485 1 Technical Conference 2 RP-1999-0040 3 4 IN THE MATTER OF ss. 57 and 70 of the Ontario Energy 5 Board Act, 1998, S.O. 1998, c. 15, Sched. B; 6 7 AND IN THE MATTER OF a proposed Standard Supply Service 8 Code for electricity distributors. 9 10 11 12 13 14 15 16 17 TECHNICAL CONFERENCE 18 19 20 21 22 23 Hearing held at: 24 2300 Yonge Street, 25th Floor, Hearing Room No. 1, 25 Toronto, Ontario on Thursday, July 15, 1999, 26 commencing at 9:00 a.m. 27 28 VOLUME 3 486 1 APPEARANCES 2 JENNIFER LEA Counsel, Board Technical 3 Staff 4 BRIAN HEWSON/ Board Technical Staff 5 UNA O'RILEY 6 JACK GIBBONS Pollution Probe 7 TOM ADAMS/ Energy Probe 8 MARK MATTSON 9 RICHARD STEPHENSON Power Workers Union 10 ROBERT POWER/ Various Intervenors 11 PETER BUDD/ 12 ALEXANDER GRIEVE 13 BRUCE MacODRUM/ Toronto Hydro Electric 14 MARK RODGER System Limited 15 ALAN MARK Municipal Electric 16 Association 17 TOM BRETT Independent Power 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 Technology 25 DAVID POCH Green Energy Coalition, GEC 26 ZIYAAD MIA Coalition of Distribution 27 Utilities et al 28 487 1 APPEARANCES (Cont'd) 2 ALECK DADSON Enron Capital & Trade 3 IAN MONDROW Heating, Ventilation and Air 4 Conditioning Contractors 5 Coalition Inc., HVAC 6 Coalition 7 MARCEL REGHELINI Ontario Hydro Services 8 Company 9 ROGER WHITE/ Energy Cost Management 10 RICK GROULX 11 MARK RONAYNE Competition Bureau 12 KEITH RAWSON TransCanada Power 13 ANDREW BARRETT Ontario Power Generation 14 Inc. 15 RICHARD BATTISTA Union Gas Limited 16 BARBARA BODNER Enbridge Inc. 17 AMIR SHALABY Ontario IMO 18 DAN PASTORIC Energy Advantage 19 JIM RICHARDSON/ Upper Canada Energy Alliance 20 PAUL FERGUSON 21 MICHAEL JANIGAN Vulnerable Energy Consumers 22 Coalition 23 24 25 26 27 28 488 1 INDEX OF PROCEEDINGS 2 PAGE 3 Preliminary matters 490 4 Presentation by Mr. Alan Mark 491 5 Presentation by Mr. I.H. Jennings 505 6 Questions of Mr. Mark and Mr. Jennings 510 7 Luncheon recess at 12:35 p.m. 613 8 Upon resuming at 1:40 p.m. 613 9 Presentation by Mr. Seabron Adamson 616 10 Presentation by Mr. Barry Conway 650 11 Question of Mr. Adamson and Mr. Conway 657 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 489 1 ERRATA 2 3 Technical Conference 4 Wednesday, July 14, 1999, Volume 2 5 Pages 393 to 397: 6 7 Replace every occurrence of 8 "MR. STEPHENSON:" with "MR. RODGER:" 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 490 1 Toronto, Ontario 2 --- Upon resuming on Thursday, July 15, 1999 3 at 9:00 a.m. 4 MS LEA: Good morning. Welcome back 5 to the third day of the Standard Supply Code Technical 6 Conference. 7 I have one announcement. The 8 presenter listed as the first item on the agenda on 9 Friday, DTE Probyn -- Daria Babaie, who was intending 10 to come and present that particular submission, 11 apparently has time constraints that prevents their 12 attendance. 13 So I have a phone number for them 14 also, if you wish clarification. It is (416) 681-9264. 15 If you need something further, 16 perhaps you could let me know and we can contact them. 17 As you are aware, the schedule is 18 becoming a little uncertain due to the various delays 19 we have had. About mid-afternoon today perhaps we will 20 take stock of where we are at and attempt to get 21 something fixed together as to the rest of the 22 schedule. 23 Any of those people who are listed as 24 presenting, if you have time constraints, please let us 25 know and then we can attempt to schedule you in at a 26 time that suits everyone. 27 Our first presenters this morning are 28 Mr. Mark and Mr. Jennings. I see that they have taken 491 1 their seats at the front. 2 MR. MARK: Only because I have always 3 wanted to see what it is like to be up here. 4 MS LEA: Well, there you go. 5 You gentlemen have a presentation 6 that you wish to make before questioning begins? 7 MR. JENNINGS: Yes, please. 8 MS LEA: All right. Please go ahead, 9 then. Thank you. 10 Do you need slides or anything? 11 MR. MARK: No. 12 MS LEA: Okay. Great. Thank you. 13 PRESENTATION 14 MR. MARK: The MEA has filed a 15 proposed alternative which sets out, in general terms, 16 the flexible arrangements that it proposes for 17 section 29 supply. 18 To a significant extent, the 19 framework of that proposal, and indeed many of the 20 objections of the MEA to principally the Board staff 21 proposal, arise out of the MEA's understanding of the 22 legislation and indeed some of the direct objectives 23 and policies enshrined in the legislation and the 24 specific provisions of the legislation, which to a 25 large extent define the structure and operations of the 26 marketplace. 27 Mr. Jennings will present the 28 proposal. But in light of the fact that it was, to a 492 MARK/JENNINGS, presentation 1 significant extent, premised upon the directions and 2 constraints of the legislation, and our comments on the 3 legislation will, at the hearing, form part of the 4 submission, we thought it appropriate today to at least 5 spend a few minutes outlining our position in that 6 regard, not for the purpose of having an argument on 7 the legislation but merely for the purpose of 8 presenting the framework as it is seen from the 9 perspective of the requirements of the legislation. 10 I will just spend a few minutes 11 reviewing that. For those who wish, there is a brief 12 outline of the submissions I will go through today with 13 respect to legislation. That is in the pile over on 14 the window ledge at the side of the room. 15 I simply want to remind people that 16 while we will often, in the course of the presentation 17 and submission, refer to the Municipal Electric 18 Utilities, or the MEUs, the submission is made on 19 behalf of and applicable equally to the several 20 privately owned distribution utilities in the province. 21 Indeed, as everyone is aware, one of the objectives and 22 consequences of the legislation will be effectively to 23 put all distributing companies on the same OBCA 24 footing. So the submission, notwithstanding the 25 nomenclature "MEU", is intended to apply with respect 26 to all utilities. 27 Let me turn to a brief overview of 28 the legislative framework. 493 MARK/JENNINGS, presentation 1 The most important point to keep in 2 mind, of course, is that the Ontario Energy Board, with 3 all due respect to it, has no inherent jurisdiction 4 with respect to the regulation of the electricity 5 industry. As an administrative tribunal, it has no 6 inherent jurisdiction. Its jurisdiction is derived 7 exclusively from, and indeed is circumscribed by, the 8 Ontario Energy Board Act and the Electricity Act. 9 The deliberations of the MDC, and 10 indeed the initial default supply proposal that 11 emanated from it, were tabled before Bill 35 was 12 tabled. There seems to have been a process whereby the 13 MDC's proposal, which was developed without reference 14 to any guiding legislation, took on a life of its own. 15 The important point to bear in mind 16 here is that the Board does not have an open-ended 17 jurisdiction to structure the electricity industry or 18 portions of it in any way it sees fit. Rather, to a 19 large extent, the structure of the industry has already 20 been determined and dictated by the legislation. 21 It is important to take a pause and 22 to examine whether any particular proposal conforms 23 with the legislation and the Board staff technical 24 proposal in particular, which had its origins in a 25 proposal which predated the tabling of Bill 35. 26 Bill 35, which is now enacted, is 27 also interesting because it has expressly within it a 28 list of the objectives which the government is seeking 494 MARK/JENNINGS, presentation 1 to accomplish with the legislation. So, again, it is 2 not open, respectfully, to the OEB to determine its own 3 list of objectives for the restructuring. Rather, it 4 is to abide by, and is constrained by, the objectives 5 that are set out in section 1 of the Ontario Energy 6 Board Act. 7 On the subject of the objectives 8 themselves, it seems to the MEA that there are several 9 objectives, either explicitly or implicitly, underlying 10 the Board staff proposal that are not authorized by and 11 indeed are inconsistent with the legislation. 12 The most significant ones are the 13 objective which seems to drive the Board staff 14 proposal, which is the view that section 29 rates are 15 not to be rates which provide the full benefits of 16 competition to section 29 customers. 17 There seems to be an assumption in 18 the Board staff proposal, and indeed it is evident that 19 it is quite explicit in this regard, that they view 20 section 29 rates as rates which should be designed not 21 to make the full benefits of competition available to a 22 certain set of customers, section 29 customers, and to 23 require them to leave the section 29 service if they 24 want to have available to them the full benefits of 25 competition. 26 The second objective underlying the 27 proposal appears to be the notion that section 29 28 customers are somehow or in some way not legitimate LDC 495 MARK/JENNINGS, presentation 1 customers, but are somehow ill-gotten assets which the 2 LDCs should be forced to divest themselves of. 3 The other objective which seems to 4 motivate it is the belief that the retail affiliates of 5 the local distribution companies are also somehow 6 illegitimate competitors and that measures must be 7 taken to disadvantage the retail affiliates in the 8 marketplace. 9 In our submission, none of these 10 objectives are apparent from the legislation and, 11 indeed, the objectives contained in the legislation are 12 to the contrary. The objectives make it clear that 13 first and foremost the objective of the legislation is 14 to ensure that customers get the benefits of 15 competition in terms of price and choice. That is 16 first and foremost what is intended to be accomplished. 17 The suggestion that customers who 18 wish to continue to be served by the LDC should not be 19 permitted to do so or that they should not be permitted 20 to access the benefits of competition through the LDC 21 is contrary to those objectives. Indeed, if one goes 22 back to the government White Paper, it is clear that 23 the government's intention was that customers who 24 wished to take supply from their local distribution 25 company should be entitled to full benefits of 26 competition. 27 The White Paper stated expressly that 28 customers would always have access to electricity at 496 MARK/JENNINGS, presentation 1 market-based rates through their current supplier. 2 Those are the words of the White Paper which we can 3 have regard to in determining the objectives of the 4 legislation. 5 In our submission, the intention of 6 the legislation is clear, that the full benefits of 7 competition are to be available to consumers, including 8 through their local distribution company, and implicit 9 in that is the notion that customers who do not wish to 10 change are not to be denied pricing benefits and choice 11 which are available to other customers in the 12 marketplace. 13 The system is not to be structured to 14 incentivize them or require them to leave the LDC if 15 they wish to obtain the benefits of the competitive 16 environment. 17 That philosophy is not only apparent 18 from the objectives, but is enshrined in various 19 specific provisions of the legislation. I want to take 20 just a few moments to review some of those. 21 It is firstly important to bear in 22 mind that the words or concept of standard supply are 23 not to be found anywhere in the legislation. It was a 24 proposal of the MDC which predated the legislation and 25 is not derived from or reflected in the legislation. 26 On the contrary. The Act is clear in 27 not making any distinction whatsoever between the type 28 of service which is to be provided by distribution 497 MARK/JENNINGS, presentation 1 companies under section 29 and the type of service 2 which is to be provided by any other participant in the 3 marketplace. 4 Section 29 speaks of an obligation on 5 the distribution companies to sell electricity to 6 someone who wants to buy from it -- not to supply, not 7 to provide, but to sell. Sell is found in the 8 definition of "retailing" in the legislation. 9 Section 78(3) of the legislation very 10 directly and expressly calls the function and service 11 to be provided by the LDC under section 29 as 12 retailing. That is the description used in the 13 legislation itself. 14 Not only is there no basis in 15 section 29 for the notion of a mandatory supply regime 16 at spot price pass-through, the legislation is 17 expressly the contrary in indicating that the LDC is 18 expected to provide retail service, the same type of 19 service that any other retailer covered by the 20 legislation provides. 21 The language of standard supply is in 22 fact the language of the old Public Utilities Act which 23 no longer applies and a regime where electricity was 24 provided at uniform regulated rates with a statutory 25 payment obligation. That is supply and that is why, in 26 our submission, the term "supply" is nowhere to be 27 found in section 29. Section 29, as indicated, speaks 28 in terms of selling and retail. 498 MARK/JENNINGS, presentation 1 In this regard, it is worth noting 2 that if the government had intended that such a 3 significant share of the marketplace -- and I think 4 there is consensus that there will be a significant 5 share of the marketplace on section 29 service -- if 6 the government had intended that that be a 7 non-contractual, non-commercial form of supply 8 arrangement, it clearly would have put in the 9 legislation some mandatory payment obligation such as 10 is found in the Public Utilities Act. 11 In the absence of any provision in 12 the legislation which makes the customer libel for 13 power actually delivered or gives the Board the 14 authority to make the customer responsible for payment, 15 it seems to us that it's difficult to argue that the 16 government intended anything other than that the 17 substantial majority of section 29 customers will be 18 taking power from the utility on a consensual, mutual, 19 contractual basis and not under a standard mandatory 20 supply arrangement. 21 That there should be no distinction 22 between the rates and choice offered to section 29 23 customers and all other customers is reinforced by 24 section 70(9) which permits an LDC to meet its 25 section 29 obligations through its retail affiliate or 26 any other retailer. In our submission, there could not 27 be a clearer indication of the legislature's intention 28 to put section 29 customers on the same footing as all 499 MARK/JENNINGS, presentation 1 other customers. 2 It is inconceivable that the 3 legislature would have permitted the LDC to delegate 4 the section 29 function to a retail affiliate or to a 5 retailer if it was not intended that customers would be 6 offered retail service akin to the service offered by 7 the retail affiliate or other retailers. 8 The draft proposal to require the 9 delegated retailer to provide service other than on a 10 commercial retail basis is, frankly, a tortured reading 11 of the legislation. This is further reinforced by the 12 phase-out provisions contained in the legislation. 13 One of the premises of the standard 14 supply regime that is proposed by Board technical staff 15 which seems to be one of its foundations is again this 16 notion that there should be some standard service, some 17 minimum or generally available service that any 18 customer can take advantage of at any time. 19 The Act explicitly provides that at 20 some point, and it seems to be in one case expressly 21 linked to the competitive environment, that the 22 obligation to sell contained in section 29 is going to 23 go by the boards and that customers will have access 24 only to whatever retail offerings there are in the 25 marketplace and not to some mandated standard supply 26 regime. 27 Once again, there is a clear 28 indication from the legislation that what is intended 500 MARK/JENNINGS, presentation 1 by the government is that all customers should get 2 commercial retail supply in forums developed by 3 competition in the marketplace and that it is not the 4 expectation or the function of the Ontario Energy Board 5 to provide some standard non-commercial, non-market 6 derived form of supply. 7 It should also be borne in mind in 8 this connection that section 78, which is the provision 9 of the Act dealing with the setting and fixing of rates 10 for standard supply, is inconsistent with the regime 11 which is now proposed. 12 Two features stand out from 13 section 78. The first one, which we have had some 14 discussion of already, is the fact that a rate is 15 clearly distinguished from a method or technique. 16 In our submission, that is a strong 17 indication that the utility is to be permitted to 18 propose a rate which may have its origins in a method 19 of determining the rate, but it is manifestly not a 20 spot price pass-through. 21 The proposal presently on the table 22 would make any application under section 78 23 meaningless. 24 The second feature is that in the 25 ordinary course the rates are to be proposed by the 26 distribution companies, without suggesting that there 27 would be 250 separate applications, because clearly 28 there would not be. 501 MARK/JENNINGS, presentation 1 The regime contemplated by the 2 legislation is that a distribution company should be 3 able to determine which rates are appropriate for 4 section 29 service in its service territory, and to 5 bring those rates forward for consideration by the 6 Board, subject to the Board's right to fix a different 7 rate if the rate proposed was not just or reasonable. 8 "Just and reasonable" is an 9 interesting phrase and, in our submission, describes 10 the Board's power to protect consumers against price 11 gouging and other unfair practices but is not the 12 language one would expect to see if the Board was 13 intended to be given the power to micro-manage and 14 micro-regulate the rates of the utility. 15 In this regard it should also be 16 borne in mind that the Board staff proposal does not 17 allow for any distinctions to be made between customers 18 of different sizes and classes. There is a well 19 accepted common-law principle that it is appropriate in 20 rate making, and often necessary in rate making, to 21 make appropriate distinctions amongst classes of 22 customers according to their conditions of service and 23 their needs. 24 The Board staff proposal would 25 exclude from application a broad set of generally 26 accepted rate-making principles and, in our submission, 27 the legislation should not be interpreted as permitting 28 that to happen. 502 MARK/JENNINGS, presentation 1 In terms of the objective that seems 2 embedded in the Board staff proposal to inhibit the 3 delegation of the section 29 function to the LDC's 4 retail affiliate, in our submission there is no 5 question that any such objective is precluded expressly 6 by the legislation. As indicated previously, there is 7 a clear contemplation in the legislation that the LDC 8 should be able to delegate the section 29 function to 9 its retail affiliate. 10 While it may be suggested by some 11 that it is open to the LDC to establish another 12 additional affiliate which does nothing other than deal 13 with the section 29 supply regime, there is certainly 14 nothing in the legislation to suggest this. We suggest 15 that it would be an interesting interpretation of the 16 legislation to suggest that the government had gone to 17 the lengths it did in the legislation to very carefully 18 mandate the circumstances and conditions in which 19 functions had to be separated and affiliates had to be 20 created but intended to leave the door open for that 21 regime to be supplemented by a standard supply regime 22 which mandated the creation of an additional affiliate. 23 The legislation is exhaustive in 24 dealing with mandated functional separations and 25 corporate separations. It should be treated as 26 exhaustive and the Board, in our submission, does not 27 have the authority to supplement it. 28 It is also not reasonable, in our 503 MARK/JENNINGS, presentation 1 view, to suppose that when the government described the 2 section 29 function as "retailing" and authorized the 3 LDC to delegate the retail function to an affiliate, 4 that the government did not intend that that function 5 be delegated to a retail affiliate. It is the only 6 reasonable interpretation available from the 7 legislation. 8 I want, lastly, just to take a moment 9 to deal with the aspect of the Board staff proposal 10 which would mandate that the LDC procure the power for 11 standard supply as presently envisioned by them from 12 the IMO. 13 There is, in our submission, simply 14 no authority in the legislation which bestows a 15 regulatory power on the Ontario Energy Board to 16 regulate procurement. 17 While there is power expressly given 18 with respect to transmission and distribution and 19 retailing, there is no power given to the Board to 20 regulate with respect to procurement. Again, that is 21 consistent with the legislature's intention that it is 22 the market which should operate to regulate, if you 23 will, the procurement function, and that if it intended 24 that a participant in the market should be bound by any 25 other regulation other than the market rules the 26 government would have expressly said so. 27 In the absence of such an express 28 provision, the Board has no inherent jurisdiction to 504 MARK/JENNINGS, presentation 1 regulate on the procurement side. 2 In closing, I just want to make an 3 additional comment concerning the Affiliates 4 Relationship Code. 5 While I understand that the Board has 6 indicated it does not want it to be on the issues list, 7 the Board has indicated it will take comments on other 8 aspects. In view of the correspondence with the 9 Minister, we think it appropriate to put the issue on 10 the table. 11 The effect of 2.5.7 of the Affiliates 12 Relationship Code, in conjunction with other provisions 13 of the proposed Standard Service Supply Code, is to 14 preclude the LDC from having the section 29 function 15 performed by the retail affiliate. 16 For the reasons I outlined 17 previously, we view this as an unreasonable 18 interpretation of the legislation, and indeed when one 19 takes a step back and looks at the legislation as a 20 whole, it is clearly intended that the municipal 21 electric utilities should commercialize their 22 operations and thereafter be on no other or different 23 footing from any other player in the marketplace. 24 In our submission, the restraints 25 imposed in combination of the two Codes which results 26 in an effective prohibition from delegation of the 27 authority to the retail affiliate is not permitted by 28 the legislation. 505 MARK/JENNINGS, presentation 1 That, in summary form, is the outline 2 of the view of the legislation and the constraints it 3 imposes on the Board in the exercise of its 4 jurisdiction and the principles which should guide the 5 Board in selecting a section 29 supply alternative. 6 Mr. Jennings will now deal with the 7 proposal in particular. 8 PRESENTATION 9 MR. JENNINGS: You have to view the 10 proposal in light of what we believe the legislation 11 says. The MEA and its members didn't ask that we move 12 forward in the electricity restructuring at a pace far, 13 far greater than when in gas. In fact, we propose that 14 there be a staged and careful implementation approach 15 so we make sure we get the wholesale market right and 16 then move on. But the government and the legislature, 17 in their wisdom, decided not to do that. 18 Similarly, the utilities and the MEA 19 didn't ask for the OBCA move in restructuring. The 20 legislature and the government decided that was the way 21 to go, that all companies would be on that footing. 22 Given those things, we think the 23 legislature has, in effect, gotten it pretty right and 24 it flows from that that the utilities can continue to 25 serve their customers as they move into the new arena, 26 as promised in the White Paper. 27 We see that the utilities have three, 28 in our view, quite distinct obligations under 506 MARK/JENNINGS, presentation 1 section 29. In summary, section 29 is ensuring that 2 somebody is prepared to sell in some other 3 jurisdictions where there isn't this kind of back-stop 4 protection. There are situations where people with a 5 bad credit risk, et cetera, can't find readily a 6 provider, so the government has looked to a point of 7 contact, and that is the wires company, and given it a 8 responsibility to ensure that somebody is prepared to 9 sell to the people so long as they are able to pay. 10 If I can draw an analogy, one of our 11 member utilities, Cochrane, is the supplier of Internet 12 services and cellular phone services, not because this 13 is a major effort for them but because nobody wanted to 14 go to that part of the country and do the marketing, as 15 was mentioned yesterday or the day before. So they are 16 on their own right, in that case, assuming a supplier 17 of last resort. 18 So we have three distinct 19 obligations. Most of the discussion to date has 20 centred in on the people who don't want to make a 21 choice, the small residential and small commercial 22 customers, and we do agree that they need some 23 protection, but the Act doesn't make any distinction. 24 Large industrial customers have access to section 29 as 25 well, and it is a bigger stretch to assume that they 26 have to be given what may be the best rate, and they 27 have an even greater effect on the market. 28 The market, as we have said, is both 507 MARK/JENNINGS, presentation 1 the spot market and the contracts market, and we 2 believe you need both. 3 Section 29(2) is quite distinctive. 4 You have a situation where there is an obligation to 5 make sure that people have somewhere to move to if they 6 are dissatisfied, having once decided that they are 7 going to sign a contract. We have said that we have no 8 objection under section 29(1) where people don't want 9 to move to there being no contractual agreement; in 10 fact, that is advantageous. Quite frankly, it is not 11 clear in the legislation how that is to be done, but if 12 the government and the OEB can find a way to impose on 13 the customers an obligation to pay and the other 14 elements of an implied contract, we are quite 15 supportive of the idea that section 29(1) customers not 16 have to sign a contract. 17 Having chosen to sign a contract, 18 though, there is a question as to whether or not they 19 should be able to go back to a no-contract arrangement. 20 Clearly, as was said, the Act contemplates a commercial 21 arrangement. 22 Section 29(3) is particularly 23 concerning. Even if one were to look at that kind of 24 spot pass-through arrangement, the costs and 25 administrative arrangements for section 29(3) are 26 substantially different than for the others. You have 27 the potential of a retailer other than the LDCs picking 28 up, let's say, 50 per cent of the load and then being 508 MARK/JENNINGS, presentation 1 unable to perform and suddenly, overnight, you have 2 100 per cent increase in the volume of business. At 3 minimum, there is a change in administrative costs 4 there that is substantially different than what is 5 under the others. 6 So I think there are three distinct 7 obligations that have to be recognized and we would 8 argue that the utilities have the authority to propose 9 different approaches in three ways: the kind of rate 10 that is appropriate for each of those, by customer 11 class, and in fact a combination, as the legislation 12 says, of ways of meeting it. So they might choose to 13 meet their section 29(1) obligations directly if they 14 were only going to be a wires company and go to a third 15 party for the other things, or they might choose to 16 meet sections 29(1) and (2) through their retail 17 affiliate but look to a third party to take the higher 18 risks of perhaps large customers and the section 29(3) 19 obligations. 20 The spot pass-through isn't, as was 21 said, a rate. We would like to be clear that if the 22 Board is prepared to accept that we are very supportive 23 of the MEUs having the ability to propose that, but it 24 is a proposal as a way of limiting the shareholder risk 25 that is involved in this. We don't think it is what is 26 contemplated, and in fact, as we have said in our 27 submission, our recommendation would be that customers 28 would far prefer and are better treated by a standard 509 MARK/JENNINGS, presentation 1 rate that they are used to, which is what has been 2 promised. But we do also try and argue for and defend 3 the rights of the MEUs to make their own determination 4 locally on how best to serve the customers. 5 Another significant factor is how 6 this is structured. There is an issue of timing, but 7 let us assume that the market opens reasonably early in 8 the year 2000. The MEUs have until November 2000 to be 9 incorporated under the OBCA, so they will be an MEU 10 which can't split itself into parts in operating both 11 as a retailer and as a wires company out of one 12 organization, which stresses the point, we believe, 13 that in fact the customers are there and the issue, in 14 terms of 2.5.7., is how they choose to organize their 15 OBCA company and where they put the customers. 16 At the moment they are the customers' 17 current supplier and retailer. They set a variety of 18 rates. They have different strategies and, 19 particularly, if we think about the private utilities 20 which are going to be covered on exactly the same 21 basis, they have a variety of values in terms of that 22 customer relationship, which is very important to the 23 continued health of the organization. 24 So when they split their company in 25 two, we believe it is their right to propose, subject 26 only to the Board's authority -- and the Board is told 27 that it can't order significant restructuring except to 28 require the establishment of a retail affiliate to meet 510 MARK/JENNINGS, presentation 1 section 29 in the other competitive activities that the 2 MEUs, the local distributors, are able to do. 3 Section 73 lists a whole bunch of 4 competitive activities that they must do through a 5 competitive affiliate, and the Board's authority to 6 require that, we think, is akin to the Cochrane 7 situation where if nobody else is there and they are 8 unable to find a third party perhaps to provide 9 reasonable and just rates the Board can require them to 10 set up a retail affiliate. 11 I think that is the paper everybody 12 has. I think that adequately describes the proposal. 13 MS LEA: Thank you very much, 14 Mr. Jennings. 15 Mr. Gibbons, do you have questions 16 for this gentlemen? 17 MR. GIBBONS: Yes. 18 MS LEA: Thank you. Please go ahead. 19 MR. GIBBONS: You are proposing that 20 the MEUs be allowed to offer a fixed-price option for 21 their section 29 customers, and according to Dr. Dewees 22 that could make it very hard for your competitors to 23 gain market share from you in the residential and small 24 commercial market. Do you agree with that analysis? 25 MR. JENNINGS: It is not clear. I 26 think there is a fairly clearly documented resistance 27 to movement. But barring that, I don't think it makes 28 it any more difficult. In fact, the section 29, 511 MARK/JENNINGS 1 whatever the proposal is, will be an "A" rate. If 2 Don Dewees' evidence was right and the fixed rate is 3 going to cost a little more, if they are more 4 interested in price and security they may move 5 elsewhere. 6 But we expect there to be some in our 7 share. There is no question. 8 MR. GIBBONS: Do you believe if the 9 MEUs are able to retain significant market share in the 10 residential and small commercial market that will 11 frustrate the people of Ontario achieving the benefits 12 of a competitive electricity market? 13 MR. JENNINGS: Frankly, we think it 14 would increase it. You have a much more active 15 negotiated contract market, with the possibility of 16 other suppliers working the system effectively rather 17 than all flowing through sort of a blind bidding system 18 through the spot market. 19 Having both, I think, puts some 20 healthy pressure on things. 21 MR. GIBBONS: With respect to your 22 fixed-price option, you will presumably purchase some 23 of your supplies under medium and long-term contracts? 24 MR. JENNINGS: I would expect so. 25 MR. GIBBONS: Yes. And would you 26 expect that you would do that exclusively through 27 public tenders? 28 MR. JENNINGS: I would assume that 512 MARK/JENNINGS 1 you would use any techniques. John Todd's proposal 2 yesterday I'm sure would be very attractive to some of 3 the utilities. But they will be business companies, 4 and they will use whatever practices are appropriate to 5 business companies, constrained by whatever 6 requirements the Board has on them within their 7 mandate. 8 I would think some kind of penalty 9 process would be common, but I think you would see a 10 variety of tenders. Some communities are going to lean 11 to green power local supply issues. There are going to 12 be a variety of factors which will respond to the local 13 communities, frankly, a lot better. 14 MR. GIBBONS: If you do supply a 15 fixed-price option, will that necessitate you 16 establishing restrictions on the ability of your 17 customers either to leave your system or to come back 18 to your system? 19 MR. JENNINGS: I would think the way 20 section 29 is set up, their ability to leave, after 21 section 29(1), is in law -- even though I don't see how 22 you could. I would assume after that, under 23 section 29(2) or (3), the only limits would be ones 24 that would be in common with any retailer in terms of 25 any penalties to ensure they have picked up their 26 administrative costs. But that would be up to the 27 Board to regulate. 28 So I don't see that they would be any 513 MARK/JENNINGS 1 more restrictive than anybody else's customers. 2 I am not an expert on this. I am a 3 forester by training, and a biologist. 4 MR. GIBBONS: If the MEUs were to 5 offer a fixed-price option, would that increase their 6 business risk relative to the Board staff's proposal? 7 MR. JENNINGS: It would allow them to 8 accept some risk, yes -- probably not as great as the 9 risk allowed by the investment that is allowed under 10 the affiliate relationship code, but it would allow 11 them to accept the risk. 12 But they are supposed to be business 13 companies, and if they are to make a profit, then they 14 ought to be allowed to take a concomitant risk. 15 MR. MARK: If I could just add 16 something there. 17 Unless one assumes an insolvency 18 situation, there is no difference whether you put the 19 risk on the parent company or the subsidiary company, 20 if you assume that that is going to be a common method 21 of implementing it, or even if they are sister 22 companies. The ultimate shareholder is going to be the 23 same in either instance. 24 So unless you want to assume that the 25 shareholder is prepared to permit its affiliate to, for 26 example, go bankrupt, then the same shareholder, 27 whether it is a public shareholder or a private 28 shareholder, is bearing the risk, whether the risk is 514 MARK/JENNINGS 1 found in the affiliate or in the LDC. It is to a large 2 extent, I think, a distinction without a difference. 3 MR. JENNINGS: The other issue is 4 that if in fact the Board staff proposal relieves the 5 utility of risk, it, as has been said, places it on the 6 customers, and most of our members are still quite 7 concerned about ensuring that they are providing the 8 customer with something reasonable and balancing risk 9 across their community. 10 MR. MARK: This reflects also on what 11 I call the legitimacy of the objective of the Board 12 staff paper, which is to have no risk on the LDC. 13 Assuming the government understood the basics of 14 corporate law when it drafted the statute, it well 15 understood that the risk of any commercial activity 16 that the affiliate engages in is a risk which is being 17 imposed on the same ultimate shareholder. 18 So, frankly, the argument that we can 19 put risk in the retailer and no risk in the LDC is an 20 artificial construct and is not something you can base 21 the -- 22 MR. GIBBONS: And under your 23 fixed-price option for section 29 customers -- and I 24 think you just alluded to it, Tony -- the MEU would 25 have the opportunity to earn a profit under those 26 electricity sales, or a loss. 27 MR. JENNINGS: Yes. 28 MR. GIBBONS: And if your proposal 515 MARK/JENNINGS 1 was accepted and the MEUs are allowed to offer a 2 fixed-price offering under section 29, how many Ontario 3 Energy Board hearings do you think there will be in any 4 given year to test the just and reasonableness of these 5 rates? 6 MR. JENNINGS: I would expect the 7 Board to find that there is a limited logical set of 8 approaches that will work. As has been said, there 9 will be groupings, utilities will get together, and MEA 10 has traditionally worked with its members to come up 11 with some fairly common approaches -- not always single 12 approaches, but a limited number. 13 On top of that, I would expect, if 14 our interpretation of what this regulation is about is 15 correct, that the Board could exercise its authority to 16 have written hearings and a lot of this could be 17 handled administratively. 18 MR. GIBBONS: When you say that you 19 think there would be a limited number of hearings, can 20 you be sort of a bit more specific. 21 You talk about the groupings of 22 different utilities. Can you give us sort of a 23 ballpark estimate of how many groupings there would be? 24 Is it five or is it more like fifty? 25 MR. JENNINGS: My suspicion is that 26 it would be closer to five than fifty, but I honestly 27 don't know. One of the issues is that the legislation 28 has set up something that we believe in, which is local 516 MARK/JENNINGS 1 decision-making, and it will be the local people who 2 decide. We will try and facilitate that. 3 If you think about it, there are a 4 limited number of logical options. Somebody is going 5 to come up with something that we didn't think was 6 logical and find a logic for it. 7 MR. MARK: I think you will find, as 8 happens in regulation in most sectors in most 9 environments, that very rapidly a set of standards or 10 permitted parameters are going to develop, and 11 guidelines will be developed and applications will be 12 made within those envelopes. I would expect that in 13 very short order you would not have a lot of outliers, 14 if you will, which would require some form of hearing 15 process more than a written administrative process. 16 MR. JENNINGS: Jack, your question I 17 think goes to the regulatory burden issue. It really 18 bears on an understanding of what is expected under 19 section 29. 20 If, as Mr. Mark said, the emphasis is 21 that the rates being offered are just and reasonable, 22 then Mr. Todd's proposal of comparison of benchmarking 23 approach can deal with that. That is a fairly limited 24 and light and relatively easy approach to regulation. 25 There are also some issues about 26 cross-subsidy and access for information, but those 27 things are there anyway. Those are not additional 28 issues. 517 MARK/JENNINGS 1 MR. GIBBONS: Can you tell us how 2 many MEUs have signed up so far with ENERconnect to be 3 their supplier? 4 MR. JENNINGS: I can't tell you, but 5 there is an understanding that a whole bunch have. 6 What has happened is a number of MEUs have invested in 7 ENERconnect in order that there be a consolidation 8 organization active in the wholesale market other than 9 OPG. 10 You can assume that many utilities 11 that have invested in ENERconnect will buy from 12 ENERconnect, but part of ENERconnect's commitment was 13 that they wouldn't be tied to buy all or any. They 14 will have the choice of getting their energy where they 15 can best get it for their customers. 16 At the moment there is a proposal 17 out, but it isn't a binding one, so the decisions 18 haven't been made yet. 19 I think this exercise will in fact 20 define a lot of where that goes. 21 MR. GIBBONS: Thank you, Tony. Thank 22 you, Alan. Those are all of my questions. 23 MS LEA: Thank you. 24 Mr. Adams. 25 MR. ADAMS: I want to start off by 26 understanding who is speaking. 