And that is the important one: 25 "...or at the wholesale market 26 hourly spot rate (the wholesale 27 market hourly spot price, plus 28 the administrative cost 342 MARK/JENNINGS, presentation 1 component...)" 2 Et cetera. 3 So what you are suggesting there, it 4 seems to me -- correct me if I am wrong here -- is that 5 the LDC could propose to the Board a spot market price 6 pass-through. 7 MR. JENNINGS: Yes. 8 THE CHAIRMAN: That would be part of 9 the offerings of the LDC? 10 MR. MARK: The LDC, as we indicate -- 11 and we put a sample chart together on page 8, and it is 12 just a sample -- envision that the utility would be 13 able to, and probably would, apply for a section 29 14 rate that saw spot rates offered to certain customers 15 and fixed rates to others. Spot rates to industrials 16 makes sense because they don't have the same 17 transaction costs, et cetera, et cetera. 18 MR. JENNINGS: The tendency, has been 19 to talk about all of the default as if it applied only 20 to the small customers, but it doesn't. It applies to 21 all customers. So we would, frankly, like to 22 preserve -- to go back to Mr. Mark's comments -- what 23 makes sense for the appropriate class. 24 The other thing that hasn't been 25 discussed much is the fact that the risks, rewards, et 26 cetera, for the different categories of section 29 are 27 likely to be different. 28 If you think about -- and that's why 343 MARK/JENNINGS, presentation 1 we constructed the sample. 2 If you think about a small 3 municipality that has perhaps -- and we have a few 4 examples -- 20 per cent of its load in a single 5 industrial plant, if they have the obligation to be 6 prepared to take them back when their other supplier 7 defaults or fails, that is a huge burden compared with 8 allowing for 29(1) for a bunch of small customers. 9 So we think you need to allow them 10 the flexibility under any regime to deal not only with 11 the different customer classes but with the different 12 categories of obligation that they faced with. 13 I mean the government simply looked 14 around and said: Who can we pin this temporary 15 obligation on? The only person around, in the legal 16 sense, was the LDC that is connected to the customer no 17 matter what. 18 THE CHAIRMAN: So under that scenario 19 then the Board would simply approve a fixed rate, in 20 your scenario, for example, the small residential 21 consumers approve that, but would also then approve a 22 fixed rate for -- 23 MR. JENNINGS: A spot rate for some 24 other class. 25 THE CHAIRMAN: I'm sorry, a spot rate 26 for the balance? 27 MR. JENNINGS: Right. 28 In fact, the sample on page 8 would 344 MARK/JENNINGS, presentation 1 have in fact a package of nine different -- perhaps 2 different rates. They need not all be different. 3 We, frankly, don't think there is 4 going to be a huge range of options, that logic will 5 get people not only clustering together, as has already 6 been talked about, to work together but also I think 7 the MEA will probably play its traditional role of 8 coming up with some standards and some packages that 9 can be brought forward in bulk. 10 We also think that the kinds of PBR 11 approach that are being worked on on the wires side -- 12 and, unfortunately, they are not quite that far along, 13 but price caps and some incentives would work well. 14 I was just reading last night about 15 Colombia, where they have basically looked at all of 16 the rates and then regulated simply by saying you take 17 your input costs plus the average of what everybody 18 else's rates are and there is almost a formulaic 19 approval of what their allowable rate maximum is. 20 There is a rate incentive then to drive the rates down. 21 Colombia also is instructive on the 22 other issue about whether spot or fixed is preferred. 23 They are looking at the wholesale market. They 24 required 80 per cent when the market opened to be by 25 contract and only allowed 20 per cent to be from spot 26 in order to get some real market mechanisms going. 27 They ratcheted that down and finally 28 eliminated the restriction, but they started off saying 345 MARK/JENNINGS, presentation 1 you can't get all of it through spot. In fact, you 2 can't get most of it through spot. 3 THE CHAIRMAN: Thank you. 4 Mr. Higgin. 5 MEMBER HIGGIN: Thank you. 6 If we could just start again with 7 that table on page 8 and pick up a couple of points 8 that I would like to understand in a bit more depth 9 perhaps. This relates to the fact of what we will 10 call the questions I had to Mr. MacOdrum about 11 differentiation. 12 If the LDC, as part of its 29 13 obligations, is allowed or is not mandated to offer a 14 variety of fixed price, spot price or some other 15 combination it chooses, how do they relate to the 16 offerings that its affiliate as a competitor will 17 equally well be offering to customers that wish to 18 choose the competitive market? How do you relate those 19 two, especially if the affiliate is the agent and he is 20 carrying out the 29 obligation? 21 MR. JENNINGS: I think you need to go 22 there exactly, because if in fact our reading of the 23 intent is correct, if they have a retail affiliate, 24 that's where they would put the responsibility. You 25 wouldn't want two parts of the company doing the same 26 business. 27 MEMBER HIGGIN: Right. 28 MR. JENNINGS: So just like, as I 346 MARK/JENNINGS, presentation 1 understand it, OHSC has done, you would put the default 2 responsibility -- they are obliged to do it from day 3 one in their retail and you would have the same kinds 4 of code of conduct that is in the affiliate code to 5 provide whatever ethical walls are needed. 6 But let me reiterate and pick up on a 7 point that was made by Mr. Power in his submission, and 8 I think quite eloquently made by Ms Woolf. 9 It is important to be as precise and 10 as clear -- and I would hope the Board accepts some 11 responsibility for being clear -- about what customer 12 information can or can't be passed specifically. I 13 mean that's what has worked best in other jurisdictions 14 is to be as precise as possible about what the customer 15 information restrictions are and aren't, and leave as 16 much room as possible. 17 If there isn't a reason for 18 restricting, then, in our submission, lighthanded 19 regulation forbearance is appropriate. 20 MEMBER HIGGIN: I come back to the 21 question about how do you differentiate -- 22 MR. JENNINGS: The customers? 23 MEMBER HIGGIN: -- the offering for 24 standard supply from the retail options that the 25 affiliate is likely to offer? I would hope they would 26 be offering spot price for those customers who wanted 27 it directly. 28 MR. JENNINGS: And there certainly 347 MARK/JENNINGS, presentation 1 has been some discussion in terms of making settlement 2 work and in terms of making others work, that under 3 your retail settlement option or code you might require 4 the utilities to make spot available, but not, in our 5 view, as the 29 responsibility. You would approve a 6 specific rate. 7 We expect that the kind of rules that 8 Ms Lea referred to, methodologies, et cetera, would say 9 that that has got to be an energy-only rate, so that it 10 is easily comparable, et cetera. 11 MEMBER HIGGIN: That's an assumption? 12 MR. JENNINGS: No. It is. I said I 13 am assuming, but it would make the regulatory burden 14 easier and that that would be the default rate that 15 people who didn't elect a choice under 29(1) got, 16 whether you like it or not. 17 There is a different issue, frankly, 18 in law about 29(2) or (3). If somebody comes back, 19 there doesn't appear to be any obligation to take them 20 back without contract if they have already gone into 21 the contract market. 22 MR. MARK: If I understand your 23 question, sir, really the answer is that the major 24 differentiation is that under section 29 -- or, put it 25 the other way, under competitive retail rates the 26 customer is making a choice to enter that market and 27 have that type of service, as opposed to, I think, 28 certainly a large portion of the section 29 supply will 348 MARK/JENNINGS, presentation 1 be either non-choosing or people who come back for 2 various reasons. 3 But there is no necessary 4 requirement, if I understand your question correctly, 5 that the rate being offered by the utility under 6 section 29 be different in its commercial terms, or 7 significantly different in its commercial terms, from 8 what a competitive retailer might offer. 9 Your observation was you would hope 10 that competitive retailers would offer spot 11 pass-through. 12 MEMBER HIGGIN: As well as all 13 others. 14 MR. MARK: As well as all others. 15 Even under the draft SSSC proposal, as you now have it, 16 you would have a situation where the LDC is offering or 17 is mandated to offer, under section 29, spot 18 pass-through and the retail affiliate of the LDC is 19 offering, amongst its menu of choices, spot price 20 pass-through. There is the same rate. 21 To be sure, if the LDC selects a 22 particular fixed rate, if it is permitted, if we 23 persuade you that they should be able to offer a 24 fixed-price offering, it may or may not be different in 25 its terms of service from fixed-price rates that either 26 the affiliate or competitors offer. 27 But your question I think, if I may 28 suggest, incorporates an assumption that many people 349 MARK/JENNINGS, presentation 1 have here, which is just the wrong assumption. The 2 question of, you know, how are you going to distinguish 3 the rates offered under section 29 from real rates that 4 we offer in a competitive world is the wrong question. 5 Our reading of the legislation is 6 they are to indeed resemble the rates that would be 7 offered in the competitive world and there is no need 8 to go on this search to make them different because 9 they shouldn't be. 10 MEMBER HIGGIN: You have no concerns 11 that that may retard the competitive market? 12 MR. MARK: In fact, there is quite a 13 bit of evidence before you that, if anything, it will 14 do the opposite. 15 Firstly, it gives the other retailers 16 a benchmark to compete against, like as implicit in 17 what Enbridge has said: Show me what your fixed price 18 is and if it can't be beat by any retailers, then there 19 is no reason to artificially promote the competition. 20 The consumers are getting all the 21 advantages they can out of the system and they will be 22 more easily able to compete against that than they will 23 against a spot price. 24 Secondly, the analogy that I have 25 thought about from time to time is look at mortgage 26 rates, which this is akin to in many ways. Canada 27 Trust, when it offers mortgage rates that are a quarter 28 or a half point below the market -- 350 MARK/JENNINGS, presentation 1 MEMBER HIGGIN: They may not do that 2 now anyway. 3 MR. MARK: Just stick with me for a 4 moment. Let's forget the events of last week. When 5 they put that out in the marketplace, they are not 6 competing with TD's variable rate mortgages. I have a 7 variable rate mortgage. I know that in the long term, 8 economists tell me, if I stay with a variable rate 9 mortgage, I will pay less in the long term than I will 10 if I go with fixed-term mortgages. So they can offer a 11 quarter point off prime and I could care less. I am 12 not going with them. 13 Who they are competing to get are the 14 customers who are signing up on fixed rate deals with 15 TD. It's two different products. I respectfully think 16 that the competition will be no more difficult and will 17 probably be easier if what they are competing against 18 is a fixed-price offering. 19 The other thing to bear in mind is -- 20 experience tells us, and the literature from other 21 jurisdictions is clear on this -- that the margins in 22 retailing of electricity are ridiculously thin. It's 23 not a profitable business. 24 That's not where retailers are going 25 to be making their mark, by beating that price. They 26 are going to be making their mark on other terms of 27 service or on bundling electricity service with 28 other -- bundling with the cable, with the gas, all 351 MARK/JENNINGS, presentation 1 that literature that comes into your house and my house 2 today. That is where they are going to make their 3 inroads, by aligning themselves with CAA and the Bar 4 Association and all those avenues. 5 With respect, we don't think that 6 putting a fixed-price offering in the default supply is 7 going to have a negative impact on the ability of 8 retailers to compete. 9 MR. JENNINGS: It seems to me that we 10 are almost backwards in the way we are looking at it 11 because, as Mr. Mark said, even in discussion with some 12 of the retailers, it's easier for them to talk to a 13 customer about being able to do better than a fixed 14 rate. Talking to them about how they compare with a 15 spot rate, which is hard to describe to the average 16 small customer, anyway, is difficult. 17 I think they will find themselves, 18 certainly in discussion with them, that some of them 19 see that a fixed rate is a good thing to compete 20 against. On the flip side, there may be a requirement, 21 not under section 29 to make sure that they, as agents 22 for small customers, have access at the retail level to 23 spot but I would suggest that that's part of your 24 settlement code issue and not the subject of 25 section 29. 