27 Do you speak for the Upper Canada 28 Energy Alliance in this proceeding? 518 MARK/JENNINGS 1 MR. JENNINGS: We speak for the MEUs 2 broadly, including their members. They have some 3 specific issues. Our position is that they have the 4 right to choose their approach to this. 5 MR. ADAMS: So I take it you are 6 speaking for Toronto Hydro, for Hydro Mississauga, for 7 Innisfill Hydro, that have separate representation 8 here? 9 MR. MARK: Let's not get caught up in 10 semantics. We appear on behalf of the -- 11 MR. ADAMS: Mr. Mark -- 12 MR. MARK: Let me answer the 13 question. 14 We appear on behalf of the Municipal 15 Electric Association. There is no secret to what the 16 Municipal Electric Association is. It is an 17 association which has a history of representing utility 18 interests and does so with them acting collectively. 19 It is not inconsistent with 20 individual utilities being represented. That's it. 21 The membership in the MEA is approximately 260 22 utilities. 23 MR. ADAMS: Mr. Mark, you can 24 characterize my question as one of semantics. I am 25 simply trying to clarify who you are speaking for. 26 MR. MARK: The MEA. 27 MR. ADAMS: Are you speaking for 28 ENERconnect? 519 MARK/JENNINGS 1 MR. JENNINGS: We are speaking for 2 the Municipal Electric Association. 3 MR. ADAMS: What is your relationship 4 with ENERconnect? What is the relationship of the MEA 5 with ENERconnect? 6 MR. JENNINGS: ENERconnect is a 7 partnership of utilities, with a managing partner that 8 is structured as a subsidiary of MEA, with a separate 9 board of directors operating separately. 10 MR. ADAMS: But ENERconnect is 11 properly described as a subsidiary of MEA? 12 MR. MARK: No. 13 MR. JENNINGS: It is a limited 14 partnership. 15 MR. MARK: ENERconnect is a limited 16 partnership established under the Limited Partnerships 17 Act. The partners have the rights and powers with 18 respect to voting and controlling that partnership, as 19 they have under the Act. 20 The general partner is a subsidiary 21 of the Municipal Electric Association, but it has to 22 answer, by agreement and by legislation, to the limited 23 partners. 24 MR. ADAMS: I think we have 25 established that the MEA has an interest in ENERconnect 26 which is represented here under a separate 27 representation. 28 MR. MARK: But it has no partnership 520 MARK/JENNINGS 1 interest. The MEA is not a limited partner. The 2 general partner, which has no ownership stake in the 3 partnership, is an administrative entity which is 4 required so that you have got -- you have to have a 5 general partner which is the one which manages the 6 business on a day-to-day basis. That is a requirement 7 of the legislation. 8 That happens to be a corporation of 9 which the sole shareholder is the Municipal Electric 10 Association, but the Municipal Electric Association 11 does not have an equity stake in ENERconnect and 12 ENERconnect's fares are subject to governments by a 13 board of directors which is elected not by the MEA but 14 by the membership of ENERconnect's limited partners. 15 The general partner is controlled by 16 the partners of ENERconnect, not by the Municipal 17 Electric Association. 18 MR. ADAMS: Thank you for that 19 clarification. 20 Does the MEA adopt the submissions of 21 all of its members that are presented in this hearing 22 or their testimony as it flows forward? 23 MR. JENNINGS: I wouldn't say we have 24 made a practice of doing so. I haven't considered the 25 thought. 26 MR. WARREN: I apologize, 27 Mr. Jennings. We are having some difficulty in hearing 28 what you said. 521 MARK/JENNINGS 1 MR. JENNINGS: My apologies. 2 MR. WARREN: In particular, I didn't 3 catch your last response to Mr. Adams' last question. 4 MR. ADAMS: Should I restate the 5 question? 6 MR. JENNINGS: I haven't considered 7 it. 8 MR. WARREN: I beg your pardon? 9 MR. JENNINGS: I haven't considered 10 it. 11 MR. MARK: He hasn't considered that 12 question. 13 MR. ADAMS: Can you advise us as to 14 whether -- 15 MR. WARREN: I'm sorry to be stupid 16 about this. The question was: Do you adopt the 17 positions put forward by individual MEUs in this 18 hearing? The answer is: We haven't considered it. Is 19 that -- 20 MR. JENNINGS: That's correct. 21 MR. WARREN: Thanks very much. I 22 just couldn't hear it. That's all. 23 MR. ADAMS: Mr. Jennings, can you 24 give me the historical interpretation that the MEA has 25 operated under on the on the concept of power cost? 26 MR. JENNINGS: The historical concept 27 under the Power Corporation Act and the Public 28 Utilities Act was that the customers paid only for the 522 MARK/JENNINGS 1 costs involved in delivering the service, which was a 2 bundled electricity service, including generation, 3 transmission, et cetera, with no taxes and no profit to 4 a shareholder involved. 5 MR. ADAMS: So would it be fair to 6 characterize that historically the MEA has supported a 7 view that producers are there to serve customers? 8 MR. JENNINGS: We used to, yes. 9 MR. ADAMS: Has that changed? 10 MR. JENNINGS: The legislation is in 11 the process of changing that by law. 12 MR. ADAMS: What's the view of the 13 MEA on the appropriate role of distribution utilities? 14 Are they there to serve their customers or are they 15 there for some other purpose? 16 MR. JENNINGS: They have, in our 17 view, little choice under the OBCA Act but to look at 18 their shareholders as well as their customers from here 19 on in. 20 MR. MARK: It also depends, I think, 21 to an extent, Mr. Adams, on who ends up owning the 22 distribution companies. That is an issue which ought 23 not to be quickly forgotten in these proceedings where 24 people often proceed on the assumption that all of them 25 will always be owned by the municipal corporation and 26 that is not necessarily the case. 27 The Municipal Electric Association 28 did not favour the commercialization of the LDCs at 523 MARK/JENNINGS 1 this time. That debate was lost and the government has 2 decided to commercialize that business. The directors 3 of those corporations will have to discharge the duties 4 that any directors have, which is to act in the best 5 interests of the corporation, and each utility, each 6 municipality, is going to have to determine how it 7 interprets those interests and will balance many 8 interests. 9 MR. JENNINGS: The government took 10 advice from some folks that a commercial 11 market-oriented approach is going to be better for the 12 customer in the long run. 13 MR. ADAMS: Mr. Jennings, would it be 14 fair to say that historically the MEA would have 15 championed the approach to power pricing, procurement, 16 and delivery of energy services to customers that would 17 minimize long-term costs? 18 MR. JENNINGS: Yes. 19 MR. ADAMS: That is not necessarily 20 the case any more because you have new interests. Is 21 that what you are telling me? 22 MR. JENNINGS: We are now faced with 23 having to, by law, pay attention to the interests of 24 shareholders as well as customers. 25 If those shareholders are municipal 26 corporations, we would and do advocate that they 27 consider the local community benefits significantly as 28 a factor in their decision on how much dividend, et 524 MARK/JENNINGS 1 cetera, they want to take out of the utility, but it's 2 a shareholder's right. 3 MR. MARK: Could I just add something 4 to that? 5 It seems to me that, ultimately, 6 whether the municipality -- I will call it that just 7 for our discussion's sake -- whether it's a participant 8 or not, how it participates, the objective of this 9 scheme is that the rates are going to be market-driven. 10 So that is going to determine rates. 11 I think the question is: Do you 12 permit or do you preclude the shareholders of the 13 successors to the MEUs from participating in that? It 14 may indeed mean that some of the profits, rather than 15 flowing to private enterprise, will flow back into the 16 hands of the ratepayers or the municipality in the form 17 of dividends. But I'm not sure that it's correct to 18 say that under the new regime they are not pursuing the 19 same objectives they had. 20 MR. ADAMS: Okay. Now, historically, 21 many of us in this room will remember Alan Mark making 22 presentations and suggesting that the MEA spoke on 23 behalf of customers. 24 Just to be clear, we can disabuse 25 ourselves of that notion from here on in. Is that 26 correct? 27 MR. JENNINGS: I wouldn't think so. 28 I would still think that most of our members at the 525 MARK/JENNINGS 1 present time -- at some future date maybe you can, but 2 at the moment most of our members are still municipally 3 owned. 4 The membership voted for a 5 constitutional change at the last annual meeting that 6 still advocates, as one of the options, customer 7 control, directly or through the trustees of the 8 municipal corporation. We believe that the benefits to 9 the community are still customer interest and still 10 believe that most of our members work hard for the 11 benefit of their customers. 12 MR. MARK: If you have attended the 13 multitude of municipal council meetings and public 14 meetings that have gone on around the province so that 15 municipalities can come to grips with the issues that 16 they face because of Bill 35 -- and I am sure 17 Mr. Rodger can concur; he has probably been to more 18 than I have -- you will find that an overwhelming 19 reason for municipalities to not privatize the 20 enterprise at the present time is that many 21 municipalities want the LDC to continue to act in the 22 customer's interest and in the public interest so that 23 their customers are not thrown, at least initially, to 24 the vagaries of public enterprise. 25 That is very much an issue which has 26 motivated many municipalities and, presumably, to some 27 extent, it will continue to motivate them as 28 shareholders. 526 MARK/JENNINGS 1 MR. ADAMS: I'm confused because this 2 seems to contradict the previous presentation that 3 Mr. Jennings just made about the impositions of the 4 OBCA character of municipal utilities requiring them -- 5 MR. JENNINGS: What I said was 6 that -- 7 MR. ADAMS: Excuse me. Let me finish 8 my question. 9 MR. JENNINGS: I'm sorry. 10 MR. ADAMS: I would characterize your 11 previous testimony as having said that although 12 historically the municipal utilities espoused a view 13 that producers were there to serve customers, now they 14 take a view that there are other interests at stake. 15 When I confronted you with the 16 implication of that, that we can disabuse ourselves 17 that the MEA speaks on behalf of customers, you take 18 exception to it. 19 I see two clear arguments being 20 presented here. Can you clarify this? 21 MR. JENNINGS: What you have 22 identified is a challenge for the membership and the 23 association to produce a -- the membership still wants 24 to focus in largely on customers and customer benefits 25 and it still tries to serve customers from large 26 industrial to small householders. Those are the 27 significant issues for our members and their 28 shareholders. But the law also requires us to 527 MARK/JENNINGS 1 recognize a shareholder interest, so we now have two 2 sets of values that we have to pay attention to by law. 3 We have no choice. 4 MR. MARK: Your questions assumes, 5 Mr. Adams, that there is a necessary incompatibility 6 between the corporate obligation and the obligation 7 posed by the Act to deal with the realities of 8 commercial interests and the fact that the shareholders 9 are municipalities which may want to act in the public 10 interest. 11 You seem to assume that those two 12 things are incompatible, and they are not. Clearly, 13 the challenge for the municipalities who want to 14 continue to hold the shares because they want to 15 protect the public interest will be to meld those two 16 objectives and to pursue them simultaneously. 17 That is the objective. I don't 18 accept that they are inherently contradictory. 19 MR. ADAMS: Let's look at some of the 20 practicalities of your proposals here and perhaps you 21 can walk me through. 22 At page 2 of your submissions, you 23 say there should be no obligation on the LDC or its 24 agents to accept customers back on a no-contract basis. 25 The middle of the page. 26 MR. JENNINGS: That's right. 27 MR. ADAMS: Would you accept that 28 that is a constraint on mobility? 528 MARK/JENNINGS 1 MR. JENNINGS: That derives from the 2 fact that we can't find anything in the Act that allows 3 for a no-contract in the first place. We are quite 4 happy, as the submission says, to have customers 5 under 29(1) not have to sign contracts. We support 6 that concept if the government and/or the OEB can find 7 a way to deal with a contract by implication, but the 8 structure of the Act, unfortunately, doesn't appear to 9 contemplate no-contract arrangements. 10 MR. ADAMS: Let me try to put my 11 question with a practical example. 12 In a situation where a municipal 13 utility has contracted for supply at some price that 14 turns out to be below spot prices -- 15 MR. JENNINGS: Yes. 16 MR. ADAMS: -- and a bunch of 17 customers have gone to other suppliers, they now find 18 that the offerings from the municipal utility, had they 19 signed up with it back when it was available, are 20 attractive and they want to come back. 21 Would your proposal lead to any 22 restrictions on customers coming back, the proposal to 23 have contract service? 24 MR. JENNINGS: I don't see why. They 25 are on a contract. The requirement is that the LDC 26 ensure that someone is prepared to sell electricity to 27 them, either the LDC directly for a short period of 28 time or the retail affiliate or a third party, and the 529 MARK/JENNINGS 1 specific offering or guarantee available to them is one 2 that is regulated. I see no reason for a problem in 3 mobility if they are coming from one contract to 4 another. 5 MR. MARK: If they leave the system, 6 as they clearly will, by contracting with other 7 retailers, I don't see how it restricts their mobility 8 to say that they can move back to the LDC or any other 9 retailer by signing a contract. Especially if the 10 motivation for them moving around is that they want a 11 better price as opposed to being the unsophisticated 12 do-nothing inertia customer, it simply cannot be said 13 that requiring them to sign a contract in any way 14 restricts their ability. They are contract players. 15 MR. JENNINGS: The more likely 16 restriction on mobility, I would think, would be the 17 terms of the other retailers contracts that guarantees 18 the people the right to move to a section 29 protection 19 if they want. 20 So I would assume that the other 21 retailers will try and put in some penalty for 22 exercising that right. That I would think, would be 23 the restriction on mobility. 24 MR. ADAMS: One of the reasons the 25 Market Design Committee proposed the spot price 26 pass-through was to facilitate some simple mechanics 27 for customer movement, customer mobility -- the 28 customers could go to other suppliers. 530 MARK/JENNINGS 1 Under your proposal I don't see an 2 explanation of where the bill gets sent, where the 3 payment obligation comes from, what the impact is on 4 prudential requirements. Can you explain to us what 5 the mechanics are of your proposal with regard to 6 customer mobility? 7 MR. MARK: I'm sorry? Customer 8 mobility? 9 MR. ADAMS: If a customer leaves 10 system supply and goes to contract supply, what 11 happens? 12 MR. JENNINGS: What is "system 13 supply"? 14 MR. ADAMS: "System supply" is 15 LDC-provided commodity. They are going to an 16 alternative commodity supplier. 17 MR. JENNINGS: But they may not be 18 there to start with. The LDC might propose to meet 19 their 29(1) obligation through a third party. 20 MR. ADAMS: That's fine. 21 Let's take a situation where you have 22 an LDC or its designate providing the commodity supply 23 and a customer wants to go to ABC retailer. 24 MR. JENNINGS: Yes. 25 MR. ADAMS: How does this work? 26 You haven't explained the mechanics 27 of how this works. Explain it. 28 MR. JENNINGS: It works exactly the 531 MARK/JENNINGS 1 same way as the Board's proposal: They write a letter, 2 there is an arrangement, they sign a contract with 3 somebody else, the somebody else advises the LDC that 4 they are now their customer. 5 It works the same way as anybody 6 moving from one retailer to another. 7 MR. ADAMS: So you have lower volumes 8 on the LDC's contract of supply. How are those volumes 9 contracted? As in "shrunk" to represent the movement 10 of the customer load to another supplier? 11 MR. JENNINGS: Quite possible. 12 MR. ADAMS: I'm asking what the 13 mechanics are for balancing the loads. 14 MR. JENNINGS: The same mechanics 15 that are used by the utilities in servicing their 16 customers today. People move in and out of town, their 17 loads go up and down. 18 MR. ADAMS: Today they are no 19 customers that are moving to alternative suppliers 20 because they are trapped by the monopoly. 21 MR. JENNINGS: No. But the risk that 22 you are talking about in terms of load variation is 23 there anyway. 24 MR. ADAMS: I'm not talking about a 25 risk of load variation. 26 MR. MARK: It doesn't matter that the 27 utilities will deal with in their procurement 28 practices, in their contracts with suppliers. They may 532 MARK/JENNINGS 1 be taking a substantial quantity from spot. They will 2 have commercial contracts. 3 We have all been talking here about 4 the volume, the volume risk, and we know that there is 5 a balancing act. There is a trade-off between paying a 6 price for the -- minimizing the price for that risk and 7 how much mobility you want, and the utilities are going 8 to have to make judgments about where to strike the 9 proper balance. 10 But to a large extent it is going to 11 be dictated by what is available in the marketplace, 12 and that is a little bit difficult to predict with 13 exactitude. 14 MR. JENNINGS: Cornwall, which hasn't 15 been mentioned here but is a good case in point, has a 16 portfolio of contracts: some are firm, some are 17 shoulder and flexible, some are peaking, some are in 18 U.S. dollars, some are in Canadian dollars. They come 19 from a variety of sources. As their customers move up 20 and down they give them fixed prices and look after 21 them quite well. They have, in fact, quite a low rate 22 in the province today. 23 They have been operating in the 24 environment that is contemplated by the Act for some 25 years. 26 MR. ADAMS: Just to repeat, my 27 question was: Please explain the mechanics of customer 28 mobility. 533 MARK/JENNINGS 1 I just want to make sure I have a 2 complete answer to the extent of the MEA's thinking in 3 walking through all of the procedures that allows bills 4 to be formed, customers to be charged, and somehow 5 producers to receive compensation for the power they 6 have produced, and that is the answer that I get. 7 MR. MARK: I don't understand -- 8 MR. JENNINGS: It depends on what 9 your question is. 10 MR. MARK: Yes. I don't understand 11 what the question is, frankly. 12 There is one issue which is the 13 mechanics of how you send the bill, but you seem to 14 suggest that what you are inquiring about is degree of 15 mobility. 16 For myself, I'm not sure I understand 17 the question. 18 MR. ADAMS: The MDC produced several 19 hundred pages, an explanation of how the mechanics of 20 all this works, and I get from the MEA a four-page -- 21 MR. JENNINGS: With respect, we are 22 talking about retail activities which were not several 23 hundred pages of MDC activity. 24 The MDC itself paid attention largely 25 to the wholesale market. The retail technical panel 26 produced a lot of things that the Market Design 27 Committee did not have time to go over in any extensive 28 detail. 534 MARK/JENNINGS 1 As I understood your question, it 2 was: How do you handle the transfer of billing 3 information? 4 All of those issues can be handled on 5 the same basis whether we are dealing with fixed price 6 or spot pass-through. 7 The billing arrangements are the 8 same. 9 I mean, if we need to go into that in 10 today's hearing we can, but I fail to see how it is 11 germane to the issue. 12 Your issue, as I understood it, was 13 going to the question about how they manage their load. 14 That is a different issue, and that is germane. 15 Can you expand your question? 16 MR. ADAMS: I can make this question 17 much more precise. 18 The spot price pass-through was a 19 fundamental design element that allowed a certain 20 mechanical system for transfer of customers, movement 21 of customers from Supplier A to Supplier B. Somebody 22 has to work out the logic on this so that the power 23 market can function. 24 I don't see the MEA having done that. 25 I'm asking you for your explanation of how customer 26 mobility works as a mechanical matter. 27 MR. JENNINGS: I don't understand how 28 the spot price pass-through was a mechanic for transfer 535 MARK/JENNINGS 1 of customers. 2 MR. ADAMS: Okay. That's fine. We 3 will leave it at that. 4 MR. JENNINGS: Let me be clear that, 5 as was said by Mr. Mark, the spot price pass-through 6 concept was developed before the legislation was 7 available, and the MEA representatives on several 8 occasions at the Market Design Committee asked that 9 there be a thorough step-back review of the legislation 10 by the Market Design Committee itself carefully going 11 through what we have ended up -- instead of having down 12 there -- having Mr. Mark do, to try to look at whether 13 that concept is allowable under legislation. 14 MR. ADAMS: Mr. Jennings, do you 15 accept the testimony of Don Dewees when he expressed 16 his view -- and I would suggest he is quite an eminent 17 person on this matter -- that a fixed price standard 18 supply is likely to mean higher cost in the long run 19 than a spot price pass-through? 20 MR. JENNINGS: He also went on to say 21 that it was not likely to be the lowest available, that 22 other people would be able to get it. 23 So no, I didn't understand that part 24 of his evidence. It didn't seem to make sense. 25 MR. ADAMS: Thank you for your 26 opinion. 27 One final question. 28 Would the MEA advance, support, or in 536 MARK/JENNINGS 1 any other way, lend comfort to a measure that would 2 interfere with the opening of the market as per 3 government policy in year 2000? 4 MR. JENNINGS: I'm not sure I 5 understand the question. 6 MR. MARK: You will have to tell us 7 what the issue is, Mr. Adams. 8 I mean, it is a hard question to 9 field without knowing what the debate was and what the 10 issue was. 11 MR. JENNINGS: If the market you are 12 talking about is the wholesale market, probably not. 13 If it is the retail market, we have advocated that 14 there be some trials to make sure we have this right 15 before we open it up completely. 16 So it depends on the issue you are 17 raising. 18 MR. ADAMS: We will leave it at that. 19 MS LEA: Thank you, Mr. Adams. 20 Mr. Stephenson. 21 MR. STEPHENSON: Thank you. 22 Let me just come back to: it's not 23 the issue of who you are speaking for, but who you are 24 agreeing with perhaps. 25 I noted in the material filed by 26 Mr. Power and Mr. Budd that you are one of the sponsors 27 of -- or one of the stakeholders, I guess, in 28 association with at least Ms Woolf's paper, and I'm not 537 MARK/JENNINGS 1 sure if that also applies to Mr. Adamson's paper, and I 2 just wanted to understand from the perspective of the 3 MEA what it viewed as the implication of its 4 sponsorship of that paper. 5 I guess what it comes down to is: Do 6 you endorse the analysis and recommendations contained 7 in those papers? 8 MR. JENNINGS: We concentrated our 9 efforts on the material that you are seeing here. We 10 also felt it valuable to bring somebody of Ms Woolf's 11 stature to these proceedings and to provide her advice 12 as advisors to a number of governments around the 13 world. 14 We also felt it useful, because we 15 are interested in what is best for the customers, to 16 get London economics analysis of what the implications 17 of intermediate and forward markets are on the record. 18 So we provided some financial support for that as well. 19 But our own focus was on the material 20 you have seen here. 21 MR. STEPHENSON: I noted that 22 Ms Woolf makes the notation that: 23 "OHSC has provided funding for 24 this paper in the interests of 25 encouraging a complete debate." 26 (As read) 27 Would you characterize the MEA's 28 involvement in these papers in the same fashion as that 538 MARK/JENNINGS 1 or is it something beyond that? 2 MR. JENNINGS: What has she said? 3 MR. STEPHENSON: She says that: 4 "OHSC has provided funding for 5 this paper in the interests of 6 encouraging a complete debate." 7 (As read) 8 Which I understood to mean that OHSC 9 doesn't necessarily agree with what she is saying, but 10 they thought that her contribution nevertheless is 11 valuable. 12 Would you characterize your own 13 support -- 14 MR. JENNINGS: That is probably a 15 fair characterization for us as well. 16 MR. STEPHENSON: I don't know if you 17 have turned your mind to it with any great detail, but 18 can you assist us: Is there anything specifically in 19 either Ms Woolf's analysis or recommendations, or 20 Mr. Adamson's analysis or recommendations, that the 21 MEA, as a matter of its own policy, does not agree 22 with? 23 MR. JENNINGS: I haven't turned my 24 mind to it in detail. 25 If there was a point of departure it 26 would be our suggestion that the Act gives our members 27 the right to take different strategies and different 28 approaches, and, to the extent that the Board is 539 MARK/JENNINGS 1 prepared to allow it, their right to propose a spot 2 price pass-through approach if they deem it appropriate 3 for some or all of their obligations under section 29. 4 MR. STEPHENSON: Is it fair to say 5 that insofar as your presentation, your proposal that 6 comes under your letterhead, differs, either explicitly 7 or implicitly, from Ms Woolf's or Mr. Adamson's 8 proposals, we obviously should take your own paper as 9 reflecting the MEA's policy as compared to anything 10 Ms Woolf's and Mr. Adamson's might have? 11 MR. JENNINGS: At the point of time 12 it was submitted, that's correct. That doesn't prevent 13 us from being persuaded by other arguments. 14 MR. STEPHENSON: You may sign on at 15 the end of the day. Okay. 16 MR. JENNINGS: The direction we have 17 as staff at the MEA is to make sure we are doing the 18 best thing for the system overall, and the customers, 19 and the shareholders. 20 MR. STEPHENSON: Fair enough. 21 I think this one is for Mr. Mark, and 22 permit if I will, but it is rather unusual obviously to 23 have sort of evidence about domestic law, so I take 24 this in the manner I hope it was intended, which was 25 simply to explain the basis for your position? 26 MR. MARK: Yes. It wasn't intended 27 as evidence. As I said at the beginning, the concern 28 was that because, to a significant extent, the 540 MARK/JENNINGS 1 structure proposed by the MEA is based on a reading of 2 the legislation, we thought it fair to put out there on 3 the table what we thought those directions were. 4 MR. STEPHENSON: Okay. And that is 5 fair enough. In that spirit I am not about to engage 6 in a debating society about whether my interpretation 7 is different or the same. 8 But maybe you can assist me. I had 9 understood, Mr. Mark, that you made some comment -- and 10 I assume it is derived from a provision of the Act -- 11 that you understood that at some point in time the 12 section 29 obligation was going to disappear. 13 MR. MARK: Could. 14 MR. STEPHENSON: And what would 15 trigger that happening? 16 MR. MARK: There are two sections 17 which deal with the disappearance of that obligation. 18 One is, I believe, section 70 -- 19 MR. POWER: Subsection (10). 20 MR. MARK: -- subsection (10), 21 basically which says that there can be a date 22 prescribed by regulation under which the distributor 23 cannot comply directly with section 29, and there is no 24 triggering event identified for us. The Lieutenant 25 Governor in Council may say that this can only be 26 provided by somebody other than the distributor. We 27 say the logical inference is a competitive service 28 provider. 541 MARK/JENNINGS 1 Another provision is in section 29 2 itself, if I am not mistaken -- section 29 of the 3 Electricity Act -- which provides in subsection (4) 4 that: 5 "The Board may exempt a 6 distributor from any provision 7 of this section if, after 8 holding a hearing, the Board is 9 satisfied that there is 10 sufficient competition among 11 retailers in the distributor's 12 service area." (As read) 13 My point was that this indicates that 14 the government's objective is to ensure that all 15 customers have what is essentially a competitive retail 16 service, which is inconsistent somewhat with the notion 17 that we should always have a public service fall-back 18 standard spot price pass-through option. These seem 19 inconsistent. 20 MR. JENNINGS: It would appear, 21 between those two, to suggest, fairly clearly we think, 22 that the government favours delivery through the retail 23 affiliate, if there is one. You can do it directly if 24 you are going to be only a wires company, so that 25 somebody is doing it, but you can't do that forever. 26 It is certainly not the preferred option. 27 MR. STEPHENSON: Let me just come 28 back to that. Where is it in the Act that you say SSS, 542 MARK/JENNINGS 1 or the section 29 obligation -- let's use your 2 language -- can be provided through a retail affiliate? 3 MR. MARK: The licensing provision, 4 section 70, clearly provides that the function can be 5 designated to an affiliate of the distributor. 6 MR. STEPHENSON: That is 79(b), I 7 think. 8 MR. MARK: I think that's correct. 9 MR. STEPHENSON: But you would agree 10 with me that is an affiliate, period? 11 MR. MARK: Sure. But if you also 12 look at the other right in section 70(9), it is clear 13 that the government considers that the function being 14 performed is a retail function. Just let me turn it up 15 for a moment, if I can put my hands on it. 16 MS LEA: It is section 70, 17 subsection (9), I think, for the record. 18 MR. MARK: If you look at section 19 70(8) and all of the subsections -- for example, look 20 at (3): 21 "The Board may make orders 22 approving or fixing just and 23 reasonable rates for the 24 transmitting or distributing of 25 electricity and for the 26 retailing of electricity in 27 order to meet a distributor's 28 obligations under section 29." 543 MARK/JENNINGS 1 (As read) 2 It couldn't be clearer. The 3 government considers that the section 29 obligation is 4 met through what it calls "retailer". 5 The other section says you can carry 6 out your retail obligation through an affiliate. I 7 don't consider it to be a leap to suppose that the 8 government must have meant your retail affiliate. And 9 given the lengths that the legislation went to to 10 carefully prescribe the circumstances in which there 11 must be separation of functions into different 12 affiliates, it is simply not open to anybody to 13 credibly suggest that what the government really was 14 allowing for here was for the Board to say: In 15 addition to the scheme that is clear in the Act, we are 16 going to change that and we are going to say you have 17 to set up an additional single-purpose affiliate, and 18 that when we said you could delegate the retail 19 function to an affiliate, we did not intend to say you 20 can delegate it to a retail affiliate. 21 MR. STEPHENSON: Do you view there to 22 be any distinction -- in the flexible approach that you 23 advocate in terms of the kinds of options that may be 24 offered and the classes that may be differentiated 25 between, what I will call on the one hand, competitive 26 retail activity and section 29 supply? 27 What is the difference, under your 28 model, between those two activities? 544 MARK/JENNINGS 1 MR. JENNINGS: I think the only 2 difference is that one is an obligation on the LDC to 3 ensure that someone is there. 4 The simple reading of section 29 5 is -- and there are -- I believe it is New Zealand, but 6 I could be wrong -- other jurisdictions where they 7 haven't provided a back-stop and some people with bad 8 credit ratings, et cetera, find that nobody will sell 9 them electricity, even though they have a little cash 10 in their pocket. 11 This is, on a reading of it, simply a 12 way of ensuring that in fact there is a retail function 13 available to customers under three quite different and 14 quite specific circumstances. 15 MR. STEPHENSON: Just to be fair to 16 you, what I assumed is that there would be at least a 17 couple of other minor differences. I think you have 18 indicated that for the 29(1) customers there would be 19 no contract, whereas I assume for your competitive 20 retailing you would have contracts in every case. 21 MR. JENNINGS: 29(1) we have said 22 that we were prepared to support no contract if there 23 is a way to do it. 24 MR. STEPHENSON: I understand that. 25 But that would be a slight distinction -- 26 MR. JENNINGS: But that is just 27 trying to take care of the customers. I don't think 28 there is a distinction in law. 545 MARK/JENNINGS 1 MR. STEPHENSON: Secondly, the other 2 distinction would be that your 29(1) rates would have 3 to be approved by the Board. 4 MR. JENNINGS: And (2) and (3). 5 MR. STEPHENSON: But compared to pure 6 competitive retail rates, which presumably aren't 7 approved by anybody other than the customer and the 8 company, correct? 9 MR. JENNINGS: Correct. 10 MR. MARK: I think in principle 11 that's right, I mean subject to -- because of the 12 customer profile, et cetera, the utility may decide 13 that certain rates are appropriate for certain groups 14 and not others and may vary the rates in its retail 15 package and its section 29 package. But I think, from 16 a more general perspective, it is not anticipated that 17 there would be a sort of significant difference in the 18 type of rates offered. 19 MR. JENNINGS: I think there is 20 another distinction, to answer you, that we 21 expect -- don't know and it is not there in law, but it 22 would make sense on 29(1) at least for the Board to 23 require that it be a pure energy rate. There will be a 24 lot, we expect, of retail offerings if the market 25 actually gets going -- and we believe this will help it 26 get going -- there will be a lot of offerings that are 27 that plus your cable, or it is bundled with other 28 things. That is going to be very hard to sort out the 546 MARK/JENNINGS 1 just and reasonable rate basis. 2 So it wouldn't surprise us if the 3 Board required that the rates offered under 29 be an 4 energy rate, pure and simple, as opposed to being 5 bundled with anything else. 6 MS LEA: Mr. Stephenson, I'm sorry to 7 interrupt. I should have been more vigilant about the 8 time. I should call a break soon. Is this a good time 9 for you, or do you want to continue for a short time? 10 What would you like to do? 11 MR. STEPHENSON: This is perfect. 12 This is a fine time. I am only going to be maybe five 13 or ten minutes at the most, but I would be happy to 14 have a break now. 15 MS LEA: Okay. Let's have a 16 15-minute break, please, and return at 10 to 11:00. 17 --- Upon recessing at 10:35 a.m. 18 --- Upon resuming at 10:50 a.m. 19 MS LEA: Good morning. I think we 20 are ready to start again. 21 Mr. Stephenson, I think you are in 22 the chair. 23 Thank you. 24 MR. STEPHENSON: I just want to 25 follow up on the point that we were discussing earlier, 26 that, from the MEA's perspective, the very minor 27 distinction I think is there between fully competitive 28 retailing on the one hand and section 29 retailing on 547 MARK/JENNINGS 1 the other. As I understood it, it is your view that 2 there would be very minimal distinction between those 3 two things, and I think we covered off what those 4 distinctions might be. 5 The thing that I have some difficulty 6 with is that it seems to me that the Act does seem to 7 make a very explicit distinction between those two 8 types of activities, and in particular it is in 9 section 71. 10 As I read it -- maybe, Mr. Mark, you 11 can help me -- what that provision does is prohibits a 12 distributor -- and then there is this issue about 13 municipal corporations and so forth -- from engaging in 14 any other activity other than transmitting or 15 distributing, or section 29. That would include, 16 presumably, competitive retailing. 17 The point is, doesn't that section 18 indicate a policy in the Act which recognizes a very 19 fundamental distinction between the nature of the 20 activities between section 29 retailing on the one hand 21 and competitive retailing on the other? 22 MR. MARK: Mr. Stephenson, I suggest 23 it indicates the opposite. 24 What it indicates is that the 25 government recognizes that it has created this other 26 obligation that you have to retail under section 29, 27 and that simply, as a matter of not having inconsistent 28 provisions, it says that you can do it in your 548 MARK/JENNINGS 1 distribution company or in your retail company because 2 you have the flexibility for either. 3 I would note also that section 71 4 really characterizes the section 29 function as a 5 business activity. It is clearly talking about 6 business activity. I see it just as ordering the 7 house. I mean, they have generally said that you can't 8 do anything else other than distribute, but then they 9 say on the other hand that we have to have somebody who 10 is going to have the obligation to sell. We are going 11 to make that the distributor and therefore there has to 12 be this exception. 13 MR. STEPHENSON: If you are going to 14 define section 29, or the nature of the activities you 15 are going to be engaging in under section 29 in the 16 manner you have suggested, why do you need this 17 restriction in there at all? 18 MR. JENNINGS: Because they have 19 said -- if I can come at it -- it is the same issue -- 20 they have said that this is a retailing function. The 21 distributor shouldn't be in competitive businesses. 22 There is an exception to that. If in fact the only way 23 the distributor can reasonably meet its obligation 24 under section 29 -- or obligations, plural -- under 25 section 29 is directly, then, for a period of time, 26 until those changes that were previously mentioned are 27 required by regulation, when they can't do it that way 28 any more, they have the section that says that is an 549 MARK/JENNINGS 1 exception. 2 MR. MARK: And they have certainly 3 left it open to the Board to require that the 4 section 29 function be carried out in the retail 5 affiliate. The MEA doesn't have any objection to that, 6 provided that you don't make the retail affiliate give 7 away the rest of its business for the high privilege of 8 doing section 29. 9 That is identified clearly in section 10 70(14), which gives the Board the power to make the 11 distributor, who doesn't have a retail affiliate, 12 create a retail affiliate. So I think you can 13 accommodate it to the extent that the Act does suggest 14 that the distributor is better off not being in the 15 competitive activities. 16 If you look at section 70(14), which 17 allows the Board to mandate the creation of the retail 18 affiliate, I think you can reasonably say the Board 19 might consider directing that the function be performed 20 not through the distributor but only through either a 21 third party or the retail affiliate. 22 I think that is what it leads you to. 23 I don't think it leads you to the conclusion that when 24 the government called the function retailing it really 25 meant that it wasn't retailing. 26 MR. STEPHENSON: Let me move on to 27 something else. 28 One of the things that you talked 550 MARK/JENNINGS 1 about as a potential basis for differentiation amongst 2 the kind of offerings that would be made in fulfilment 3 of the section 29 obligation is customer classes, and 4 Mr. Mark referred to the common-law rationale or 5 justification or recognition of the appropriateness of 6 creating customer classes. 7 The difficulty I was having with that 8 was this. I may be wrong, and there are certainly 9 people with a lot more experience and wisdom on this in 10 this room than me, but I had always understood customer 11 classes to be intrinsically a cost of service notion, a 12 recognition of cost causality, essentially, being 13 different amongst different types of recipients, and 14 that it was appropriate to how people pay for the cost 15 they caused. 16 What I am having difficulty 17 understanding is how that notion applies in the context 18 of a commodity sale, particularly where there is no 19 doubt that you are going to be able to recover 20 administrative costs associated with providing the 21 commodity. 22 In terms of the actual cost of the 23 commodity, how does it make any difference whether they 24 are an individual residential customer or the largest 25 industrial customer? I mean, presumably you are buying 26 the commodity in bulk or as part of a portfolio, and I 27 just don't understand how it applies. 28 MR. MARK: I am certainly no more 551 MARK/JENNINGS 1 expert in this than you are, and I will obviously pass 2 to Mr. Jennings, but one thing does strike me, that the 3 utility may want the flexibility to engage in 4 procurement on a basis which better serves customers of 5 a certain profile. It may be that commercial customers 6 can be better served by putting together a portfolio of 7 energy and demand -- energy sources which better 8 matches price-wise their load profile, and it may be 9 that you would have a somewhat different procurement 10 for a different class of customers, with some variation 11 of the rates perhaps by time of day, to optimize your 12 offerings to the different classes. 13 So you are right to the extent that 14 it may not be, to the same degree it used to be, a 15 cost-of-service issue because you are now unbundling 16 the rates, and presumably most of the cost 17 differentials will be reflected in differences in the 18 transmission and distribution rates. 19 But there is still room in there for 20 optimizing the rates for different classes. 21 MR. STEPHENSON: Let me just explore 22 that for a second -- I'm sorry, Mr. Jennings. 23 MR. JENNINGS: Let me just do a 24 couple of "for instances". Again, I am not a rate 25 expert. 26 I think if you think of the different 27 kinds of customers and the three different obligations, 28 you can see there are, at minimum, administrative 552 MARK/JENNINGS 1 differences in cost and, if in fact there is a rate 2 that is approved that will include the administrative 3 cost. So there is some exposure for the utility. 4 One of the costs is in the form of 5 risk. If you think of 29(3), where the utility has to 6 have or arrange a backstop, we have municipal utilities 7 where single companies represent 15, 20 per cent of 8 their total load. To be able to step in on a moment's 9 notice to backstop that administratively is a problem. 10 The power is flowing through their 11 wires. If the spot price pass-through were allowed, 12 that might be a very good strategy for any large 13 industrial class customer coming back, shazam!, onto 14 the system. So there are some administrative costs and 15 risk management that is necessary. 16 Alternatively, you have to be 17 prepared for all comers at all times, and that is 18 certainly not going to serve a lot of the small 19 customers. If we are dealing with a whole bunch of 20 small businesses and residential customers, one would 21 assume that there is not significant movement in any 22 given period of time. 23 MR. STEPHENSON: Let me just make 24 sure I understand that. 25 I think I am now understanding. I 26 was incorrect in this understanding. 27 Essentially, an LDC, in meeting its 28 section 29 obligation, would assemble a portfolio, and 553 MARK/JENNINGS 1 there would be simply one portfolio to serve all 2 customers on section 29. 3 I take it that in your proposal that 4 wouldn't necessarily be the case. In fact, you would 5 have segments, perhaps, in your portfolio which the 6 LDC, in fulfilling its section 29 obligation, would be 7 fulfilling something like a brokerage function, 8 customizing its procurement for either a single or a 9 group of customers that may have some particular 10 characteristics. 11 MR. JENNINGS: They would put 12 together a portfolio, but the different classes will 13 have different impacts on how that portfolio is 14 structured. 15 When we take section 29(1), 16 Dr. Dewees indicated that the spot pass-through might 17 be the best you could get. If that part of his 18 presentation were accurate, then one would assume a 19 whole bunch of large industrial customers would see no 20 reason to leave. In fact, they are the ones who can 21 best take advantage of the long-term spot, whereas a 22 lot of small customers are more concerned about cash 23 flow issues on a day-to-day basis. 24 So you have these people, but they 25 are entitled by law to be able to leave simply by 26 writing a letter. That would argue for me having -- if 27 I have a large number of them in my utility -- a larger 28 portfolio of power on an "as required" basis and buying 554 MARK/JENNINGS 1 from somebody else who is passing the risk to the 2 generator, so the price is going to be higher. 3 MR. STEPHENSON: If you have what I 4 would call a segmented portfolio, where parts of the 5 portfolio are more or less dedicated to particular 6 groups of customers -- I think you had indicated that 7 there were different costs associated with that, 8 certain segments in terms of risk management and so 9 forth -- can you assist me? Doesn't that entail a 10 policing function for the OEB insofar as these are all 11 regulated rates to ensure that you have in fact 12 allocated the correct portion of your risk management 13 cost into that segment of the portfolio which is then 14 flowing down to the rate that that class of customers 15 get? 16 Don't you wind up having a fairly 17 hands-on policing function for the OEB? 18 MR. JENNINGS: If you assume that the 19 requirement for regulated rate in this is a 20 cost-of-service detailed analysis, that could be the 21 case. 22 But, in fact, if you look at the 23 structure, it would appear to be simply ensuring that 24 those rates offered are just and reasonable. It 25 doesn't suggest a detailed analysis. It is our view 26 that in fact what this is saying is we have three 27 classes of vulnerable customers and they can't be taken 28 advantage of. So there is, we would advocate, a light 555 MARK/JENNINGS 1 comparative overview situation. 2 MR. STEPHENSON: Let me just move on 3 to the last issue I want to deal with, and that is the 4 issue of risk. 5 I think it was Mr. Mark who talked 6 about how ultimately the distinction between requiring 7 certain functions to be carried out in an affiliate 8 versus directly by the LDC was more or less irrelevant 9 from the perspective of risk because of course the 10 ultimate shareholder is the same in either case. 11 I understand, more or less, your view 12 on that. 13 MR. MARK: To the extent that 14 proponents of other models come forward with one of the 15 foundations of those models, being the proposition that 16 the LDC should not be exposed to risk, what I have 17 indicated is that that just doesn't enter into the 18 equation. 19 MR. JENNINGS: And it is not 20 consistent with the Affiliates Code that the Board has 21 already approved. 22 MR. STEPHENSON: I confess that I 23 have not thought this through entirely, but let me 24 raise something with you and get your response to it. 25 Is it one possibility that the 26 legislation contemplates that LDCs may engage in 27 retailing activities but only through affiliates? 28 Clearly, retailing activity is a riskier activity than 556 MARK/JENNINGS 1 the regulated wires business. The magnitude of that 2 risk is unknown. 3 Isn't part of the difference, 4 notwithstanding the single shareholder, that if the 5 retail affiliate gets into financial difficulty, its 6 financial obligations are self-contained within the 7 retail affiliate, that is, the creditors of the retail 8 affiliate won't have recourse against the wires assets? 9 MR. JENNINGS: That is probably one 10 of the reasons why the government would recommend that 11 at some point the distribution company no longer be 12 allowed to do it. It is clearly not their preferred 13 option, and also why it's the only -- 14 MR. STEPHENSON: But isn't that a 15 very legitimate objective or policy objective for 16 requiring riskier activities to be carried out only 17 through corporate affiliates? It is to prevent 18 recourse against the wires asset. 19 MR. JENNINGS: If the local utility 20 chose -- for instance, if it decided that it only 21 wanted to be a wires company and it chose to deliver 22 this directly, not through a third party, you are 23 suggesting that the Board would, in its review, take a 24 look at how the risk involved compares with the return 25 on equity the shareholder can expose. 26 MR. STEPHENSON: I think the point 27 is, if I am right about that, that that is an argument 28 in favour of keeping the section 29 obligation as risk 557 MARK/JENNINGS 1 free as possible, because section 29 obligations can be 2 conducted through the LDC directly -- 3 MR. JENNINGS: But it -- 4 MR. STEPHENSON: Hold on. Let me 5 just finish. 6 MR. JENNINGS: Okay. 7 MR. STEPHENSON: Then, bearing in 8 mind this risk aversion to the LDC wires assets, you 9 want to make that section 29 operation -- business, if 10 you like -- as risk free as possible to maintain this 11 basic notion of protecting the wires assets from 12 creditors. 13 MR. JENNINGS: I think you make a 14 good point if you are looking at a utility that chooses 15 to do it directly. I think again that is why the 16 government has clearly tipped against that strategy 17 over time. 18 The same does not -- in fact, it 19 reinforces the need to differentiate between those 20 three strategies. 21 MR. MARK: The other difficulty I 22 have is that your concern really only applies in a 23 circumstance of complete financial failure of the 24 retail affiliate. I am not sure that that is the 25 scenario we ought to be contemplating. 26 It contemplates that what the 27 government is suggesting is that the parent corporation 28 should let the affiliate and its creditors go 558 MARK/JENNINGS 1 unsatisfied and just cut them loose. 2 But the second point, which I don't 3 think is a scenario that is envisaged in the 4 legislation -- I have difficulty -- it seems reasonably 5 clear that government has the separation primarily for 6 other reasons rather than the financial reason. 7 The other issue that bears on this, 8 though, is that the government has permitted, or it is 9 permitted -- I forget exactly where it is found -- a 10 25 per cent guarantee is permitted to come from the 11 LDC. 12 MR. JENNINGS: That is the Board and 13 its Affiliates Code. 14 MR. MARK: In the Affiliates Code 15 they are permitting a guarantee of 25 per cent of the 16 obligations. 17 So it seems to me to be a rather 18 extreme scenario that you are dealing with. The more 19 likely purpose for the separation is for cross-subsidy 20 and some of the other informational objectives. It 21 seems to me a stretch to say that the government has 22 required this situation, that it required this 23 separation because in a situation where the retail 24 affiliate has reached total failure it wants the 25 publicly-owned parent corporation to be able to say to 26 creditors, "You're on your own." 27 MR. STEPHENSON: This will be the 28 last point. 559 MARK/JENNINGS 1 Surely, it is within the 2 contemplation of everybody that, as we enter a new 3 fully competitive marketplace in retail, amongst that 4 hurly-burly there will be winners and losers and there 5 is going to be a shake-out, and it is well within the 6 contemplation of everybody that financial failure is 7 entirely possible amongst competitive retailers. 8 MR. MARK: I think if this Board were 9 to tell the utilities that they can do the section 29 10 supply in the retail affiliate without having to give 11 up the rest of the business of the retail affiliate, I 12 don't think you would have a lot of opposition. 13 MR. STEPHENSON: Let's deal with 14 purely private sector competitive retailers. You don't 15 have any philosophical problems with them going 16 bankrupt. It's within everybody's expectation that 17 that is an outcome of a competitive marketplace. 18 MR. JENNINGS: That's why sub (3) of 19 29 presumably is in force. 20 MR. STEPHENSON: Exactly. 21 Surely there is no reason at all, 22 given the level playing field, that we would have a 23 different set of presumptions for privately-owned 24 competitive retailers versus publicly-owned via 25 affiliates of LDCs. It is equally within the realm of 26 contemplation that those companies will fail. 27 MR. JENNINGS: Affiliates of LDCs may 28 in fact be private companies. Some obviously will be 560 MARK/JENNINGS 1 since there are some privates now. 2 MR. STEPHENSON: Fair enough. 3 Thank you. Those are my questions. 4 MS LEA: Thank you. 5 Mr. Power, do you have questions for 6 this panel? 7 MR. POWER: No questions. Thank you. 8 MR. RODGER: No questions. 9 MS LEA: Mr. Rodger has no questions. 10 Mr. Warren. 11 MR. WARREN: I have just a very few 12 questions. 13 MS LEA: Thank you, Mr. Warren. 14 MR. WARREN: First of all, 15 Mr. Jennings, let me see if I can understand this. 16 May I presume that the MEA has 17 received an opinion from Mr. Mark with respect to the 18 interpretation the Act which Mr. Mark has summarized in 19 his presentation this morning and on the two-page 20 submission. Is that fair? 21 MR. MARK: Whether it's true or not, 22 it's privileged information. 23 MR. WARREN: Whether or not you have 24 received the opinion, have you received an opinion to 25 this effect? 26 MR. MARK: Sorry? 27 MR. WARREN: I'm asking Mr. Jennings 28 has he received an opinion from Mr. Rodger -- I'm 561 MARK/JENNINGS 1 sorry, from Mr. Mark. 2 MR. JENNINGS: Mr. Rodger, no. 3 MR. WARREN: With respect -- 4 MR. MARK: Whether he has or he 5 hasn't, that's also privileged. 6 MR. WARREN: The analysis which is 7 set out by Mr. Mark, which presumably is not 8 privileged, has that analysis been made available to 9 the members of the MEA? 10 MR. JENNINGS: It was submitted to 11 the Board or a version of it was submitted to the Board 12 in the first round. Unfortunately, because of the 13 number of days that were allowed, we weren't able to 14 get it together in time. It arrived late and was not 15 included in the Board's summation. We did provide it 16 to all our members. 17 MR. WARREN: But do I take it that it 18 is open to the members, each of your individual 19 members, to decide whether or not they agree with 20 Mr. Mark's analysis? 21 MR. MARK: As it always is with every 22 issue at the MEA -- and perhaps in the context of your 23 question it is worth reminding everyone for the record 24 that the MEA is a democratic organization with a system 25 of committees by which the membership authorizes the 26 association to speak on the collective behalf of the 27 membership -- as I understand it, and Mr. Jennings can 28 correct me if I'm wrong, the position, if you will, 562 MARK/JENNINGS 1 that has been put before you is one which has been duly 2 authorized in accordance with those standing 3 procedures. 4 MR. WARREN: I take it the answer to 5 my question, Mr. Jennings, is that it is open to the 6 individual members of the MEA to take a different 7 interpretation of the legislation if they so choose? 8 MR. JENNINGS: If they so choose. Of 9 course, we periodically have individuals or even a few 10 members disagree with us on policy points and 11 presumably the same could be an interpretation of 12 legislation. 13 MR. WARREN: If you could turn up 14 page 3 of your written submission, Mr. Jennings. 15 If I look at the top paragraph under 16 the heading "Rates" in the second sentence, you 17 indicate: 18 "The MEA would recommend to its 19 members that they would best 20 meet the customer protection 21 objective by providing 22 customers..." (As read) 23 Or at least the residential and small business 24 customers: 25 "...with a true fixed rate to 26 meet section 29(1)." (As read) 27 That is the recommendation. Has that 28 recommendation been made to all of your members? 563 MARK/JENNINGS 1 MR. JENNINGS: Yes. I believe that's 2 in the previous material we set up. 3 MR. WARREN: Is it open to your 4 members to disagree with that recommendation and to 5 take their own position? 6 MR. JENNINGS: Absolutely. 7 MR. WARREN: Now, I haven't done the 8 head count, and I'm sure that someone can correct me if 9 I'm wrong, but we have about, roughly speaking, 10 30 members, 30 MEUs represented in this proceeding. 11 Can you tell me with respect to the 12 balance of the 260 members, how many of them are 13 adopting your recommendation as it is set out on page 3 14 of your submissions? 15 MR. JENNINGS: I cannot. I can tell 16 you that a number of them have said they are counting 17 on the MEA to try and sort this out and represent their 18 interests. 19 MR. WARREN: Fair enough. I just 20 want to get a sense of the order of magnitude. Is it 21 the case that we have 35 of your members, for example, 22 who are going to adopt this recommendation? 23 MR. JENNINGS: I would think that you 24 are closer to 200 out of 260 and maybe more. I would 25 also think that some who are represented here on 26 specific issues don't disagree with our position. 27 MR. WARREN: Fair enough. I wasn't 28 dealing with those. I was dealing with the balance of 564 MARK/JENNINGS 1 the 230. 2 Now, the second area I want to deal 3 with is the ENERconnect connection which was discussed, 4 I believe, with Mr. Gibbons in his questions this 5 morning. 6 As I understand it, the MEA has a 7 managerial function with respect to ENERconnect. Is 8 that correct? 9 MR. JENNINGS: No. The MEA is the 10 shareholder of the general partner which has the 11 managerial functions, but the contractual arrangements 12 are such that the board of directors of that 13 corporation, the general partner, is controlled by the 14 limited partners. 15 MR. WARREN: The MEA, as I take it 16 from the answer that was given earlier, doesn't make 17 any money if ENERconnect makes money. Is that right? 18 MR. JENNINGS: Let me be specific. 19 We do have an obligation, a right to collect the costs 20 of setting ENERconnect up to recover our costs if it 21 makes money. Other than that, we have no revenue from 22 it. 23 MR. WARREN: In your understanding of 24 it, Mr. Jennings, does ENERconnect make more money 25 under a scheme in which there is a portfolio of 26 supplies made available to fulfil a section 29 27 obligation than it does if there is simply spot price 28 pass-through? 565 MARK/JENNINGS 1 MR. JENNINGS: Let me answer it the 2 other way around. ENERconnect is operated on behalf of 3 the limited partners. 4 MS LEA: I can hardly hear you, 5 Mr. Jennings. 6 MR. JENNINGS: ENERconnect is 7 operated on behalf of its limited partners to make sure 8 in fact that there is some power procurement benefits. 9 ENERconnect makes no net profit other than the benefits 10 to its member, its partner. 11 MR. WARREN: I'm sorry, were you 12 finished, Mr. Jennings? 13 MR. JENNINGS: I think the other 14 question is whether or not there is a market at all. 15 If everything is going through spot price, or close to 16 everything, then we probably don't need ENERconnect. 17 MR. WARREN: Let's imagine a 18 universe, if we can, in which your proposal or 19 something like Mr. Adams' proposal or indeed Mr.Todd's 20 proposal goes through, whether it's a portfolio of 21 options available under section 29, including fixed 22 price or a variety of fixed price. Do I understand 23 correctly that in that scheme to the extent that 24 ENERconnect is the procurer, the aggregator, for the 25 supply, ENERconnect would make money which would be 26 distributed on some basis to the partners who own it? 27 Is that correct? 28 MR. JENNINGS: Make money in the 566 MARK/JENNINGS 1 sense of profit on the transaction? 2 MR. WARREN: Yes. 3 MR. JENNINGS: I don't think that's 4 necessarily correct. I don't understand that that's 5 what is causing it. 6 MR. WARREN: Not necessarily correct 7 or it may be correct? Which is it? 8 MR. JENNINGS: As far as I'm aware, 9 there is no present contemplation that ENERconnect will 10 be making a profit on the procurement function. 11 MR. WARREN: I believe you said in 12 answer to Mr. Gibbons that the LDCs who are partners in 13 ENERconnect have no obligation to procure supply from 14 ENERconnect. Is that correct? 15 MR. JENNINGS: It's my understanding. 16 MR. WARREN: Is there, in your view, 17 any conflict of interest between the LDCs' obligation 18 to their shareholders under the OBCA and their 19 obligations as partners of ENERconnect? 20 MR. MARK: What obligations of 21 partners of ENERconnect are you referring to? 22 MR. WARREN: To advance the 23 ENERconnect presumably. 24 MR. MARK: It's clearly agreed 25 amongst all the partners that they are free to get all 26 their procurement elsewhere, ergo, they do not have a 27 fiduciary or any other duty to advance the interests of 28 ENERconnect by purchasing from it, so there is by 567 MARK/JENNINGS 1 definition no conflict of interest. 2 MR. WARREN: Can the partnership 3 agreement forming ENERconnect be produced as part of 4 this proceeding? 5 MR. MARK: I think you will have to 6 ask ENERconnect. 7 MR. WARREN: Finally, could you 8 explain to me, Mr. Jennings, looking at page 2 of your 9 submission, the distinction between a person who is 10 taking their supply under section 29(1) and who leaves, 11 goes to somebody else, and comes back? Do I understand 12 it correctly that a section 29(1) person doesn't have 13 to have a contract with the LDC? Is that right? 14 MR. JENNINGS: Let me restate it. I 15 will try and get this clear again. 16 We find nothing in the Act, with the 17 advice we have, that has anybody without a contract. 18 Under the old legislation, the Power Corporation Act 19 and the Public Utilities Act, there were arrangements 20 that took the price of contracts for electricity. You 21 don't find that in this Act. 22 We are prepared and support the 23 concept of no requirement for the existing customers. 24 That is what they are used to. That is what the White 25 Paper suggested. So we support that concept for the 26 29(1)s. 27 MR. WARREN: Just going on on that, 28 let's suppose then that there is no contract under 568 MARK/JENNINGS 1 section 29(1). 2 MR. JENNINGS: Right. 3 MR. WARREN: The person leaves and 4 then comes back. As I understand it, your view is, 5 under section 29(2), that they then must sign a 6 contract with the LDC. Is that right? 7 MR. JENNINGS: I think that's 8 consistent with the construction of the legislation. 9 That's correct. They have chosen to go elsewhere, 10 which presumably means signing a contract. They have 11 decided they want to buy power on that basis. 12 MR. WARREN: Now, once having signed 13 a contract, are the services and the rates at which 14 they had received those services any different when 15 they are section 29(2) customers than when they were 16 section 29(1) customers? 17 MR. JENNINGS: They may be. It 18 depends on what rate structure is proposed by the 19 specific utility they are dealing with and approved by 20 the Board. 21 MR. WARREN: If I may, I think you 22 have got to bear in mind that there is contemplation 23 that some of the 29(1) customers will make no choices 24 about anything whatsoever. Somehow the Board is going 25 to have to fashion a scheme where there is, if you 26 will, a form of service that they get if they elect 27 nothing else. 28 You may be talking about two 569 MARK/JENNINGS 1 different types of people when you ask the question, 2 "Will the service be any different?". The available 3 options may be no different, but your comparator group 4 may be a group that by nature and definition doesn't 5 exercise any option. It only gets one form of supply. 6 MR. WARREN: Perhaps I can frame it 7 this way, Mr. Jennings. 8 In your view of the legislation, is 9 the LDC entitled to discriminate between a 10 section 29(1) customer and a returning section 29(2) 11 customer in terms of the services and prices at which 12 they may get those services? 13 MR. JENNINGS: Without accepting the 14 usual derogatory interpretations that discriminate, I 15 would think yes they could make a distinction between 16 them because they are different risks and there are 17 different responsibilities. 18 That would help to achieve the 19 legislature's goal that this essentially will be phased 20 out. 21 MR. WARREN: Finally, and you may 22 have answered this question in response to 23 Mr. Stephenson, but it wasn't clear to me, is it your 24 view that one of the options which the LDC may offer is 25 a spot price pass-through? 26 MR. JENNINGS: I didn't answer that 27 response. 28 A reading of the Act would suggest 570 MARK/JENNINGS 1 that the only way you can get there, assuming a rate is 2 a rate is a rate, is by contract. On the other hand, 3 if you look at the Market Design Committee's report, it 4 recommended in No. 2, which Dr. Dewees referred to, 5 both what was called then a default rate and a spot 6 pass-through and said both of those should be required. 7 There was some discussion about 8 whether all retailers should be required to offer spot 9 as one of their portfolio of offerings. I didn't 10 answer to that. 11 In terms of section 29, what we are 12 suggesting is, if the Board is prepared to accept that 13 we would support our members' right to take that 14 approach in meeting their obligations. There is a 15 separate, aside from section 29, issue in order to make 16 the retail market work, have spot available. That is 17 quite distinct as was identified by the Market Design 18 Committee. 19 MR. WARREN: Finally, sir, if I 20 correctly understood your recommendation that each LDC 21 would have the right to choose the options that they 22 want to make available to their customers under 23 section 29, it follows from that that you may have, for 24 example, residential consumers in adjoining areas that 25 will have different services and different prices 26 available to them under the section 29 regime. 27 MR. JENNINGS: At least the 29(1), I 28 would expect, but, technically, I think you are 571 MARK/JENNINGS 1 correct. I would expect under 29(1) that the services 2 would be very similar but they may, as they are today, 3 be quite different. You have different companies 4 supplying the services. They could be different. 5 MR. WARREN: Thanks very much, 6 Mr. Jennings. 7 MR. JENNINGS: There is nothing that 8 we can see in the legislation that suggests a single 9 product-wide approach. 10 MR. WARREN: Thank you. 11 MS LEA: Thank you, Mr. Warren. 12 Mr. Janigan, do you have questions? 13 MR. JANIGAN: Just a few. 14 MS LEA: Thank you. 15 Go ahead. 16 MR. JANIGAN: I'm going to resist the 17 opportunity, Mr. Mark, of asking if you filed a Resume 18 with your statutory analysis outline. 19 I want to get to the different 20 classifications of customers, or the different types of 21 customers and how they will be treated under your 22 alternative. 23 The first class of customer is those 24 that will not choose, that simply do not choose a 25 supplier, continue on receiving and paying their bills. 26 I believe I heard Mr. Mark indicate 27 that in that circumstance what would happen is that the 28 Energy Board would in fact rule that there was an 572 MARK/JENNINGS 1 implied contract with either the LDC or the affiliate 2 that it has chosen to supply the 29(1) service. Is 3 that correct? Am I correct in my understanding? 4 MR. JENNINGS: I think that is the 5 only way you can go to it. 6 MR. MARK: Put it this way: We have 7 identified a concern that the legislation doesn't 8 expressly deal with the mandatory payment obligation. 9 Whatever scheme is adopted from amongst the proposals 10 around the table, somebody at some point is going to 11 have to pay very careful attention to that question and 12 decide whether there is a sufficient existing 13 jurisdiction in the Board to effectively implement the 14 implied contract or whether some additional legislative 15 authority may be necessary. 16 But that is a feature that seems to 17 me to be common to every form of proposal. 18 MR. JENNINGS: In 29(2) we are not 19 saying the utility must do that. If in fact there is a 20 way of the Board imposing the contractual obligation on 21 the customers and the utility chooses to get the 22 Board's approval to take them back on a similar 23 no-contract basis, that would be up to them. 24 MR. JANIGAN: Was I correct in my 25 understanding that this flows from the distinction that 26 you set out in your opening remarks concerning the fact 27 of the use of the word "sell" rather than "supply" in 28 section 29, or am I incorrect on that? 573 MARK/JENNINGS 1 MR. MARK: I'm sorry. The contract? 2 MR. JANIGAN: In particular, I 3 believe you indicated in your opening remarks that in 4 fact the use of the word "sell", particularly in 5 section 29, rather than the old language under the -- 6 MR. MARK: The Act uses consistently 7 and interchangeable "selling" and "retail" and uses 8 nothing -- no suggestion anywhere by use of different 9 words to suggest that the function performed under 10 section 29 is any different. 11 If you combine that with the fact 12 that the government clearly intends that at some point, 13 presumably in the not too distant future, that the 14 section 29 obligation will disappear -- and don't 15 forget, once the section 29 obligation disappears, 16 everybody is going to have to sign a contract. There 17 is go to be no such thing as a do-nothing customer who 18 wants electricity. 19 So when you put all that together, 20 the conclusion, it seems to us, is pretty clear that 21 what the government had in contemplation is that people 22 are going to contract for supply. What the Act does is 23 simply says that for a period of time the LDC or its 24 delegate cannot say no. 25 MR. JENNINGS: I don't think this is 26 evidence in terms of the legislation per se, but in the 27 nature of this I think it is worth mentioning, that in 28 our comments on Bill 35 we in fact identified that 574 MARK/JENNINGS 1 there were some things that were in the old legislation 2 which allowed the schema -- the regulator, in effect, 3 at the time -- to impose on the end-use customer some 4 obligations to balance the contract. 5 We don't find that here. The 6 government chose not to correct that. 7 We also, you will find on the record, 8 recommended that the word "sell" be changed in 29 to 9 something else, and the government did not change that. 10 They chose to keep it there. 11 Anectodal, but it supports, as we 12 have said, the fact that the obligation -- and I stress 13 that -- on the utilities, not something they asked for, 14 is to provide retailing under these circumstances, 15 selling. 16 MR. JANIGAN: In dealing with this 17 group of customers that simply do not choose -- and 18 let's assume that the Energy Board implies a contract 19 in that circumstance, the offering or offerings that 20 the individual LDC, or the LDC through an affiliate, 21 chooses to supply will ultimately be approved by the 22 Energy Board. 23 Now, if the Energy Board chose to 24 determine that the only rate which is just and 25 reasonable under their determination is a smoothed spot 26 pass-through for example, as exists in the Board staff 27 proposal, would that be something that would be 28 permitted the Energy Board, in that circumstance? 575 MARK/JENNINGS 1 MR. JENNINGS: That is more a 2 question for Mr. Mark. 3 But there will be differences in 4 costs and administration given different utilities and 5 different strategies. The Act contemplates them 6 proposing and the Board approving, so I -- and the Act 7 also gives the Board the right to set out some methods 8 specific to the licence. But, as was said earlier, 9 that is distinct from rate. 10 So to reach something that says you 11 can only do it one way would seem to frustrate the 12 intent of the legislation. 13 MR. JANIGAN: I guess what I'm 14 getting at is, in the event -- I understand you object 15 to the idea of a setting of a standard supply function 16 or rate at this point in time. 17 Couldn't the Board, through its 18 rate-setting ability, when your individual LDC comes 19 forward with a 29(1) rate before the Board, simply say, 20 "That is not permissible and this is what we want"? 21 MR. MARK: It seems to me that 22 encompasses two -- there are two questions there. The 23 first question is: Is it permissible to the OEB in any 24 circumstance to impose spot price pass-through? 25 As I have indicated, both the other 26 day and today, in our minds there is a question about 27 the Board's jurisdiction to do that as oppose to fix 28 a rate. 576 MARK/JENNINGS 1 The second question is whether it 2 would be advisable to do so. 3 I expect that the MEA's view of the 4 matter would be you would have to see what size of that 5 component of the marketplace is. It may be that you 6 get to a point where the do-nothing group of customers 7 is of such a size that it is not going to make a 8 difference to the achievement of the market objectives 9 or the other objectives if you do that. I suspect if 10 that group is of any size the position will be, for the 11 reasons articulated, that it should not be spot price 12 pass-through. 13 MR. JENNINGS: The other thing is, 14 this has to be looked at in terms of the whole overall 15 schema. The spot pass-through per se, if in fact 16 Don Dewees is correct and it is the lowest you can get, 17 is likely to keep a whole bunch of people and load 18 there, and I would think particularly large industrial 19 load, if he's right on that point. 20 He did, in fairness to him, say that 21 even though that is the best you could do large 22 industrial customers might do better. I didn't 23 understand that. 24 So I think an aggregator who can 25 aggregate a whole bunch of residential customers ought 26 to have the same power in the market a large 27 industrial. 28 But aside from that, if you have only 577 MARK/JENNINGS 1 the spot market you probably don't have much activity 2 going on to get true competition and generation in this 3 province, and the customers are even more 4 disadvantaged. 5 So we have some concerns about the 6 concept of spot pass-through in terms of its impact on 7 the whole issue of competition in generation. 8 MR. JANIGAN: Now, getting back to 9 this group of customers who, for whatever reason, do 10 not choose -- and let's assume once again that the OEB 11 implied a contract in this circumstance. 12 If the LDC chooses to meet that 13 obligation by supply through a retail affiliate, who do 14 these customers get their bill from? 15 MR. JENNINGS: I would assume from 16 the retail affiliate, but that would be an organization 17 decision of the utility. They could contract that out 18 to a third party. 19 MR. JANIGAN: In terms of the 20 customers who do not have an offering available to them 21 or, for whatever reason, are not supplied in any 22 competitive market, I would assume that the same kind 23 of arrangements would be implicit for them? 24 MR. JENNINGS: Yes. 25 MR. JANIGAN: The third category are 26 those who have chosen a retail supplier, but the 27 retailer has not supplied for whatever reason, for 28 failure or it has withdrawn from the market. 578 MARK/JENNINGS 1 MR. JENNINGS: Or their supplier may 2 have failed for some reason. 3 MR. JANIGAN: That's right. 4 MR. JENNINGS: Yes. 5 MR. JANIGAN: In that circumstance, 6 when the customer chooses to avail him or herself of 7 the supply from the LDC, that would be pursuant only to 8 a written contract in your scheme. Would that be the 9 case? 10 MR. JENNINGS: You put your finger on 11 a difficulty, because that could happen quite suddenly. 12 There is a difficulty in requiring people to sign a 13 contract before they get supply if in fact supply 14 disappears at 12:01 today. 15 In reality, the utility -- the 16 electrons are still going to flow and the utility is 17 still going to have to settle up. 18 So there is an exposure of the 19 utility under that in order to get a contract in place. 20 They are going to be billed for the electricity, and 21 they may or may not have a contractual obligation on 22 the recipient to buy. 23 MR. MARK: If I could add? 24 Even when the section 29 obligation 25 is eventually phased out, as seems to be the intention, 26 you are always going to have that potential problem of 27 what happens to the customer whose supplier -- you 28 know, who may only be somebody who gauges in financial 579 MARK/JENNINGS 1 transactions -- closes its doors, the electrons are 2 still flowing so there is something of value going 3 through the system and to that customer and there is 4 going to have to be some sort of regime set up to deal 5 with that. 6 It is not a problem which is 7 particular to any of the proposals here, and I don't 8 recall offhand if anybody's proposal or the MDC's paper 9 even has a scheme for dealing with that. 10 MR. JENNINGS: But there is a 11 prudential requirement that needs to be involved with 12 any retailer because of the possibility of them not 13 being able to perform and their financial guarantee. 14 Because they don't, in the first instance, pay for the 15 electricity, even though nominally they take ownership, 16 it goes through the LDC's meter. 17 That is a big exposure of the wires 18 companies if we don't get the prudential requirements 19 right. That is a separate issue. As Mr. Mark said, it 20 applies regardless of whether there is a section 29. 21 MR. JANIGAN: I guess what I'm 22 getting at is: People in this particular situation, 23 would they automatically obtain electricity at the same 24 rates as those who were in the situation of never 25 having chosen initially, or is it just impossible to 26 tell? 27 MR. JENNINGS: I'm not a rate expert, 28 but my guess would be that they would not, that in fact 580 MARK/JENNINGS 1 the administrative costs and the risk burdens involved 2 in meeting 29(3), and maintaining preparedness to meet 3 29(3), would be different than serving 29(1) customers. 4 MR. JANIGAN: If I understood your 5 answers earlier, I think to questions from Mr. Adams 6 and Mr. Gibbons, those who have chosen but do not like 7 the choice would, similarly, not have the same supply 8 as those who have never chosen? 9 MR. JENNINGS: They might, but no 10 requirement. They would have the right to shop around, 11 but there is an obligation on the LDC to ensure that 12 they have at least one other approved rate that they 13 can go to. 14 MR. JANIGAN: Thank you, those are 15 all of my questions. 16 MS LEA: Thank you very much, 17 Mr. Janigan. 18 Mr. Perdue, unfortunately we need to 19 break for lunch at noon. Will that give you sufficient 20 time? 21 MR. PERDUE: I will be finished 22 before noon. 23 MS LEA: Thank you. Go ahead. 24 MR. PERDUE: Mr. Jennings, I act for 25 some of the private retailers, and I just want to ask a 26 quick question as to how they would fit into your 27 proposed plan. 28 What I am suggesting, sir, is that if 581 MARK/JENNINGS 1 the market opens on December 1, can we assume, then, 2 that on that day the utility would set up an SSS in an 3 affiliate and that it would move all SSS requirements 4 to the affiliate on December 1, the opening day of the 5 market? Can I assume that? Or the option would be 6 available as an option plan? 7 MR. JENNINGS: That is an option. I 8 guess that is what I was searching for. Thank you, 9 Dick. 10 The utility has to divide itself into 11 parts on or before November 7. 12 MR. PERDUE: That is why I picked 13 December 1 as the date, assuming that that therefore 14 was done. 15 MR. JENNINGS: And it is before 16 November 7 that they must decide whether they are 17 putting their customer responsibilities in their 18 affiliate or how they are organizing their company. 19 Right now they are giving a bundled 20 service that includes both the retailing of electricity 21 and the provision of wire service, and it is all 22 bundled together. Any return that they have from 23 maintaining the system comes from the overall price. 24 They are being required by November 7 to separate, if 25 they want to stay in the retailing business -- if they 26 want to stay in it, they are being required to separate 27 into two. 28 I would think that they have to make 582 MARK/JENNINGS 1 their decision at that point, not when the market 2 opens. 3 MR. PERDUE: All right. 4 So what we are saying is that those 5 customers, then, who choose to provide the SSS through 6 an affiliate would, as of the date the market opens, 7 move all of the customers -- the customer care services 8 for those customers -- to the affiliate? 