26 Section 29 really, in our view, I 27 think looks at what Wisconsin and Norway have done and 28 focuses on the default supplier rather than the default 352 MARK/JENNINGS, presentation 1 supply. Yes, the rate is regulated because if it's the 2 only rate in town, you need a regulator to look over 3 the shoulder and say that this is just and reasonable 4 and it's not gouging some people who have no other 5 choices. 6 MEMBER HIGGIN: To be fair to the 7 retailers who have come before the Board, they 8 certainly didn't say that they supported the 9 fixed-price option. They quite clearly preferred, as 10 the competitor's option, being the spot price 11 pass-through, those that have come before the Board. 12 MR. JENNINGS: That's true. A whole 13 bunch have not come before the Board and I shouldn't, 14 in these surroundings, assume what their motivation is, 15 but it, I think, is instructive that -- 16 MEMBER HIGGIN: The Board has been 17 there on this one. You may remember the time when 18 Consumers then, now Enbridge, offered a retail 19 competitive offering. They tried to bring that forward 20 and the retailers climbed all over them and the Board 21 in doing so. So we have been there on that. 22 MR. JENNINGS: But I must say I am 23 concerned about the extent to which we draw the 24 parallels between gas and electricity. The history of 25 how gas got from where it was to where it is is a long 26 convoluted one with a lot of discussion, not so much in 27 law as in what could be worked out between the Board 28 and the parties, as I understand it. I am far from an 353 MARK/JENNINGS, presentation 1 expert in it. 2 Mr. Mark didn't want to go very far 3 down the road, but it's clear that the sections that 4 are in the electricity area are quite different in some 5 significant respects to what is in gas. I come back 6 to, for instance, an analogy to system gas, as I 7 understand it, which must be delivered, if I am 8 correct, by the distributor. I don't think retailers 9 can distribute system gas. 10 If that's correct, then the sort of 11 not-for-profit basis of doing it and getting a return 12 on the wires or pipes makes sense, but if you look at 13 this as a resale function, the retailers make their 14 returns on something other than the wires and pipes. 15 The way the Act is constructed, it says retail is 16 retail is retail. 17 MEMBER HIGGIN: Thank you very much, 18 gentlemen. 19 THE CHAIRMAN: There are no other 20 questions. Thank you very much for your presentation. 21 MR. MARK: Thank you, Mr. Chair. 22 THE CHAIRMAN: We shall adjourn until 23 1:30, at which point we will hear from Ontario Power 24 Generation Inc. 25 We are adjourned. 26 --- Upon recessing at 1200 27 --- Upon resuming at 1334 28 THE CHAIRMAN: Please be seated. 354 MARK/JENNINGS, presentation 1 Good afternoon, gentlemen. 2 Particularly, welcome to you, Mr. Barrett. It's nice 3 to see you back here at the Board. It's good to see 4 you. 5 If you would introduce yourselves, we 6 can proceed with the OPGI presentation. 7 MR. CAMPBELL: Thank you, 8 Mr. Chairman and Members of the Board. 9 My name is Bruce Campbell and I 10 appear as counsel for Ontario Power Generation Inc. 11 OPG's submission was filed with the 12 Board on August 3rd and will be spoken to today by the 13 two gentlemen to my left. 14 To my immediate left, and of course 15 well known to the Board, is Mr. Andrew Barrett who 16 holds the position as Senior Advisor Regulatory Affairs 17 at OPG. Mr. Barrett will be speaking particularly to 18 that portion of OPG's submission dealing with issues 1, 19 2(b), 3 and 4. 20 To the left of Mr. Barrett is Mr. Guy 21 Raffaele -- that is spelled R-A-F-F-A-E-L-E. He also 22 holds a position at OPG as Senior Advisor Regulatory 23 Affairs. Mr. Raffaele will speak to market power 24 arrangements and, in particular, that portion of the 25 submission that deals with the TransCanada proposal. 26 With that introduction I am going to 27 ask Mr. Barrett to proceed, Mr. Raffaele will follow 28 him, and then those two gentlemen will be available for 355 MARK/JENNINGS, presentation 1 your questions. 2 THE CHAIRMAN: Thank you, 3 Mr. Campbell. 4 PRESENTATION 5 MR. BARRETT: Thank you, 6 Mr. Campbell. 7 Good afternoon, Mr. Chairman and 8 Panel Members. 9 We have participated in this 10 proceeding because we are, of course, interested in all 11 aspects of the development of the Ontario marketplace. 12 We have addressed ourselves to only a couple of the 13 issues in this proceeding, as you will note from our 14 submission, and I would like to briefly summarize our 15 recommendations for you on these issues and provide 16 some of our rationale in advancing these 17 recommendations. 18 With respect to the standard supply 19 service pricing, our advice is that whatever the 20 pricing methodology, be it spot price or be it fixed 21 pricing, the Board should only approve one form of 22 standard supply and not a menu of options as has been 23 suggested by others. 24 We make this submission because of 25 our concern that a menu of standard service supply 26 options would significantly increase the regulatory and 27 administrative burden associated with the provision of 28 standard supply and, in addition, we are concerned that 356 CAMPBELL/BARRETT/RAFFAELE, presentation 1 a menu could significantly undermine the development of 2 a competitive retail market by potentially crowding out 3 supply alternatives that competitive retailers could 4 offer to distinguish themselves from the regulated 5 supply. 6 But just to be clear, in making this 7 submission we are not saying anything against the 8 distributor's ability to offer customer billing options 9 such as equalized billing plans, which we think have 10 value for customers and should be maintained. 11 With respect to the issue of 12 LDC-owned generation, our starting point on this issue 13 is that LDC-owned generation should be operated in an 14 affiliate and not within the regulated distribution 15 utility. Maintaining a separation between the 16 competitive businesses like generation and the 17 regulated wires business is, in our submission, 18 consistent with both the spirit of the industry 19 restructuring and with the legislation. 20 For any transaction between the 21 distribution utility and a generation affiliate, the 22 Board's Affiliates Relationship Code can be used to 23 address concerns over potential self-dealing and 24 cross-subsidy. 25 With respect to the issue of 26 marketing restrictions on standard supply service 27 providers, we are recommending that the Board 28 reconsider the marketing restrictions contained within 357 CAMPBELL/BARRETT/RAFFAELE, presentation 1 sections 2.2.4 and 2.2.5 of the Draft Standard Supply 2 Service Code. 3 It is clear that the restrictions 4 found in these sections have been proposed to deal with 5 the potential for unfair access to customer information 6 by the competitive retailer and to reduce the potential 7 for cross-subsidy. We acknowledge that these are 8 wholly legitimate regulatory concerns and they need to 9 be addressed by the Board. 10 However, we have also noted the 11 comments of a number of MEUs. They have expressed the 12 concern that the proposed marketing restrictions in 13 these sections potentially undermine the viability of 14 their retail affiliates. 15 We are concerned that if these 16 proposed restrictions go forward it may limit the 17 number of retailers active in the market. We, of 18 course, are interested in ensuring that there are a 19 large number of retailers active in the marketplace 20 since each of these retailers represents a potential 21 customer of OPG. 22 However, having more retailers active 23 in the market will also benefit customers through 24 increased competition and the potential for a wider 25 range of products and service offerings. 26 In our view, the Board needs to 27 balance Board staff's legitimate regulatory concerns 28 against the potential for harm to the retail market if 358 CAMPBELL/BARRETT/RAFFAELE, presentation 1 few MEUs decide to create retail affiliates. 2 In considering this balance, the 3 Board should consider whether Codes of Conduct or other 4 types of ringfencing within the retail affiliate are 5 the preferred solution to the Board staff's concerns. 6 With respect to the issue of billing, 7 we are recommending that the Board allow distributors 8 to provide non-discriminatory access by retailers to 9 the billing envelope. 10 We see two potential benefits from 11 this approach. 12 First, there is the potential for 13 additional revenue for the distributors which could, of 14 course, be credited back against the cost of service. 15 Secondly, this would provide an 16 effective means, in our judgment, of communicating 17 information to customers about the options that are 18 available in the marketplace. 19 That concludes my remarks. 20 I want to thank you for your 21 attention. 22 I will now turn it over to 23 Mr. Raffaele who will address issues of market power. 24 PRESENTATION 25 MR. RAFFAELE: Thank you. 26 Good afternoon. 27 Ontario's solution to market power in 28 the electricity generation industry balanced the 359 CAMPBELL/BARRETT/RAFFAELE, presentation 1 competing objectives of a broad range of market 2 participants. Those objectives included creating a 3 competitive environment, minimizing the standard debt, 4 and creating viable successor entities. 5 So we are naturally concerned with 6 any proposal that would impact on the market power 7 mitigation solution and, in particular, with 8 TransCanada's proposal in these proceedings. 9 There are three points we want to 10 make about this proposal. 11 First, although there may be other 12 ways of mitigating market power, this is the one that 13 the MDCs unanimously approved and the government 14 endorsed. It now exists in the licence conditions of 15 OPG as well as other market players. Changing an 16 aspect of these arrangements can upset the balance 17 everyone struggled for almost a year to achieve. 18 Second, proposals aimed at one aspect 19 of the market power mitigation solution may well have 20 consequences that upset the remainder. 21 In TCPL's proposal, for example, what 22 is referred to as OPG backstopping will hinder the 23 creation of a competitive market and will create 24 inequities between customers. 25 We don't think the standard supply 26 service proceedings are the place to revisit the 27 balancing of interests in the market power arrangements 28 that have been approved and put into place by the 360 CAMPBELL/BARRETT/RAFFAELE, presentation 1 government and by the Board. 2 Third, and moving to the details of 3 TransCanada's proposal, I believe there are several 4 flaws in TransCanada's logic. 5 As we pointed out in our submission, 6 the proposal completely ignores the fact that load 7 profile impacts customer price. Even if OPG is 8 successful in achieving a 3.8 cents per kilowatt 9 average price, customers who peak during high demand 10 hours will see and should see an average price above 11 3.8 cents per kilowatt hour, and those who are 12 base-loaded or peak during the off-peak periods should 13 pay, and will pay, less than 3.8 cents per kilowatt 14 hour. This sends the appropriate price signal to 15 customers. 16 Another flaw in TransCanada's most 17 recent submission, the one dated August 5th, is the 18 suggestion that OPG should provide a backstop to the 19 3.8 cents per kilowatt hour default price. 20 This would create unfairness between 21 customers. For instance, if the average price were to 22 land at, say, 4 cents per kilowatt hour rather than 23 3.8 cents per kilowatt hour, under the current market 24 power mitigation solution all Ontario customers would 25 see a rebate of about .15 cents per kilowatt hour. 26 Under TCPL's proposal, using a reasonable set of 27 assumptions, customers on default supply would, in 28 effect, be receiving a rebate of .2 cents per kilowatt 361 CAMPBELL/BARRETT/RAFFAELE, presentation 1 hour while everyone else receives less than half of 2 that in the rebate. 3 As the rebate was intended to be 4 distributed to all customers equally based on their 5 consumption, this is clearly an inequitable outcome of 6 this proposal. 7 For all these reasons our position is 8 that the Board should not adopt the TransCanada 9 proposal. 10 Thank you. 11 THE CHAIRMAN: Thank you. 12 Any questions from -- 13 MS O'REILLY: I have some questions 14 on the Market Power Mitigation Agreement. It has been 15 discussed during this proceeding not extensively, but 16 certainly referred to a lot. 17 The first question that I have is 18 whether the Market Power Mitigation Agreement is a 19 price cap or a revenue cap. 20 MR. RAFFAELE: It is neither in pure 21 form. It is neither a pure price cap, nor a pure 22 revenue cap. 23 What happens is, after the end of a 24 12-month period there is a calculation of the average 25 spot market price. If that happens to be greater than 26 3.8 cents per kilowatt hour OPG pays a rebate on a 27 predetermined quantity which is called the CRQ. 28 You can look at that as a revenue cap 362 CAMPBELL/BARRETT/RAFFAELE, presentation 1 on a prespecified amount, the amount we can make on 2 that, or you can look at that as a cap on the price 3 that we receive for that amount, but it is neither in 4 the purest form. 5 MS O'REILLY: Okay. As I understand 6 it, the MPMA limits OPG's revenue through a rebate 7 mechanism, but it doesn't fix revenue for other 8 suppliers, nor does it set prices for individual 9 consumers. Is that an accurate understanding? 