9 MR. JENNINGS: They wouldn't move 10 them there. We have agreed with the Board that you 11 can't move back and forth between the parties. They 12 wouldn't move them anywhere. The part of the company 13 that is all one company today that looks after the 14 customer and the commodity would have to be separated 15 out, if that is the strategy they choose, on or before 16 November 7. 17 MR. PERDUE: I may have misused the 18 word or should not have used the word "move". But what 19 you are going to do, then, is to separate from the 20 wires company the customer care services into an 21 affiliate. Am I correct? 22 MR. JENNINGS: That is one strategy, 23 yes. 24 MR. PERDUE: And the procurement as 25 well? 26 MR. JENNINGS: Yes, that is a 27 strategy that is available to the utility. 28 MR. PERDUE: I would assume, then, 583 MARK/JENNINGS 1 that on December 1, if that is available and the 2 utilities in fact take advantage of the proposal that 3 you are suggesting, those affiliates would provide a 4 fixed price for their SSS customers and they would 5 offer them a range of other prices, all of which would 6 be regulated? 7 MR. JENNINGS: Not all of which -- 8 the one rate which is required to be regulated in order 9 to provide the assurance of supply would be regulated. 10 They could well have a variety of other rates, but 11 those would be unregulated rates. 12 MR. PERDUE: Excuse me. The only 13 rate, then, that would be regulated would be the one 14 that the Board stipulates must be offered? 15 MR. JENNINGS: What the law requires 16 is that there be a supply available, either provided by 17 the LDC or a retail affiliate or a third party, and I 18 would assume that a number of members will look to 19 third parties to ensure that customers have access to 20 electricity at that rate, and that one rate must be 21 regulated for -- 22 MR. PERDUE: So the OEB, then, would 23 only regulate one rate? 24 MR. JENNINGS: That's correct. 25 MR. PERDUE: All right. There would 26 be other rates also offered by the affiliate? 27 MR. JENNINGS: The affiliate and 28 others, yes. 584 MARK/JENNINGS 1 MR. PERDUE: Let's leave the others 2 aside. 3 MR. MARK: There may be more than one 4 rate available to section 29 customers. They may be 5 able to choose from -- 6 MR. JENNINGS: And anything that is 7 offered to meet section 29 would require regulation. 8 MR. PERDUE: All I am asking is, does 9 your proposal permit the utilities to request, say, two 10 or three regulated rates from the utility for their SSS 11 customers? 12 I thought I heard that earlier, that 13 that was the case, but I may be wrong. 14 MR. JENNINGS: It definitely does in 15 terms of some different categories and different 16 classes, yes, and potentially requests further 17 regulated rates. 18 MR. PERDUE: So as of December 1, 19 then, it is conceivable that the affiliate could have 20 three or four regulated rates. Am I correct? 21 MR. JENNINGS: Yes. 22 MR. PERDUE: And those regulated 23 rates, would there be an administrative charge as well? 24 MR. JENNINGS: Part of the rate, 25 presumably. 26 MR. PERDUE: All right. Would there 27 be any return on infrastructure as well on those rates? 28 MR. JENNINGS: I would assume so, 585 MARK/JENNINGS 1 yes. 2 We are talking electricity rates, so 3 I apologize. Probably not. By "infrastructure" you 4 meant wires and poles? 5 MR. PERDUE: No, I didn't. That is 6 why I used the word "infrastructure". I meant the 7 infrastructure of the affiliate. 8 MR. JENNINGS: Okay. Yes. Then I 9 was right the first time. Yes, presumably that would 10 be included. They would have to have -- 11 MR. PERDUE: But it is the 12 infrastructure of the affiliate we are talking about, 13 not the infrastructure of the utility. 14 MR. JENNINGS: Correct, yes. 15 MR. PERDUE: Just so we understand, 16 the utility will pass on a regulated rate which will 17 have a rate of return. We understand that. 18 MR. JENNINGS: A wires rate, that's 19 right. 20 MR. PERDUE: Yes. But you are saying 21 that there would be a separate rate from the 22 affiliate -- or what your proposal requests is a 23 separate rate from the affiliate, which would include 24 the commodity charge, an administration charge, plus a 25 return on infrastructure. 26 MR. MARK: No. There is a difference 27 between infrastructure costs and return on 28 infrastructure. If you are talking about -- 586 MARK/JENNINGS 1 MR. PERDUE: I know there is a 2 difference. I am asking, though, which -- 3 MR. MARK: I know, but I think your 4 questioning went back and forth between the two without 5 making the distinction clear. I think your first 6 question was not the return -- and I may be mistaken. 7 My sense of your first question was infrastructure 8 costs, as opposed to return on infrastructure. 9 MR. PERDUE: I don't care how the 10 affiliate's infrastructure is charged to the customer. 11 However, I am assuming that it would be charged by a 12 return on that infrastructure, somehow or other. That 13 is contemplated, am I correct? 14 MR. JENNINGS: I assume so. I hadn't 15 turned my mind to the specifics, but I would assume so. 16 MR. PERDUE: And that return to the 17 SSS customers would be regulated. 18 MR. JENNINGS: Yes. 19 MR. PERDUE: And the administrative 20 charge would be regulated. 21 MR. JENNINGS: Yes. I would assume 22 that all of that is in a rate. It is the rate proposed 23 which has to cover all of those costs. 24 MR. PERDUE: I don't care if it is 25 bundled or not, but, nonetheless, those items actually 26 would then form the bundled rate. Bundled or 27 unbundled, it doesn't make any difference. 28 MR. MARK: Yes, as it is even with 587 MARK/JENNINGS 1 the spot price pass-through. 2 Even the Board's proposal 3 specifically contemplates that on top of the commodity 4 price is an amount to reflect the cost of service in 5 terms of the admin of the infrastructure costs of the 6 service provider, and I would assume the same thing 7 would apply whether your service provider is a dis. 8 co., a retail affiliate, another retailer or a third 9 party dedicated only to billing services. That same 10 cost is going to be packaged under any conceivable 11 proposal. 12 MR. PERDUE: I appreciate that. 13 MR. JENNINGS: If the utility 14 contracted with one of your members to provide the SSS 15 service, I would assume the same package of costs would 16 have to be captured in there in order to do that. 17 MR. PERDUE: All right. And the 18 customer care costs are also -- 19 Do you know what I mean by customer 20 care, sir? I am using that in the sense that I think 21 is somewhat defined under regulatory business. Do you 22 know what I mean by that? 23 MR. JENNINGS: Please help me. 24 MR. PERDUE: I think it would 25 essentially involve meter reading, billing, accounting, 26 providing the bill, collecting the bill and call 27 centres. 28 MR. JENNINGS: Depending on the 588 MARK/JENNINGS 1 arrangement and scheme of the set-up, as I understand 2 it the responsibility for metering and meter reading, 3 at least in the short-term, is not yet determined and 4 is being looked at under the distribution code. 5 So it would depend. There are some 6 options. Clearly, some utilities will look at 7 contracting out some of these things. So I don't think 8 there is a single answer to that question. 9 MR. PERDUE: That's fine. 10 I am going to be another five or ten 11 minutes, maybe. Do you want me to carry on or to stop? 12 MS LEA: Just one moment. 13 Are there other questioners, besides 14 Mr. Poch and Mr. White, for this panel? 15 MR. POCH: I was just going to say 16 that I am going to take Mr. Stephenson's lead and not 17 ask the debating society, which means that I am 18 actually going to honour that commitment. I have no 19 questions. 20 MS LEA: Are there any other 21 questioners, then, besides Mr. White for this panel? 22 What I am going to suggest, if it is 23 agreeable to Mr. Perdue, is for me to interrupt him and 24 ask the one question I have. I, unfortunately, have a 25 commitment at noon, but Ms O'Riley will be able to stay 26 and you can keep going, and then we can let you 27 gentlemen go before lunch, which probably would be 28 preferable. 589 MARK/JENNINGS 1 If that is agreeable, Mr. Perdue, I 2 will interrupt you at this point. 3 MR. PERDUE: Any time. 4 MS LEA: Thanks. 5 Gentlemen, I wonder if you could help 6 me with one thing. 7 I had understood you to say on a 8 couple of occasions that the function performed under 9 section 29 is no different from any other type of 10 selling and that it isn't a question of no contract 11 selling. I understood that part of the reason for this 12 interpretation was the lack of a mandatory payment 13 obligation in the legislation. Do I understand you 14 correctly? 15 MR. MARK: That's correct. There is 16 a section that allows a cut-off for non-payment, but 17 that I think is different than all of the terms of a 18 contract. How quickly you have to pay and all of those 19 things that would be in a normal contract is an 20 obligation on the buyer. Clearly, the Board has the 21 authority to oversee the sellers. 22 MS LEA: Thank you. 23 Mr. Jennings, yes, you have 24 anticipated my question. I wanted to understand how 25 section 31 of the Electricity Act fits into your 26 understanding of how the legislation works. 27 As we are aware, section 31(1) allows 28 you to shut off the distribution of electricity to a 590 MARK/JENNINGS 1 property if there are amounts payable for distribution, 2 or for amounts payable for section 29 service. 3 Further, under subsection (3) you can recover all of 4 the amounts payable, despite shutting off the 5 distribution of electricity, and that includes amounts 6 payable for section 29 service. 7 When I read that it sounds as if 8 section 29 service is something special, something 9 different. Can you help me with that and comment on 10 that, please? 11 MR. MARK: I haven't considered that 12 question before. 13 Offhand, it strikes me that the 14 reason why section 29 is specifically referred to in 15 section 31 is because that is the only situation in 16 which the distributor is providing a retail service. 17 So it makes no sense for the section to say that you 18 can cut off supply if somebody hasn't paid the 19 distributor the distribution charge or the retail 20 charge. What they are saying is that you can cut off 21 somebody who is not paying the distribution charge or 22 the section 29 retail charge because that is the only 23 retail charge a distributor is going to levy? 24 MR. JENNINGS: It is the distributor 25 who must cut off, and that raises, frankly, a different 26 concern because it is not clear how somebody who isn't 27 paying one of Mr. Perdue's client's bills gets cut off. 28 MS LEA: Yes. Thank you, 591 MARK/JENNINGS 1 Mr. Jennings. 2 That also points to a difficulty that 3 I was having. It appears that section 31 only allows 4 for cut-offs for retail if the distributor is providing 5 it under section 29, or so it appears. Is that what I 6 understood your answer to be also? 7 MR. MARK: There are two possible 8 interpretations. Either it is because that is the only 9 type of retail service -- because, yes, it only 10 contemplates cut off if the distributor is the 11 supplier, but, admittedly, there is another possible 12 perspective on that, which is that it is giving a 13 cut-off right if anyone who is providing the section 29 14 service hasn't been paid according to the obligations 15 of the customer. But that seems to me a bit of a 16 stretch of an interpretation. 17 The point I would make is that the 18 whole section seems to me to be contemplated on having 19 a payment obligation in the first place, which is the 20 problem I have with it. 21 MS LEA: So I guess I go back to my 22 original question, then. Is it still your view, given 23 the provisions of section 31, that the function 24 performed -- the services provided -- under section 29 25 are no different from other retail services? 26 MR. MARK: It is no different in 27 their type or nature, in the sense that we say the 28 section 29 customer should have available to him the 592 MARK/JENNINGS 1 type of rights and the types of choice which are 2 typical of what is offered in competitive markets. 3 There is an acknowledgement here of a 4 difference, which is that there is a difference between 5 the service the distributor provides under section 29 6 and the retail service, in that the distributor can't 7 say no. He has to enter into a contract for one of his 8 rates with the customer. 9 So that is the difference. Unlike 10 the other retail marketers, they don't have the 11 opportunity to say to the customer, "I don't like the 12 cut of your jib. I don't like your credit rating", or 13 whatever, "I am not going to take that risk." 14 There is an obvious and fair quid pro 15 quo here. If you have to take the customer, we are 16 going to give you a corresponding power which nobody 17 else has, which is that if the son of a gun doesn't pay 18 you don't have to supply him. 19 MS LEA: Thanks very much for your 20 answers. 21 Thank you, Mr. Perdue. Please go 22 ahead. 23 MR. JENNINGS: Could I ask, for 24 biological reasons, for a quick recess? 25 MS LEA: Certainly. I was just 26 trying to rush through so that you can get off the hot 27 seat there. 28 MR. JENNINGS: I understand. 593 MARK/JENNINGS 1 MS LEA: Certainly if the seat has 2 gotten too hot, let's break for five minutes, then. 3 --- Short recess at 12:05 p.m. 4 --- Upon resuming at 12:08 p.m. 5 MS LEA: Mr. Perdue. 6 MR. PERDUE: Tony, if we could just 7 go back to that affiliate that we have here, besides 8 the various regulated SSS rates that he is offering, 9 the affiliate is also offering unregulated rates in 10 normal contract offerings. Am I correct? 11 MR. JENNINGS: I would assume so, 12 yes. 13 MR. PERDUE: I think there was some 14 indication -- Mrs. Jones, if she is a customer of one 15 of these utilities offering several rates, is she going 16 to have an opportunity to decide which of those rates 17 she should fall into or is she going to be put into 18 that rate or class as a result of some allocation by 19 the affiliate? 20 MR. JENNINGS: I would assume 21 Mrs. Jones has a choice. 22 MR. PERDUE: Now, how is she going to 23 exercise that choice? 24 MR. JENNINGS: I had difficulty 25 understanding the question, Dick. 26 I would assume, like anything else 27 that is offered to her, there is a description or a set 28 of arrangements and she gets to choose. 594 MARK/JENNINGS 1 MR. PERDUE: What I am saying is that 2 I'm assuming that if you have several SSS offerings -- 3 and I'm gathering that there was some discussion 4 earlier that there could be several residential small 5 market SSS offerings -- therefore somebody has to 6 determine, according to your proposal, where Mrs. Jones 7 fits into those. 8 What you are saying is that 9 Mrs. Jones would get an option as to which one of those 10 residential small volume rates classes she might fit 11 into. Have I read it correctly? 12 MR. JENNINGS: You are correct. 13 MR. PERDUE: Presumably, then, you 14 would have to get some sort of -- I'm sorry, Tony; were 15 you going to say something? 16 MR. JENNINGS: No. 17 MR. PERDUE: Presumably, then, if 18 Mrs. Jones is going to exercise her option, she then 19 would have to be informed that there is an option. 20 Obviously, the utility would send out information 21 indicating that she had an option as to which one of 22 these rates she wanted to fall into? 23 MR. JENNINGS: Yes, I would assume 24 that there is an obligation to set out what is being 25 provided as a section 29 protection for her. 26 MR. PERDUE: Right. And, presumably, 27 then, she had to send something back or contact the 28 affiliate somehow and indicate which one she wanted? 595 MARK/JENNINGS 1 MR. JENNINGS: Yes. 2 MR. PERDUE: All right. 3 MR. JENNINGS: The exception to that 4 is the 29(1) folks who are just "leave me alone and 5 don't do anything". Clearly, they have to fall to one 6 rate and the Board would have to be clear about that 7 rate. 8 MR. PERDUE: I'm sorry, I may have 9 misunderstood, then. I thought we only had one 10 regulated rate. 11 MR. JENNINGS: For 29(1) customers? 12 I mean -- 13 MR. PERDUE: I don't care which 14 customers. You only have one regulated rate. 15 MR. JENNINGS: No. I do care, 16 unfortunately. 17 MR. PERDUE: Okay. 18 MR. JENNINGS: There were three 19 different conditions. If in fact we have this 20 arrangement where Mrs. Jones doesn't have to choose, 21 doesn't have to do anything, there has to be one rate 22 that that person goes on if they don't elect anything 23 else. 24 MR. PERDUE: Right. No choice for 25 Mrs. Jones at all. Gotcha. 26 MR. JENNINGS: No. 27 MR. MARK: She has a choice. 28 MR. JENNINGS: She chooses to not 596 MARK/JENNINGS 1 choose. 2 MR. MARK: If she is one of those 3 customers who, no matter how many times you knock on 4 the door or sell them something in the mail, simply do 5 nothing, then clearly there has to be a rate which 6 applies without that customer doing anything. 7 That is the same concern I expressed 8 before about the payment obligation in that 9 circumstance. You are always going to have those 10 customers who you are going to have to tell, "Because 11 you have done nothing, the Energy Board said you are 12 getting Rate X." 13 MR. PERDUE: I acknowledge that. 14 MR. JENNINGS: But the jurisdictions 15 normally, for example, required every customer to 16 choose between these range of options and said at the 17 end of the day, "If you don't send in your form, you'll 18 get X." 19 So I would assume that the Board 20 would say, and appears to have the authority to say, 21 what X is for those people who don't sign anything and 22 don't make any -- 23 MR. PERDUE: I appreciate that, and 24 there is only -- 25 I'm sorry. Is Mrs. Jones asked by 26 the affiliate if she wants to have a series of rates? 27 I thought we had established that 28 Mrs. Jones would get some sort of choice from the 597 MARK/JENNINGS 1 affiliate. 2 MR. JENNINGS: If Mrs. Jones is a 3 29(1) customer who doesn't want to sign anything, 4 doesn't want to read any forms, et cetera, then she 5 would get one rate. 6 MR. PERDUE: All right. Then she 7 would not get a choice. 8 MR. JENNINGS: She would get a 9 choice -- 10 MR. PERDUE: Excuse me, I will take 11 that back, I'm sorry. 12 If we have, then, the one single 13 regulated rate -- 14 MR. MARK: Perhaps I could try and 15 clarify it. 16 You may have a situation in which 17 there is more than one available section 29 rate to a 18 customer. 19 MR. PERDUE: That's what I was 20 asking. I was trying to determine that. 21 There is more than one section 29. 22 MR. MARK: You could conceivably have 23 a situation where the Board may say, for example, that 24 a section 29 customer can elect between a fixed rate 25 and a spot price pass-through or a second type of rate, 26 and if they don't elect its default is this. 27 That is a possibility that isn't 28 precluded by this proposal, I don't believe. 598 MARK/JENNINGS 1 MR. PERDUE: That's what I was trying 2 to determine, then. So the proposal would permit 3 Mrs. Jones a default choice. Of course, she does not 4 choose. But it would also allow her to choose through 5 several other regulated rates. That is what this 6 proposal would allow. 7 MR. JENNINGS: To be frank, we 8 haven't canvassed that issue very far. But Mr. Mark's 9 reading would suggest that that was possible. 10 MR. PERDUE: All right. 11 When Mrs. Jones -- let's say she is a 12 default customer and she remains on the SSO, and it's a 13 single rate. Let's assume there is just one rate, not 14 several, but she does not choose in any case. 15 She gets a bill, a monthly bill, 16 whatever, and that bill comes from the affiliate. Am I 17 correct? 18 MR. JENNINGS: If she is being served 19 by the affiliate, yes, it could be. 20 MR. MARK: Just to clarify, as I 21 understand it, there is permitted flexibility in the 22 billing arrangements. You are going to have 23 situations, as I understand it, where for example the 24 distributor may be rendering the bills on behalf of the 25 retailers. 26 So I don't think it is necessarily 27 the case that the affiliate is going to be rendering 28 the bill. 599 MARK/JENNINGS 1 MR. PERDUE: So the wires company, 2 then, could be rendering the bill. Am I correct? 3 MR. MARK: They could be. 4 MR. PERDUE: But this proposal would 5 permit the affiliate to render the bill? 6 MR. JENNINGS: I think this proposal 7 doesn't preclude anything in terms of billing 8 arrangements. 9 MR. PERDUE: If she is on an SSS 10 rate, the default rate, if I might use that term, and 11 that default rate is provided by the affiliate, you are 12 saying that the bill could still come from the wires 13 company. 14 MR. JENNINGS: It might. The wires 15 company -- well, assuming a parallel to the gas, some 16 of the utilities are billing on behalf of a number of 17 energy marketers. It could be that way, but it doesn't 18 have to be that way. 19 MR. PERDUE: All right. 20 If the bill comes from the affiliate, 21 if under your proposal the affiliate -- and we are just 22 talking about Mrs. Jones, the default customer -- your 23 proposal, then, would permit the bill to come from the 24 affiliate and it would then permit the affiliate's name 25 on the bill. Am I correct? 26 MR. JENNINGS: I would assume so, 27 yes. 28 MR. PERDUE: And the payment, then, 600 MARK/JENNINGS 1 would be made to the affiliate? 2 MR. JENNINGS: Yes. 3 MR. PERDUE: And the affiliate would 4 then pay to the wires company only the distribution 5 cost, the distribution tariff. Is that correct? 6 MR. JENNINGS: Unless the wires 7 company was providing some other services to that and 8 other retailers. 9 MR. PERDUE: What I am trying to get 10 at -- let's talk about the commodity portion of 11 Mrs. Jones' bill. 12 MR. JENNINGS: Right. 13 MR. PERDUE: The commodity portion of 14 Mrs. Jones' bill, I presume, if it is on some sort of a 15 fixed price default, that that would be paid through 16 some sort of presumably bilateral contract with the 17 supplier? 18 MR. JENNINGS: Presumably, yes. And 19 the distribution company has a retail settlement -- the 20 wires company has a retail settlement obligation to 21 either perform or arrange. 22 MR. PERDUE: I'm sorry? Why would 23 the wires compare with settlement? 24 MR. JENNINGS: The wires company gets 25 billed for 100 per cent of the electricity coming into 26 the wires, regardless of who the seller is. 27 MR. PERDUE: So then they are going 28 to get paid -- they are going to have to pay the spot 601 MARK/JENNINGS 1 price to the IMO, is what you are saying, and the 2 bilateral -- and that is a contract for differences, is 3 what you are saying? 4 MR. JENNINGS: They may have a 5 contract for differences, or whatever, but the wires 6 company, which is not in the commodity business, gets 7 the bill. It is the one that is metered, and it will 8 pay the IMO. It has an hourly settlement 9 responsibility with all of the retailers that happen to 10 be operating in its area and all of its customers. 11 MR. PERDUE: I appreciate that. 12 From a money point of view, then, the 13 affiliate would pay the wires company, its parent, that 14 money, which would cover the spot price payable to the 15 IMO. Then the remainder would be settled up with the 16 contract for differences with your generator. 17 MR. JENNINGS: Correct. 18 MR. PERDUE: If Mrs. Jones all of a 19 sudden decides -- do we know who Mrs. Jones is? She is 20 an SSS-regulated default customer? 21 MR. JENNINGS: A 29(1) default 22 customer. 23 MR. PERDUE: She is contestable. Am 24 I correct? 25 MR. JENNINGS: Yes, very. 26 MR. PERDUE: The other affiliate, the 27 other customers served under different rates in the 28 affiliate -- we spoke about them before -- they too are 602 MARK/JENNINGS 1 contestable? 2 MR. JENNINGS: Yes, I believe so, 3 subject to whatever their contract conditions are. 4 MR. PERDUE: So what we are doing is 5 we are providing a regulated service with a contract, 6 and therefore their contestability is removed. They 7 are not contestable. 8 MR. JENNINGS: When you say "others", 9 it depends on which other you are talking about. 10 MR. PERDUE: I am talking about the 11 regulated ones, not the unregulated ones. Leave aside 12 any thought of the unregulated ones. I know you are 13 supply, but we are not talking about those. 14 MR. JENNINGS: But you asked him. 15 Your question was about the other ones. So, please be 16 clear when -- 17 MR. PERDUE: I'm sorry, I will be 18 more specific. I am just talking then about the -- 19 MR. MARK: You were specific and you 20 asked about the other ones. 21 MR. PERDUE: All right. I apologize, 22 Mr. Mark. I will try better. 23 What I am talking about is the 24 regulated SSO customer who has for some reason picked a 25 different rate, but he is an SSS customer. 26 MR. JENNINGS: What I was trying to 27 make a distinction -- if that customer -- look at our 28 discussion about the question about the implied 603 MARK/JENNINGS 1 contract and about the phasing out of this protection 2 and the phasing out of the wires company providing this 3 service. If we want to assist in moving in that 4 direction, it seems logical that anybody who leaves and 5 signs a contract would logically be expected to sign a 6 contract when they come back. 7 So you will have some section 29 8 customers who have a contract. 9 MR. PERDUE: Mrs. Jones signs with 10 Sunoco. She signs a two-year contract with Sunoco. 11 Where does Sunoco send notification of this contract 12 signature? To the wires company? 13 MR. JENNINGS: Assuming the law 14 allows Sunoco to send notification, I would assume they 15 send it to the wires company, from the way the Act is 16 constructed. 17 I say "assuming" because it says the 18 customer must advise the LDC. 19 MR. PERDUE: All right. 20 Mrs. Jones, then, if you are happy 21 with Mrs. Jones -- Mrs. Jones has sent the notification 22 to the wires company. Then the wires company 23 presumably would inform the affiliate that Mrs. Jones 24 wants to go somewhere else? 25 MR. JENNINGS: We are a third party 26 retailer, however that is arranged. Yes. 27 MR. PERDUE: Right. Okay. And 28 Sunoco, then, would start to bill Mrs. Jones. 604 MARK/JENNINGS 1 MR. JENNINGS: That's one option. 2 MR. PERDUE: Let's just assume that's 3 the option that they take, that is permitted and 4 accepted and whatever, that Sunoco then would take over 5 according to the MDC's recommendation. Sunoco would 6 take over the billing of both the distribution function 7 and the commodity function. 8 MR. JENNINGS: As I understood the 9 MDC's recommendation, they favoured the LDC doing all 10 of that, unless the retailer was prepared to pay for 11 the additional costs for setting it up the other way, 12 but let's assume they did, so we are now there. 13 MR. PERDUE: Yes. Let's assume, 14 then, that Sunoco bills both. Does that mean then that 15 Sunoco then would carry on still paying the spot price 16 to the utility and the money would be then paid to the 17 utility, is that correct, not to the affiliate. 18 MR. JENNINGS: To the wires company. 19 That's correct. 20 MR. PERDUE: All right. 21 If the affiliate is going to do all 22 these functions in the regulated part of the 23 utility -- I'm assuming part of the affiliate is going 24 to have to be virtually regulated, part of it. What's 25 the rationale for not just doing it within the utility, 26 within the wires company itself? What is the advantage 27 to moving it out if everything is regulated? 28 MR. JENNINGS: Because the codes 605 MARK/JENNINGS 1 don't allow certain sets of information and advantage 2 to move back and forward. This is, as we said, a 3 commercial function. It would be logical to do the 4 commercial activities and cost effective to do it all 5 in one place. 6 MR. PERDUE: That's true, Tony, but 7 that is not true for the regulated part. We are 8 talking here -- we agreed that there were certain 9 regulated rates, certain regulated administrative 10 charges. 11 MR. JENNINGS: But those are 12 commercial rates. 13 MR. PERDUE: They are regulated 14 commercial rates. 15 MR. JENNINGS: That's correct. 16 MR. PERDUE: Okay. I will look that 17 up. 18 MR. JENNINGS: I mean, that is really 19 fundamental to what our understanding of what the 20 legislation says, that section 29 is retailing. The 21 Act says that. 22 MR. PERDUE: I agree that if you want 23 to retail in competition with a broker, that is the 24 other half of the retail company that we have not 25 spoken about, and you want to offer unregulated rates, 26 that's fine. 27 But the regulated part of the SSO -- 28 if we have just one charge, it would have to be split 606 MARK/JENNINGS 1 into three or four charges -- what you are talking 2 about, the regulated administrative charge and the 3 regulated fixed price, all that sort of stuff, is 4 regulated. Why would that be undertaken in the 5 affiliate? 6 MR. JENNINGS: Because it is a 7 commercial undertaking the same as all the other things 8 they are doing. There is no need to separate your 9 administration into two parts. 10 MR. MARK: It would be cheaper if you 11 were going to take advantage of an existing 12 administrative infrastructure. 13 MR. PERDUE: Where? In the wires 14 company? 15 MR. MARK: No, in the affiliate. 16 MR. JENNINGS: Let me assume that I 17 am a little utility and I only want to be a wires 18 company. I am going to go to the board and say, "I 19 want to contract my obligations out to Perdue", and 20 Dick Perdue comes up with one of the battery of rates 21 that are being offered in his retailer company and 22 says, "This is the one we want regulatory approval of, 23 that it's just and reasonable", not that it's cost 24 analyzed, et cetera, but that this is a just and 25 reasonable rate. That is the rate we are asking for, 26 to keep it to one to make it simple, the rate we are 27 asking for Board approval for to offer for 29(1) 28 customers. 607 MARK/JENNINGS 1 MR. MARK: No doubt the rate that 2 Mr. Perdue offers for that "can do it for" is cheaper 3 than the LDC who is not in this business and doesn't 4 want to be in this business. 5 MR. PERDUE: The amount of the rate 6 I'm not too concerned with. It was the sharing of the 7 resources I was concerned with. I gathered that the 8 share in resources that you were referring to at this 9 point were the share in resource of the affiliate 10 between the two sides of the affiliate. 11 MR. JENNINGS: It could equally be 12 the sharing of the resources of the retail marketer who 13 you contract with. If Sunoco, to use your example, is 14 doing all the billing and everything, then it would be 15 logical to contract for Sunoco to meet the obligations. 16 Although this is a delegation not an abdication of 17 responsibility on the LDC's part, they have got to 18 assure it is being done and they are on the hook with 19 the Board for the approval. 20 There is economies in Sunoco doing it 21 out of its single instances. 22 MR. PERDUE: Thank you, gentlemen. 23 That's all. 24 Thank you. 25 MR. JENNINGS: Thank you, Mr. Perdue. 26 Mr. White. 27 MR. WHITE: I have three areas of 28 interest. I would like for a minute to take us to a 608 MARK/JENNINGS 1 different Mrs. Jones because I don't necessarily want 2 to carry the same baggage as the previous one. 3 Mrs. Jones has made a contractual 4 relationship with a third party and that third party 5 defaults on the contract they have with Mrs. Jones and 6 Mrs. Jones doesn't find out about it and Mrs. Jones' 7 lights still stay on. 8 What we are looking at is sort of a 9 29(2) kind of situation. 10 MR. JENNINGS: 29(3). 11 MR. WHITE: 29(3). Does the 29(3) 12 rate under the proposal you have put forward relate to 13 the 29(1) rate or some other menu of rates or 14 alternatives? 15 MR. JENNINGS: It's theoretically 16 possible that a utility could come forward and say 17 "Well, we are only proposing one rate to meet all of 18 these requirements". 19 My expectation is, because there are 20 different risks, different exposures and different 21 administration, that there would at least be some 22 variation between 29(3) and 29(1). The utility would 23 find out fairly quickly that Mrs. Jones' supplier is 24 not able to perform. 25 There are a whole bunch of codes and 26 other things and IMO rules that have yet to be worked 27 out which are going to define some of this, but there 28 is definitely a lag, probably close to two months, 609 MARK/JENNINGS 1 before the next billing in which they advise Mrs. 2 Jones, "Here is what you are going to get if you want 3 to sign with us. Otherwise you have to find another 4 supplier." 5 If the other supplier will take over 6 from the first one, then they don't have to get 7 Mrs. Jones to sign. 8 MR. WHITE: Let's deal with a Miss 9 Jones. 10 MR. JENNINGS: Miss Jones. 11 MR. WHITE: All right. So we change 12 the context a little better. 13 MR. JENNINGS: A student who is 14 renting. 15 MR. WHITE: "Ms"; is that better? 16 I'll get there. I guess it's the grey showing. She 17 has turned 16 and has no established credit rating and 18 is trying to establish electrical service. She would 19 clearly be a 29(1) customer from your perspective 20 initially? 21 MR. JENNINGS: She may be. 22 MR. WHITE: In the absence of 23 anything else. 24 MR. JENNINGS: Okay, if she has to 25 sign up with somebody else or something else, yes. 26 Actually, that's interesting because 27 she hasn't been there before. I'm not clear in law 28 whether she would enter under 29(2). Otherwise you 610 MARK/JENNINGS 1 would never have this scheme phasing out which is 2 contemplated in the Act. To be honest, Roger, I 3 haven't thought it through. 4 MR. WHITE: That's the other place I 5 would like to go and you may want to caucus a little on 6 this one because I am still trying to get my head 7 around the implications of the phase-out, particularly 8 when I put them together with section 142 of the 9 Electricity Act. 10 The phase-out I understood from 11 earlier comments this morning can happen in one of two 12 ways, one by a regulation or an Order in Council that 13 basically says that default supply can no longer be 14 offered in other than an affiliate. It can't be 15 offered by the distributor. It's still open to have it 16 offered by either an affiliate or a third party, but 17 the distributor is put out of that business. 18 MR. JENNINGS: The distributor that 19 has a lot of relationships and is otherwise a regulated 20 company shouldn't be in the competitive business, 21 except 29 would appear to be the construction. It can 22 only be there for some period of time. 23 MR. WHITE: If there is no third 24 party in the scheme of things for this particular 25 distributor -- 26 MR. JENNINGS: If they can't find 27 one, then the Board has got the authority to order them 28 to set up a retail affiliate in order to provide the 611 MARK/JENNINGS 1 service. 2 MR. WHITE: I think that deals with 3 the dilemma I was facing myself because under 142 it's 4 permissive that the municipality set one up, but the 5 Board has the ability to order the LDC to do it as 6 well. 7 MR. JENNINGS: The Board can require 8 for that or other competitive activities under 9 section 73 of the OEB Act. It can order the LDC to set 10 up and that's the only structural authority of 11 significance that the Board has, it would appear, 12 except for sub (9) which is section 29 responsibilities 13 or 73, which are the other competitive affiliates, 14 including retailing. 15 MR. WHITE: Potentially though, in 16 the absence of a Board order, if the municipal 17 corporation had not set up a retail affiliate and was 18 carrying on default supply obligations directly within 19 the wires business, in the absence of a Board order, if 20 the regulation were passed which closed the ability of 21 the LDC to do it directly, it might continue to have a 22 statutory obligation to provide, if you will, default 23 supply or standard supply even though it doesn't have 24 an affiliate with which to do it. 25 MR. JENNINGS: Presumably in that 26 situation the Board would exercise authority to require 27 the establishment of an affiliate for the purpose of 28 fulfilling that section 29 obligation. 612 MARK/JENNINGS 1 MR. WHITE: But it's not mandated. 2 MR. MARK: No, but I don't think we 3 should presume that the government on this issue and 4 the Board on this issue would be two ships passing in 5 the night. 6 MR. WHITE: No comment. 7 MR. JENNINGS: One hopes rather than 8 assumes. One hopes that the government wouldn't make 9 it illegal to provide, wouldn't say you can't provide 10 through the distributor unless they were reasonably 11 assured that there are other ways of doing it, so 12 you -- I mentioned the Cochrane situation where in 13 other services nobody was interested in providing the 14 service, so the PUC stepped in. 15 That clearly I think was contemplated 16 in the legislation as a possibility. The Board has 17 some -- it's probably the wrong word, but let me say 18 Draconian powers in this respect. They can order, and 19 it's the only place they can order a restructuring. 20 They can order the set up of a retail affiliate if you 21 can't do it some other way. 22 In another case, if you are not 23 performing your job right, they can order somebody else 24 to run the system with no compensation. 25 MR. WHITE: No further questions. 26 Thank you very much. 27 MS LEA: Thank you, Mr. White. 28 Thank you Mr. Mark, Mr. Jennings. 613 MARK/JENNINGS 1 We will reconvene at twenty-five to 2 2:00. 3 MR. POWER: Just to let everybody 4 know, I do have copies of the paper that John Todd 5 referred to here. I will just lay them out on the side 6 there. 7 --- Upon recessing at 12:35 p.m. 8 --- Upon resuming at 1:40 p.m. 9 MS LEA: Good afternoon. 10 One administrative announcement. It 11 appeared to us, in any event, that we would not 12 complete all the presentations and questioning by the 13 end of this week. Also, we had a couple of parties who 14 made specific requests to give their presentations on 15 Monday. 16 I would like to inform attendees that 17 on Monday morning at 9:00 a.m. the Toronto Hydro panel 18 will present. They will be starting us off, then, 19 Monday at 9:00 a.m. 20 Following them, Mr. Rawson from 21 TransCanada Power will be making his presentation. 22 I hope that everyone else can be 23 accommodated within the scope of Friday, but if there 24 is anyone else who cannot attend on Friday who is 25 scheduled for Friday, perhaps they could let me know. 26 MR. BUDD: Excuse me. If I may? 27 MS LEA: Yes? 28 MR. BUDD: Do we know how long those 614 MARK/JENNINGS 1 two presentations might be, and the cross-examinations, 2 because I do know that there is one fellow who has 3 flown in from Alberta to be here. 4 MS LEA: When is that? 5 MR. POWER: John Jenkins, who is in 6 the panel with Fiona Woolf. 7 MS LEA: Oh. Well, I was hoping they 8 would be completed tomorrow. I'm talking about Monday. 9 MR. POWER: Oh, Monday. I'm sorry. 10 MS LEA: Yes. I'm sorry, Mr. Power, 11 perhaps I didn't make myself clear. 12 MR. POWER: No, that's okay. 13 MS LEA: I was talking about Monday 14 morning at 9:00 a.m., we would start with Toronto Hydro 15 and then Mr. Rawson to follow. 16 MR. POWER: Great. Okay. 17 Thank you. 18 MS LEA: Mr. Power, I think you have 19 some presenters to present. 20 MR. POWER: We do indeed. 21 Maybe I can give a brief overview of 22 who will be here and the documentation. 23 Just by way of background, we will 24 have two panels of witnesses, to use the old language, 25 or two panels of presenters, Seabron Adamson and Barry 26 Conway, who are here today in front of us. 27 Afterwards it will be Fiona Woolf, 28 Gunars Ceksters and John Jenkins. 615 MARK/JENNINGS 1 In terms of the documents, you will 2 have the report of Fiona Woolf and Seabron Adamson. 3 Seabron Adamson's paper is attached as Appendix B and, 4 of course, the CVs are attached as "F" and "G" to that 5 document. 6 There are witness statements that 7 were also provided for the other witnesses, Gunars and 8 John Jenkins and Barry Conway. 9 In terms of the panels, very 10 generically, Seabron Adamson and Barry Conway will deal 11 with market mechanisms for electricity pricing and 12 consumer protection, and also deal with the capability 13 of utilities to manage risk in the competitive 14 marketplace. 15 Panel 2 will deal with the major 16 effects of the proposed Standard Supply Code, including 17 its immediate impact on the Lakeview Generating Project 18 and related impacts on other commercial ventures, and 19 constructive comments on how the draft Standard Supply 20 Code can be amended to still achieve its objectives but 21 without these types of detrimental effects. 22 By way of introduction to Seabron 23 Adamson, who has flown up today to be here with us, 24 Mr. Adamson has a wide range of practical experience in 25 advising governments and regulators in both market 26 design and implementation. 27 He is relatively rare in that he has 28 10 years of experience in competitive electricity 616 MARK/JENNINGS 1 markets in various jurisdictions in the world. He has 2 just finished one of the largest merchant plant capital 3 market financings in the world at about $1 billion U.S. 4 and, perhaps importantly, has done extensive work in 5 the Alberta jurisdiction, which is somewhat relevant 6 here, advised the Alberta Department of Energy on the 7 market power mitigation options and designed the 8 contract option model in the 1998 legislation. 9 Barry Conway is the V-P of Energy 10 Market Operations with ENERconnect, and he is here to 11 speak about the capability of the utilities to manage 12 their risk in the new market. Of course, Barry is well 13 known to most of us, having participated through the 14 MDC process. 15 With that background, perhaps I can 16 just hand it over to the witnesses and go from there. 17 MS LEA: Thank you. 18 MR. POWER: I will have one or two 19 questions at the tail end, after they are done. 20 Thank you. 21 PRESENTATION 22 MR. ADAMSON: I would like to stand 23 up, if I may, just because I'm not used to making 24 presentations sitting down. Will you be able to hear 25 me if I speak from here? 26 MS LEA: As long as your voice is 27 captured by the microphone. That's the main thing, 28 sir. 617 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: Okay. 2 Well, as Rob suggested, my name is 3 Seabron Adamson from Frontier Economics in the Boston 4 area. 5 I would just like to start with kind 6 of a list of the issues I would like to speak about 7 briefly this morning -- or this afternoon now, rather, 8 I'm sorry. 9 I would like to start with a set of 10 economic principles which, from my viewpoint, should 11 underlie the design of the pricing mechanism for 12 standard supply service in the Province of Ontario. 13 I would like to focus on the 14 importance of getting those economic principles right, 15 the development of an efficient wholesale and retail 16 market, which I think is everyone's objective in this 17 room. 18 I would like to comment a bit on the 19 consistency of the draft code in Ontario with the 20 principles I have enumerated before. 21 I will give a brief overview -- and 22 it will necessarily be briefer than I might like -- for 23 how my alternative proposal for standard supply service 24 might work, and talk a little bit about implementation 25 of that. 26 Finally, probably many of you are 27 aware of the famous line of George Bernard Shaw that if 28 you laid all the economists in the world end-to-end 618 ADAMSON/CONWAY, presentation 1 they still wouldn't reach a conclusion. But I would 2 like to try to make a conclusion and try to get some 3 recommendations on how I think such an alternative 4 proposal might be implemented in the Province of 5 Ontario. 6 I believe you are being handed out 7 copies of slides. I will try to refer to the numbers 8 as we go along. 9 What are the economic principles for 10 designing this mechanism, and in fact for designing 11 most pricing mechanisms? There is nothing particularly 12 special about the standard supply service pricing 13 mechanism in this regard 14 I would like to start with two main 15 economic principles. 16 First off, is the principle that 17 risks should be allocated efficiently. 18 One of the more sort of interesting 19 developments of modern economics has been the 20 understanding that prices and risks have distributions. 21 They are not single numbers and there is no perfect 22 information of those numbers. There is always 23 variation in those numbers. 24 The question of risk is: Who should 25 bear risk? An economic principle is: The party which 26 can bear and mitigate risks at lowest cost is the 27 person who should bear it. That is what is most 28 efficient. We all are risk averse, we all want to try 619 ADAMSON/CONWAY, presentation 1 to avoid risk if possible, but it is better for me to 2 avoid it rather than someone else if I can do something 3 about it at the lowest cost. 4 So in a very simple example, I am in 5 a power market -- taking us back to our example of now. 6 Risks related to fuel prices, where might those go? 7 Down this vertical chain all the way from the fuel 8 supplier down to generators, intermediaries, final 9 customers. 10 Well, I might recommend, for example, 11 that those at least get pushed up as far as generators, 12 because generators are probably more likely to be able 13 to bear them and to hedge them at lowest cost. They 14 can sign the risk mitigating contract with their 15 upstream gas suppliers, and they may have a substantial 16 enough portfolio with a different fuel mix in order so 17 that they may not be particularly heavily exposed by 18 the change in any one fuel product, much less than an 19 individual customer. 20 Finally, I would like to note that 21 people with risk aversion, it depends on who you are. 22 Some customers -- and I would put in this category 23 probably lower income customers -- are much more likely 24 to be risk averse for a basic commodity like 25 electricity than other customers. 26 Second, we need to think practically 27 about what are the costs of moving things around. Why 28 don't markets always work perfectly? Why do they 620 ADAMSON/CONWAY, presentation 1 always allocate risks in the absolute optimal fashion? 2 Well, the second point, of course, is 3 that there are very significant transaction and 4 information costs. It costs me money, it costs me time 5 to do anything about this. To the level of when you 6 aggregate lots of time coming from millions of 7 individual customers, those costs are very, very large. 8 So at the level of the small consumer 9 in particular, the cost of doing anything to hedge 10 risks is much, much higher, as a proportion of my total 11 investment in this enterprise than it may be from 12 someone else. I'm not taking advantage of any 13 economies of scale. I have no idea what this is all 14 about, and it costs me a lot of time and money to find 15 out anything about it. 16 As opposed to an industry participant 17 who might be acting on a very large number of 18 consumers, so once he or she knows, she can use that 19 same information for the benefit of lots and lots of 20 different parties. 21 Finally, I would like to consider the 22 impact on the wholesale market. I think this is a very 23 critical element of the critique than I presented in my 24 paper. 25 What does this mean for the 26 functioning of the wholesale market? Is this only 27 about what price the apocryphal Mrs. Jones gets 28 charged, or does this have any influence for the 621 ADAMSON/CONWAY, presentation 1 remainder of the market? 2 I actually would argue very strongly 3 that it does. One practical lesson of electricity 4 markets is that intermediate contract markets, whether 5 they be financial hedges or physical sales contracts, 6 they are not an addendum to the market, they actually 7 are the market. To think only about the spot market is 8 actually putting the cart before the horse. 9 The vast majority of power in a free 10 market in electricity will actually be traded under 11 contract. That is for two real reasons. First, as 12 other people have suggested, there is very substantial 13 volatility in electricity prices and people are risk 14 averse. We understand that. 15 Second, this actually reflects the 16 economics of this industry. All of the parties in 17 there have risk, not just the consumer. A generator 18 who has sunk half a billion dollars into a set of power 19 plants and has to meet a debt financing schedule also 20 has risks. 21 Now, if I have risks and Barry over 22 here has risks, it seems to me relatively economically 23 efficient that we try to get together and do a swap. 24 It is like those little analogies they always use about 25 trade between Canada and Japan, or something, in the 26 newspaper. It is most efficient if we actually don't 27 do everything independently of each other. 28 Remember that these markets are not 622 ADAMSON/CONWAY, presentation 1 an addendum to the market, they are the market for the 2 most part. Most of these power markets that we see, 3 the vast majority of the electricity is traded under 4 these contracts, even in markets such as the England 5 and Wales pool, where everything pretty much is 6 required to be bid into the pool and purchased from the 7 pool. There is a pool price and it appears in the 8 paper every day. 9 I would argue that, although that is 10 a price, and it is a reference price, and it is a very 11 nice price that you can look up on the Web site, it is 12 not the price for electricity in that market. The 13 price for electricity in that market is actually 14 defined by contract prices. Normally about 70 to 15 80 per cent of the total volume of power traded in this 16 market is actually traded under forward contracts. 17 What do these forward contracts do? 18 They help Barry and I hedge our risks. We know that. 19 But they have some other important features for people 20 coming into the market as well. Clearly, they help 21 retailers who are going to be, hopefully, serving final 22 competitive retail customers at fixed prices who need 23 to hedge their own risks. 24 They also have a very powerful effect 25 on the ability of people to enter these markets from 26 the generation side. Remember, I am again thinking 27 hundreds of millions of dollars in capital and I want 28 to be able to hedge my risk of market revenues and 623 ADAMSON/CONWAY, presentation 1 fluctuations. 2 These forward contract prices are one 3 of the things that send the signal about, "Should I put 4 money into this?" And just as importantly, "Can I get 5 my bankers to lend me money against this?" 6 As Rob mentioned beforehand, I kind 7 of wear two hats in terms of my advisory role in these 8 types of markets. One is on the economics of 9 restructuring and the design of the California Power 10 Exchange and stuff like that. The other one is a bit 11 more commercially focused, which is advising people who 12 invest in merchant generation, be they utilities, 13 independent developers or, very often, commercial and 14 investment banks, about, "Is this a good decision? 15 Should you finance this?" 16 The first question that always come 17 up in one of these merchant financings is: What does 18 the forward market say? 19 I just completed a big transaction in 20 western New York state and they basically pay us to 21 produce revenue projections which they then use to 22 basically back up their financial modelling of the 23 company revenues. But the first thing you are always 24 asked when you do the financing presentation is: Are 25 these consistent with the forward prices going out? If 26 they are, okay, then the market agrees with you. If 27 they are not, you had better make a very, very good 28 case. 624 ADAMSON/CONWAY, presentation 1 We know that merchant power financing 2 is never going to be as risk free as generation 3 financing may have been in the past when we had 4 effectively regulated returns. But anything that 5 basically helps give a new entrant any market-based 6 contract signal of what the future price of electricity 7 is has a very powerful influence on your ability to get 8 financing for merchant generation, of any sort, and to 9 basically secure a lower cost of debt or lower cost of 10 equity. 11 So if those signals don't exist we 12 might surmise -- and from my practical experience I 13 would argue not to surmise, not to say "I know", but it 14 is a little harder for you to see that just because I 15 say it -- if those signals aren't there we have 16 fundamentally a higher cost of capital for merchant 17 generation, and over the long run I personally don't 18 see how that doesn't translate into higher final retail 19 prices for consumers. 20 These slides don't really quite fit 21 the screen. Maybe you will have to look at the paper. 22 An assertion has been made by some of 23 the previous presenters and in some of the previous 24 written comments that, "Our price is always the lowest 25 price, so if you charge anybody any other price, you 26 are basically charging them an artificially high 27 price." 28 I don't actually agree with that. I 625 ADAMSON/CONWAY, presentation 1 don't agree with that because, as I said before, there 2 are multiple prices in these markets and the contract 3 prices seem to dominate the volume. There is a 4 succession of prices in one of these power markets. 5 If you have ever been involved in the 6 trading side of this industry, like I have, there is no 7 price to look up. It is like if you called the 8 Toronto-Dominion Bank and said, "What is the interest 9 rate?" I think you would get a very long and pregnant 10 pause. We don't have an interest rate. An interest 11 rate for what? For what term? Based on what security? 12 Based on what currency? 13 There is a very large number of 14 prices for, in this case, a truly commoditized product, 15 in Canadian dollars, which are all on top of each other 16 and all evolve together. Similarly, the contract 17 prices and the spot prices in these markets tend to 18 evolve together. 19 The spot price may be a final kind of 20 price for settling up all of the differences, but I can 21 assure you that it is the experience that almost all of 22 the markets have come through in Ontario -- I don't 23 believe economics is any different in Ontario than it 24 is anywhere else in the world -- that actually the spot 25 market volume will end up being a very small proportion 26 of the contract volume unless it is artificially 27 distorted from being so. That, I think, is an issue of 28 very real concern. 626 ADAMSON/CONWAY, presentation 1 Consumers, we know, face 2 risks -- price risks -- and we think they are risk 3 averse. Like all of us, they don't like risk, so they 4 get away from it. But they are not the only people in 5 these markets who actually face any risk. As I 6 mentioned, generators face risk. They invest money and 7 they are dependent on market prices and contract prices 8 over time in order to recover their fixed costs. 9 Where this is really especially 10 rather true is for smaller generators and probably new 11 entrant generators, and most importantly for those who 12 don't have sufficient market power to, in effect, 13 dictate what prices may be, but are rather dependent on 14 the influence of external events in determining what 15 prices will be. 16 On a risk-adjusted basis -- and this 17 is a very important fact -- the spot price isn't 18 necessarily the lowest price. Just like on a 19 risk-adjusted basis me taking a variable mortgage rate 20 is not necessarily the cheapest way for me to borrow 21 money to buy my home. 22 We are always cognizant of the 23 trade-offs between risks and returns or risks and 24 costs. Electricity, I don't believe, is any different 25 from that. Electricity is a commodity, but then so are 26 dollars a commodity, and people are allowed to express 27 risk preferences there. 28 If I am coming in and I am saying, "I 627 ADAMSON/CONWAY, presentation 1 actually want to buy in this market", from one of these 2 retailers, which I have just drawn as a little white 3 box, is the spot price necessarily the best price I am 4 going to get? 5 If you were in a market where you 6 thought new entry was likely and where a new entrant 7 was probably going to face very substantial 8 systemic-type risks, like I believe you would in this 9 market, a lot of risk about worrying about not external 10 parameters like what the gas price is going to be but 11 parameters that are harder to judge, like "What are 12 some of my large competitors going to do?" I argue that 13 if I was that new entrant generator, in order to secure 14 financing and to lower my volatility of return, maybe I 15 would accept a lower expected profit -- and these 16 prices are all expectations; hindsight is the only 17 perfect information -- in return for some lower 18 volatility and uncertainty. 19 I suspect in this type of market that 20 a new entrant will be very, very strongly interested in 21 doing this to have lower volatility or uncertainty, or 22 I would personally opine that they will have extreme 23 trouble when they go into the syndicated loans market 24 trying to do the financing for their plants. 25 It's just not a creditable scenario, 26 given the current state of the financing of merchant 27 based assets in these newly evolving markets. 28 Based on these economic principles, 628 ADAMSON/CONWAY, presentation 1 what initial conclusions might we draw about the draft 2 Standard Supply Service Code? 3 Our first reaction, upon looking at 4 this, was one of astoundment, actually. It allocates 5 all the price risks to the person who can't deal with 6 it -- Mrs. Jones, who finds it by far most costly to 7 deal with it, or the millions of Mrs. Jones and 8 Mr. Jones who live across the province. 9 That certainly is truly 10 extraordinary. 11 Now, another assertion -- remember 12 the comment about transaction costs. She may not like 13 her price to go up and down a lot, but it is also 14 relatively expensive for her to find out what she can 15 do about it and to understand this rather peculiar 16 industry: I am just not getting my electric bill. It 17 didn't use to fluctuate in the past, and now it seems 18 to have developed a mind of its own. 19 I am probably pretty likely, if I am 20 Mr. Jones, to kind of stay where I am. Although the 21 system has decreased my welfare quite considerably by 22 exposing me to this risk that I didn't have before, I 23 might just stay there. I would think: Well, I am 24 probably reasonably sophisticated in thinking about 25 financial markets, have some expertise there. Do I 26 always make sure that I leave the balance on my lowest 27 credit card? No. Most of the time I probably don't. 28 I don't have the time. Most people are like that. 629 ADAMSON/CONWAY, presentation 1 So it is quite likely that even 2 though this risk allocation is pretty poor, a very 3 large number of them will just suffer and bear it and 4 go on. 5 The second point is, as these people 6 stay, we probably are going to find a much lower demand 7 for intermediate contract products, for contracts, 8 physical or financial, over the counter, traded through 9 an exchange. I am not real particular about what kind 10 they are, but I am very clear that they are very 11 important to these markets. 12 What does that imply? It implies 13 that if these contract markets are liquid, new 14 interests and small generators are going to have a 15 great deal of hedging their own revenue and cash flow 16 risks. I assert that that raises their cost of 17 capital. 18 Who else is this going to affect? 19 Well, most of the merchant power transactions in the 20 world are actually not people building new power 21 plants, they are people buying power plants that are 22 sold. If the decontrol process is ever going to 23 involve the actual sale with any of the generation, 24 that too has to be financed. 25 What does it mean? People looking to 26 buy this, whether it is a TransAlta or a Duke Energy or 27 a National Power, or whoever, by looking to buy these 28 assets and face higher risks, they pay less. That is 630 ADAMSON/CONWAY, presentation 1 all there is to it. 2 The market structure doesn't make 3 sense. The rules are uncertain. It is just a discount 4 to what you are willing to pay. 5 Finally, over the long term increased 6 risk, to me, necessarily implies higher prices for 7 generators to take on this risk. 8 One thing that also rather struck me 9 in this proceeding is that there was a lot of 10 discussion of volatility, and there was a lot of 11 discussion about what the impact might be on customer 12 bills. I haven't tried to recreate all of this 13 analysis, of course. 14 The one thing that was very clear to 15 me is that a lot of the conclusions about the potential 16 volatility of the Ontario market seemed to have been 17 rather extrapolated from that of the Alberta market far 18 to the west and not really interconnected. 19 I would advise you strongly to put 20 some very strong caveats on estimates of volatility 21 taken in the market. Alberta, because it is in Canada, 22 has really no more connection to the Ontario power 23 market than that of New Zealand. First of all, the 24 fact that it is Canadian doesn't mean anything to it. 25 I would like to offer two other 26 things about using these volatility assessments, which 27 I think are actually very critical. 28 First off, of course, is that the 631 ADAMSON/CONWAY, presentation 1 systems are different, the physics are different, the 2 plants and the margins are different, the volatility in 3 the underlying fuel prices is different. 4 Secondly, for the period that they 5 were looking at the prices on, the market structure in 6 Alberta is extremely concentrated. I believe John Todd 7 yesterday referred to a study done by London Economics, 8 my old firm, for the Alberta Department of Energy on 9 market power issues. 10 I actually authored that study and 11 advised the Alberta government on these issues. To me, 12 it was a pretty open and shut case. This industry is 13 so concentrated that the potential abuse of market 14 power is extremely high. 15 Actually, the structure we are 16 actually starting with in Ontario is actually worse 17 still, and where market structure problems exist, no 18 amount of patching up of rules can correct it. We can 19 stick band-aids all over the patient, but he has 20 probably still got a bad heart. 21 Secondly -- and this is a very 22 important point, and I absolutely urge you, before you 23 kind of take extrapolations of these numbers into 24 thinking -- to consider this point. The prices in 25 these markets are very dependent on the incentives 26 placed on generators, particularly if those incentives 27 are on generators who have substantial potential market 28 power. 632 ADAMSON/CONWAY, presentation 1 We all know the stories of the 2 England and Wales duopoly, National Power and Power 3 Gen, and so forth. We all know that to a very 4 significant degree the prices in those markets are 5 traditionally pretty much what NP&PG thought they 6 should be. 7 Before you look at historical Alberta 8 prices and the patterns of those prices in 9 understanding what might happen in Ontario, I suggest 10 you think very hard about what the incentives were on 11 the generators historically before -- well, even now, 12 before the new legislation is enacted in Alberta. 13 I would sort of point to one or two 14 comments. 15 Over 90 per cent of the energy in 16 Alberta was traded under form of legislated hedges. 17 These were betting contracts basically between the 18 generation and distribution components of the same 19 vertically integrated utilities. Those provided an 20 awful lot of revenue stability to the generators. 21 The way the legislated hedges are 22 structured is effectively a form of contract for 23 difference. I don't want to get too much into the 24 details of incentives and modelling or something like 25 this, but I will be happy to explain it to anyone 26 later. 27 Most of the time these actually 28 provide no incentives for generators to push up prices. 633 ADAMSON/CONWAY, presentation 1 If you are covered by a significant amount of 2 legislative hedge, actually the strongest incentive is 3 to basically bid your marginal cost. 4 Alberta prices are historically one 5 of the fewer markets in which you could take a marginal 6 cost-based dispatch model and come very close to market 7 prices. Most markets don't have that, because in most 8 markets people are trying to recover some fixed costs, 9 particularly in peak periods. After all, they have to 10 pay their property taxes, pay their staff, pay their 11 bank, whoever. 12 In Alberta, all that was actually 13 done through these hedge contracts. It was really not 14 done through the market at all. The market, as it 15 exists historically in Alberta, is almost a sideshow. 16 The real action, the real revenues are all in the 17 legislated hedges, which were basically dictated from 18 the start of the process and covered the mass majority 19 of the energy. 20 So we have a mechanism that said: 21 Bid low; stay low. No incentive for you to push it up. 22 You will have to give it back in every hour -- and it 23 is calculated hourly. And that's a very different 24 mechanism than the MPMA approach in terms of the 25 incentive it creates, whether you do this hourly or 26 whether you do this annual rebate process. 27 Causing a rebate above a fixed price 28 initially is rather different than implying a very high 634 ADAMSON/CONWAY, presentation 1 degree of CFD cover on a generator. 2 If any of you have this document 3 here, I think it is on page 14 of this document 4 entitled "The Effect of Volatile Electricity Prices on 5 the Residential Customer's Bill", I think there is a 6 histogram -- I can never remember all the statistical 7 words -- about the distribution of hourly prices. 8 The extraordinary thing to me, of 9 course, is that it is not that these prices are very 10 volatile. These prices aren't volatile at all. They 11 are extremely heavily concentrated in a couple of 12 areas. 13 The average annual price it lists is 14 actually probably below the average cost of any of the 15 generators. They were covering other costs from the 16 legislated hedges. These are not prices in the same 17 way in which we are thinking of market prices in the 18 Ontario market. 19 If generators would have been 20 receiving these prices over time, they would have been 21 bankrupt by then. Every generator, I believe, in 22 Alberta probably would have exited the market had they 23 received these prices without the legislative hedges. 24 To suggest that this is the pricing 25 pattern consistent with generators recovering their 26 average costs in the Ontario market is to me to have a 27 very profound misunderstanding of the nature of the 28 Alberta market historically. 635 ADAMSON/CONWAY, presentation 1 It's not that one can learn lessons 2 from these markets, but be very, very careful at making 3 extrapolations across them because there are these kind 4 of regulatory differences or market structure 5 differences which can have very, very powerful effects. 6 So in terms of thinking about the prices, don't just 7 think about what the fuel prices are going to be and 8 whether some of the nukes are going to be up or down, 9 think very, very carefully in my estimation of what the 10 incentives are for participants. Then it really shakes 11 the pavement. 12 Finally, in one final example -- this 13 is another area of concern for me, frankly, when I got 14 involved in this, thinking about the MPMA approach, 15 which is another sort of historical example -- I 16 mentioned before that effectively they created a near 17 duopoly of national power in Power Gen in England and 18 Wales in 1990. Finally, the regulators saw they had to 19 do something, a credit-to-market structural solution, 20 and said, "We will have an effect of a price cap, an 21 average price that we will jump up and down about if 22 the generators make the price go above this level". 23 The outcome of that is actually to 24 cause an increase in market volatility, really for a 25 couple of reasons. If you couldn't raise your overall 26 spot price any more, you could try to raise the net you 27 got out of the contract market by forcing people, 28 making it more and more incentivized for someone to buy 636 ADAMSON/CONWAY, presentation 1 a contract with you. I could simply make the prices 2 jump around because it helps scare off entrants an 3 awful lot. 4 Really, in posing this thing that 5 they felt was a market price cap, which did cap the 6 market price as suggested, it actually has a series of 7 unintended impacts by the regulator, in my opinion, in 8 the contract market and in terms of volatility. 9 It's quite likely, although it's very 10 difficult to prove, that it may have created some 11 rather peculiar incentives on the ability to manipulate 12 the shape of prices, in fact, in order to push up peak 13 and market prices, and off-peak prices down, simply 14 because it made it much harder for a base lead new 15 entrant combined cycle plant to enter the market. 16 Third, in my opinion, the initial 17 risk allocation in this has also been poor. It has 18 often been suggested that if people don't like it they 19 can move to a retailer that will offer them a fixed 20 rate. 21 Again, coming back to this 22 transaction cost issue, I think this is kind of a nice 23 way to think about it. I think it was like the 24 activation in the energy and chemistry, that people 25 have to get over this hump a bit in order to finally 26 kind of move to a greater risk allocation, and that it 27 is the smaller consumers who are going to face the vast 28 majority of those transaction costs. 637 ADAMSON/CONWAY, presentation 1 I don't know of a way to assess those 2 on a province-wide basis. It would be interesting to 3 sort of work out how long you might think it would take 4 the average person to find out about this and multiply 5 it up, but I would expect that you would get a very 6 large number. 7 I think that practical experience in 8 other systems is kind of really more than a -- 9 recommends this conclusion. I can think of almost no 10 system where smaller customers have switched very much, 11 to any significant degree, even in the context of 12 systems like in parts of Pennsylvania where there has 13 been almost bribery to make them do it, as Fiona 14 suggests, by the setting of a shopping credit price, at 15 a price which is probably substantially higher than the 16 market price. 17 So there is a real cost saving set by 18 effectively regulatory declaration at the output of 19 this hearing that says, "You can cut your rate by 20 switching." 21 The last numbers I saw evidently 22 suggested about 25 to 30 per cent of people who 23 switched, even though I think there was a very 24 substantial amount of money to be saved for each 25 customer for switching. If that's not there, people 26 aren't going to switch. Inertia is pretty high. 27 What does that leave us with? Well, 28 it probably leaves us back up here. It says "Offering 638 ADAMSON/CONWAY, presentation 1 the option to switch to a competitive retailer." It's 2 a cap on what people might -- a welfare lots of people 3 might have, but it's really not secure. 4 Thinking a little bit about some of 5 the other approaches to this problem, and I don't want 6 to run too much longer over my time, there is this kind 7 of, "Well, we will set a rate, we will just set a fixed 8 rate, have a regulatory proceeding for it", and that's 9 pretty much the shopping credit model. I think it has 10 some rather substantial problems with that. 11 It does require very substantial 12 oversight. Pennsylvania has the benefit of a 13 relatively small number of very large utilities. In 14 doing so, those cases were still very contentious and 15 protracted in terms of setting those shopping credit 16 rates. 17 Given the number of likely standard 18 service supply providers, to me that seems a completely 19 impractical solution and doesn't take in any advantage 20 of the kind of market stability to firm information 21 about what is sufficient. It really creates very few 22 incentives for them to purchase efficiently on behalf 23 of customers. You really are dependent on the 24 regulator to step in and knock people on the head if 25 they are doing something wrong. It probably would, if 26 you want to set a fixed rate in advance, force the OEB 27 or some other figure of authority to estimate spot 28 market prices which seems like it's an issue of great 639 ADAMSON/CONWAY, presentation 1 concern in this proceeding. That to me fails any form 2 of regulatory burden. 3 The second option which I sort of 4 considered was the implementation of kind of an auction 5 process, a tender process, whatever you might call it. 6 I guess you might describe it as being relatively 7 similar to this model described by John Todd yesterday 8 afternoon, so it's quite good. 9 It's kind of close, I guess, in the 10 U.S. terminology to what I call "standard offer model", 11 where there is a bid supplied, a standard offer of 12 service. 13 That certainly has some of the 14 benefits of not requiring nearly the same level of 15 behavioral regulation so it does require you to 16 administer an RFP for essentially an awful lot of 17 standard service providers. 18 Importantly to me, and I thought 19 about this model in putting mine together, it's a very 20 passive model, "I ran my option, I ran my RFP, these 21 are the bids I got, I show them to you", it's over. 22 There is no incentive created on me as a standard 23 service provider to go out and try to do anything to 24 get a better deal for customers to try to sign up 25 anything to actively participate in the market. All I 26 have to do is show that I have met my statutory duty to 27 run this option. 28 I have some experience with some of 640 ADAMSON/CONWAY, presentation 1 the U.S. options for standard offer service, and they 2 haven't tended to be particularly successful. There is 3 an awful lot of uncertainty about what the kind of 4 implications are, especially for the more longer term 5 ones. 6 For example, in Massachusetts, the 7 state where I actually live, they had the provision 8 that whoever bought a certain set of power plants got 9 this whether they wanted it or not, as no one else did. 10 After a very large option design process on which the 11 Massachusetts Department of Telecommunications and 12 Energy spent quite a lot of money, they had not a 13 single bidder, and so the obligation effectively went 14 to the new generation owner. 15 What can we try to do to get around 16 this requirement to go and oversee an awful lot of 17 options or oversee the procurement process for an awful 18 lot of utilities? 19 In my thinking about this, I thought 20 "Well, I think perhaps a comparative competition may 21 offer a way for it". Just in kind of explaining this, 22 I will just try to give you a kind of a very simple, 23 stylized example. 24 Say, for example, I run a company 25 that buys many plane tickets between two cities, which 26 I certainly have -- I don't know, let's say Boston and 27 Toronto -- there is this wide variety of fares 28 available. I mean, there is the hundred dollar weekend 641 ADAMSON/CONWAY, presentation 1 fare all the way up to the, you know, $1,200 2 welcome-to-the-airport fare. It's pretty burdensome 3 for me to ensure that my employees are always buying 4 these tickets at the lowest prices. If I say, you 5 know, "Gosh, you seem to have bought a lot of expensive 6 $1,200 tickets", and they are saying, "Well, those were 7 the only ones available", what I don't know is did they 8 really buy those because they were the only ones 9 available or were those the ones with the triple miles 10 that week or something. 11 It's a classic regulatory problem of 12 information. I'm sitting here and I really don't have 13 much way of knowing what all these people are saying is 14 true or not. 15 One thing I might think about is 16 maybe if I had some kind of comparative competition 17 between my employees to ensure that everybody has an 18 incentive to get a good fare -- even though there is an 19 agency problem because I'm doing the paying and they 20 are doing the buying and they are the ones with the 21 frequent flyer miles -- so I might think of a little 22 system like this where I say, "Everybody has to report 23 the cost of the tickets they have bought to me and I am 24 going to pay everyone the average cost across the whole 25 company-wide set of employees", I am going to pay them 26 the average cost of the ticket, and, "If you do better 27 than that, fine, as Mary has done here, you get to keep 28 the difference. If you do worse than that, then you 642 ADAMSON/CONWAY, presentation 1 lose the difference." 2 If they really all had the same 3 opportunities to buy, that has a couple of features. 4 Clearly, I, as the company, am doing better on Bob and 5 worse on Mary than I could by paying them their average 6 cost, but what I am actually giving them is a great 7 incentive to compete with each other, to push down the 8 average cost per ticket, and I might expect that that 9 average cost might fall rather sharply because everyone 10 is all of a sudden not incentivized to buy the most 11 expensive airplane fare on Air Canada between Boston 12 and Toronto. 13 Even though I give up a little bit on 14 something and make a little on the other, what I may 15 expect is a very strong pressure on this yellow dotted 16 line to fall as people try to beat each other out. 17 It seems to me -- and comparative 18 regulations, again, they are not something I have 19 suddenly invented. There is vast economic literature 20 on this if you want to check -- it seems to me that 21 this might be the base of the mechanism to try and get 22 the incentives right, and when the incentives are 23 right, then the regulation is much, much easier. 24 So how might this be implemented in 25 the form of a standard service arrangement? 26 These systems, by the way, because I 27 probably have to switch terminology in here, are often 28 called yardstick competition, where effectively the 643 ADAMSON/CONWAY, presentation 1 "yardstick" is, in my previous case, the average cost 2 of the ticket. 3 One might think of: Well, we start 4 people off basically on the basis of their purchase 5 costs, which in most places are the average, they are 6 the arbitrary drawings of the black band, and we stack 7 everyone up. My yardstick in this case might be the 8 average demand weighted price in dollars per megawatt 9 hour or my set of standard supply customers. 10 We stack them up highest to lowest 11 and calculate the average -- man, it's all pretty 12 easy -- and say: All right. Now the next thing we 13 need is the creation of some incentives on this 14 mechanism. 15 But we have to allow for the fact 16 that there is some imprecision in information. We will 17 say -- let's deal within 5 per cent of the average. 18 These are example numbers. These are not to be taken 19 home and written down. Your band, the regulatory 20 mechanism says, you know, you get nothing extra on 21 that. 22 If you manage to beat it by very 23 much, you get a sharing of the difference between that 24 and the average and if you manage to do significantly 25 worse, like the SSC provider has on the red band on the 26 very left hand side, then you actually are penalized 27 for that. 28 Again, what does that do? It 644 ADAMSON/CONWAY, presentation 1 provides a very strong incentive for people to try to 2 push down this average and that, I believe, is 3 beneficial to consumers. 4 Speaking a little bit more about the 5 implementation of this, and I said I didn't want to 6 turn this into too long a spiel, how might we think 7 about a standard supply service mechanism driven around 8 the principles of comparative competition? 9 First off, we are offering a fixed 10 price as one of our objectives -- we think that is a 11 much better risk allocation initially -- so we are 12 going to have a substantial contractual portfolio for 13 the standard supply list, so providers or groups of 14 providers will have to contract for the majority, in 15 one form or another, of their standard supply loads; 16 plus from that we calculate a very simple dollars per 17 megawatt yardstick measure, which I suggest might be 18 demand weighted average prices in dollars per megawatt 19 hour, and those then go into creating the kind of 20 stacked up costs that I showed you in the previous 21 slide and the retail tariff could actually be set, 22 100 times normal rate-making principles from the 23 contract costs, as said. 24 Now, there are a couple of critical 25 features here which I want to sort of outline which I 26 think are critical and which shouldn't be completely 27 ignored. 