10 MR. RAFFAELE: Yes, it is. OPG is 11 allowed to bid freely into the market, so the hourly 12 prices will fluctuate and all other suppliers will 13 receive whatever the market clears at. At the end of 14 the 12 months, if that happens to be greater than 3.8, 15 then we pay a rebate. So, effectively, we didn't see 16 the full amount. 17 MS O'REILLY: Given that OPG is meant 18 to bid freely under this agreement, does that mean that 19 individual customers could see volatility on their 20 bills, at least on a seasonal and monthly basis? 21 MR. RAFFAELE: I believe so. There 22 is nothing in the Market Power Mitigation Agreement 23 that would impact volatility. What it does is, with 24 the rebate, it changes the average. But since prices 25 will continue, I would imagine, to be set by marginal 26 production costs, then there should be no impact on 27 volatility. 28 MS O'REILLY: I understand that the 363 CAMPBELL/BARRETT/RAFFAELE, presentation 1 agreement has something that is called the price spike 2 adjustment that applies if prices are far in excess of 3 their usual range, such that OPG is protected from 4 providing a rebate on revenue earned during such a 5 price spike. 6 Could you explain what that is and 7 how that works? 8 MR. RAFFAELE: This is one of those 9 issues where a picture is worth a thousand words, but 10 let's see what I can do. 11 The price spike adjustment is 12 designed to protect OPG from rebating a revenue it 13 never earned when prices are extremely high. You can 14 look at the whole rebate mechanism on an hourly basis. 15 You can look at every hour as either a positive or 16 negative contribution towards a rebate number that has 17 been calculated throughout a year. 18 If prices are extremely high and OPG 19 is not producing its expected hourly quantity in that 20 hour, then it would owe a huge rebate on something it 21 never earned. That wasn't an acceptable outcome in the 22 situations when prices are extremely high, because it 23 doesn't send any correct incentive signal to OPG. We 24 have every incentive during those hours to produce as 25 much as possible. So this is a protection on us. 26 Getting back to the issue of the 27 impact on customers, the price spike adjustment is an 28 adjustment to the rebate that we pay. The other 364 CAMPBELL/BARRETT/RAFFAELE, presentation 1 suppliers still see whatever the market price is in 2 that hour, and customers pay whatever it is in that 3 hour. The rebate at the end of the 12 months 4 compensates if on average things turned out to be 5 greater than 3.8, not just that hour. 6 MS O'REILLY: Thank you. 7 Finally, could you explain the 8 application of the agreement. 9 As I understand it, the average price 10 is the average hourly spot market price, and that 11 doesn't include bilateral contracts that are sold 12 within Ontario. 13 I want to know if that is accurate. 14 Second, does that mean that the 15 rebate only is given to people who buy through the spot 16 market? 17 MR. RAFFAELE: On the first issue of 18 whether it is accurate that the bilateral quantities 19 and costs don't come into the calculation of rebate, 20 yes, it is. The average price is a calculation of spot 21 price -- based on spot price only. 22 As far as the rebate goes, the MDC 23 didn't place any restrictions on any entity's ability 24 to enter into financial bilaterals or physical 25 bilaterals, including OPG. 26 So customers are free to enter into 27 those agreements with us and with others, and at the 28 end of the year if the spot market price is above 3.8, 365 CAMPBELL/BARRETT/RAFFAELE, presentation 1 then a rebate goes to all Ontario customers whether 2 they signed a bilateral or bought through the spot 3 market. If they are located in Ontario, they have a 4 right to their share of the rebate. 5 MS O'REILLY: Thank you. Those are 6 all of my questions. 7 THE CHAIRMAN: Thank you, 8 Ms O'Reilly. 9 Ms Lea? No? 10 MS LEA: No, thank you. 11 THE CHAIRMAN: I had one on your 12 assertion that the Board should adopt only one form of 13 pricing for standard supply -- 14 MR. BARRETT: Yes, Mr. Chairman. 15 THE CHAIRMAN: -- when finalizing the 16 Standard Supply Service Code. 17 By that do you mean overall or do you 18 mean for a customer class? What would your position be 19 if there was a different pricing mechanism for 20 industrial versus residential, for example? 21 MR. BARRETT: I think there has been 22 a certain amount of discussion around this issue, and I 23 think I would break it into two different parts. 24 There has been a suggestion by some 25 that some parts of the default group of customers might 26 have a fixed price while others would have a spot 27 pass-through. 28 I think we would be opposed to that, 366 CAMPBELL/BARRETT/RAFFAELE, presentation 1 because in our mind that creates two different types of 2 default supply. It starts to complicate matters, 3 something which we think should be relatively simple 4 and straightforward and transparent in terms of 5 operation and minimize the burden on the Board as well. 6 There has also been discussion about 7 whether it would be appropriate to use different load 8 profiles within the class of default customers. We 9 think that is acceptable and in fact appropriate. 10 Within the default group of customers, there will 11 clearly be class differences and usage, and load 12 profiles I think would appropriately allocate the 13 commodity cost usage of those customers and would send 14 appropriate price signals and would deal appropriately 15 with the proper allocation of those costs. 16 We are supportive of the use of load 17 profiles but not supportive of different types of 18 standard supply service being used. 19 THE CHAIRMAN: Thank you very much. 20 I believe there are no further 21 questions. Thank you for your presentations. 22 MR. CAMPBELL: Thank you very much. 23 Is the next group of presenters here? 24 I don't have a name for who is going to be representing 25 the conglomeration of utilities. 26 MS LEA: I think it is Mr. Mia. 27 THE CHAIRMAN: Is Mr. Mia here? 28 MS LEA: The name of Mr. Mia is 367 CAMPBELL/BARRETT/RAFFAELE, presentation 1 spelled M-i-a. I believe his first name is Ziyaad. It 2 is -- 3 MR. MIA: Sorry to interrupt. 4 Mr. Wiersma is going to be delivering the presentation. 5 MS LEA: Thank you very much. I beg 6 your pardon. 7 While I have the microphone, I wonder 8 if I could deal with two administrative matters. One 9 is related to this presentation. 10 The first is that Mr. MacOdrum of 11 Toronto Hydro delivered what I understand to be the 12 second part of Exhibit F-1, and I would like to submit 13 that to the Board. 14 Secondly, I received from Mr. Mia a 15 submission on behalf of the group of utilities to be 16 represented in the next presentation. That submission 17 should become Exhibit F-3, if it please the Board. 18 I will pass those out. 19 EXHIBIT NO. F-3: Copy of 20 submission on behalf of the 21 Coalition of Distribution 22 Utilities 23 THE CHAIRMAN: Thank you. 24 Mr. Wiersma, welcome to the Ontario 25 Energy Board. We look forward to your presentation. 26 MR. WIERSMA: Thank you, Mr. Chair 27 and Members of the Board. 28 MS LEA: Could we please have the 368 CAMPBELL/BARRETT/RAFFAELE, presentation 1 spelling of your name for the record, sir. 2 MR. WIERSMA: W-I-E-R-S-M-A. 3 MS LEA: Thank you. 4 PRESENTATION 5 MR. WIERSMA: My name is John 6 Wiersma. I am the General Manager of Pickering Hydro. 7 I present this submission on behalf of the Coalition of 8 Distribution Utilities: namely, Brampton Hydro, 9 Cambridge and North Dumphries Hydro, Guelph Hydro, 10 Niagara Falls Hydro, Oakville Hydro, Pickering Hydro, 11 Richmond Hill Hydro, and Waterloo North Hydro. 12 Our submission today will focus on 13 deciding the appropriate method and mechanism for 14 delivering standard supply service. I will also 15 examine the impact of section 2.5.7 of the Affiliates 16 Relationship Code on the distributor's obligation and 17 ability to provide standard supply service. 18 The White Paper discussed one of the 19 objectives of the restructuring of Ontario's 20 electricity market as that of providing electricity 21 consumers with reasonable prices. 22 Another principle that came out of 23 the White Paper was with respect to the new and 24 expanded role of the Ontario Energy Board. 25 The White Paper suggested that in the 26 new markets the OEB be redesigned to provide better 27 protection to Ontario's electricity consumers, at page 28 16 of the White Paper. 369 MIA/WIERSMA, presentation 1 With respect to those consumers that 2 did not choose an electricity supplier, the White Paper 3 made it quite clear that distributors would continue to 4 serve these customers. 5 It is in this context, today, that we 6 must assess the draft Standard Supply Service Code that 7 has been put before the Board and the public. 8 Essentially, the question is that the 9 draft Standard Supply Service Code subsequently meets 10 the objectives of the White Paper. The evidence, if we 11 may refer to it as that, with which we undertake this 12 assessment is the work of the Ontario Market Design 13 Committee, or the MDC, the Energy Competition Act, the 14 White Paper and the transcripts of the technical 15 conference held by the Board this past July. 16 The enabling legislation which guides 17 and facilitates Ontario's electricity sector 18 restructuring the energy Competition Act makes consumer 19 protection a cornerstone of its purpose in keeping with 20 the principles outlined in the White Paper. Section 1 21 of the Electricity Act outlines the purpose of the Act 22 as protecting the interest of consumers, with respect 23 to the prices and the reliability of quality and 24 service. 25 The Ontario Energy Board Act uses the 26 exact same words in outlining the guiding objectives, 27 with respect to carrying out its responsibilities with 28 respect to electricity. 370 MIA/WIERSMA, presentation 1 What are the interests of consumers, 2 with respect to prices? Well, if we look to the White 3 Paper for guidance, it is clear that reasonable prices 4 and greater choice are fundamental goals. As such, it 5 is abundantly clear that both the policy basis and the 6 legislative foundation of Ontario's electricity sector 7 restructuring demands that the interest of electricity 8 consumers be addressed and protected, especially with 9 respect to ensuring the provision of reasonable prices, 10 reliability and choice. 11 In light of this, our position is 12 straightforward: the draft Standard Supply Service 13 Code fails to meet the very important goals of consumer 14 protection -- it is our concern -- and the provision of 15 reasonable prices for standard supply customers. How 16 can these goals be met? It is our position that a 17 price which is fixed, for example, over a period of one 18 year, will afford those customers that do not choose a 19 new supplier information from the frequent volatility 20 and variability of spot market prices in their bills 21 from month to month. 22 Essentially, a local distribution 23 company, or LDC, would be able to provide customers 24 with a stable price for standard supply service whereby 25 the ups and downs of the spot market prices would be 26 smoothed away. 27 The commodity for the standard supply 28 service offering could be procured by an LDC in any 371 MIA/WIERSMA, presentation 1 number of ways that won't be available in a new 2 marketing, including, for example, through an RFP 3 process or through an aggregator. 4 Within this framework, adjustments 5 could be made, for example, on an annual basis, to 6 account for load variability and changes or other 7 imbalances. These adjustments would then be reflected 8 in the following year's price. 9 In 1998, during what was surely a 10 busy year, the MDC worked to outline the basis for a 11 competitive electricity market. With respect to 12 standard supply service or default supply, the MDC 13 recommended a smooth spot price. 14 Our question is: Why was a smoothed 15 price recommended? 16 Put very simply, the MDC was 17 concerned with exposing consumers, especially smaller 18 consumers, to frequent price volatility. Professor 19 Dewees affirmed this position in the technical 20 conference. Professor Dewees also agreed that 21 customers would likely prefer a longer smoothing period 22 over a shorter one, since a longer smoothing period 23 would provide more stability and predictability for the 24 consumer. 25 The draft Standard Supply Service 26 Code provides no smoothing period at all. Under the 27 draft Standard Supply Code, small consumers may see 28 their bills change dramatically from one month to the 372 MIA/WIERSMA, presentation 1 next. This is neither what the White Paper recommended 2 nor what the Energy Competition Act entrenched and it 3 does not adequately address the MDC's concern, as we 4 reiterated by Professor Dewees, that price volatility 5 should be dampened. 6 In fact, Mr. Adamson noted at the 7 Technical Conference that the draft Standard Supply 8 Service Code allocates all risks related to default 9 supply to the person who can't deal with it: the small 10 consumer. This means that the small consumer will be 11 expected to accept, absorb and manage all of the price 12 risks that will be engendered in Ontario's spot market. 13 We don't think this is reasonable and it is not fair. 14 Given these realities, the 15 unfortunate consequence of the draft Standard Supply 16 Service Code is either that small consumers will just 17 continue to bear the risks of volatility because the 18 costs of risk management are too high or the mechanics 19 too complicated, or small consumers will be pushed or 20 forced to switch from default supply simply due to fear 21 of the price volatility. 22 In either case, the consumer's 23 actions are not the result of a considered decision. 24 The choices they are exercising are not those 25 envisioned by the White Paper or the Energy Competition 26 Act. Rather, these choices are based on fear, 27 confusion and misunderstanding -- motivations which are 28 not part of the policy or legislative framework 373 MIA/WIERSMA, presentation 1 underlying the Ontario's electricity sector 2 restructuring. 3 At the Technical Conference, Mr. Todd 4 noted that bill stability is attractive to customers 5 because it gives them the opportunity to budget. This 6 notion resonates with the members of the Coalition of 7 Distribution Utilities because many of our customers 8 desire bill stability and some of our customers are of 9 limited means or rely on fixed incomes. You can just 10 imagine what kind of havoc a spot price pass-through 11 resulting in widely varied monthly bills can inflect on 12 these type of customers. 13 This certainly is not what 14 competition is about, it certainly is not what choice 15 is about, and it certainly is not what consumer 16 protection is about. These are the consumers who need 17 the protection of the Board. 18 With all due respect to Board Staff, 19 the draft Standard Supply Code fails to protect smaller 20 consumers and, in so doing, fails to meet the policy 21 goals of the White Paper and the legislative 22 requirements of the Energy Competition Act. 23 The entire discussion then begs the 24 question: Will there be price volatility in the new 25 market? 26 From the presentations and 27 discussions at the technical conference, the answer to 28 that question, clearly, is: Yes, expect that to 374 MIA/WIERSMA, presentation 1 happen. 2 In the new market, with prices set by 3 market forces, one would expect there to be price 4 volatility. It was evidenced at the Technical 5 Conference there will likely be price volatility under 6 the market power mitigation regime and the level of 7 that volatility will increase with the decontrol of 8 Ontario Power Generation's capacity over the next few 9 years. 10 In fact, Professor Dewees also 11 confirmed that within the short run there will be more 12 price variability. 13 Many others at the Technical 14 Conference also testified to that fact, that prices 15 will be variable and volatile in the competitive 16 environment. Mr. Todd argued that monthly, daily and 17 hourly prices will be very volatile. Furthermore, he 18 stated that small consumers cannot react to hourly 19 prices by making consumption adjustments. This is due 20 to the fact that prices for the commodity are known to 21 the small consumer only after the commodity is used, 22 because the meter is read every month or two months and 23 the energy is already consumed. 24 In any event, small consumers who do 25 not react to price changes by altering their 26 consumption will not be spared the brunt of price 27 spikes because many of them will be subject to billing 28 according to a load profile and not actually usage. 375 MIA/WIERSMA, presentation 1 This is doubly unfair in that it exposes small 2 consumers to risk, even when they chose to mitigate or 3 avoid those risk. This sort of consequence or result 4 is counter-intuitive and contrary to the notion of 5 choice, which is a cornerstone of the competitive 6 market. 7 Exposing small consumers to the ups 8 and downs of the spot market while they do not have the 9 wherewithal to manage that risk through consumption 10 adjustments is patently unfair and contrary to the 11 goals of the restructuring and the spirit of the Energy 12 Competition Act. This is especially true for those 13 consumers who may have limited means and for who 14 electricity may very well be a necessity rather than a 15 luxury which they may cut back on. 16 Take for example the recent heat wave 17 in central and east of North America. During this 18 period electricity was an essential necessity for many 19 consumers, and we witnessed the tragic toll that heat 20 wave brought on some of those who could not afford that 21 necessity. Situations such as a heat wave result in 22 increased consumption and thereby result in higher 23 costs. Applying spot market prices during these 24 periods of increased use will serve only to compound 25 the increasing electricity costs for smaller consumers. 26 As a result, fear of even higher 27 costs may crystallize in these consumers foregoing 28 consumption and thereby placing their health and 376 MIA/WIERSMA, presentation 1 wellbeing at risk. 2 In Ontario, we do not need to see a 3 new electricity market where the health and life of 4 some citizens are put at risk due only to the fact that 5 they cannot afford higher electricity prices at certain 6 times of the year. Offering a stable supply price over 7 a particular period, for example, a year, will insulate 8 consumers from monthly price shocks and will serve to 9 provide consumers with reasonable prices and good 10 service. 11 The MDC recommended, as Professor 12 Dewees stated, that default supply customers should 13 receive the best possible combination of "price and 14 service". While the alternative approaches of the spot 15 pass-through and the fixed price with adjustments 16 ultimately provide a competitive price to the consumer, 17 the fixed price with adjustments provides better 18 service in that it provides bill stability and 19 insulates consumers from month-to-month price 20 fluctuations. Therefore, measured against the MDC's 21 yardstick of "price and service", it is clear that a 22 fixed price is more attractive than the spot 23 pass-through for the standard service supply service. 24 In light of this, it is our 25 submission that the draft Standard Supply Service Code 26 does not deliver the best possible combination of price 27 and service to consumers. To bring this point home a 28 little bit better, I would like to use an imaginary 377 MIA/WIERSMA, presentation 1 story, and it concerns gasoline prices. 2 In the month of July -- and this is 3 just a story but it's illustrative -- I went to my 4 favourite service station and wanted to fill up my car. 5 To my surprise, there was no price on the pumps. There 6 was, however, a notice which said gasoline will now be 7 sold at the spot market price and that I would be 8 informed on my bill in August what that price would be. 9 The notice also said that there were 10 other discount service stations that offered a 11 published price, but I knew that I was getting good 12 gasoline from my service stations and I didn't want to 13 go down the road to get the discounted gasoline. I was 14 in the habit of filling up on Friday afternoons and 15 when I got the bill, I found that the first week I was 16 paying 70 cents per litre for regular gasoline. The 17 second week it was 68 cents, the third week it was 18 70 cents again, and the last week it was 72 cents. 19 I talked to my neighbour about it and 20 he had a similar experience, but he bought his gasoline 21 on a different day. His prices were very different 22 than mine. I found the whole thing very disconcerting 23 because I had lost complete control of my purchasing 24 decisions and I never knew what my bill was going to 25 be. 26 In desperation, I started going to 27 the discount service stations for the simple reason 28 that I couldn't live with the uncertainty any more. 378 MIA/WIERSMA, presentation 1 Others followed suit and it didn't take long, my 2 service station had gone out of business. This is just 3 a fictional story, but the idea behind the story is 4 that there are some parallels. The parallels may not 5 be exactly the same, but I think it's illustrative. 6 Notwithstanding that, the point is 7 that the consumer is uneasy over an unpublished price. 8 In our tradition, the customers always received an 9 annual rate chart and we identified rate increases in 10 advance. Many utilities also have historical 11 information on the bill and the customer can quickly 12 determine how much their current bill will be by adding 13 the percentage rate increase to the previous year's 14 bill. In other words, the bills are fairly 15 predictable. 16 Despite the fixed rates, when there 17 are dramatic weather variations and the bills are up 18 slightly, there is a flood of calls from consumers into 19 our office. High bills are always equated with 20 suspicion: Is the bill accurate, did you calculate it 21 correctly or is the meter accurate? Price volatility 22 will have the same impact. There will be that 23 suspicion: Is the bill accurate? Is the meter 24 accurate? It will flood the switchboard and cause 25 customers to lose confidence in the system. 26 Our small business customers also 27 have the same concern. Electricity costs are a 28 significant cost input for them and they frequently 379 MIA/WIERSMA, presentation 1 call at the end of the year to determine what the new 2 rates will be. It has to be factored into their 3 budgets. They cannot live with the price volatility 4 nor with the frustration of being notified about the 5 rates after the fact when they receive their bills. 6 I reiterate, the White Paper 7 identified reasonable prices and choice as fundamental 8 goals of restructuring. Reasonable prices mean 9 understandable, manageable and stable prices and bills 10 for all consumers, and especially those smaller 11 consumers that I mentioned throughout this submission. 12 Choices should be motivated by rational considerations 13 that do not include fear and misunderstanding. 14 Unfortunately, the draft Standard Supply Service Code 15 delivers neither reasonable prices nor true choice for 16 default supply customers. 17 It is our submission that a standard 18 supply offering that provides a stable price that is 19 fixed with adjustments will better meet the needs of 20 our customers. 21 Now I would like to talk a bit about 22 the Affiliates Relationship Code. Our Coalition is 23 also concerned that section 2.5.7 of the Affiliates 24 Relationship Code, as drafted, is unduly onerous and 25 will serve to impede the development of a healthy 26 retail market in Ontario and preclude the delivery of 27 default supply service through an LDC's retail 28 affiliate. 380 MIA/WIERSMA, presentation 1 Ms Woolf outlined these concerns at 2 the Technical Conference. By preventing a retail 3 affiliate from using existing customer lists, the 4 Affiliates Relationship Code is effectively 5 handicapping the significant portion of the players in 6 the retail market. The retail business will likely be 7 very competitive with small margins and a variety of 8 players bringing to the market their expertise, 9 knowledge and data. 10 By preventing the use of an LDC's 11 customer lists and data by a retail affiliate, the 12 Affiliates Relationship Code places these potential 13 retailers at an unfair disadvantage vis-a-vis other 14 non-LDC retail affiliates. In addition, by forcing the 15 LCD's retail affiliates to start from scratch, the Code 16 serves to impose additional costs and inefficiencies on 17 the market. Just imagine starting with one customer, 18 your first customer, and you have all these fixed 19 costs. That, ultimately, has a detrimental impact on 20 the competitiveness with which the utilities can 21 operate. 22 This clearly could have not have been 23 the intent of the Energy Competition Act to narrow the 24 field to just a few competitors. For effective 25 competition to exist, the retail affiliates of local 26 distributors must have a chance to get their business 27 started. This will lead to a healthy competitive 28 marketplace. 381 MIA/WIERSMA, presentation 1 With respect to the options for 2 delivery of default supply, section 2.5.7 of the 3 Affiliates Relationship Code serves to preclude the 4 delivery of default supply by an LDC's retail 5 affiliate. Again it is our submission that this is 6 unduly onerous and ultimately does a disservice to the 7 development of the market and the interests of 8 consumers. 