28 One of the comments has been that 645 ADAMSON/CONWAY, presentation 1 there is all this quantity risk, because people 2 basically can leave and come back, which is definitely 3 true. However, I would sort of like to remind people 4 that, well, we are actually not unused to markets with 5 substantial quantity risk -- not just in electricity 6 even, I mean, retailers deal with it dealing with 7 selling -- I don't know -- Stephen King novels all the 8 time. 9 How that is normally dealt with is in 10 a contractual mechanism so that some producer assumes a 11 substantial amount of that quantity risk, what might be 12 called full requirements contracts in the language of 13 municipal utilities, and in the United States, for 14 example, net-back contracts, other terminology of that 15 nature. 16 The same thing is that, because I 17 have set it all up, in signing up my contract portfolio 18 I would obviously be very cognizant of the fact that if 19 my quantity of customers actually drops, then I 20 probably will be selling contract coverage to someone 21 else. 22 The great thing about this is that 23 the electricity demand in the short run is very, very 24 inelastic, so if I lose my load from my standard supply 25 it's going somewhere else. It didn't just, like, 26 disappear and move to Manitoba, it is somewhere in the 27 system. So there is probably a demand for contract for 28 somewhere in the system. 646 ADAMSON/CONWAY, presentation 1 Selling quantity risk hedging 2 contracts, we would expect, in a system like this, is 3 not to be extremely costly. Those are, in fact, common 4 in some of the markets we know, including England and 5 Wales, where people, even on the competitive side, face 6 the same types of quantity risks. After all, I have to 7 go out and offer people a bunch of prices, and there is 8 inevitably some time delay before I decide how many of 9 them sign up and how many of them quit, and so on and 10 so forth. 11 I think it has kind of become clear 12 that there is a trade-off between the ability of people 13 to flip back and forth, on and off standard supply 14 service, and the cost of providing that. I'm not 15 saying that it is necessarily a zero effect. 16 It is worth recognizing from the 17 policy side that you are effectively trying to offer 18 people a costless option, and one of the things of 19 Finance 101 is that the options always have some 20 positive value. So if there is a cost in terms of 21 dealing with that quantity risk, what I would say is: 22 Well, the market has probably just crystallized it for 23 you and told you how much it is going to cost, and it 24 is the difference between quantity risk hedging 25 contracts and, say, a pure fixed-term/fixed-quantity 26 contract. 27 But remember, the amount of 28 electricity sold in the province is pretty much going 647 ADAMSON/CONWAY, presentation 1 to depend on GDP growth, the weather. If it moves 2 around between people, people sell contracts back and 3 forth all the time, and one of our sort of objectives 4 is the creation of liquidity in these intermediate 5 markets. 6 So we maybe shouldn't be too 7 concerned that there is going to be that much quantity 8 risk, because if I lose it, well, maybe I would sell my 9 contract off to Barry or someone else who has just 10 picked it up for his retail load. 11 So why do I think this form of 12 comparative competition may offer some benefit over the 13 kind of current system? 14 First off, one of my clear and first 15 principles was that the risk allocation needs to be 16 efficient, and a risk allocation where the final small 17 customer bears all the risk to me seems highly 18 inefficient by definition. 19 What it does is it allows a mechanism 20 without having large amounts of transaction costs and 21 information costs. So a lot of that price risk is 22 really allocated back up to where it belongs, up to 23 level of generators, maybe up to the level of fuel 24 suppliers. It certainly doesn't belong with small 25 customers, because there is going to be a significant 26 volume of contracts being traded to meet this. 27 I have heard estimates that 70 per 28 cent of the final market may be served through standard 648 ADAMSON/CONWAY, presentation 1 service supply initially. It stimulates the demand for 2 hedging contracts, fixed price contracts. If you leave 3 that 70 per cent out of the market, you are almost 4 assuredly damaging the liquidity and viability of these 5 contract markets which, in my opinion, are so critical. 6 Again, remember my comment that 70 to 7 80 per cent of the power in one of these markets 8 typically is traded under a contract. If we say that 9 only industrial customers, intermediate meter customers 10 are likely to be trading in this market initially, you 11 know, why only 25 per cent? If the market seems 12 naturally to want to evolve to a much higher level of 13 trading, we certainly must be worried, I think, 14 economically to thinking there may be some economic 15 distortion being put on here if we think that only 16 industrial customers are going to participate in this 17 market. 18 Finally, it even helps them because 19 even industrial customers of course do have some risk 20 aversion, so the fact that there is more liquidity in 21 these markets certainly doesn't hurt them any anyway. 22 Finally, I think it will make the 23 task of the entrant much, much simpler. It allows him 24 or her to have some benchmark going forward about what 25 revenue streams are going to be, and that really can't 26 do anything but help lower uncertainty over revenue 27 streams, and that has an almost direct linear impact on 28 the cost of capital, that, in turn, as new entrants 649 ADAMSON/CONWAY, presentation 1 come in or as you start to finally decontrol generation 2 in the province and sell it off, can't help but lower 3 wholesale prices and/or maximize the value you will get 4 for existing generation over time. 5 But I did promise to try to make some 6 sort of conclusions, and some of these I have already 7 probably repeated enough. 8 I do believe the spot price 9 pass-through mechanism is inefficient. I am very 10 hard-pressed to think of another industry in normal 11 market circumstances where one uses it without knowing 12 the price before one has bought it. The ability to 13 respond to a price is clearly dependent upon that price 14 being known at the time of consumption. 15 It is likely to impair the 16 development of liquid intermediate markets which are 17 critical for the robustness of the wholesale market. 18 They are the majority of the wholesale market. Without 19 these markets new entry is going to be hindered. We 20 are not clear where the supply situation is going to be 21 in Ontario. I guess it rather depends on what happens. 22 With the nuclear plant, if it turns 23 out tight, you don't want these contract markets to be 24 liquid and to make it that much slower for any new 25 generation to come into the province. 26 The OEB is rightfully concerned about 27 the cost and burden of implementing a fixed price 28 mechanism. That's just clear, both in terms of the 650 ADAMSON/CONWAY, presentation 1 direct costs of doing it and the potential elapsed time 2 of implementing such a mechanism. 3 However, I think there are the 4 competitive forces that I have described, the 5 requirement that people are even not directly competing 6 but indirectly competing with each other, can be 7 harnessed to give standard supply providers incentives 8 to purchase electricity at those lower costs, and I 9 think that tends to make the regulatory profit much, 10 much simpler where the incentives are going the same 11 way between the regulator and the regulated. 12 If there are any kind of net costs of 13 implementing such a system, which I haven't tried to 14 specify in my comments today, they are likely to be 15 greatly outweighed by the benefits of lower risk to 16 smaller consumers than development of an official 17 wholesale contract market and, finally, wholesale -- a 18 power market in its true sense in Ontario. 19 Thank you. 20 MR. POWER: Perhaps we can have 21 Mr. Conway next and then I will have a couple of 22 questions and we can open it up. 23 Would you like the lights on, 24 Mr. Conway. 25 PRESENTATION 26 MR. CONWAY: Thank you, Rob. 27 My comments are short. I will not 28 try to match Seabron in any way whatsoever, including 651 ADAMSON/CONWAY, presentation 1 standing up. 2 My comments are directed at the 3 developing capability of municipal utilities to manage 4 risk in the new market. This story necessarily starts 5 with a history of ENERconnect. 6 By the way, some of my comments were 7 pre-empted by earlier conversation this morning, but 8 this is what I wanted to tell people about ENERconnect. 9 The history of ENERconnect is 10 necessarily brief because it was created to fit into 11 the new paradigm that the government is trying to 12 create for electricity in Ontario. It starts in 1996, 13 which you will recall was the year of the MacDonald 14 Commission. The report of that commission essentially, 15 among many things, said that municipal utilities were 16 going to have to be able to manage market risk in the 17 new world, that they would have to be able to cope with 18 the buying and selling of futures and forwards. 19 So the MEA immediately started to 20 investigate how that should be done and, in 1997, 21 roughly at the time in which the government issued its 22 White Paper, which essentially endorsed that need, 23 ENERconnect was created as a separate organization. 24 There were two basic principles to 25 the ENERconnect proposal. The first principle was that 26 ENERconnect was founded to provide its partners with 27 power procurement and related services at cost. 28 The second principle was that 652 ADAMSON/CONWAY, presentation 1 although it was founded on the concept of the power of 2 aggregation, if I can put it that way, the members were 3 afraid to do that function themselves or to go to other 4 third parties to supply energy procurement, so we have 5 no monopoly on their business. 6 This must have been a good 7 proposition, because during 1998 over 230 municipal 8 utilities joined ENERconnect. They invested in excess 9 of $3 million as seed money to start up the business, 10 and they elected a board of governors to govern it. 11 The other important thing we did in 12 1998 was go about trying to find a service provider to 13 help us with power procurement, and we issued an RFP to 14 do that. Some long and arduous number of months later 15 we signed a contract with Enron, and just last month we 16 launched a new product line of services that were aimed 17 exactly at the kinds of services that municipal 18 utilities will require to meet their obligations under 19 the Standard Supply Code as it currently exists. 20 Now, everyone knows who Enron is. 21 They are big. But the most important point about them 22 is that they are very good at what they do. I believe 23 this gives the municipal utilities the instant 24 capability to manage risks in the marketplace through 25 ENERconnect. 26 The next thing I thought I would deal 27 with is just a little explanation of what ENERconnect 28 is. 653 ADAMSON/CONWAY, presentation 1 It is a limited partnership now of 2 about 222 municipal utilities. We lost a few through 3 amalgamation and sale. It has a board of nine members. 4 There are only seven full-time staff. We provide most 5 of our services by using strategic partners, so 6 essentially we are a virtual company. 7 ENERconnect is not a unique 8 proposition. There are quite a few agencies springing 9 up in the U.S. like us. I can name a few. There is 10 the Northern California Power Agency, the Energy 11 Authority of Florida, the Municipal Power Agencies of 12 Indiana and Oklahoma, and the American Municipal Power 13 of Ohio, to name a few. 14 Because our partners have no 15 obligation to buy from us, I think essentially what is 16 happening with ENERconnect is that they are regarding 17 us as an insurance policy at this point. They have not 18 signed up to do business with us as yet because, as you 19 all know, the market is not completely defined yet. So 20 ENERconnect is basically their fall-back position. 21 Dealing with some of the risks that 22 municipal utilities face. 23 First of all, they are under serious 24 time pressures to do a lot of things, so I suppose that 25 is the risk of being spread too thin. They have to, by 26 November of next year, incorporate under the Ontario 27 Business Corporations Act. They have to deal with the 28 question of whether they should be sold or retained. 654 ADAMSON/CONWAY, presentation 1 They have to decide whether they want a retail 2 affiliate. They have to obtain licences to do all 3 those things. They have to prepare for 4 performance-based regulation. They also have to get up 5 and running for the new market that presumably is 6 coming at the end of next year. 7 That leads me to the standard supply 8 obligations then, the sort of operational services they 9 will be required to provide. There are really two 10 components to it. 11 The first component has to do with 12 retail settlements. As we all know, there is a task 13 force that was meeting yesterday in the next room 14 trying to work out the details of that, but that will 15 impose certain work and software requirements on all 16 utilities. 17 They are also required by the IMO to 18 deliver on a daily basis data for dispatch, and that 19 will require them to mount a forecasting capability. 20 Of course, they will also have to figure out whether 21 the bill they received from the IMO is correct or not, 22 and that will be quite a daunting task considering the 23 amount of data they will have to deal with in the new 24 market. 25 There are some 20 or so utilities 26 that are dealing with the retail settlement task force. 27 There are three or four large utilities there working 28 with the IMO. It is unclear, actually, what the other 655 ADAMSON/CONWAY, presentation 1 utilities are doing to prepare, but there is quite a 2 lot of work to be done. 3 In order to provide all of these 4 functions they will have to invest in staff and they 5 will have to invest in software. 6 If they are sold, if they are 7 amalgamated, or if the market rules change -- and if 8 you look at any market that has been deregulated 9 anywhere in the world, the rules have changed fairly 10 shortly after deregulation -- all of these investments 11 could be either fully or partially stranded. 12 So we have dealt with stranded 13 investments, market rule changes. 14 The market risks that are often 15 talked about, and in fact have been talked about for 16 the last few days, that they also have to deal with are 17 price and volume uncertainty; the problem of supplier 18 default, in which case credit assessment becomes a very 19 important task for them. 20 If they decide to import their power 21 needs from the U.S., they have to deal with 22 transmission access and, potentially, currency exposure 23 as well. 24 I guess the point of my message is 25 that all of these risks are manageable. 26 First of all, ENERconnect is a 27 service bureau proposition, so we are making 28 investments. The municipal utilities do not have to 656 ADAMSON/CONWAY, presentation 1 make investments on behalf of all of these functions 2 that they will have to develop. They do not have to 3 hire new staff if they take the ENERconnect route. 4 There are also a lot of other third 5 party suppliers available. As most of you probably 6 know, there are at least 300 power marketers registered 7 in the United States that are obviously capable of 8 helping. In fact, if the municipal utility wants to 9 outboard all of its risk it can do so by outsourcing 10 through a wholesaler this requirement contract with any 11 of those power marketers. 12 The Board has heard from at least two 13 groups of municipal utilities -- actually three: the 14 Upper Canada Energy Alliance, the G6 Utilities and the 15 Northern Energy Alliance. There are other groups of 16 utilities forming alliances as we speak. There is the 17 group of Niagara utilities, there is a triangle group 18 around the Guelph area and there is something going on 19 in eastern Ontario. All of these groups will have the 20 skill to develop their own buying operation in time. 21 I might add, too, that the G6 22 utilities, in particular, recently announced that they 23 were soliciting interest in purchasing up to 1,000 24 megawatts of fixed priced power, and they received 25 quite a broad variety of responses -- 22 in all -- from 26 companies all around the North American continent. So 27 it is quite obvious that Ontario is an important market 28 in the North American context and it will not be 657 ADAMSON/CONWAY, presentation 1 overlooked. 2 That concludes my comments. 3 MR. POWER: Thank you very much, 4 Mr. Conway. I just have three questions for 5 Mr. Adamson. 6 Mr. Adamson, Mr. Dewees has made the 7 assertion that the percentage in the market accounted 8 for by the large industrial customers is sufficient to 9 sustain the development of a forward market. Would you 10 have any response to that assertion by Mr. Dewees? 11 MR. ADAMSON: As I mentioned during 12 my presentation, I think two things are relevant. 13 First off, in markets unconstrained by mechanisms such 14 as the Standard Supply Draft Code we have been 15 discussing here, the vast majority of the actual 16 physical megawatt hours traded actually seemed to go 17 into contracts. That is a lot higher than 25 per cent. 18 It is rather hard to make an 19 assessment, or at least I don't know of an easy way. I 20 don't know of a way to do so that says, "Here is the 21 percentage you require" in order to have the 22 intermediate markets develop the required level of 23 liquidity. I can't help but believe that, if 24 experience tends to show that it is a much higher 25 percentage of that, that you are not essentially 26 damaging the potential by artificially constraining it. 27 The other thing I would like to say 28 is that it is not just the pure volume of generation in 658 ADAMSON/CONWAY, presentation 1 megawatt hours. Liquidity in the market is relatively 2 dependent on the number of players in the market as 3 well. So although those consumers may make up a 4 relatively large amount in megawatt hour terms, there 5 are probably relatively small numbers of players from 6 the industrial side that would be participating. 7 Those players probably are -- and 8 typically they are quite energy intensive -- probably 9 are the best ones to actually face spot prices as well. 10 They are usually the ones that we see in other 11 markets -- Alberta, England and Wales and 12 whatnot -- who actually can respond to these price 13 signals because they are the ones who usually can sit 14 there with somebody on a switch and say, "Gosh, if the 15 price hits a spike, we turn off this pump". I believe 16 that there are quite a few large industrial consumers 17 in Alberta who literally did that. They had a little 18 program that picked up the prices off Alberta's Web 19 site and if it went above a certain number a red light 20 flashed and some guy went over and turned off some form 21 of industrial machinery. 22 So they are maybe the ones who are 23 best able to deal with the actual price risk, the 24 physical management of it, by changing their 25 consumption. 26 Of that generation, of that 25 per 27 cent of total market volume, is most of that going to 28 be in the price hedging market? No, probably not 659 ADAMSON/CONWAY, presentation 1 because there is probably a fair number of particularly 2 large industrial consumers who are actually able to 3 deal with the price signals that an hourly market 4 produces. 5 MR. POWER: Thank you. 6 Mr. Todd yesterday made a comment 7 that there was a trade-off between the mobility of 8 customers and the ability to pursue a stable or fixed 9 rate. Do you have any comments on that assertion? 10 MR. ADAMSON: I think I did mention 11 that you can't offer people a costless option, and the 12 option to switch without any form of constraint always 13 costs someone somewhere. There is some form of 14 quantity risk. 15 I think at the kind of policy 16 level -- and it clearly is a policy decision -- one of 17 the things to think about in designing these mechanisms 18 is, do we want to select that option? It is like me 19 picking the options on my car. I like some, but, gosh, 20 some of them cost more money than I am willing to pay. 21 That is clearly a policy decision about whether you 22 want to choose to exercise that. 23 To the extent that there is a cost, 24 as I said before, I think the overall quantity risk in 25 the market can't be that high, because the overall 26 short-term elasticity of demand for electricity is very 27 low. So if I don't need my contract, someone else 28 will. 660 ADAMSON/CONWAY, presentation 1 However, it is probably clear that 2 there is some cost, and that just needs to be stated 3 upfront, call a spade a spade and say whether you are 4 willing to live with the cost or not. 5 MR. POWER: Thank you. My last 6 question is, you were here this morning for Mr. Mark's 7 and Mr. Jennings' testimony. They outlined a type of 8 light-handed regulation or review of rates charged for 9 what we are calling the standard supply. Do you have 10 any comments on that? 11 MR. ADAMSON: I think it is probably 12 almost a job requirement for anyone who calls 13 themselves an economist to call out for light-handed 14 regulation. I suspect you would lose your union card 15 if you didn't. 16 --- Laughter 17 MR. ADAMSON: It is a bit like saying 18 "I am member of the Communist Party, but a secret 19 admirer of Bill Gates." It doesn't happen. 20 Everyone wants to believe in 21 light-handed regulation, and many regulatory regimes 22 are truly light-handed. I think the question becomes: 23 How do you actually implement it? Who is actually 24 going to do what? Is there going to be a sufficient 25 level of oversight? 26 I believe that it is not impossible 27 for regulators to oversee contract purchases on behalf 28 of franchise or standard supply customers. That is not 661 ADAMSON/CONWAY, presentation 1 dissimilar to the mechanism that the regulator in the 2 U.K. offers and has used for franchise customers of the 3 RECs over time, where they effectively buy contracts 4 and are really basically able to pass the costs 5 through, subject to some potential regulatory 6 intervention, nor does offers have a huge staff of 7 people involved in doing this. Offers just doesn't 8 have a huge staff and it is not seen to require that 9 much effort, given the scale of the market. 10 When I first moved over to London in 11 the very early nineties, one of my very first projects 12 was in fact what was called the Economic Purchasing 13 Review, which was done by the firm Northern Economics, 14 which I worked for at that time, basically helping 15 offers to decide whether the contracts had been 16 purchased in an economic manner, i.e. at the lowest 17 cost, risk adjusted. While it was not a trivial 18 exercise, it wasn't exactly the Manhattan project 19 either. The outcome seemed to be fairly reasonable and 20 offers went on its way. So it is not impossible to do 21 it that way. 22 I am a proponent of creating 23 incentives where practical. I think if you get the 24 incentives right, which was the purpose of the 25 presentation I just gave, it makes the life of the 26 regulator much easier. If you have faith in the fact 27 that the incentives you have created are correct, I 28 think that makes a much more light-handed approach 662 ADAMSON/CONWAY, presentation 1 really possible. 2 MR. POWER: Thank you, Mr. Adamson. 3 Ms Lea, these gentlemen are here to 4 answer any questions. 5 MS LEA: Thank you very much. 6 Mr. Gibbons, I understand that you 7 very kindly switched places with Mr. Warren, due to a 8 time constraint of his. 9 Mr. Warren. 10 MR. WARREN: Thank you. 11 Mr. Adamson, first of all, just by 12 way of clarification on your submission, it isn't 13 stated in your submission by whom you were retained to 14 prepare it. Can you tell me who it is who retained 15 you? 16 MR. ADAMSON: My paper, as Rob Power 17 suggested, is included in the volume in conjunction 18 with Fiona's paper. We are sort of a double-axe on 19 this. I guess that I am the first movie. She is the 20 main feature. 21 If you flip over -- 22 MR. WARREN: I wouldn't say that you 23 were a "B" movie trailer, Mr. Adamson. 24 MR. ADAMSON: Well, you know. Maybe 25 sometimes the "B" side is a better thing. 26 --- Laughter 27 MR. ADAMSON: If you look on page 1 28 of the executive summary at the end of the paper, which 663 ADAMSON/CONWAY, presentation 1 is in this document -- 2 MR. WARREN: I have it, Mr. Adamson. 3 MR. ADAMSON: There is a list of the 4 stakeholders who supported that submission. I also 5 want to include in that, because they are not listed in 6 this group, Enron Capital & Trade Canada, which we also 7 interacted with. 8 MR. WARREN: I just want to make it 9 clear. Were you retained by Enron directly to prepare 10 a paper? Is that what I am to understand? 11 MR. ADAMSON: I believe that it is a 12 contractual mechanism, but it was on behalf of a more 13 substantial group of stakeholders. Barry can probably 14 tell you more about the contract than I can. 15 MR. CONWAY: There were five parties: 16 Toronto Hydro, Enron, ENERconnect, the MEA and the 17 Ontario Hydro Services Company. 18 MR. WARREN: I am sorry, Mr. Conway, 19 I can't write as fast as you can speak. It is Toronto 20 Hydro, the MEA, Enron -- 21 MR. CONWAY: ENERconnect and the 22 Ontario Hydro Services Company. 23 MR. WARREN: Perhaps you can answer 24 this question. Those five entities retained Ms Woolf 25 and Ms Woolf, in turn, retained Mr. Adamson? Is that 26 the way it worked, or did they retain Mr. Adamson 27 directly? 28 MR. CONWAY: Those five parties 664 ADAMSON/CONWAY, presentation 1 agreed, as a group, to retain Mr. Adamson. 2 MR. WARREN: When I look at the first 3 page of Ms Woolf's written submission and I see the 4 group of stakeholders, what is the relationship between 5 those stakeholders and the five people you have just 6 told me you retained, among others, Mr. Adamson? 7 MR. CONWAY: Some of them are the 8 same. 9 MR. WARREN: I take it that London 10 Hydro is not the same as any of those five. Did they 11 independently retain Mr. Adamson or Mr. Conway? Can 12 you help me out? 13 MR. CONWAY: Another group that is 14 listed in that paper retained Fiona Woolf. 15 MR. WARREN: Looking at page 1, the 16 folks who are listed there retained Ms Woolf to provide 17 a paper. There is a smaller group, consisting of 18 Toronto Hydro, the MEA, Enron, ENERconnect and the 19 Ontario Hydro Service Corporation, which retained 20 Mr. Adamson. Is that correct? 21 MR. CONWAY: That's correct. 22 MR. WARREN: Am I to take it from 23 that, Mr. Conway, that those members of the larger 24 group who didn't retain Mr. Adamson didn't feel it was 25 necessary or don't support his position? What am I to 26 conclude about that? 27 MR. CONWAY: I think we can conclude 28 that the history of retaining the two parties was a 665 ADAMSON/CONWAY, presentation 1 little disjointed and eventually came together into one 2 package. 3 MR. WARREN: But I am clear that 4 Mr. Adamson appears here today on behalf of five 5 entities and five entities alone. Is that right, 6 Mr. Conway? 7 Is that your understanding, 8 Mr. Adamson? 9 MR. POWER: If I could interject, I 10 think I said at the start that there is the group of 11 clients that we represent, that has been set out at the 12 start of this proceeding, which is putting these 13 gentlemen on the stand. So they are here on behalf of 14 the group, if that helps you in any meaningful fashion. 15 MR. WARREN: Well, sorting out the 16 players is hard, Mr. Power, but it is about the best I 17 am going to get, I guess, at this stage. 18 Mr. Adamson, I just want to start 19 with the final point, the final question that was asked 20 you by counsel for the group, Mr. Power, and that is 21 whether or not -- and this is my gloss on the question, 22 and you can tell me if I have misunderstood it -- he 23 asked you if you agree with the proposal that was 24 advanced by one of the people that retained you, namely 25 the MEA, and I took it that you didn't agree with it. 26 MR. POWER: I didn't ask whether he 27 agreed, I just asked Mr. Adamson to comment on one 28 aspect of the testimony that was heard earlier. 666 ADAMSON/CONWAY, presentation 1 MR. WARREN: Let me ask the question. 2 Do you agree with the proposal that has been advanced 3 by the MEA? 4 MR. ADAMSON: I believe I was 5 agreeing with the assertion that an approach of 6 light-handed regulation is most appropriate. So in 7 that very broad sense, I do support a fixed-price 8 standard supply service mechanism, I do support some 9 other features of what they spoke to today -- and I 10 can't say that I probably took in all of it -- and I do 11 support some form of light-handed regulatory approach. 12 I definitely agree with that. 13 I have tried, I believe, to go a 14 little further in describing the mechanics of an 15 incentive-based mechanism for the standard supply 16 service procedure. So I don't think they elucidated 17 anything as detailed as I have. I guess I have gone 18 beyond what I believe they said this morning. 19 MR. WARREN: Do you agree that what 20 they are proposing constitutes light-handed regulation? 21 They described it that way. I am going to ask you if 22 you agree that what they have proposed constitutes 23 light-handed regulation? 24 MR. ADAMSON: I personally think that 25 light-handed regulation, I would say, is more in 26 practice than in theory. There may be all sorts of 27 different schemes which might be applied in a 28 light-handed or a sort of heavy-handed way. I 667 ADAMSON/CONWAY, presentation 1 certainly believe Mr. Mark had the idea that he is 2 hoping for a regulatory scheme that would be applied in 3 a light-handed way. 4 I believe, using these types of 5 incentive approaches, it makes it much easier for the 6 OEB to act in a light-handed way. 7 MR. WARREN: So you think that your 8 proposal constitutes a lighter form of light-handed 9 regulation than what they are proposing. Is that a 10 fair summary? 11 MR. ADAMSON: I think in the 12 implementation of it and the practice of it, it would 13 turn out to be lighter-handed, if that is in fact an 14 adjective. 15 MR. WARREN: Can I ask you to turn 16 up, then, Mr. Adamson, page 3 of the prefiled material. 17 MR. CONWAY: Which section? 18 MR. POWER: Of Mr. Adamson's paper? 19 MR. WARREN: Yes. He didn't write 20 any others, did he? 21 It is Mr. Adamson's paper, your 22 prefiled material. 23 MR. ADAMSON: Okay. We are there. 24 MR. WARREN: Do I understand 25 correctly that what you are talking about on this page 26 or this section of your paper is the risk which the 27 standard service proposal imposes on consumers? 28 Is that fair? Have I got that? Is 668 ADAMSON/CONWAY, presentation 1 that what you are talking about here? 2 MR. ADAMSON: Can you give me a 3 specific line or -- 4 MR. WARREN: I want to take you to 5 the third full paragraph, the one that begins with the 6 words "Wholesale electricity prices". 7 Do you see that paragraph? 8 MR. ADAMSON: Yes. 9 MR. WARREN: In the last sentence you 10 say: 11 "This is hardly an economically 12 rational policy since the 13 introduction of competition is 14 designed to provide economic 15 benefits to customers, not 16 impose large and often 17 undiversifiable risks on them." 18 (As read) 19 Do I understand your paper to be 20 suggesting that the standard service proposal, the spot 21 price pass-through, imposes large and undiversifiable 22 risks on consumers in Ontario? 23 MR. ADAMSON: It is my opinion that, 24 yes, it proposes that the mechanism, as currently 25 proposed in the Code, imposes a substantial risk upon 26 them and that they will face a serious disbenefit from 27 that risk that they need not face. 28 MR. WARREN: Is the source of that 669 ADAMSON/CONWAY, presentation 1 risk price volatility? 2 MR. ADAMSON: Yes, fundamentally. 3 MR. WARREN: Can you tell me, sir, 4 what independent analysis you have made of the risk of 5 price volatility in Ontario, if any? 6 MR. ADAMSON: I have not made an 7 analysis of price risk volatility in Ontario. 8 MR. WARREN: What are you relying on 9 for your proposition that under the spot price 10 pass-through there will be a large risk of price 11 volatility in Ontario? 12 MR. ADAMSON: I had seen the analysis 13 that had been prepared in this paper, for example, 14 which is labelled "RET94", called "The Effective 15 Volatile Electricity Prices on the Residential 16 Customer's Bill". That provides some analysis. I have 17 not done a specific volatility analysis of my own. 18 I was also basing it on my experience 19 of what the volatility tends to be in these markets, 20 some of which are actually summarized in this paper, 21 for example. If you turn to page 19, there is a little 22 table about "Averages in Standard Deviations and 23 Coefficients of Variation". 24 I have done an analysis of volatility 25 in prices in some other markets and fundamentally 26 believe that while I have not studied the empirics of 27 Ontario in particular, the same laws of economics 28 apply. 670 ADAMSON/CONWAY, presentation 1 MR. WARREN: Can I take it from 2 that -- first of all, I take it that the principal 3 source of your conclusion is the PHB analysis. 4 MR. ADAMSON: I had not seen the 5 John Todd paper at that time, by the way, although that 6 is an additional kind of reference point for you, 7 called "The Assessment of Price Volatility in the 8 Competitive Ontario Electricity Market". 9 I would say the basis of my assertion 10 was on my experience in other competitive electricity 11 markets around the world -- 12 MR. WARREN: Have you read -- 13 MR. ADAMSON: -- more than the PHB 14 paper, about which I had some misgivings, to be honest. 15 MR. WARREN: Have you read Mr. Todd's 16 analysis? 17 MR. ADAMSON: I have now, but I had 18 not read it at the time when I wrote the words which 19 you just quoted to me. So I think it is unfair to say 20 that I based my assessment upon Mr. Todd's analysis. 21 MR. WARREN: Can you turn it up for 22 me, please. I ask you to turn to page 22. 23 I am going to take you to the third 24 full paragraph and I am going to read it to you. It 25 says: 26 "The full impact of the spot 27 market volatility would not be 28 observed by consumers paying for 671 ADAMSON/CONWAY, presentation 1 SSS under the purest spot market 2 pass-through, for two reasons: 3 first, the monthly pricing 4 mechanism will smooth volatility 5 of the ROE spot market; second, 6 charges for distribution and 7 customer care are likely to be 8 relatively stable, which will 9 reduce the volatility of the 10 total bills of customers." 11 (As read) 12 Do you have any reason to quarrel 13 with that conclusion of Mr. Todd? 14 MR. ADAMSON: I don't believe 15 Mr. Todd is here. 16 MR. WARREN: Do you have any reason 17 to quarrel with that conclusion of Mr. Todd? 18 MR. ADAMSON: Of Mr. Todd; excuse me. 19 First off, the pricing mechanism -- 20 it is probably true, in fact, that the distribution 21 rates aren't going to change. I certainly don't 22 disagree with that. Customer care costs are not a 23 defined term that I am familiar with. I assume this is 24 like billing costs, call centre costs, and stuff, and I 25 would agree that those probably are to be relatively 26 pretty constant. 27 However, I would note that even on a 28 monthly basis, it seems to me that the pure energy or 672 ADAMSON/CONWAY, presentation 1 commodity component of electricity prices could be 2 highly, highly volatile. 3 MR. WARREN: I assume I can conclude, 4 Mr. Adamson -- but I want to be clear on this so that I 5 understand the basis for your conclusions -- that you 6 have not done any independent analysis of the potential 7 impact of the spot price pass-through on the bills of 8 customers. 9 Is that fair? 10 MR. ADAMSON: That's absolutely true. 11 MR. WARREN: Staying on page 3 of 12 your paper, you talk about -- and this is in the 13 second-to-last paragraph, about two-thirds of the way 14 through it, in a sentence beginning with the words 15 "Experience in other markets". 16 You talk there in that sentence about 17 the real and significant transaction and information 18 costs. 19 Have you made a quantitative 20 analysis, Mr. Adamson, of what those transactional and 21 information costs are in Ontario? 22 MR. ADAMSON: I have not made an 23 analysis of what those costs may be in Ontario, no. 24 However, I do believe they exist. 25 MR. WARREN: I take it in reading 26 your paper -- and please correct me if I am wrong -- 27 that the transactional and information costs would be 28 the same whether you had a fixed-price regime or a spot 673 ADAMSON/CONWAY, presentation 1 price pass-through regime. Is that fair? 2 MR. ADAMSON: I am a bit unclear on 3 your question. 4 MR. WARREN: Let me rephrase it, 5 then. 6 Are the transactional and information 7 costs that you are referring to on page 3 of your paper 8 unique to a spot price pass-through regime or do they 9 obtain generally regardless of the standard service 10 regime that is in place? 11 MR. ADAMSON: Well, I think I 12 understand what you are saying there. 13 Remember, these costs are borne by 14 those who switched. I can effectively not incur those 15 costs by doing nothing and writing the cheque for my 16 electricity bill as it comes through the post. 17 It is when I change. It is when I 18 try to move over that hump in my little drawing is when 19 I would incur these costs. 20 I do think one relatively important 21 feature, though, is that we need to be realistic, from 22 the policy perspective, about the difficulties that the 23 average small consumer has in evaluating these offers, 24 these retail offers, from competitive retail suppliers 25 in the market. 26 So would the transactions costs be 27 more difficult, or the information costs, rather, be 28 more difficult for someone who is offered a price by 674 ADAMSON/CONWAY, presentation 1 Toronto Electricity Retailers Company, compared to a 2 spot price mechanism where the customer is not even 3 able to look on his bill and say, "Well, gosh, right 4 now I am paying X cents, and this guy is offering me 5 Y cents. Is Y even less than X?" 6 One lesson, I think, of the telecom 7 market, which I believe Mr. Todd alluded to yesterday, 8 is that there has been a very strong kind of 9 rationalization and simplification of the offers made 10 to consumers, because small consumers, like me with my 11 own telephone bill, tend to respond very much to "9 12 cents a minute to anywhere in the United States" type 13 messages rather than the comparisons to very hard to 14 assess floating spot prices. 15 I would think that the transaction 16 cost might be higher if you were transitioning from a 17 spot price mechanism than a fixed price mechanism. 18 However, I would note that the main 19 costs were incurred just from the fact that I am trying 20 to understand this enough to switch. 21 MR. WARREN: Okay. Thank you for 22 that clarification. 23 Let me see if I understand one aspect 24 of your concern about the spot price pass-through. It 25 is that there are hidden costs, and the hidden costs 26 are the costs of bearing the risk. Is that fair? 27 Undisclosed costs under the spot 28 price pass-through, and that is the cost of the risk. 675 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: There is inevitably, I 2 believe, in almost all markets, a trade-off between 3 costs and risk. People, in most products, in most 4 items in their ordinary life, are risk averse and don't 5 accept risks without some reason. Maybe that's not 6 true in lottery tickets, probably not, but people in 7 general don't take on price risks without some form of 8 compensation. 9 Is there a cost to doing so? I would 10 argue if I am risk averse that the definition of being 11 "risk averse" is that I prefer a less risky selection 12 to a risky selection at the same net cost. You can 13 describe it as a cost or you can describe it as a 14 disbenefit, if you will, a lower utility, but I accept 15 a variable return on my savings. I accept a lower 16 expected on variable return than I would for an 17 expected fixed return on my savings account. 