9 By allowing an LDC's retail affiliate 10 to deliver default supply, we can achieve cost 11 reductions, eliminate waste and duplication, and 12 achieve economies of scale. Surely, achieving these 13 sorts of efficiencies would be consistent with the 14 stated goals of the White Paper, the Energy Competition 15 Act and the MDC, namely, the provision of reasonable 16 prices, fostering of consumer protection and the 17 delivery of the best combination of price and service. 18 Coupled with our concerns regarding 19 the Affiliates Relationship Code is our concern with 20 section 2.2.4 and 2.2.5 of the draft Standard Supply 21 Service Code, which prohibits distributors or third 22 parties from retailing in the same territory where they 23 provide default supply. 24 In keeping with our comments with 25 respect to the Affiliates Relationship Code, it is our 26 submission that these geographic restrictions are 27 unduly onerous and impractical and ultimately will not 28 serve the interest of default supply customers. These 382 MIA/WIERSMA, presentation 1 restrictions introduce additional burdens that do not 2 further the stated goals of competition and choice. 3 Rather, they work against these goals by imposing 4 inefficient and unwarranted costs and barriers on a 5 market and, ultimately, on consumers. 6 We suggest that the relevant sections 7 of the Affiliates Relationship Code and the Standard 8 Supply Service Code be amended to allow for the 9 establishment of a fair and level playing field at the 10 outset of Ontario's new market. I believe that 11 utilities are a part of that marketplace. They should 12 not be excluded. Such changes would serve to 13 facilitate the efficient delivery of default supply 14 conserved to enhance the development of a robust retail 15 market in Ontario, ultimately benefiting all consumers. 16 In conclusion, it is our submission 17 that the draft Standard Supply Service Code as it now 18 stands fails to meet the fundamental goals of Ontario's 19 electric restructuring, as enunciated in the White 20 Paper and the Energy Competition Act. With respect to 21 default supply, those goals are focused on providing 22 consumers with reasonable prices, quality service and 23 real choice. 24 The proposed spot price pass-through 25 serves only to place the burden of this squarely on the 26 shoulders on those who are least able to bear it: 27 small consumers. This exposure to risk was surely one 28 of the key motivations behind the White Paper's goals 383 MIA/WIERSMA, presentation 1 and the legislation's protections. 2 Professor Dewees also agreed that the 3 MDC was motivated by similar factors when it expressed 4 the concern to dampen price volatility. In light of 5 this, it's apparent that the draft Standard Supply 6 Service Code does not meet the most fundamental goals 7 with respect to default supply and the protection of 8 default supply customers. 9 Once again it's our position that the 10 standard supply offering which provides a stable price 11 that is fixed with adjustments, for example, over a 12 year will better meet the goals of the White Paper, the 13 recommendations of the MDC and the spirit of the Energy 14 Competition Act. We submit that this approach, coupled 15 with the relevant changes of the Affiliates 16 Relationship Code and the Standard Supply Service Code, 17 as discussed previously, will serve Ontario well in the 18 development of operation of its new electricity market. 19 Thank you very much. 20 THE CHAIRMAN: Thank you, 21 Mr. Wiersma. 22 Any questions? 23 MS LEA: No, thank you. 24 MEMBER HIGGIN: You have clearly 25 indicated that you support the fixed price option, as 26 we will call it, and actually more than one, but we 27 will talk about that as a group. You outlined as well, 28 as others have, why you don't believe the spot price 384 MIA/WIERSMA, presentation 1 pass-through is in the best interest of consumers, the 2 customers. 3 What I would like to try and get your 4 views on is, first of all, whether there are ways in 5 which it could be fixed -- i.e., not a fixed price, but 6 the spot price concept, something based on spot price 7 could be fixed -- or is it, in your view, totally 8 unfixable as far as consumers are concerned? 9 MR. WIERSMA: I think this is going 10 to be very difficult to do. To be able to fix it, one 11 would have to know what the average is going to be at 12 the end of the year. 13 MEMBER HIGGIN: You need a forecast? 14 MR. WIERSMA: You need a forecast of 15 prices. 16 As we have seen in the U.S. and 17 elsewhere, there is a tremendous amount of volatility 18 and whether there is an accurate assessment of what 19 that forward price will be, that would be very 20 difficult as the market opens up. 21 MEMBER HIGGIN: So you are saying 22 that is a fundamental requirement, that if you were 23 able to have a forecast that was reasonably reliable or 24 could be updated more reasonably frequently as in 25 gas -- you know, the way gas prices are set there are 26 forecasts, "Here is the one year out", and then they 27 are reviewed monthly and updated for the purposes of 28 resetting the price as frequently as every quarter. 385 MIA/WIERSMA, presentation 1 MR. WIERSMA: It's our view that 2 customers want to know for the next year what the price 3 is going to be. Businesses want to know that in 4 particular. They call us and they want the -- they ask 5 us, "What is the price going to be? We have to 6 budget." They don't want to be subject to the 7 volatility. 8 Our residential consumers too, they 9 feel comfortable with a rate and then having that 10 appear on their bill, the same rate bill after bill, at 11 least for a year, rather than having a different rate 12 on every bill. 13 MEMBER HIGGIN: Just a question about 14 customer mobility, as you see it, within the concept of 15 the fixed price. 16 Do you still see that customer 17 mobility should be maintained in all classes of 18 customers, or do you think that there should be a 19 consequence of accepting a fixed price, for example, 20 maybe there are going to be administrative costs that 21 wouldn't be levelized on a full year. Do you see there 22 are any consequences that may impact on customer 23 mobility within a fixed price model? 24 MR. WIERSMA: I think it is a factor 25 that has to be taken into account. I think that can be 26 dealt with by an administrative charge if customers 27 move too frequently. 28 MEMBER HIGGIN: So you would see it 386 MIA/WIERSMA, presentation 1 that if you move once to move to the competitive 2 market -- I think this is where I was going to go 3 next -- what would happen, then, if the customer 4 decided to come back to the LDC? Would you see, as 5 some have suggested, that they are then without 6 contract, that they basically have to come back under 7 whatever terms you are able to offer some have 8 suggested, or would think, as you may have now 9 suggested, there would be a set approved administrative 10 fee in order to reconnect that customer? 11 MR. WIERSMA: I think it is 12 reasonable that the administrative costs of customers 13 moving back and forth, that that be recovered. 14 There is also the issue of 15 forecasting for these customers coming back and having 16 a supply available for them. Again, I think that can 17 be dealt with as well. 18 I think a fixed price supply doesn't 19 always -- there are many definitions of "fixed price". 20 It could be, for instance, fixed price for 80 per cent 21 or 90 per cent of the load and then there could be a 22 load following contract as well to top that up to allow 23 for that mobility of customers moving in and moving 24 out. That would be done in a load following at will 25 contract for the balance of the supply. 26 MEMBER HIGGIN: Now, you focussed 27 your submission on the small customers as being the 28 people that you, at least, are concerned with mostly. 387 MIA/WIERSMA, presentation 1 Do you see that the fixed-price offering is equally 2 best for the general service, particularly those that 3 may have interval meters and for the larger industrial 4 customers that do have interval meters? 5 MR. WIERSMA: It is my opinion that 6 the larger customers are better informed, they know 7 more about risk management and are better able to 8 participate in the forward market and to deal with risk 9 mitigation. Small customers have no knowledge of that. 10 Small business customers, they don't know about that 11 either. 12 MEMBER HIGGIN: Their option would be 13 to go to the competitive market -- 14 MR. WIERSMA: Yes. 15 MEMBER HIGGIN: -- as opposed to 16 opting for the fixed-price offering from the LDC? 17 MR. WIERSMA: Yes. They may. 18 In some industries it is very 19 important when they have a contract to supply product 20 or equipment. They have the prices fixed for the year 21 and they also want their input prices fixed. For them 22 it may be important to have a fixed price from their 23 utility for electricity; for others it's less 24 significant. 25 MEMBER HIGGIN: Yes. I think if you 26 have read the Ontario Federation of Agriculture, for 27 example, they have reasons like that for them 28 wanting it. 388 MIA/WIERSMA, presentation 1 Thank you very much for your 2 comments. 3 We appreciate it. 4 THE CHAIRMAN: Mr. Wiersma, when 5 Toronto was here this morning, Toronto Hydro, they 6 talked about volatility as well and had some examples 7 of what it would have meant to their customers. Have 8 you done any of that representing your organization or 9 is it difficult to do? 10 MR. WIERSMA: We haven't done any 11 studies of that. 12 I can just say to the Board that in 13 my particular utility we have had a fairly high 14 percentage of electrically heated consumers and of 15 course in the winter the bills would be significantly 16 higher than in the summer. That always created a lot 17 of reaction from the customers if it was a particularly 18 cold period. 19 So customers do respond to that 20 volatility and they are not very pleasant about it. 21 They think that something is wrong with the meter or 22 something is wrong with the bill calculation. Why is 23 my bill so high? We have to explain that to our 24 customers. That takes a lot of administrative 25 management to administer those types of calls. 26 THE CHAIRMAN: Okay. Thank you very 27 much for your presentation. 28 Is Mr. Quesnelle here from Woodstock 389 MIA/WIERSMA, presentation 1 Public Utility Commission? 2 Come forward, please. 3 Mr. Quesnelle, welcome to the Board. 4 PRESENTATION 5 MR. QUESNELLE: Thank you. 6 This submission from the Woodstock 7 PUC is a little different than what we have been 8 hearing, both through the Technical Conference and here 9 at the hearing this past week, in that it does with 10 kind of a nitty-gritty issue, kind of the rubber has 11 hit the road type of issue in that we are looking at 12 the mechanics of a retail settlement system. 13 Basically, what I would like to do 14 here today is describe a prepaid power retail 15 settlement system that we have in use in Woodstock, and 16 also give our views on how the drafted SSSC would 17 eliminate our ability to utilize that technology as it 18 currently stands in the draft Code. 19 I would also like to comment on a few 20 of the regulatory concerns that have surfaced in 21 relation to some of the proposed alternatives. 22 Just as background, the concept of 23 prepaid power is not new. Electricity consumption 24 meters with coin mechanisms much like parking meters 25 have been used in other jurisdictions dating back more 26 than 50 years. The modern version of this application 27 is much more sophisticated and provides all the data 28 acquisition requirements to satisfy typical customer 390 QUESNELLE, presentation 1 information system record keeping. 2 A typical purchase transaction of a 3 prepaid customer consists of the customer purchasing a 4 power card at one of our retail outlets. The retail 5 outlets we have include our main office as well as two 6 convenience stores that operate 7 days a week, 24 hours 7 a day. 8 The power card value is determined by 9 the amount of the power the consumer wishes to purchase 10 at that time, $5, $10, $50, whatever they choose at 11 that time. The dollar amount of the purchase is 12 encoded on the card's magnetic strip and the customer 13 takes it home. 14 Once home, the customer swipes the 15 card through an electronic reader that deposits the 16 amount purchased in memory on a display unit. As power 17 is consumed, an optical reader counts the revolutions 18 on the consumption meter, your typical meter that is 19 used and basically verified through Industry Canada, 20 typical consumption meter, and it reduces the cash 21 balance on the deposit accordingly. 22 Other information that is available 23 on this display reader, which is kind of the customer 24 manager of their resource, include the dollar value of 25 the electricity remaining since their last purchase, 26 the present use per hour in dollars and cents, the 27 dollar amount used in the past 24 hours, the dollar 28 amount used in the previous month, the dollar amount of 391 QUESNELLE, presentation 1 most recently used power card, and the present rate in 2 cents per kilowatt hour. Now, that is present rate of 3 what the purchase allowed them to get. 4 Further, up in the display menu 5 there, it is basically telling them what their present 6 consumption is in dollar and cents. If I turn the 7 fridge on, turn if off, what is the difference, and I 8 can calculate the consumption price of that fridge, for 9 instance. 10 Our experience at the Woodstock PUC 11 that has been gained over the last 10 years that we 12 have been using this technology. 13 We have approximately 2,500 customers 14 on the system. The purchasing patterns established by 15 customers on the system are comparable to that of 16 purchasing gasoline. It seems to be a common analogy 17 today, everybody is going to the pump with their 18 analogy here and we are doing the same, but it is very 19 much like that as far as purchasing patterns go. 20 The average purchase is between $20 21 and $25 with a frequency of approximately 2.5 times per 22 month. 23 It has been amazingly consistent over 24 the years on that. We have never had an average 25 purchase of less than $20 and we have never had one 26 over $25. It really is we do about 6,000 transactions 27 a month and the numbers are that consistent. There is 28 a slight variation seasonably, but literally the 392 QUESNELLE, presentation 1 variation is $1 or $2 one way or the other. 2 The number of customers on the system 3 represents about 25 per cent of our total residential 4 customer base and is primarily tenancy customers. 5 Due to the prepaid nature of the 6 settlement system our year-end bad debt write-offs have 7 diminished dramatically, from a high of $70,000 in 1993 8 to a 1998 level of $6,000. 9 Reducing the level of bad debt 10 write-offs was undoubtedly the goal when the program 11 was introduced. This benefit is still one of the main 12 reasons of having the system in place, but others have 13 surfaced over time. 14 As the system expanded, we have 15 reduced our costs of billing and collection through 16 staff reductions in these areas. Customers' high bill 17 complaints have reduced dramatically. With the usage 18 information at the customers' fingertips, they have a 19 better appreciation for the cost to run individual 20 appliances. 21 We also are looking at an historic 22 customer complaint. Often when you delve through the 23 issue of a high bill complaint, it is often a lack of 24 ability to pay as opposed to questioning the 25 consumption. When you pay as you go, you remove that 26 argument yourself. You have already paid for it. 27 So the customer complaints do reduce 28 dramatically with this program. 393 QUESNELLE, presentation 1 We have testimonies from customers 2 who are using less electricity now that they have the 3 ability to monitor their usage. We actually looked 4 back in the early 1990s when there were demand side 5 management programs in place, and there was funding 6 available for some of these programs if you could 7 suggest that there was a conservation element to some 8 of these programs. We didn't have enough of a customer 9 base to really do the case study, and we are relying on 10 anecdotal. But it certainly did appear to us, when we 11 took a close look at it, that the usage patterns or the 12 consumption patterns of people on this group, if you 13 matched them against like comparators, certainly was 14 lower. 15 Utilities and other municipalities in 16 Ontario have either had smaller scale programs in place 17 for some time or at least have authorized the 18 commencement of pilot projects. 19 It is worth noting that the same 20 system that we are utilizing in Woodstock is widely 21 used in the recently deregulated market in New Zealand. 22 In talking to the people that were involved in the rate 23 establishment base there, there isn't an issue with the 24 prepaid power in that spot market. I am not exactly 25 sure how their model works, but the prepaid power is 26 not posing a problem under the model that they have 27 adopted in New Zealand. 28 The incompatibility -- and this is 394 QUESNELLE, presentation 1 the crux of the matter as far as utilizing this 2 technology -- simply stated, a Standard Service Supply 3 Code that requires settlement based on the notion of 4 real-time pricing calculated and invoiced after the 5 fact is totally incongruous with the concept of prepaid 6 power. 7 As stated earlier, our intention 8 today is to bring this issue to light and to state why 9 we feel the proposed Standard Service Code is 10 incompatible with prepaid power and perhaps point out 11 the benefits of ensuring that this tool is left 12 available to future LDCs. 13 Any of the alternatives that propose 14 allowing for a fixed rate offering by an LDC in 15 satisfying its obligations would be compatible with 16 prepaid power. 17 However, we do wish to indicate 18 support for the MEA proposed alternative with respect 19 to prepaid power. Although this retail settlement per 20 se was not directly considered in drafting of the MEA 21 alternative, the benefits of the prepaid system are in 22 line with the submission's stance on the spirit of 23 Bill 35 and what the legislators envisioned. 24 The reason we bring this issue 25 forward at this time is basically twofold: first, we 26 wanted to bring notice to the fact that we have a 27 mechanism in place that deals with retail settlements 28 in a way that does not fit the proposed SSS model; and, 395 QUESNELLE, presentation 1 second, to visit the issue of customer transfer and 2 Affiliates Relationship Code. 3 On the first point, the mechanism we 4 utilized to sell electricity does not, by its very 5 nature, allow for billing on a post-determined rate. 6 Oddly enough, we do feel that it is probably better 7 suited to achieve one of the advantages put forward in 8 the proposed SSS; that being price signals to the 9 consumer. 10 In recognizing the fact that the 11 residential consumer based in the province does not 12 have interval metering at this time and that the spot 13 market pass-through has an inherent lag time associated 14 with it, one would have to agree that the association 15 by a consumer of price and the time of consumption is 16 false at best and misleading at its worst. 17 In contrast, if a fixed term SSS rate 18 could be offered to a prepaid customer, perhaps a rate 19 based on recent historic spot market prices, the 20 consumer would have purchased electricity at a price 21 that reflects recent market value and therefore 22 conducts itself accordingly. 23 To revisit the automobile gasoline 24 analogy and push it a little further, consumers become 25 more resource management conscious if they are watching 26 the needle on the gauge consistently move towards 27 empty. That is what the prepaid system does for us. 28 Our experience to date is that 396 QUESNELLE, presentation 1 prepaid customers are very aware of their electricity 2 usage patterns and the nature of their energy 3 consumption. 4 The alternatives to the draft SSS put 5 forward at the technical conference and here at the 6 hearing this week speak to various procurement models 7 to be used by the SSS supplier. This brings forward 8 the issues of regulatory burden, as well as regulatory 9 authority. 10 One of the advantages of the proposed 11 SSS is its ease of regulation. The alternative, in 12 contrast, requires some regulatory overseeing, perhaps 13 in the area of procurement from the wholesale market. 14 The MEA in its submission contends 15 that the Board does not have the legislated authority 16 to impose a procurement process. 17 I raise these points as a framework 18 for a suggestion on how to balance the desire to 19 minimize regulatory burden with the need to ensure a 20 fair and just rate. 21 I will just describe a scenario here, 22 if you can bear with me. 23 What if the OEB were to establish a 24 wholesale procurement methodology that would satisfy 25 the stated goal of consumer protection and the SSS 26 supplier had the option of using it? Using the method 27 that would be prescribed would obtain a buy on having 28 to provide evidence to satisfy the Board on the 397 QUESNELLE, presentation 1 appropriateness of the rate. 2 If they are so inclined as to use 3 another rate-building methodology, they would make a 4 full submission to the Board under normal procedures. 5 In this way, the Board has not 6 mandated the process and the regulatory burden is 7 minimized. 8 To further reduce the regulatory 9 burden of testing for compliance as whether the SSS 10 supplier did indeed procure power in the method they 11 stated they would, an audited report could be required 12 to be filed with the Board. This report could be in 13 the form of a special report, as outlined in the 14 Canadian Institute of Chartered Accountants handbook. 15 This report could be prepared and supplied by the 16 supplier's auditor as an add-on function of preparing 17 the annual audited financial statements. 18 I believe that any involvement with 19 the Institute of Chartered Accountants of Ontario would 20 certainly work with the Board on preparing that type of 21 special report so it could have a uniform nature 22 obviously across the province, and the Board could 23 trust that it was being done in a uniform manner. 24 On the issue of customer transfer 25 restrictions as proposed in the Affiliates Relationship 26 Code, we concur with the assertions put forward by the 27 MEA. In our view, the Code in its present form is 28 making a public policy statement that was not envisaged 398 QUESNELLE, presentation 1 by the legislators. 2 The restrictions of the ARC have the 3 effect of devaluing the commercial enterprise owned 4 primarily by the municipalities. We concur with the 5 MEA that this notion is not one that is found in the 6 White Paper or the legislation. We feel that the 7 current owners, who are ultimately either municipal or 8 provincial taxpayers, are having their assets devalued. 9 It is worth noting that many 10 municipal electric utilities were originally private 11 sector enterprise and were purchased by municipalities 12 at fair market value. To return these enterprises to a 13 commercial basis on a devalued basis does seem odd. 14 The proposed ARC transfer 15 restrictions, along with the proposed SSSC, will make 16 for some difficult and challenging decisions for both 17 our LDC and our prepaid customer base. 18 This concludes my remarks. I 19 certainly welcome any questions on my presentation. 20 THE CHAIRMAN: Thank you, 21 Mr. Quesnelle. 22 MS O'REILLY: I am wondering whether 23 you could comment on whether there are any implications 24 for customer mobility with a prepaid power system, 25 whether or not the price is a spot price or a fixed 26 price, if you have done any thinking about that or 27 could give us your observations. 28 MR. QUESNELLE: We currently don't 399 QUESNELLE, presentation 1 have any contracts, other than the unwritten contract 2 we have with all of our customers, as far as term on 3 the prepaid power. It is pay as you go. If someone -- 4 there are move-ins/move-outs, just like any other 5 customer base. 6 In the opening of a market, if the 7 prepaid customer was lured away to another retailer, it 8 would then resort back to a normal transaction that 9 they would basically work out with that retailer. I 10 guess we will have to wait for the Retail Settlement 11 Code to come out to see exactly how those mechanisms 12 would work. 13 MS O'REILLY: I note that you said 14 that you agreed with the Municipal Electrical 15 Association that the Board should be, I guess, 16 reviewing rates. I wondered if you had any thoughts on 17 how the Board might judge whether or not a fixed rate, 18 for example, would be just and reasonable, what 19 methodology it could use. 20 MR. QUESNELLE: I haven't given a lot 21 of thought to that, other than I think that, the end 22 goal or part of the end goal being minimizing the 23 regulatory burden, there is some attractiveness to the 24 RFP format. In talking about the yardstick, I think 25 that is something that we will, through the local 26 distribution tariff, grow accustomed to on PBR format. 27 I think they are both attractive. 28 I haven't really thought it through 400 QUESNELLE, presentation 1 more than that, other than neither one of them 2 particularly offend us. 3 MS O'REILLY: Thank you. 4 THE CHAIRMAN: Thank you. 5 Dr. Higgin? 6 MEMBER HIGGIN: I would just like to 7 understand whether you see your prepaid system 8 surviving after unbundling of the rates -- that is, 9 into a distribution-related component which would have, 10 for example, a customer charge, and maybe something 11 else, and then the kilowatt hour charge, which will be 12 separate -- and how do you, and how does New Zealand, 13 handle the unbundled rate? 14 MR. QUESNELLE: The program does have 15 the ability to do both a set and a flexible portion in 16 its countdown. We currently have fixed charges that 17 are also on it. If a customer has a rental water 18 heater, we have a fixed rate for that. So it does have 19 the programmability to do both. One comes off, 20 literally -- to give you the mechanics of it: if it is 21 a $3 charge for whatever the fixed rate would be, say a 22 rental water heater -- it might be a bit low -- for 23 just ease of the math, every night at midnight 10 cents 24 comes off, and that takes the $3 off over the month. 