18 MR. WARREN: Mr. Adamson, there 19 wasn't any magic in my question. I thought what you 20 were saying in your presentation to us, in the written 21 paper, was that one of the problems with the Board 22 staff's proposal was that the spot price pass-through 23 doesn't factor in the cost of risk and that you think 24 it ought to be to in accord with the thinking in 25 economics. Have I got that right? 26 MR. ADAMSON: I think it should 27 account for risk. You can describe it as a cost, you 28 can describe it as a lower utility. There is a 676 ADAMSON/CONWAY, presentation 1 trade-off between cost and risk and that trade-off, I 2 believe, has not been properly accounted for. 3 MR. WARREN: Thanks. 4 Now, if you go to a fixed price 5 regime -- correct me if I am wrong -- what you do is 6 you get a higher cost, all things equal, than a spot 7 price pass-through, but the higher cost includes 8 coverage for the risk. Is that not fair? 9 MR. ADAMSON: No, I wouldn't say that 10 was completely true. That may be true. I don't 11 believe that's necessarily true because I would need to 12 account for the risk preferences of other people in the 13 market. 14 MR. WARREN: It may be the case under 15 a fixed price regime that customers are forced to buy 16 at a hedge price that they may not be willing to pay. 17 Is that not a possibility? 18 MR. ADAMSON: That, I would argue, is 19 the flip-side of they may be forced to buy at a 20 unhedged price that they are not willing to pay. 21 MR. WARREN: Fair enough. But those 22 are two choices which people can make. Fair enough? 23 MR. ADAMSON: One could design a set 24 of policies where one allowed people to express 25 preferences between fixed and floating options, if you 26 will, and, in general, offering people that choice, 27 unless it was very costly, is probably of net benefit 28 to the chooser. 677 ADAMSON/CONWAY, presentation 1 MR. WARREN: Now, let me turn to your 2 specific proposal. First of all, can you help me out? 3 How does your proposal differ -- your proposal 4 envisages a portfolio of choices which each local 5 distribution company will make available to the default 6 customers. Is that right? 7 MR. ADAMSON: I think you are making 8 that extrapolation, not me. What types of choices have 9 to be offered to standard supply of service, what types 10 of final retail rates have to be offered to standard 11 supply service customers is not something I have 12 discussed. What I was offering is a mechanism by 13 which, I believe, a fixed rate standard supply service 14 could be offered, but I have not said anything about 15 are there five options, two options or one option. 16 MR. WARREN: It might just be one 17 option. Is that fair? 18 MR. ADAMSON: That again is a policy 19 decision. 20 MR. WARREN: And whose decision is 21 that? Is it the individual MEU or the regulator? 22 MR. ADAMSON: That's for you to 23 decide, not me -- you broadly. 24 MR. WARREN: In your universe, as you 25 imagine it, Mr. Adamson, who makes the choice, is it 26 the regulator or the LDC, about what options are made 27 available and how many of them are -- 28 MR. ADAMSON: I have not made a 678 ADAMSON/CONWAY, presentation 1 comment on that. That is the choice that -- 2 MR. WARREN: I am asking you, 3 Mr. Adamson. 4 MR. ADAMSON: -- people in Ontario 5 have to choose, not me. 6 MR. WARREN: Do you have a 7 preference? 8 MR. ADAMSON: I have offered a 9 mechanism by which a fixed rate choice could be offered 10 to them. I have not tried to define that that should 11 be the only choice. 12 MR. WARREN: So you don't suggest 13 that it should be -- you don't take any position as to 14 whether or not it should be one fixed price choice or a 15 number of them. You don't take any position on that at 16 all? 17 MR. ADAMSON: I have not stated that 18 there needs to be one choice. 19 MR. CONWAY: I think, actually, that 20 might be covered in Fiona Woolf's paper. 21 MR. ADAMSON: There are clearly some 22 other choices because I can always switch to a 23 competitive supplier. So there are at least some other 24 options, clearly, but you are making the line that I am 25 imposing one choice on it. I am offering a mechanism 26 by which a fixed rate choice might be made available. 27 That might be the only method if people in Ontario 28 wanted to implement it that way or it might be, you 679 ADAMSON/CONWAY, presentation 1 know, one of several options. 2 MR. WARREN: So the limit of what I 3 am to take from your paper is that you are suggesting a 4 methodology whereby a fixed price regime might be made 5 available under standard supply. That is what I am to 6 take from your paper? 7 MR. ADAMSON: That is one conclusion 8 to take from the paper. 9 MR. WARREN: You spend some 10 considerable time talking about regulatory costs. 11 First of all, have you made any 12 independent assessment about the regulatory costs in 13 Ontario from a spot price pass-through regime? 14 MR. ADAMSON: No, I have not. 15 MR. WARREN: I just want to 16 understand how the regulatory system works for your 17 suggested mechanism. Can you describe to me how it 18 works? 19 MR. ADAMSON: Sorry, what do you mean 20 by "the regulatory mechanism"? 21 MR. WARREN: Well, let me walk 22 through it. 23 Let's take an LDC. Let's take 24 Toronto Hydro under your regime. Does it come forward 25 to the Board with a yardstick proposal, as you have 26 described it, for one rate or two rates or three rates 27 to be approved by the Board? 28 MR. ADAMSON: There is one yardstick 680 ADAMSON/CONWAY, presentation 1 mechanism which would be used by the regulator. So 2 there is no multiple kind of different yardstick 3 mechanisms in use. I certainly don't envision that at 4 the same time. I think that would be extremely 5 difficult. 6 Could you turn to page 16 of my 7 paper? 8 MR. WARREN: I certainly can. 9 MR. ADAMSON: There is a little bit 10 in there which you might see in a section called 11 "Regulatory Implementation of Yardstick Approaches" and 12 there is a number of points beneath it. Effectively, 13 what is the set of choices that the OEB would have to 14 make in putting such a system in place? I am not going 15 to bore you all to tears by reading these multiple 16 points. I think it gives a little bit of a road map 17 about some of the choices in designing the yardstick 18 mechanisms that the OEB would face in implementing such 19 a system. 20 Now, another question is: How does 21 one get the retail rate which will actually be charged? 22 That is envisioned as being really very quite simple. 23 Individual standard supply service providers would sign 24 up a portfolio of contracts on which is the basis they 25 could offer a fixed rate. The question is, how do you 26 go -- 27 MR. WARREN: They sign up with whom? 28 MR. ADAMSON: Pardon? 681 ADAMSON/CONWAY, presentation 1 MR. WARREN: They sign up with -- 2 MR. ADAMSON: They contract with 3 counter-parties in the market, which might be 4 generators, might be financial intermediaries, might be 5 marketers, might be, you know, any other party willing 6 to hedge prices for them, or there are expected 7 standard supply service loads. Now, an interesting 8 question and I believe a question the regulatory agency 9 in Ontario has probably been faced with before is: How 10 do we go from a set of costs to a retail test to be 11 offered? 12 We may have multiple classes of 13 service. We have to do some allocation of costs in 14 between those. I have not commented on this because I 15 believe that those principles are pretty familiar to 16 regulatory agencies around the world. So given a set 17 of contracts acquired by the SSS provider, one 18 challenge, I guess, for wont of a better phrase, is: 19 How does that get turned into a final rate? I assume 20 there is probably a methodology for doing that in 21 Ontario already, so I haven't laid great stress upon 22 it. 23 Then the next question is: How do I 24 make sure that the incentive mechanism actually 25 provides the incentive for them to cut those costs and 26 that is, actually, for the regulatory -- I'm sorry, the 27 yardstick mechanism that I described in the previous 28 section. You might just look at Figure 3 and Figure 4. 682 ADAMSON/CONWAY, presentation 1 MR. WARREN: Each individual LDC 2 making an assessment of its SSS requirements goes out 3 and finds a portfolio of potential providers of fixed 4 price contracts. Is that correct? 5 MR. ADAMSON: It would certainly have 6 to be active in the market to know what contracting 7 options were out there for it. 8 MR. WARREN: And it picks a contract 9 or contracts and those contracts are measured according 10 to your yardstick. Is that right? 11 MR. ADAMSON: Yes. 12 MR. WARREN: The role of the 13 regulator is, first, to set the yardstick. Is that 14 right? 15 MR. ADAMSON: And the surrounding 16 parts of the mechanism, yes. 17 MR. WARREN: Then the regulator has 18 to do an assessment as to where they are in the band, 19 whether they are in the penalty portion, the neutral 20 portion or the bonus portion of the band. Is that 21 right? 22 MR. ADAMSON: Yes, if you chose a 23 risk-sharing arrangement of that sort. You could make 24 it even simpler than that. 25 MR. WARREN: The regulator would have 26 to do this under your proposal. There are now some 27 270, I guess, LDCs in the province. The regulator 28 would have to make, I assume on an annual basis, this 683 ADAMSON/CONWAY, presentation 1 calculation of whether or not these contracts met -- 2 where they fell within the yardstick guidelines. Is 3 that the way it works? 4 MR. ADAMSON: Yes. 5 MR. WARREN: Under the proposal, are 6 you advocating as the most effective method your 7 incentive system, which has the bonuses and penalties? 8 MR. ADAMSON: I'm sorry, am I 9 advocating...? 10 MR. WARREN: Do you recommend that as 11 the most effective system of standard supply, which is 12 your incentive system with the bonuses and the 13 penalties? 14 MR. ADAMSON: As I mentioned, I do 15 want to harness comparative competition in the creation 16 of incentives. 17 MR. WARREN: I just want to stay with 18 this so I can understand the practical implications. 19 The Board makes the assessment on an individual basis 20 of the 260 or 270 contracts that have been entered 21 into -- 22 MR. ADAMSON: Or groupings thereof. 23 MR. WARREN: Or groupings thereof. 24 Fair enough. 25 MR. ADAMSON: It appears very likely, 26 at least from the discussions I have been hearing in 27 the last few days, that there would be far, far fewer 28 than 270. 684 ADAMSON/CONWAY, presentation 1 MR. WARREN: But as things stand now, 2 today there are 270 of them but the Board, if the 3 incentive system is adopted, it may impose a penalty on 4 some of the MEUs, depending on where they fall in 5 relation to the yardstick. Is that correct? 6 MR. ADAMSON: If you adopted the 7 penalty band system illustrated in Figure 4, yes. 8 MR. WARREN: Who pays the penalty? 9 MR. ADAMSON: Pardon? 10 I'm sorry. Hold, please. 11 --- Pause 12 MR. ADAMSON: I'm sorry. I assume 13 that in order to create an incentive, I mean I think it 14 is very clear from any principle of corporate law that 15 the incentive have to fall upon the shareholder of such 16 a firm in order to give management the incentives for 17 performance. 18 MR. WARREN: Now, have you made an 19 assessment, Mr. Adamson, of the regulatory costs, an 20 independent assessment of the regulatory costs, if your 21 scheme were adopted in Ontario? 22 MR. ADAMSON: No, I have not. 23 MR. WARREN: Now, on page 13 of your 24 paper you talked about an "adder". I'm not sure I 25 understand what it means. What are you talking about 26 when you talk about an "adder"? What is it intended 27 to be? 28 MR. ADAMSON: Are you making a 685 ADAMSON/CONWAY, presentation 1 reference to the fourth full paragraph in? 2 MR. WARREN: Yes. 3 MR. ADAMSON: Oh, okay. That was a 4 response to a very queer issue which has been raised in 5 some other jurisdictions, and I believe it has also 6 been raised in this one as well, that says: Well, we 7 need to ensure that there is an incentive large enough 8 for customers to shift into the retail market. 9 The regulatory mechanism needs to 10 ensure that there is a guaranteed margin for 11 effectively competitive retailers. 12 That is not a mechanism with which I 13 would agree. If you wanted to have that outcome that 14 there was a guaranteed margin, I would suggest that 15 instead of being tied up in a very complex and 16 contentious picot-style Pennsylvania Utility Commission 17 hearing that it be adopted as a transparent sheer adder 18 onto the price as a market incentive for people to move 19 away. 20 However, I'm not advocating that one 21 do that. I'm saying, however, if you wanted that to be 22 a policy objective, you could do it that way and it 23 would seem to me to be more transparent than some of 24 the mechanisms used in other jurisdictions. 25 MR. WARREN: Thank you for that. I 26 now understand your position on it. 27 I want to just briefly return to this 28 question of the yardstick mechanism which you talked 686 ADAMSON/CONWAY, presentation 1 about. 2 In the range of the 270 MEUs that we 3 have in this province, some of them are very small and 4 are in relatively remove areas. Various of the people 5 who have made submissions to the Board have recognized 6 the possibility that some of those smaller MEUs may not 7 be able to secure bids or may not be able to secure 8 supply on terms that are as favourable as, for example, 9 Toronto Hydro. 10 Do you acknowledge that is a risk in 11 Ontario? 12 MR. ADAMSON: It looks like you are 13 making an assertion of economies of scale for market 14 power in purchasing. 15 MR. CONWAY: I would also say that 16 that's the purpose of ENERconnect to make sure that -- 17 MR. WARREN: I wasn't asking you a 18 question, Mr. Conway. 19 I was asking a question of 20 Mr. Adamson about his analysis. 21 We will deal with ENERconnect later. 22 Thank you. 23 MR. POWER: I think we are here to be 24 helpful to the Board, aren't we? 25 MR. ADAMSON: First off, are there 26 likely to be large economies of scale in purchasing 27 power? The answer is yes, down to the level of the 28 size of some of the municipal utilities in Ontario, 687 ADAMSON/CONWAY, presentation 1 some of which are very, very small indeed, at least in 2 comparison to many in other jurisdictions. There are 3 likely to be economies of scale at those sizes. 4 That is why I fundamentally believe 5 that any procurement process almost guarantees some 6 form of aggregation in it because it is not going to 7 be -- is not going to be efficient to do almost 8 anything for that small number of customers. 9 The second point is perhaps a 10 different one, which is what is the -- is there a 11 downstream market power, if you will, the ability for 12 a Toronto Hydro, one of the largest of the utilities in 13 order to kind of get its way in the market through 14 effectively bullying, I guess, the other side, the 15 sellers of such contracts. 16 I don't know of any evidence that 17 suggests that Toronto Hydro would be that big or have 18 that type of pricing power in the market. I suggest 19 that it is probably relatively unusual that such market 20 power could be exerted upstream. 21 MS LEA: Mr. Warren, I'm sorry. 22 We have been on now for nearly two 23 hours. I'm going to have to take a break shortly. 24 Do you know how much longer you will 25 be? I know you have time constraints yourself. 26 MR. WARREN: I will be about 27 15 minutes, but I have risk managed my time constraints 28 to a limited degree or the Children's Aid Society hits 688 ADAMSON/CONWAY, presentation 1 me for not picking up my daughter. 2 We can take a break, and I will be 3 finished in about 15 minutes after that. 4 Thank you. 5 MS LEA: Thank you. 6 MR. WARREN: I appreciate Mr. Gibbons 7 courtesies during this time. 8 MS LEA: Mr. Brett? 9 MR. BRETT: Yes. Just before we do, 10 Ms Lea, I just want to say that I have with me now a 11 document which is a series of talking points for the 12 IPPSO panel which is going to appear tomorrow. It is 13 really an elaboration of the short document IPPSO filed 14 some time earlier. There is nothing new in it, but it 15 is a little more precise. 16 I am going to leave copies on the 17 sideboard there. I will try to hand them out so people 18 have a chance to read it, if they are interested, 19 before the IPPSO panel appears. 20 Thank you. 21 MS LEA: Thank you. 22 Let's take a 15 minute break then. 23 --- Upon recessing at 3:30 p.m 24 --- Upon resuming at 3:47 p.m. 25 MS LEA: Can we reconvene, please? 26 Do we have presenters? Yes, we do. 27 Mr. Adamson and Mr. Conway. Are you 28 content to begin, gentlemen? Your counsel isn't yet in 689 ADAMSON/CONWAY, presentation 1 the room. I think you are all right. 2 MR. ADAMSON: No. He will catch up 3 in a minute. 4 MS LEA: All right. 5 Mr. Warren. 6 MR. WARREN: I think actually I would 7 feel more comfortable if Mr. Power were in the room. 8 MS LEA: That's fine. Thank you. 9 All right, Mr. Warren. I think you 10 are safe now. 11 MR. WARREN: With apologies, 12 Mr. Adamson, I just want to go back one last time to 13 see if I can understand the way that what you are 14 proposing would actually work. 15 As I understand the exchanges we had 16 earlier, an LDC would go out in the market and would 17 determine what supplies were available for the SSS 18 service. Is it possible under your scenario that an 19 LDC might decide that, for example, it should make 20 available two or three or more fixed-price contracts to 21 fulfil its SSS obligation, in other words, to provide 22 options of fixed-priced contracts for its customers? 23 MR. ADAMSON: Pricing options to 24 final customers. Personally, that is not an option 25 that the mechanism I have proposed prevents. 26 Personally, I doubt it would be necessary to do so. 27 That somewhat depends upon the range of patterns of 28 consumption of various types of customers to be offered 690 ADAMSON/CONWAY, presentation 1 standard service supply. 2 If their consumption characteristics 3 were relatively similar as regards time of day, peak, 4 off peak, that type of thing, one might easily say 5 let's go for a great simplification and just say there 6 is one type of fixed-price standard supply service 7 offer on the table. Then it certainly would make it 8 even simpler. 9 If the consumption patterns between 10 different types of customers are different, I think we 11 are all familiar with the standard economic arguments 12 about matching prices and promotion patterns may make 13 for more efficient consumption. 14 MR. WARREN: Is it possible under 15 your scenario that an individual LDC might have to 16 enter into a number of supply contracts in order to 17 meet its SSS fixed-price obligations? 18 MR. ADAMSON: You mean it might have 19 to contract with more than one party. 20 MR. WARREN: Yes. 21 MR. ADAMSON: Upstream. I think it 22 certainly might choose to do so. I think most trading 23 portfolio approaches certainly might assume that one 24 had more than one barrel in one's gun, for example. 25 MR. WARREN: And what does the Board 26 make its yardstick assessment on? Does it make it on 27 the supply contracts or on the fixed-price contract -- 28 the supply contracts which the LDC has entered into or 691 ADAMSON/CONWAY, presentation 1 on the fixed-price contract which it makes available to 2 its SSS customers? 3 MR. ADAMSON: The mechanism, as I 4 have envisioned it in this preliminary description, is 5 that the yardstick is calculated from the purchase 6 contracts from the standard supply service provider to 7 whoever its contractual counter-party is. 8 Remember, what we are trying to do is 9 place incentives through this yardstick mechanism to 10 push down purchase costs. We still want rates set as 11 much as possible based on cost-of-service. That is 12 clearly economic efficient. 13 If we chose to do the other, you are 14 actually proposing that -- it sounds like your 15 uncertainty is over why don't we just do it for the 16 final retail tariffs. I think if you kind of sketch it 17 out on the board, you would see that it would be very 18 difficult to get the incentives right in order for 19 people to not just raise tariffs, since they would not 20 be cost-based in this case, and make more money. 21 So we are still aiming very much for 22 the traditional, that the requirement of regulation is 23 to determine what costs are and hopefully to push those 24 down as much as possible. 25 MR. WARREN: You just used the 26 modified preliminary to describe your proposal. Do I 27 take it that we are to take from the use of that 28 modifier that your proposal is a preliminary one that 692 ADAMSON/CONWAY, presentation 1 requires fuller fleshing out? 2 Is that what I am to conclude from 3 the use of that modifier? 4 MR. ADAMSON: Absolutely, and I would 5 not claim to have done all of the work to make this a 6 reality in this period of time and given this level of 7 resources. 8 MR. CONWAY: As a matter of fact, 9 Mr. Adamson was retained to give a framework which we 10 could move ahead with. He was not retained, although 11 it is a tempting proposition, to work all of the 12 mechanics through to the final analysis. We are still 13 doing that right now for the spot price pass-through. 14 MR. POWER: I also don't think it is 15 the suggestion here that it is the responsibility of 16 the parties to provide the ultimate solution, but 17 rather to assist the Board in understanding the issues. 18 MR. WARREN: Thanks, Mr. Power and 19 Mr. Conway, but I understood the answer that I got from 20 Mr. Adamson. 21 The Board makes its assessment under 22 the incentive systems after the fact as to whether or 23 not there should be a bonus or a penalty, is that 24 right? After the contract has been entered into. 25 MR. ADAMSON: I can envision a couple 26 of different options. 27 I would think that one wants the 28 ability to look at how contracts performed when all of 693 ADAMSON/CONWAY, presentation 1 the information is available. Why might you do that at 2 the end of the period, as opposed to the start? After 3 all, the contracts -- or at least it has been the 4 impression that the contracts have been signed upfront. 5 The answer is that there are a lot of contracts. 6 Remember, these contracts are being offered by 7 generators or other intermediaries who themselves face 8 risk, and you want to make sure -- they want to be able 9 to hedge their own risks. For example, they may want 10 some indexation against, I don't know, natural gas 11 prices or something. We may need the ability to see 12 the outcome of the market, and connected markets like 13 natural gas markets, in order to assess exactly what 14 the purchase cost was. 15 So, for example, if one of the 16 contracts that I as an SSC provider signed up was with 17 a new entrant gas-fired generator and he offered me an 18 uptake contract that some form of tolling arrangement, 19 so it included some variation with his gas purchase 20 cost, that might quite an efficient outcome, and we 21 don't want to preclude that. 22 So that is why I made my initial 23 recommendation that we kind of do this at the end of 24 the period so that all of that information gets 25 encapsulated. 26 MR. WARREN: Now, the penalty is paid 27 by the LDC, is that right? Have I understood that 28 correctly? 694 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: You need to create a 2 meaningful incentive on management. Exactly how that 3 is affecting the relationship between the standard 4 service provider and the LDC, or whatever, is somewhat 5 independent of my scheme. I don't think we need to be 6 too prescriptive about that at this time. 7 MR. WARREN: Who pays the bonus, if 8 one is awarded? 9 MR. ADAMSON: Pardon? 10 MR. WARREN: Your scheme is a 11 symmetrical scheme. There are some penalties, but 12 there are also some bonuses, as I understand it. Who 13 pays the bonus? 14 MR. ADAMSON: One strong possibility 15 is that the penalties get paid out as the bonus. 16 MR. WARREN: And who administers that 17 scheme? Is it the Board that administers that scheme? 18 MR. ADAMSON: Yes, but I think that 19 might involve relatively little more than an Excel 20 spreadsheet. 21 MR. WARREN: Does your scheme, in 22 order to function effectively, require the presence of 23 an aggregator of significant size? 24 MR. ADAMSON: Define how you are 25 using the term "aggregator". 26 MR. WARREN: Look next door at 27 Mr. Conway. 28 MR. ADAMSON: Oh, an aggregator of 695 ADAMSON/CONWAY, presentation 1 standard supply service provider, sir? Something of 2 that -- 3 MR. WARREN: Right. 4 MR. ADAMSON: No. I would find it 5 surprising that, particularly standard supply service 6 providers of the smaller sort, would want to do it all 7 on their own. It just doesn't seem a very efficient 8 way to go. I do believe that there would be economies 9 of scale in this. 10 But there is no theoretical reason 11 why you can't do it under that. It doesn't require 12 that Mr. Conway here exists, although I think it would 13 certainly give him a very substantial role and that he, 14 indeed, will exist. 15 MR. WARREN: Finally, on the issue of 16 the regulatory oversight, does your scheme -- first of 17 all, you have raised as an issue to be dealt with the 18 question of whether or not the Board actually has to 19 prove the individual rates charged. Is that correct? 20 In addition to assessing the 21 contract, does the Board, in your scheme, have to 22 approve the actual rates that are charged? 23 MR. ADAMSON: One needs in any 24 rate-making approach, I believe -- I need a 25 methodological machine that takes me from a set of 26 costs to a rate that I charge consumers. 27 Now, what if you took my suggestion 28 that, yes, these consumers don't look that different 696 ADAMSON/CONWAY, presentation 1 from each other, so we are only going to offer one 2 fixed rate. Particularly in that sort of simplified 3 case, it seems to me very, very simple to go from a 4 purchase contract portfolio to a final rate. But there 5 is a significant -- 6 If you simplified that, then it is a 7 completely trivial process. Even if you were to create 8 multiple cases, there is a lot of experience in a whole 9 number of jurisdictions about how one does cost 10 allocation. I suspect that it is not a set of 11 regulatory issues that hasn't arisen here before. 12 MR. WARREN: The final point on the 13 process is, in the event, under your incentive scheme, 14 that a penalty is charged against an LDC, does the LDC 15 have the right to a hearing to, in effect, challenge 16 the allocation of the penalty and say that there are 17 circumstances which make that inappropriate? Or have 18 you thought about that? 19 MR. ADAMSON: I have thought about 20 that. I can't say that I have thought hours and hours 21 about it, but I have thought about it. 22 One always needs sufficient 23 regulatory flexibility for dealing with the unforeseen 24 that often crops up in all markets and in all 25 regulatory circumstances. How would one deal with an 26 ice storm type of occurrence, which happened not too 27 long ago in Canada, and what might happen in the 28 ability of people to source electricity from generation 697 ADAMSON/CONWAY, presentation 1 that they thought was going to be available and could 2 contract for? 3 I mean, there is always a variety of 4 potential events which are unforeseen and 5 unforeseeable, to a large degree. 6 So you certainly would want to 7 maintain the flexibility, I believe, as you would in 8 any system, for the Board or an appropriate regulatory 9 authority to intervene where there is clearly something 10 that had come in the way of the normal functioning of 11 the market. 12 I would not see it as something where 13 there is an automatic right for everyone, a potentially 14 large number of standard supply service providers, to 15 say, "Gosh, we didn't do very well, so we will run off 16 and see if they will change it for us." One always 17 wants to maintain enough regulatory flexibility to deal 18 with situations as they occur. 19 MR. WARREN: Mr. Janigan isn't here. 20 He acts for the Vulnerable Energy Consumers Coalition. 21 I always want to call it "Venerable", but -- 22 MR. ADAMSON: Venerable as well as 23 vulnerable. 24 MR. WARREN: That is something I 25 reserve for people like Mr. Mark. 26 You did have in your overheads, on 27 page 8, some observations which I took to be 28 suggestions that you didn't like Mr. Todd's proposal 698 ADAMSON/CONWAY, presentation 1 for a tendering process. Just so that we have a record 2 which at some point Messrs. Janigan and Todd can 3 address, I wonder if you could just articulate for me 4 what you don't like about a tendering process as it is 5 envisaged by Mr. Todd in his paper yesterday. 6 MR. ADAMSON: I am sorry that I 7 didn't get to see all of Mr. Todd's presentation. I 8 had a devil of a time getting here from the airport 9 yesterday afternoon. 10 To use the old cliche, the vicar's 11 egg being good and bad in part, there is a great deal 12 about Mr. Todd's paper, which is the main thing I have 13 seen that I think he filed, which I actually did like. 14 I thought he showed a very good understanding, from my 15 perspective, of how this market works. He has shown a 16 very good understanding of the desirability of a fixed 17 price mechanism, all of which I wholeheartedly support. 18 The real differentiation between us, 19 I guess, if you want to call it that, to me seems to be 20 the mechanics of the process. He, from my reading, 21 seems to be expounding basically an option process and, 22 as I think I said in my slide, it is similar in many 23 ways to some of the standard offer options that have 24 been held in the U.S. in various restructuring efforts. 25 I mentioned the one in Massachusetts, for example. 26 There have been others. 27 The difference between us -- and it 28 is a relatively subtle difference -- is that the 699 ADAMSON/CONWAY, presentation 1 competitive mechanism is designed as an option process, 2 which is that the standard supply service provider 3 holds this RFP process, option, whatever you want to 4 call it, and waits for bids to come in. In my proposal 5 I was trying to harness incentives on the standard 6 supply service provider not to be sort of a pure 7 passive -- "I held my option. This is what came out. 8 My process if fine. It is approvable." It is to apply 9 that competitive pressure to make these guys not just 10 kind of wait for whatever comes out in the wash for 11 consumers, but get them out there with a very strong 12 incentive to make it happen. Because it is my belief 13 that these markets, particularly in the early days, 14 require a lot of work. There are options out there but 15 they need development. If you want those options to be 16 real options, you have to get people out and give 17 people a strong incentive to get out of their office 18 and find those deals on behalf of these customers. 19 So I think that is the real 20 difference. In many ways they are quite parallel. I 21 don't want to be seen in a position of saying, "No, no, 22 no, don't agree with what he says", because the vast 23 majority of what he says I agree with. The difference 24 is one of the mechanics of the implementation of two 25 different approaches. 26 MR. WARREN: Could I ask you to turn 27 up page 8 of your overheads. 28 MR. ADAMSON: Yes. 700 ADAMSON/CONWAY, presentation 1 MR. WARREN: I am looking at the 2 second large bullet item, "Implementation of Tendering 3 Process". You have two sub-bullet items. One is "No 4 incentives on providers to actively pursue the best 5 deal for customers." Is there, to your knowledge, a 6 way to get around that problem? 7 MR. ADAMSON: Yes. I think that part 8 of my proposal is the creation of those incentives. 9 MR. WARREN: That is your bonus and 10 penalty system? 11 MR. ADAMSON: Yes. Those were 12 designed to give strong economic incentives. 13 MR. WARREN: Thanks, Mr. Adamson. 14 I just have a couple of questions for 15 you, Mr. Conway. Perhaps you could turn up -- I don't 16 know that it is paginated, but I think it is the last 17 of your pages of your overhead presentation, where you 18 have the heading "These Risks Are Manageable". 19 Now, I have two areas of questions. 20 My note of your discussion today, Mr. Conway, was that 21 ENERconnect services are at no charge to the MEUs. 22 Have I misunderstood that? 23 MR. CONWAY: What I did say was that 24 they would be at cost. 25 MR. WARREN: They would be at cost. 26 Okay. 27 The other thing I wanted to explore 28 with you is risk -- sorry. It is at cost, so there is 701 ADAMSON/CONWAY, presentation 1 no profit in ENERconnect for the services it provided 2 for its partners. Is that right? 3 MR. CONWAY: Yes, I think so. We 4 would base our rates on expected cost. 5 MR. WARREN: But the use of 6 ENERconnect is a cost that the MEUs have to absorb, 7 right? 8 MR. CONWAY: Correct. 9 MR. WARREN: When you talk about risk 10 management, I just want to understand if I have this 11 correctly: Is ENERconnect going to act as a kind of 12 insurer for its partners in the event of, for example, 13 a fixed-price contract that goes sour? 14 Is that the function it is going to 15 provide? 16 MR. CONWAY: It depends how we 17 operate in the market. If we provide the services to 18 connect one of our members with a supplier, we would do 19 the credit assessment for that supplier and then 20 recommend that the contract go ahead if it passed. 21 But in that particular case, the 22 contract would be between the utility and the supplier. 23 And probably it would be a full requirements kind of 24 contract, if that was the case. 25 MR. WARREN: I apologize, Mr. Conway, 26 I didn't hear the last part of your answer. It would 27 have to be what? 28 MR. CONWAY: It would probably be a 702 ADAMSON/CONWAY, presentation 1 full requirements kind of contract in that case. 2 MR. WARREN: I don't know what that 3 means: full requirements kind of contract. 4 MR. CONWAY: It means a fixed price 5 with a floating volume basically. 6 MR. WARREN: I had just a narrower 7 question, Mr. Conway, to understand the function of 8 ENERconnect. 9 If an LDC enters into a fixed-price 10 contract and if, for example, changes in market prices 11 mean that it is stuck with a supply that no one is no 12 longer buying, is it the function of ENERconnect to 13 cover the costs of that contract that have gone bad, or 14 is the LDC on its own? 15 MR. CONWAY: In the particular -- I 16 didn't finish my answer, incidentally. 17 In the particular case that I 18 outlined, we would just provide the service of making a 19 marriage, in which case the contract would be between 20 the supplier and the affiliate. 21 In the case where we provided the 22 power ourselves, that is some kind of a portfolio pool, 23 we would guarantee the price. 24 MR. WARREN: Have you finished your 25 answer now, Mr. Conway? 26 MR. CONWAY: Yes. 27 MR. WARREN: Great. Now, my 28 question, then, is: In the circumstance of the first 703 ADAMSON/CONWAY, presentation 1 instance where you have a contract between the LDC and 2 the supplier, if that contract goes bad, does 3 ENERconnect ensure that on behalf of its member LDC? 4 Or is the LDC on its own? 5 MR. CONWAY: No. I think that we 6 would probably recommend some kind of protection, like 7 some kind of prudential requirement be put up. 8 But in the case I outlined, in the 9 first case, the answer is no. 10 MR. WARREN: Thank you very much. 11 MS LEA: Thank you, Mr. Warren. 12 Mr. Adams. 13 MR. ADAMS: Thank you. My questions 14 are addressed to Mr. Adamson, but please feel free to 15 pipe up. 16 I should introduce myself. My name 17 is Tom Adams. I represent a small charity called 18 Energy Probe. 19 It's a federally registered 20 charitable foundation under the board of directors of 21 Energy Probe Research Foundation, and it has no 22 fulltime employees. 23 Just picking up on a point near the 24 close of Mr. Warren's questions of you, Mr. Adamson, he 25 was asking for parallels between your proposal and 26 Mr. Todd's proposal. You were noting broad levels of 27 agreement between your basic concepts and his basic 28 concepts, which seems sensible enough to me. 704 ADAMSON/CONWAY, presentation 1 Would you agree that the mobility 2 implications of Mr. Todd's proposal are more or less 3 the same mobility implications of your proposal? 4 MR. ADAMSON: I can envision 5 circumstances where they might be. I am depending on 6 how one structured the kind of RFP and what one 7 required of people bidding in this standard offer 8 option. There are certainly circumstances where I can 9 see them being the same. 10 I think one kind of distinction in 11 this regard, which may be a relatively settled one but 12 which I think is worth noting, is that standard offer 13 options are basically held by the group of standard 14 service providers kind of once a year, and end up in 15 almost a cycle of the people entering into the option 16 cycle, the RFP cycle, if they are all at the same time, 17 in which case the number of kind of traded contracts in 18 other periods of the year might be somewhat smaller 19 than what I think in my scheme says you may -- people 20 such as Mr. Conway or some other party, on behalf of a 21 standard supply service provider. If they lost 22 quantity, they might have dealt with it by a kind of 23 full requirements contract, this variable quantity 24 contract that Mr. Conway spoke of. 25 That would be the kind of riskless 26 option to the provider, which is one way. Or they 27 might choose to rather more actively manage it, i.e., 28 say what I can do, if I am probably one of the larger 705 ADAMSON/CONWAY, presentation 1 standard supply service providers, is actively manage 2 my own kind of contract volumes. If I lose quantity of 3 standard supply service over the year, trade it off to 4 you, if you are another one, for example. 5 I think it would rather depend on the 6 rules of how the RFP options were written. Mr. Todd 7 may have described this in more detail, and I simply 8 missed it because I only caught the tail end of his 9 presentation or his questions yesterday. 10 So it is a bit hard to say. 11 I think we would both broadly 12 agree -- or I think I am broadly agreeing with him. I 13 shouldn't put words in his mouth that he would agree 14 with me since he is not here. 15 We both recognize that there is this 16 trade-off between offering full customer ability and 17 the attendant quantity risk. I think we both be 18 comfortable in recognizing that that is a factor under 19 any fixed-price scheme. 20 MR. ADAMS: Thank you. Just on the 21 mechanics of your yardstick proposal, you had suggested 22 that all these different contracting products 23 effectively would be compared against each other. 24 What happens if the duration of one 25 utility's contracts is not directly comparable to the 26 duration of another utility's contracts? There would 27 be, I guess, a difference in risk between the two of 28 them. 706 ADAMSON/CONWAY, presentation 1 How would your yardstick assessment 2 adjust for that? 3 MR. ADAMSON: Typically, in a form of 4 comparative competition scheme, you would have to 5 assess it on the basis of contract purchase costs in 6 the year. So, really, the question I -- let me say 7 what I think you are saying and see if you agree. I 8 don't want to put words in your mouth. 9 What about if I had a multiple year 10 contract that varied in pricing over time, or something 11 like that? So it was front-ended or back-ended, or 12 something like that? 13 MR. ADAMS: For example? 14 MR. ADAMSON: For example, where we 15 might have this assessment period one versus assessment 16 period two problem. You could try to aim to levelize 17 it or you could say: Well, you know, if it's 18 front-ended and you pay big costs in year one and lower 19 costs in year two, you will probably do worse in year 20 one but you will do much better in year two. And let 21 them wash out. 22 I was actually thinking of it as 23 assessing total purchase costs during the year, 24 basically divided by megawatt-hours, some form of 25 demand weighting, and not trying to introduce the 26 complexity of a kind of multi-year allocation 27 mechanism. 