25 So we do have the ability to do that type of 26 programming. 27 MEMBER HIGGIN: But wouldn't there be 28 implicit some tradeoff between the two portions, i.e., 401 QUESNELLE, presentation 1 if you used up your water heater, then you have used up 2 your power, and vice versa? 3 MR. QUESNELLE: Yes, and that is why 4 it is done on an incremental basis back to the daily. 5 So that on the day that you run out, you are up to date 6 on both. 7 MEMBER HIGGIN: On both? 8 MR. QUESNELLE: Yes. 9 MEMBER HIGGIN: Okay. Now, then, do 10 you think the system will survive as customers migrate 11 to the competitive market? Or do you see that 12 retailers will want to render their own bill? Or do 13 you think they will be willing to go along with you on, 14 in essence, the sharing the costs of a card which is 15 for both distribution services and power from a 16 competitive retailer, from another retailer, not from 17 Woodstock? 18 MR. QUESNELLE: It is a very 19 interesting one, and I guess that is why we are here. 20 We do see difficulties in this area that it is a fairly 21 unique -- it has not really, I suppose, been thought 22 through it, the mechanics and how they are different 23 from most retail settlements. 24 As a billing function -- and that is 25 what this is; it is not a metering function, it is 26 strictly a billing function -- we would see that we 27 could work with a retailer in providing this function, 28 as the LDC, to their retail customer, if the retail 402 QUESNELLE, presentation 1 customer of theirs chose to carry on purchasing this 2 way. So we could do the retail settlement requirements 3 through ourselves, as the LDC owning this piece of 4 equipment. 5 The difficulty, I suppose -- well, 6 not knowing exactly what is going to come out of the 7 retail settlement, as far as the information transfer, 8 we haven't thought it right through, other than we know 9 that it is unique and it is going to have to be 10 recognized, I suppose, in the retail settlement. 11 The difficulty or the change in 12 information that we have on this is more one of when 13 did the person use the power. We have record-keeping 14 for all the purchases so we know how much power is 15 being used and where it is being used between 16 purchases. Every time there is a purchase, we are 17 updated basically. But we are only reading the meters 18 once a year -- that is in compliance with Industry 19 Canada -- so we do a once-a-year reconciliation between 20 the sales on the power stat versus that actual metered 21 rate, the metered consumption. So there is a bit of a 22 lag there. 23 So depending what comes out of the 24 Retail Settlement Code, we may have to ask for, I don't 25 know, some sort of understanding that this is done 26 differently, but I am prejudging what is going to come 27 out of that Code. 28 MEMBER HIGGIN: Are you participating 403 QUESNELLE, presentation 1 in the retail settlement task force effort? 2 MR. QUESNELLE: Well, we couldn't cut 3 ourselves that thin -- I am co-chairing the 4 Distribution System Code task force -- but we are 5 certainly giving our views forward to the Retail 6 Settlement Code people; they recognize what our issues 7 are and understand how we operate. 8 MEMBER HIGGIN: Just so I have 9 feeling. You mentioned 2,500 customers. How many, in 10 total, do you have? Let's just talk about the kilowatt 11 hour non-interval metered customers. How many do you 12 have in your service area, compared to the 2,500 that 13 are on this plan? 14 MR. QUESNELLE: That represents about 15 25 per cent. 16 MEMBER HIGGIN: Twenty-five of those 17 customers. 18 MR. QUESNELLE: Yes. Having said 19 that, we recognize that, you know, in bringing this 20 forward, it is kind of a "pea and the princess" type of 21 scenario here, that you are not going to govern the 22 rules of the land based on this small case, but we do 23 like to bring it forward at this time to say it is a 24 real issue for us, believe me, and we do see that there 25 are benefits to allowing for this tool to be used by a 26 much broader group in the province and there has been 27 interest expressed 28 MEMBER HIGGIN: Thank you very much. 404 QUESNELLE, presentation 1 THE CHAIRMAN: Thank you. 2 Mr. Birchenough? 3 MEMBER BIRCHENOUGH: Just on that 4 practical consideration, when the cards in your prepaid 5 system run out, what happens to the consumer? I am 6 thinking particularly now of a situation in the middle 7 of winter, when a family is in Florida for two weeks 8 and their power card runs out after the second day. 9 What happens to the consumer? 10 MR. QUESNELLE: Well, all we can do 11 is -- I can tell you what our experience has been, and 12 that hasn't happened. The system stores enough 13 information -- and that is part of the management of 14 the information that is available to the customer. 15 They know what their average monthly is in consumption. 16 By calculating the daily consumption, the system 17 forward averages that and gives you four days' warning. 18 It starts beeping and giving you a signal that, "Well, 19 it is time to head down to 7-11 and buy some more 20 power; I have four days to do that". People that are 21 going to be away for that period of time, it just 22 becomes commonplace for them to ensure that they put 23 enough money in it that it isn't going to run out 24 through their vacation. It is a very low-maintenance 25 system and that is one area that we haven't had any 26 difficulty at all. 27 THE CHAIRMAN: A couple of things are 28 puzzling me. One is the low amount that people pay for 405 QUESNELLE, presentation 1 the card, the 20 to 25, as opposed to buying 50 or 100 2 and not having to worry about it again, especially when 3 they go to Florida -- which some people are fortunate 4 enough to do. Why is that? 5 MR. QUESNELLE: That is something 6 that has, believe me, surprised the heck out of us. I 7 guess when the consumer is left totally on their own 8 funny patterns evolve that we would have never 9 guesstimated. I agree with you. I think I would 10 probably be buying, you know, the $100. But people go 11 to a convenience store. It is not something that 12 happens. You buy your bread, you buy your milk and the 13 people on this program literally buy bread, milk and 14 power and whatever is in their pocket they pick up on 15 an ongoing basis. They are never surprised by a bill. 16 By buying $25 at a time -- and it is not an 17 inconvenience because they are going to the store 18 anyway -- they are basically using our money rather 19 than their own. It is prepaid, but if you buy $100 at 20 a time, why would you give that to your utility before 21 you have to? 22 THE CHAIRMAN: Yes, I understand 23 that. 24 MR. QUESNELLE: So that's, I think, 25 how it developed. 26 THE CHAIRMAN: The other thing that 27 puzzles me is why is this prepaid card so incompatible 28 with the spot price pass-through? 406 QUESNELLE, presentation 1 MR. QUESNELLE: Due to the fact that 2 we would have no way of going back and doing the 3 true-up, it is literally -- when they purchase the 4 power, it is the cents-per-kilowatt hour rate that is 5 on our central system that they are buying. They are 6 leaving with $10 worth of power at today's rate; they 7 can use that that month -- our patterns show that they 8 are using it within weeks. But to point out the 9 situation with the vacation, you could buy $50 worth of 10 power and not run it through the system. You now have 11 50 days' worth of power at February's rates that you 12 could use in March or April. We have no way of then 13 going back on a customer-by-customer basis and doing 14 true-ups with that type of mechanism, and we think it 15 would distort, basically, the pricing signal that, you 16 know, we are trying to achieve here. 17 We think the slight incongruous 18 timing of prepaid versus the incongruous of post 19 billing -- I think the tradeoff is at least this 20 system, the customer has it right in their face as to 21 what is happening at the time. If you bought in a 22 high-price period, you know, if we did go to some sort 23 of quarterly, you know, flexibility on this, it is a 24 true price signal because if you are spending more at 25 the gas pump, to go back to that analogy, you might not 26 make the trip by car this vacation period. You know. 27 It is that basic. 28 THE CHAIRMAN: Okay. Thank you for 407 QUESNELLE, presentation 1 that and for that interesting presentation. 2 Is Ontario Hydro Services here? 3 MS O'REILLY: They are not here, 4 Mr. Chair. They did say yesterday that they would try 5 to be here at 3:00-3:30, but we have got ahead of 6 ourselves. 7 THE CHAIRMAN: Well, we won't proceed 8 without them. 9 --- Laughter 10 THE CHAIRMAN: We had best adjourn. 11 For those people who are interested in being here for 12 them -- we will have to set a time to come back in, but 13 perhaps we could keep an eye out for them and as soon 14 as they arrive, we will recommence. Hopefully, it will 15 be no later than 3:30. All right? 16 We are adjourned, then, until those 17 folks arrive and we will anticipate it will be by 18 around 3:30. 19 --- Upon recessing at 1450 20 --- Upon resuming at 1517 21 THE CHAIRMAN: We now have the 22 presentation from Ontario Hydro Services. We 23 appreciate the fact that you have come early to give us 24 your presentation. So if you would introduce 25 yourselves, we can wade right into it. 26 PRESENTATION 27 MR. MILLER: Great, thank you. 28 Let me introduce myself. I am Mike 408 MILLER/REGHELINI, presentation 1 Miller, Vice-President of Marketing for Ontario Hydro 2 Services Company. I have with me my expert colleague 3 and associate, Marcel Reghelini, who is Manager of 4 Distribution Regulation. 5 I would like to start off by saying 6 that we are delighted to be here because we feel these 7 issues are important. We want to get on with our lives 8 and put in place an effective standard supply 9 operation, so we are hoping that we can make the best 10 call possible and get going. We tried to prepare a 11 helpful brief. We hope it is so, but you will be the 12 ultimate judge of that. 13 I am going to review our brief 14 quickly and cover seven things: The guiding principles 15 behind our position; inclusions of services in standard 16 supply, and by that I mean what services should be 17 included or excluded in standard supply, in our view; 18 our views on the various pricing methods; our 19 preferred procurement options; the pros and cons of the 20 above; some thoughts on marketing restrictions; and 21 then end off, of course, with conclusions. 22 Does that seem like a reasonable 23 approach? 24 THE CHAIRMAN: It sure does. 25 MR. MILLER: First, our guiding 26 principles. 27 We of course support the development 28 of retail competition and its benefits to all 409 MILLER/REGHELINI, presentation 1 customers. We believe however that default customers 2 should continue to receive the current advantages they 3 receive from the incumbent utilities -- in other words, 4 that they shouldn't be disadvantaged -- we believe that 5 standard supply must consist of one pricing mechanism 6 and one service level that is uniform across the 7 province and, finally, we believe that standard supply 8 must minimize the financial risk to the distributor 9 offering it. 10 Those were the fundamentals, I guess, 11 that lay behind the considerations that I will now get 12 to in our brief. 13 Since a corporatized utility must set 14 up a standard supply affiliate, we feel it would be 15 helpful to know what services can be provided from the 16 distributor or from the standard supply affiliate. Not 17 surprisingly, we have a view on this. 18 After taking into consideration 19 things like the fact that the distributor has their 20 name on the bill, that we don't want duplicate billing 21 engines or operations, taking into consideration things 22 like sensitivity around confidential customer 23 information and call centre considerations, we have 24 come to the conclusion that standard supply should be 25 skinny and include the following three things: 26 forecasting capabilities to meet requirements of the 27 standard supply load, purchasing of supply from the 28 spot market or from other suppliers depending upon 410 MILLER/REGHELINI, presentation 1 which pricing option -- and we will get to this in a 2 minute -- is chosen and price risk management to the 3 extent ultimately allowed by the OEB. 4 Looking at this from the opposite 5 angle or the reverse side of the coin, what things 6 would, therefore, then be excluded from standard supply 7 or be in the distribution company. We have a long 8 laundry list of these things: meter reading, billing -- 9 and I have that bolded on my little presentation 10 here -- collection, remittance and account management, 11 customer communications and provisions of energy usage 12 information, call centre services, and the accounting 13 for differences between supply costs and the rates 14 charged for true-ups to customers. While ultimately 15 these activities may end up being contestable out there 16 in the horizon of time, we feel for now that this would 17 be our preference. 18 Moving on to pricing methodologies, 19 which pricing method is preferred by OHSC? I guess the 20 simple answer is both. I am an economist, so I 21 apologize for that two-handed response. I have to say 22 this carefully. Both the smoothed spot price 23 pass-through and the fixed price method have their pros 24 and cons, as you probably know better than I. 25 OHSC can operate successfully under 26 either approach, so we support either, but we have one 27 condition for this or would like to have one condition 28 considered, that is, we must pick one and I will abide 411 MILLER/REGHELINI, presentation 1 by that across the province. Again I reiterate, let's 2 quickly try to make a decision so that we can create a 3 standard supply operation and get onto open access as 4 quickly as possible. 5 Let's carry into each one of these 6 pricing methodologies next. First, let's look at the 7 smoothed spot price pass-through. We believe that it's 8 likely to be the lowest price to customers. We believe 9 it's likely to be the easiest to administrate or 10 regulate. It may result in some increased -- or some 11 more price volatility compared to the fixed price 12 option, but it could be lessened, as you know, through 13 smoothing and various billing options. We also 14 understand that price signals to customers may be muted 15 as a result of the smoothing and billing options. 16 After consideration, we have come to 17 the conclusion that we feel this option, smoothed price 18 pass-through, generates a more complex settlements 19 burden. You need to worry about hourly load profiles 20 and when meters are read, match prices with hours, et 21 cetera, whereas a fixed price methodology lessens this 22 burden. 23 Let's move on now to the fixed 24 pricing methodology. We believe it will generate a 25 higher price to the customer. Someone has to pay for 26 the risk offset, likely the customer. It will likely 27 allow competitive retailers to undercut prices. In 28 other words, there is less risk to pay for; hence, the 412 MILLER/REGHELINI, presentation 1 lower price. It has less of a settlement burden, 2 mentioned previously, it has -- or I should say, and, 3 finally, we believe, a fixed pricing methodology can be 4 designed to have minimal regulatory burden, which I 5 think is important. 6 Minimal regulatory burden can be 7 achieved if standard supply procurement under fixed 8 prices requires three things: One, that each utility 9 annually conduct an open tender to provide standard 10 supply; two, the tenders require the bidders or 11 suppliers to absorb the price and volume risk; and, 12 three, and I guess the most important, that the utility 13 selects the lowest bid, but subject to meeting the 14 prudential requirements set out by the OEB and cemented 15 in the Code, and that a reasonable number of bids were 16 received so that a representative competitive bid was 17 essentially put forth -- the price was put forth. We 18 feel this will allow the utility's affiliates to 19 compete for contracts, both within and outside their 20 own service areas. 21 There are a number of obvious issues 22 that surround the fixed pricing methodology, but we 23 think that they can be minimized thoughtfully. 24 Although fixed prices include a premium to absorb price 25 and volume risk, it has a low settlement and regulatory 26 burden. The low settlement burden has just been 27 discussed and a low regulatory burden will be achieved 28 if sufficient bids were received, the lowest bid was 413 MILLER/REGHELINI, presentation 1 taken, and the supplier meets those OEB prudential 2 requirements. 3 We believe competition will ensure 4 the cost of service is just and reasonable. We have a 5 couple of additional thoughts on this and that is that 6 the OEB -- and again this is really more for emphasis, 7 I think, than anything else -- that the OEB must 8 specify the prudential requirements applicable to the 9 bidders or suppliers in the Code and that, with knowing 10 these requirements and enforcing them, this will 11 minimize the risk of supplier failure and ensure 12 reputable bidders or suppliers are engaged in the 13 transactions. 14 A couple of final thoughts on 15 marketing restrictions and -- I don't know how to say 16 this, but I guess levelling of the playing field. 17 OHSC believes that the one affiliate 18 model for standard supply and competitive retail is a 19 practical and a simple solution. 20 This one affiliate can purchase on an 21 aggregate basis for both standard supply and 22 competitive retail. If standard supply just procures 23 and the distribution utility bills, to us there is not 24 an issue with respect to sensitive customer 25 information. It also eliminates the constraints 26 imposed by precluding competitive retailer offerings of 27 competitive services in areas where it is offering 28 standard supply. 414 MILLER/REGHELINI, presentation 1 So in conclusion I guess we have to 2 say that we feel the regulatory burden can be designed 3 to be acceptable under either pricing methodology. 4 There should be a single default option that is uniform 5 across the province. The price under either pricing 6 mechanism will be just and reasonable. 7 Utilities, through their affiliates, 8 should be allowed to engage in competitive procurement 9 of supply and price management and, importantly, a 10 single affiliate can provide standard supply and the 11 competitive retail offerings without having access to 12 sensitive utility information. 13 That is what I have come to say. 14 Thank you. 15 THE CHAIRMAN: Thank you, Mr. Miller. 16 Any questions, Ms O'Reilly? 17 MS O'REILLY: I don't have any 18 questions. 19 Thank you. 20 THE CHAIRMAN: Mr. Higgin? 21 MEMBER HIGGIN: Thank you. 22 Just to turn to your list of 23 inclusions -- 24 MR. REGHELINI: Yes, sir. 25 MEMBER HIGGIN: -- of what the SSSC 26 includes, the issue of forecasting capability, I assume 27 that means that as customers leave to the competitive 28 market the utility will have to adjust its forecasting 415 MILLER/REGHELINI, presentation 1 requirements commensurately. Is that how you see that? 2 How do you see the forecasting? 3 MR. REGHELINI: Certainly the utility 4 will be providing its third party standard supplier, 5 whether affiliate or not, with its aggregate standard 6 supply requirements. So as those declined the utility 7 would need to notify its standard supplier of how that 8 was declining. 9 MEMBER HIGGIN: Another feature I 10 think that I noted here, the uniform method issue, the 11 uniform method of pricing of standard supply. 12 You have heard the submissions, I 13 assume, that are counter to that that say, amongst 14 other things, that the Board shouldn't be allowed to 15 impose a particular method, it should be up to the LDC 16 to decide and the Board should approve. That's one 17 construct. 18 The other is, of course, those who 19 agree with the uniform method. 20 Why should a method be imposed? Is 21 it purely for regulatory burden reasons or do you think 22 there is a fairness issue for customers? Why do you 23 believe it should be imposed? Your word "imposed". 24 MR. MILLER: I think you are 25 absolutely right on the first point. I think there is 26 the regulatory burden issue. I think that was top of 27 mind for us. 28 I think, secondly, it was simplicity 416 MILLER/REGHELINI, presentation 1 in terms of customers understanding what it is that 2 they are getting from one service area to another. 3 Can you think of anything? 4 MR. REGHELINI: I guess the only 5 other thing that I would add, in terms of keeping it 6 simple and understandable for the customer, if you had 7 service areas that were adjacent and customers getting 8 different types of offers of standard supply, that can 9 be hard for customers to understand. 10 Certainly if there is any 11 rationalization within the industry and you have 12 customers merging utilities on different forms of 13 standard supply, how do you deal with bringing those 14 together. It just adds another level of complexity. 15 MEMBER HIGGIN: I would have thought 16 for you that might be quite a concern in that you have 17 multiple contiguous areas with municipal electric 18 utilities -- 19 MR. REGHELINI: That's correct. 20 MR. MILLER: Correct. 21 MEMBER HIGGIN: -- that that would 22 that be a major concern for you. 23 You have heard the complaint 24 arguments against the spot-based approach. Have you 25 any comments on how to fix the problems with the spot 26 pass-through approach? Have you any views on moving, 27 forward-averaging, whatever it may be, any views at all 28 regarding fixing the problems with the spot-based 417 MILLER/REGHELINI, presentation 1 approach? 2 MR. MILLER: I wish we had come 3 prepared to address that question. 4 I would simply say that in our best 5 assessment, after thinking about this hard for some 6 time, we feel that we could operate quite nicely with 7 the proposed smoothed price pass-through methodology. 8 MEMBER HIGGIN: You mentioned equal 9 billing as one -- 10 MR. MILLER: Yes. 11 MEMBER HIGGIN: -- option that you 12 had considered and there may have been -- any others 13 that you may have considered? 14 MR. REGHELINI: Just the smoothing 15 method that is chosen. If you are smoothing over a 16 billing period there is a moderating effect of that 17 even. 18 MEMBER HIGGIN: Yes. Well, that is 19 the minimum that has been proposed by some people. 20 You also are of the view that there 21 shouldn't be any distinction between kilowatt hour 22 customers using a load profile or customers that are 23 interval metered for the purpose of SSS. In fact, I 24 think you say basically they should all get the same 25 type of offering and, other than any rate class 26 distinctions, if they are larger or interval metered 27 customers they should go to the competitive market if 28 they want something else. Is that your view? 418 MILLER/REGHELINI, presentation 1 MR. REGHELINI: That's correct. 2 Those are the customers most likely to go with 3 competitive retailers and they are the more 4 sophisticated customers. 5 So in our view we felt that if the 6 Board was going to find favour with a fixed-price 7 method, then we didn't want to develop the 8 infrastructure necessary to deal with providing 9 spot-price billing to this smaller group of customers 10 when we knew that they were the most likely to actually 11 go with a competitive retailer. 12 So if it is going to be a fixed price 13 we would prefer anyone who was on standard supply got 14 that fixed price and if they wanted to be interval 15 metered and to have bills reflecting interval metering 16 they should seek a competitive retailer. 17 MEMBER HIGGIN: Thank you. 18 Thank you, Mr. Miller, Mr. Reghelini. 19 MR. MILLER: Thank you. 20 THE CHAIRMAN: I need help in 21 understanding one section of your brief. It's not 22 numbered, but on marketing restrictions you are 23 commenting on the level playing field when affiliates 24 cannot use customer information for retailing purposes. 25 But then you say, well, utility affiliates will no 26 longer have access to customer information for retail 27 purposes that no other market participant has, other 28 new entrants in the market will have their existing 419 MILLER/REGHELINI, presentation 1 customer databases which utility affiliates won't have. 2 I don't understand that, because are 3 you saying that someone new coming in would already 4 have a customer database? 5 MR. REGHELINI: That is correct. 6 They wouldn't necessarily have a customer database 7 associated with electricity sales, but they will be a 8 marketing entity that has a familiarity with customers 9 of some sort based on whatever business they are in and 10 they will be able to use that information as they move 11 into the electricity market. 12 So we are just acknowledging that the 13 utility affiliate will be hampered in a way in that it 14 won't have any customer information, whereas other new 15 entrants will come with some information that they can 16 use to leverage off of. 17 MR. MILLER: A good example of that I 18 think is ourselves compared to Sears. They come in 19 with an incredible database into an environment where 20 we are all starting off, in a sense, with zero 21 electricity customers and the acquisition cost on 22 average for our customers is like anywhere from 23 $80 to $100. 24 So it is a great advantage that the 25 gas marketers and that the people like Sears have 26 compared to a fledgling competitive retail affiliate. 27 THE CHAIRMAN: Okay. 28 Thank you for that and for your 420 MILLER/REGHELINI, presentation 1 presentation here this afternoon. 2 MR. REGHELINI: Thank you. 3 MR. MILLER: Thank you. 4 THE CHAIRMAN: Okay. That concludes 5 the presentations for today. 6 Tomorrow we will commence at 7 9:00 a.m. with Pollution Probe and their presentation. 8 Thank you all for your interest and 9 your attendance today. 10 We are adjourned. 11 --- Whereupon the hearing adjourned at 1540, to resume 12 on Friday, August 13, 1999 at 0900