28 MR. ADAMS: The Ontario Energy Board 707 ADAMSON/CONWAY, presentation 1 has a good deal of experience with something similar to 2 this proposal, in the regulation of a couple of natural 3 gas distribution utilities that have system gas. 4 One of the difficulties is that the 5 rate cases are filed at different times of the year, 6 and the purchases are made, the utility gas purchases 7 are made at different times of the year. Those market 8 prices move from time to time. 9 You wouldn't see any kind of formula 10 that could correct for the difference in timing of 11 signing up a contract rather -- 12 MR. ADAMSON: No. It would be based 13 on purchase cost for the purchase of electricity during 14 the comparison period, which, for example, might be 15 January 1 to December 31. You are saying that is the 16 comparison we are going to make and really sort of 17 realizing that standard supply service isn't a kind of 18 a purely discrete phenomenon, that it goes on in year 19 two and goes on in year three. 20 But the comparison would be made 21 probably like on an annual basis for a defined time 22 period. I think that would help cut through some of 23 the complexities of a multiple -- of the kind of 24 lagging problems I think that you are talking about. 25 It is not perfect, because clearly 26 thee could be some absolute economic reason why. But 27 at some points we do have to choose simplicity over 28 perfection. 708 ADAMSON/CONWAY, presentation 1 MR. ADAMS: Are you aware of the use 2 of yardstick regulation elsewhere in Canada in the 3 example? 4 MR. ADAMSON: Well, I know there is 5 the proposed introduction of what I might call sliding 6 scale performance-based regulation in the distribution 7 wires company, which has many of the same types of 8 features in some ways. 9 I am not familiar enough with 10 probably Canadian regulatory practice, to be honest, to 11 know that many examples. I will plead ignorance, I am 12 afraid. 13 MR. ADAMS: That's fine. In your 14 paper you put some, I would say, emphasis on the need 15 to develop liquid intermediate markets. Would that be 16 a fair characterization? 17 MR. ADAMSON: Yes. 18 MR. ADAMS: What level of liquidity 19 should the Board aim for in these intermediate markets? 20 MR. ADAMSON: I certainly didn't -- I 21 can't say I have in mind what a pure liquidity target 22 might be. I guess my first recommendation would be 23 somewhat hippocratic of the first "do no harm" type 24 approach: make sure you don't do anything which 25 damages that liquidity. 26 So in order to encourage it, I think 27 a description of what a liquid forward market might be 28 is one in which it is possible for a significant 709 ADAMSON/CONWAY, presentation 1 transaction on the scale of the transactions that occur 2 in the market to occur without having an undue impact 3 on the forward price. 4 For example, would this market be 5 deep enough for me building a 200-megawatt combined 6 cycle plant or, I don't know, any form of generation? 7 Would it be liquid enough for me to at least partially 8 hedge that risk and to get a good price signal at the 9 size of my transaction? 10 That, I think you would -- I don't 11 know of a precise time numerical method to determine 12 whether you are there at any one point. I think that's 13 the kind of objective that I think we should keep in 14 mind. 15 MR. ADAMS: Let me see if I can get 16 this in some kind of concrete terms. You said many 17 times through your testimony here that the proposal for 18 spot price pass-through will cause the intermediate 19 market to be insufficiently liquid. 20 First of all, how liquid will it be 21 if we go with a spot price pass-through? And secondly, 22 how liquid would it be under your proposal? 23 MR. ADAMSON: I guess I'm only making 24 a relative statement. 25 I don't know. I could give you, with 26 a relatively little bit of analysis, ways of trying to 27 assess the liquidity in some other markets that are 28 already existent. 710 ADAMSON/CONWAY, presentation 1 One could look at the open interest 2 on the NYMEX Henry Hub gas contract, for example. One 3 could look at the open interest, look at the trade in 4 volumes and other market parameters regarding the 5 paloverde(ph) electricity forwards contract in the 6 southwestern part of the United States for example. 7 One could look at the volumes in some of the other 8 contract markets, most of which are more 9 over-the-counter markets than some of the other 10 electricity markets around the world, in Scandinavia, 11 in Australia. 12 I don't know how to put an exact 13 precise measure, because effectively the market now is 14 so illiquid until it is -- I suspect at this point 15 until the only one who is participating in it 16 day-to-day would be able to give you a very good 17 assertion of how liquid it is in Ontario. 18 I guess my assertion I will make is 19 that I do believe that the fixed price standard supply 20 service mechanism I propose would tend to encourage 21 greater liquidity. 22 I can't say I have done the analysis 23 or in fact even thought of a way to make a numerical 24 assessment of it. I guess my response, therefore, to 25 your question is necessarily rather conditional, but I 26 do believe it would definitely help it by encouraging 27 that what may be 60 to 70 per cent of the volume in the 28 market, physical volume in the market, to be traded 711 ADAMSON/CONWAY, presentation 1 forward in these intermediate markets rather than 2 served by the spot price pass-through. 3 MR. ADAMS: Who should decide what is 4 the appropriate level of liquidity in those 5 intermediate markets? 6 MR. ADAMSON: I assume to a very 7 significant -- to a significant degree, in the final 8 analysis over the long term, people trading in a market 9 determine -- and their preference and their needs 10 determine the liquidity, determine the depth, determine 11 the volume in forwards markets. 12 However, the point that I tired to 13 make relatively strongly in my presentation, in my 14 paper, is that, you know, we are not starting with the 15 normal formation of a market here. We are starting 16 with a set of rules -- and sets of rules have to be 17 written in these things. 18 We are starting with a set of rules 19 in which we take the broad number of consumers, and a 20 very large volume of demand, and have proposed to put 21 them in a very specific place from which we think they 22 will face substantial costs for moving. The mechanism 23 we have, the proposed spot price pass-through 24 mechanism, is relatively different than what one sees 25 in the vast majorities of the commodities which one 26 consumes. I tend not to buy many things that I don't 27 know the price of until after it has happened. 28 So that is why normally I would say 712 ADAMSON/CONWAY, presentation 1 it is the supply and demand of these types of Board 2 arrangements which should determine overall how deep 3 these markets are. 4 However, I do caution that we are 5 talking about starting in a very particular place by a 6 policy choice from which we think -- or I think there 7 is evidence to suggest may not be efficient for a lot 8 of people and for which they will find it relatively 9 costly to move. 10 So that is my concern that I would 11 strongly express about the normal statement that if the 12 market wants liquidity it will create it. It will 13 create it. It may take a very long time, and if the 14 transaction costs are high enough the participation of 15 smaller consumers and that may be constrained for many, 16 many years. 17 MR. ADAMS: Is it fair to 18 characterize your position as an expectation that most 19 consumers will want a fixed price? 20 MR. ADAMSON: As I mentioned before, 21 there is certainly the likelihood of some form of 22 trade-offs. We know, for example, in other things we 23 might buy that there are some trade-offs between cost 24 and risk or reward and risk. We know that from 25 financial markets for example. 26 I do think it very important to 27 realize -- which is even alluded to in the staff 28 background paper -- there is a degree of risk aversion, 713 ADAMSON/CONWAY, presentation 1 probably even more likely for smaller consumers and 2 that that needs to be recognized. 3 I do believe that given our choice 4 people tend to pick lower risk over higher risk for the 5 same price. I don't believe that any additional costs 6 in offering that fixed price will be much higher. So 7 in my mind -- and this is a judgment and a matter of 8 experience, not a matter that I am able to draw for you 9 on a whiteboard -- in my mind that trade-off seems 10 strongly favouring a lower risk fixed-price option for 11 small consumers. 12 MR. CONWAY: It is pretty clear that 13 people do generally prefer stable rates. The recent 14 price spikes and pump prices of gasoline indicated 15 that. You might recall two weeks ago pump price went 16 from 49 cents a litre to 59 cents, and there was wide 17 uproar and the media -- I have a report in the 18 Financial Post describing the outrage of many people. 19 The tag line on the article is that consumers seem to 20 appear to prefer stable rates. 21 MR. ADAMSON: But it is even worse 22 than that. Because what about if every time you went 23 to a gas station in Toronto there was no price posted 24 and you got sent a credit card bill at the end of the 25 month that said you bought how many litres, and you 26 don't know whether the price is 49 cents or 59 cents or 27 89 cents or 22 cents, and you only got the bill at the 28 end of the month after you have bought all the gas. 714 ADAMSON/CONWAY, presentation 1 Now, that is a very peculiar situation. 2 MR. ADAMS: Basically your view it 3 appears, Mr. Adamson, that the spot price will over 4 time be more costly than the fixed price because of 5 effect of risk. Is that correct? 6 MR. ADAMSON: I do believe that if 7 these intermediate markets don't form that risks are 8 higher for market participants, I think that, finally 9 over considerable periods of time, decreases the 10 dynamic efficiency of the market and increases the cost 11 of capital. So that is why I made my assertion that I 12 think it actually instead of over time actually giving 13 people a lower price, that it damages the dynamic 14 efficiency, the increasing those into the market. It 15 won't give lower prices over time, it is quite likely 16 to give higher prices over time. 17 MR. ADAMS: So the fixed price is 18 likely to be lower than the spot price, right? 19 MR. ADAMSON: Considering a long 20 enough time horizon that questions of entry become 21 important. 22 MR. ADAMS: Understood. 23 MR. ADAMSON: So I don't want to say 24 that next Tuesday by 10 o'clock, you know. Clearly, 25 these are market forces operating under slightly higher 26 time scales. 27 But I do think -- and a good 28 industrial organizations textbook can tell you this -- 715 ADAMSON/CONWAY, presentation 1 that intermediate markets are typically viewed as being 2 very important for the dynamic efficiency of these 3 markets -- or of markets period. 4 MR. ADAMS: In your slide No. 4 you 5 say on a risk-adjusted basis the spot price may not be 6 the lowest price. I assume that is what you are 7 speaking of just now, slide 4? 8 MR. ADAMSON: Yes. 9 MR. ADAMS: Circled? 10 MR. ADAMSON: That may even be a 11 slight -- it depends on the nature of the market, but 12 that might even happen even much more over the short 13 term of laying out a scenario where -- and again, 14 remember, lots of people in these markets have risk. 15 I believe we are going to hear 16 tomorrow from someone who is going to speak about the 17 risks of entering the Ontario market. Perhaps we will 18 even have sort of a firsthand report from it. 19 Clearly, if I am particularly a 20 smaller generator where I don't really get to determine 21 what the price is going to be, I am sort of subject to 22 market forces. If you are a consumer or a retailer or 23 a standard supply service provider who is willing to 24 offer me a longer term contract, that is actually of 25 quite immense value to me. 26 So in this sort of base of prices out 27 there with different risk profiles, different time 28 durations, so on and so forth, and me finding you as 716 ADAMSON/CONWAY, presentation 1 someone who is willing to offer me a longer term price 2 as a producer when I have this huge level of sunk and 3 fixed costs, is of immense value to me. 4 So I think that in that universe of 5 prices, even under quite initial circumstances, not 6 waiting for the long run, even in initial circumstances 7 there may be many circumstances where the risk premium 8 actually -- the person most benefitting from risk 9 mitigation is the generator, not the user. 10 MR. ADAMS: Is it fair to say that 11 the risk to producers under spot prices is matched by 12 the inverse risk to consumers, right? 13 MR. ADAMSON: Yes. And that is why 14 we own a contract. That's why we have this great 15 economic advantage potentially of signing this deal. 16 MR. ADAMS: I think I'm understanding 17 your position. 18 So would it be fair to say that you 19 are suggesting the electricity prices could be 20 described by a decline in yield curve? Isn't that the 21 implication of what you have just presented here? 22 MR. ADAMSON: Yes, I think as I am 23 understanding your use of the yield curve term. Yes, I 24 think I see your point and I think I agree with it. 25 There is value to multiple parties in 26 risk hedging. There are two sides to this equation. 27 It is an equation. That is the basic assertion. 28 MR. ADAMS: So you are asserting the 717 ADAMSON/CONWAY, presentation 1 yield curve for debt, comparing T-bills versus 30 year 2 Canada's, is an inclining yield curve, but you are 3 saying for electricity it is fundamentally then debt, 4 we are going to see a declining yield curve. This is 5 fundamental. 6 MR. ADAMSON: Quite possibly. 7 Because think about the mechanics. 8 I am sinking huge costs when I build 9 the plant. What makes merchant power plant finance 10 different than some other things is that it is very 11 hard to jack the thing up and take it somewhere else. 12 It is fundamentally different than like lease finance 13 of aircraft where if Air Canada is tired of the plane 14 it ships it off and sells it to somebody in Thailand. 15 There is a huge market for 767s out there. 16 You know, once they build a plant 17 somewhere in the province you can't do anything else 18 with it, so the longer I am able to secure my customer 19 for the lower price I would be willing to offer. So if 20 that is what you mean by the yield curve example, I do 21 fundamentally agree with you. 22 MR. ADAMS: Excellent. 23 Thank you very much. I appreciate 24 that. I think we are right on the wavelength here. 25 Just to close off, for Mr. Conway or 26 Mr. Adamson, can you describe for us the role that 27 Enron played in the preparation of Mr. Adamson's paper? 28 MR. CONWAY: Enron and myself 718 ADAMSON/CONWAY, presentation 1 prepared the terms of reference. 2 MR. ADAMS: And paid a portion of the 3 bill? 4 MR. CONWAY: That's right. Actually, 5 the bill was split between other parties. 6 MR. ADAMS: Sure. A portion of the 7 bill. 8 I assume there was a certain amount 9 of vetting that involved the parties? 10 MR. CONWAY: Yes. 11 MR. ADAMS: Was Power Budd involved 12 in the vetting of the presentation? 13 MR. CONWAY: No. I prepared the 14 presentation without -- actually and came up here 15 without them having even seen it. I guess this is sort 16 of a basic assertion, because we consultants are 17 always -- 18 MR. POWER: We wouldn't presume to 19 have the level of knowledge that Mr. Adamson has. 20 MR. ADAMSON: We always get comments 21 from people, as one always says in a client situation, 22 that I do offer a pretty strong personal assurance that 23 we don't accept assignments when we are forced to say 24 what somebody thinks. It has never worked. 25 Now, just to close, you have noted in 26 your paper, Mr. Adamson, that you have a concern with 27 the lack of competitiveness in the generation side of 28 this market that causes problems for consumers. Is 719 ADAMSON/CONWAY, presentation 1 that fair? 2 MR. ADAMSON: Yes. I must qualify my 3 statements by saying I have not made a very long and 4 exhaustive analysis of the potential Ontario market. 5 MR. ADAMS: I am not asking for a 6 long and exhaustive -- 7 MR. ADAMSON: I know, but I am just 8 saying I can't offer the degree -- I can't offer the 9 type of opinions, for example, that I offered the 10 Alberta government where I, clearly, had a long time to 11 study the question, and resources, and so forth. Given 12 the description of the market structure that has been 13 described to me and that I have been able to read 14 about, I agree I have a very strong level of concern 15 about the competitiveness of the markets for 16 electricity in the province. 17 MR. ADAMS: That is particular to the 18 generation side of this market. Right? 19 MR. ADAMSON: Yes. Certainly in the 20 retailing side, one generally expects the barriers to 21 entry to be substantially lower, anyway. So it's not 22 nearly an issue. Over the very short term, the 23 barriers to entry into generation are very, very large. 24 MR. ADAMS: Would you have a concern 25 if, for some reason, somehow it developed that there 26 were barriers to entry on the retail side and some 27 individual aggregator started to establish significant 28 market power on the retailing side? 720 ADAMSON/CONWAY, presentation 1 MR. ADAMSON: Clearly, yes. I think 2 again anyone holding an economist's union card, if 3 there is such a thing, always -- the hairs stand up on 4 the back of one's neck when one hears barriers to 5 entry. It's my belief that probably the barriers to 6 entry are a little harder to establish probably on the 7 retailing side than they may be on the generation side 8 in the short term. But, yes, clearly that would, I 9 think, raise my hackles and I have raised the hackles 10 of Mr. Ronayne back there, for example, from the 11 Competition Bureau. 12 MR. ADAMS: Could regulatory policy 13 decisions create barriers to entry on the retail side, 14 conceivably? 15 MR. ADAMSON: Create barriers to 16 entry on the retail side, conceivably? I haven't 17 thought through the mechanism by which -- I mean I 18 haven't made any consideration of that, so, 19 conceivably, yes. 20 MR. ADAMS: That's great. Thank you 21 very much for your answers. 22 MS LEA: Thank you, Mr. Adams. 23 Mr. Stephenson? 24 MR. ADAMSON: Would anyone be 25 terribly offended if I take off my jacket? 26 MS LEA: Please do. 27 MR. STEPHENSON: Mr. Adamson, 28 Mr. Conway, my name is Richard Stephenson. I am 721 ADAMSON/CONWAY, presentation 1 counsel in this proceeding for the Power Workers Union. 2 Mr. Adamson, I think most of this is 3 for you. I take it from answers that you gave to my 4 friend Mr. Warren that, fundamentally, you don't have 5 any opposition to greater than one SSS option being 6 provided to consumers. You are agnostic on that issue. 7 MR. ADAMSON: I would say I haven't 8 studied that issue. In that I don't have a strong 9 belief, I guess you could characterize me as agnostic. 10 I think the trade-offs are there for whoever designs 11 the final mechanism to consider about what the costs 12 are of offering options versus the value of customer 13 choice, but I am certainly not opposed to the idea of 14 having a choice for spot price pass-through for people 15 who think that's the best way for them. If people 16 implementing the scheme think that option can be 17 included at a low cost, I think the costs and benefits 18 of trying to assess that are pretty straightforward. 19 MR. STEPHENSON: So, presumably, you 20 would not, for the reasons you have just indicated, be 21 opposed to a spot price pass-through being a required 22 SSS option, in addition to a fixed price offering? 23 MR. ADAMSON: I don't know what the 24 practical implications of offering multiple choices are 25 to people. I certainly haven't made any assessment of 26 that. One nice thing that you can say about it is that 27 it certainly offers a level of comfort and protection 28 to anyone who feels that the regulatory scheme might go 722 ADAMSON/CONWAY, presentation 1 off track or something, and so that's true. An option 2 is always worth something. It's always very true. I 3 don't know what it would cost to put it together. If 4 that's fairly low -- and I can see how it could be 5 quite low -- it may be very attractive. 6 MR. STEPHENSON: Let me turn to your 7 yardstick competition proposal and the relationship 8 between the average -- what is it, the demand average 9 cost of the supply? I have forgotten what your -- 10 MR. ADAMSON: I think I called it 11 demand weighted. "Demand weighted" is usually the 12 phrase that's used. 13 MR. STEPHENSON: Okay, demand 14 weighted cost of supply and the rate or rates being 15 charged to particular customers who are on that supply. 16 Obviously, in addition to the 17 commodity costs, there would be, presumably, the 18 overheads that are associated with supplying that 19 product to the customers. I assume that's right. 20 MR. ADAMSON: I'm sorry? Meaning 21 overheads in terms of...? 22 MR. STEPHENSON: The administration 23 costs -- 24 MR. ADAMSON: Administrative costs, 25 issues like that? 26 MR. STEPHENSON: -- the procurement 27 costs, risk management costs, whatever, all of the 28 reasonably related overhead costs in relation to 723 ADAMSON/CONWAY, presentation 1 supplying the service. 2 MR. ADAMSON: Yes, there certainly 3 would be some form of administrative costs. You might 4 want to separate those from "risk management" costs. 5 MR. STEPHENSON: Fair enough. 6 The question I have for you is: On 7 the commodity portion of the rate, whatever part of the 8 ultimate rate is attributable to the commodity costs, 9 under your scheme is there a margin on that for the LDC 10 or not, or do you have a view on it one way or another? 11 MR. ADAMSON: Is there a margin on 12 the pure -- 13 MR. STEPHENSON: Commodity. 14 MR. ADAMSON: On the pure commodity. 15 That sort of depends on how you choose to draw the 16 little bands in my picture. The simplest 17 implementation of these systems, I would say -- if you 18 are in the dead bands and there is no margin, if you 19 are in the lower -- one very simple implementation 20 might be that there is no margin in here, there may be 21 margin in here, and there may be margin the other way 22 up here. That would be one simple approach. 23 One, obviously, in designing any form 24 of these kind of systems needs to be cognizant that you 25 don't offer kind of nothing but downside and no upside. 26 A very simple form of any one of these forms of sliding 27 scale schemes might say this is where there may be no 28 margin, there may be margin down here, and there may be 724 ADAMSON/CONWAY, presentation 1 kind of a penalty up there. But you just need to make 2 sure you get the balance right. 3 MR. STEPHENSON: So is it fair to say 4 that you would not be philosophically opposed, in terms 5 of your incentive scheme, to the Board saying, "If you 6 are in the dead band, you get no margin on the 7 commodity. You are not permitted to pass on any margin 8 on the commodity", and your incentive is the incentive 9 created by virtue of the yardstick scheme itself. 10 MR. ADAMSON: Yes, in terms of a very 11 simple view of how it might be implemented, and again I 12 think in my -- 13 MR. STEPHENSON: Frankly, that is all 14 we can understand at this point, anyway. 15 MR. ADAMSON: Yes, it is rather late 16 in the day. 17 In response to the questions from 18 Mr. Warren, I didn't want to suggest that I have worked 19 out the details of everything when I haven't. What I 20 have done is tried to outline at a conceptual level 21 with some information on implementation, but I wouldn't 22 want to claim that everything is completely wrapped up 23 and here is the manual. One way one might consider 24 would be somewhat as you described. There may be some 25 level of administrative costs. There might be several 26 different ways of dealing with that. 27 To bring up an example, in England 28 and Wales, their regional electricity companies have a 725 ADAMSON/CONWAY, presentation 1 mechanism -- they don't have these bands, although they 2 considered it, but they decided that they were so close 3 to abolishing standard supply service now, which was in 4 1998, that they decided not to implement this because 5 they were going to get away from having a standard 6 supply rate and everyone was going to be in a 7 competitive market. 8 The mechanism traditionally used for 9 the equivalent of standard supply service, if I might 10 call it that, has what is called a supply price 11 control, which implements kind of a price cap 12 regulation approach to trying to make sure that, you 13 know, these kinds of administrative costs don't grow 14 too large, whoever in the standard supply service 15 provider has a strong incentive to keep those prices 16 down. 17 MR. STEPHENSON: I just want to be 18 absolutely clear that the form of competition or the 19 incentive mechanism that the yardstick entails is 20 purely comparative in that the yardstick itself is an 21 ex post calculation based upon the actual results. 22 There is no absolute number that is associated with the 23 yardstick, which is knowable in advance. 24 MR. ADAMSON: Right. The outcome is 25 one calculates the yardstick based on the results of 26 what, in this case, the SSS providers have achieved. 27 So it would be relatively difficult to say we know in 28 advance that the outcome is where the black line goes. 726 ADAMSON/CONWAY, presentation 1 So again this is a comparative competition mechanism. 2 It's the creation of an incentive effect of a 3 competitive mechanism, but between these people who are 4 providing standard supply service who are not directly 5 competing with each other. 6 Now, we might draw around this box. 7 There is still the competitive retail market which is 8 trying to access these customers, but you would still 9 be -- if you did not choose to enter that retail 10 market, you would be provided service by the standard 11 supply service company. 12 MR. STEPHENSON: I understand. 13 Have you given any thought to the 14 magnitude of the incentives and penalties which are 15 required in order to provide sufficient incentives for 16 people to compete effectively in this market? 17 What occurs to me, for example, is 18 that if you are outside the dead band, the maximum -- 19 theoretically, you could have a penalty as large as the 20 total dollars you collected in revenue that is greater 21 than the yardstick. That would be, theoretically, the 22 largest one you could have and then there would be some 23 number smaller than that. How big does it need to be? 24 MR. ADAMSON: Remember we are also 25 talking about very large volumes of electricity. So 26 there is a pretty substantial number of dollars 27 associated with the mechanism on a total volume basis. 28 So the percentages, I think, can be quite small. 727 ADAMSON/CONWAY, presentation 1 As you say, the strongest incentive, 2 certainly the strongest rational one, is the fact -- it 3 would be the system I was illustrating with my airplane 4 ticket things where, you know, you eat the difference 5 or make the difference. That's what I think a 6 regulatory economist would call a very strong 7 incentive -- a high-powered incentive mechanism. That, 8 I think, probably is too risky given the volumes we are 9 talking about. 10 I think the -- 11 MR. STEPHENSON: Sorry, I have to 12 interrupt. When you say "risky", you mean risky in the 13 sense that it would create jeopardy for the LDCs? 14 MR. ADAMSON: It would create too 15 much upside and downside as a -- it would create 16 probably too much upside and downside. 17 We want an incentive, but we don't 18 want the SSC provider turns out and this is their 19 lottery ticket. I don't think that would be a very 20 attractive regulatory outcome. 21 I have not made an assessment of what 22 I think the extra penalties would be. I haven't tried 23 to work through the numbers. 24 I would remark -- and it is a bit 25 anecdotal -- that the experience of firms under 26 incentive-based regulation for procurement or for the 27 operation of wire services and stuff is: Gosh, when 28 that's what there is for you, you work pretty hard for 728 ADAMSON/CONWAY, presentation 1 those dollars. 2 MR. STEPHENSON: Let me come back to 3 this question that Mr. Warren asked about where does 4 the incentive come from, assuming one is to be paid. 5 Would you agree with me that because 6 of the random distribution and the existence of the 7 dead band, there is no assurance that the amount of 8 penalty to be paid and the amount of incentive to be 9 paid is going to be the same in any given year? 10 MR. ADAMSON: No, they need not be 11 exactly the same. 12 MR. STEPHENSON: And it is at least 13 theoretically possible that there be no penalty at all, 14 if you had all of the ones below the yardstick all 15 within the dead band. 16 MR. ADAMSON: Yes. If the 17 distribution is not symmetric -- 18 MR. STEPHENSON: And there is no 19 reason to think it would. 20 MR. ADAMSON: No. I mean, one might 21 be surprised, not knowing anything, that it was 22 entirely asymmetric. But there is no reason to believe 23 that it is perfectly symmetric. I agree. 24 MR. STEPHENSON: In that case, where 25 does the money come from? 26 MR. ADAMSON: I think you could do it 27 from a couple of different ways. First off, we are 28 probably not talking about a huge amount of money as a 729 ADAMSON/CONWAY, presentation 1 proportion of the volumes flowing through the standard 2 service supply mechanism, which is going to be a very, 3 very large dollar amount, given the volume of 4 electricity we expect through it. 5 You could come up with it in several 6 different ways. You could effectively spread it over 7 the others in a subsequent year. I think there would 8 be any number of kind of claw-back mechanisms. 9 But again, I would say that we are 10 not talking of the dollar volume in these types of 11 markets. We are not talking about huge proportions. 12 So it is not like we can all of a sudden come out and 13 finance 5 per cent of the cost flowing through SSCs to 14 provide this kind of penalty mechanism. 15 MR. STEPHENSON: On another subject, 16 at page 17 of your prefiled material you have a 17 footnote that deals with this market power problem of 18 OPG in the near term, and you say: 19 "Accordingly, the introduction 20 of any standard supply pricing 21 model may need to incorporate 22 transitional mechanisms pending 23 decontrol." (As read) 24 The question I have for you is: What 25 transitional mechanisms do you foresee in the model 26 that you have proposed yourself here, or does it 27 already incorporate that? 28 MR. ADAMSON: No. I think it is 730 ADAMSON/CONWAY, presentation 1 somewhat external to that. Let me explain the issue in 2 a little more detail than that footnote, so that it is 3 clear what we are talking about. 4 My methodology or, for example, the 5 methodology of Mr. Todd that he described yesterday 6 require somebody to sell contracts. The natural 7 counter-party to selling contracts is a generator who 8 has generation. 9 So what my note of concern here at 10 the bottom of page 17 is saying is we need to ensure in 11 any mechanism that there is sufficient competition in 12 the contract market, short run, to make sure that for 13 the standard service supply providers there is enough 14 competing sellers of these contracts for them to be 15 able to purchase them economically. 16 If there is a situation of very large 17 concentration in the generation market, we might easily 18 worry that the concentration in the generation market 19 would be concentration in the contract market, i.e., 20 there is not enough counter-parties to go around to 21 offer these contracts sufficiently. 22 Now, this is a very distinct problem. 23 It affects everything you are trying to do here, beyond 24 standard service supply, in my opinion, as well. The 25 fact that there may be a problem with having enough 26 competitors in the contract market is in fact reflected 27 and reflective of that there in fact may not be enough 28 competitors in the spot market. These two, in some 731 ADAMSON/CONWAY, presentation 1 ways, almost might be considered as compliments to each 2 other. 3 So we need to assure ourselves before 4 implementing any mechanism, fixed-rate spot market 5 pass-through, or whatever, that indeed the upstream 6 market is going to be competitive. One thing we are 7 generally pretty cognizant of is that the potential of 8 market power in vertical relationships tends not to 9 stay there. That is an old adage of kind of people who 10 practise competition policy. And if you had a person 11 with market power, it is relatively easy for them to 12 exert it in the contract market as well as in the spot 13 market. 14 Just as a word of warning, I guess, 15 in terms of my proposal, I wanted to draw out the fact 16 that we need to assure ourselves that that market is 17 going to be sufficiently competitive. 18 Now, it may be that it may have some 19 advantages over the spot market model nonetheless, for 20 two reasons. First off, it is possible -- it may not 21 happen on day one but it is certainly possible -- that 22 in terms of offering contracts, that contract may help 23 stimulate new entry. And new entry, as we know, is a 24 very strong corrector of market power problems and 25 concentration over time in most industries. 26 The other thing is that there may be 27 scope -- and I put emphasis on "may" -- for 28 non-generator players to participate in the contract 732 ADAMSON/CONWAY, presentation 1 market. There are financial intermediaries who hedge 2 price risk and market. 3 One interesting phenomenon, for 4 example, has been the appearance of people from the 5 reinsurance industry in this market. We have recently 6 been working on a transaction where a large specialty 7 reinsurer in fact helped ensure prices in a competitive 8 electricity market. That was in Columbia. 9 Even though we don't believe that 10 those are going to provide sufficient competition and 11 we worry that these contracts need to come from 12 generators and there are simply not enough generators 13 to go around, then we certainly have to worry about the 14 viability of any one of these schemes. Market power, 15 if it exists and if it is not adequately controlled, 16 will come out. 17 The other point that I would make -- 18 I realize it is quite late in the day, and I have not 19 again made an extensive analysis of this that I am sure 20 some others have made -- is that -- and I believe there 21 is another little footnote floating around in my papers 22 somewhere. It is that mechanisms that tend to cap 23 average revenues may have a quite strong influence on 24 volatility. You need to be very careful about the 25 incentives that you put on dominant generators in that 26 case. 27 So will the MPMA deal with the 28 problem? Yes, it will help. Will it deal with it 733 ADAMSON/CONWAY, presentation 1 completely? I am yet to convince myself. I can't say 2 I have given it the level of time that I would like to, 3 but I have yet to convince myself. 4 MR. STEPHENSON: Let me just come 5 back to -- 6 MS LEA: Mr. Stephenson, do you have 7 many more questions? 8 MR. STEPHENSON: Actually, I have one 9 more. 10 MS LEA: Please go ahead. 11 MR. STEPHENSON: All right. Let me 12 come back to the issue of the connection between the 13 cost of the commodity and the rate charged to the 14 customer. 15 I took it that one of the advantages 16 of your scheme -- if you assume that we are doing this 17 yard-sticking over the course of say a calendar year, 18 for simplicity, you don't care what the folio of 19 contracts is that the SSS supplier has with the 20 generators and marketers, in the sense they could have 21 five-year ones that are in year three, and you could 22 have six-month ones, or whatever. You don't care what 23 the portfolio looks like. At the end of the day, for 24 yardstick purposes, you simply care what the actual 25 demand average cost or weighted demand cost -- 26 MR. ADAMSON: You mean actual demand 27 weighted cost is in the year, for example. 28 MR. STEPHENSON: How, for 734 ADAMSON/CONWAY, presentation 1 rate-setting purposes, assuming that we are setting a 2 rate in advance of the calendar year commencing January 3 1, 2000-and-something, and it is going to be for a 4 one-year period -- and it is going to be a fixed rate 5 and it is going to be approved by the Board. 6 It is going to be based on something 7 like the cost of the commodity, plus a mark-up covering 8 overhead. 9 MR. ADAMSON: And maybe an 10 administrative cost. 11 MR. STEPHENSON: Maybe an 12 administrative cost, exactly. 13 How do we know what the cost is for 14 the purposes of that exercise in setting the rate? 15 MR. ADAMSON: I think the majority, 16 if not the totality, of most of the contracts which you 17 are incorporating into the yardstick scheme need to 18 offer some fixed price, need to offer enough of a fixed 19 price to the SSS provider so that a fixed rate can be 20 offered from them. 21 MR. STEPHENSON: Is there a way of 22 doing that without matching the supply contract on the 23 one hand and the sales contract to the end customers on 24 the other, in the sense of term? 25 MR. ADAMSON: Are you saying -- no, 26 I'm sorry, I'm afraid I don't understand what you are 27 saying. 28 MR. STEPHENSON: I understand how you 735 ADAMSON/CONWAY, presentation 1 know what the cost is if you were going out and buying 2 from marketers one-year fixed electricity for the 3 period commencing January 1 to December 31, and you are 4 selling it to your end-users on the same time period. 5 MR. ADAMSON: Right. 6 MR. STEPHENSON: That's easy. But 7 what if there is a mismatch between those two? How do 8 you, setting it in advance, know what the cost is if 9 that is going to be the basis of your rate? 10 MR. ADAMSON: You are saying if you 11 have lots of contracts, instead of you signing them up 12 in advance to start on January 1, I have a whole bunch 13 ending March 30th and some other ones starting on 14 May 10th. 15 MR. STEPHENSON: Exactly. 16 MR. ADAMSON: If you had a whole 17 bunch of provisions. 18 I think in terms of the response I 19 just gave, one of the fundamental objectives is to be 20 able to offer a fixed price to final SSS customers, 21 unless one chose to have some variability in it, as an 22 initial design mechanism. 23 Personally, I think the way you would 24 do it is really not dissimilar to the way that the RECs 25 have done it in England and Wales. They really do 26 mainly buy fixed-price contracts. And will you have to 27 deal with a whole bunch of true-up mechanisms? 28 What I would suspect seems to happen 736 ADAMSON/CONWAY, presentation 1 is that the contract market starts to follow the time 2 horizon of the SSS yardstick assessment. 3 MR. STEPHENSON: So the contracts 4 have a matching -- 5 MR. ADAMSON: That's the easiest way 6 to do it. You can envision similar complicated ways, 7 but I am trying to keep this on the easy path as much 8 as possible. You could have multiple contract terms 9 and stuff. The simplest way would be to say: You are 10 going to offer a fixed price. The contract can match 11 the term of the fixed price. 12 MR. STEPHENSON: Thank you. Those 13 are my questions. I appreciate that very much. 14 MR. ADAMSON: Thank you. 15 MS LEA: Thank you very much, 16 Mr. Stephenson. 17 Before we close today, I have a few 18 scheduling matters. 19 Thank you very much, Mr. Adamson and 20 Mr. Conway, for your efforts today. 21 I presume, Mr. Power, that we can 22 continue with these gentlemen tomorrow morning? 23 MR. POWER: Yes. 24 MS LEA: Thank you. So I expect, 25 given the time estimates, that this panel will continue 26 until the morning break tomorrow, in any event, and 27 then your second panel will be available at that time? 28 MR. POWER: Yes. 737 ADAMSON/CONWAY, presentation 1 MS LEA: Thank you. That is helpful. 2 On Monday, we have Toronto Hydro at 3 9:00 a.m., followed by Mr. Rawson. 4 Mr. Brett, do you now have a 5 preference as to whether to bring your panel tomorrow 6 late in the day or on Monday? 7 MR. BRETT: I don't at the moment. I 8 have asked to hear from them about their availability 9 on both days. I probably won't know that until 10 tomorrow morning. 11 MS LEA: So Monday may be the safer 12 date in that sense. 13 MR. BRETT: Probably. What I don't 14 know is how long you expect the second panel to go 15 tomorrow. 16 MS LEA: Well, I have two and a half 17 to three hours of questioning, plus whatever 18 presentation time is taken for the second panel 19 tomorrow. 20 MR. BRETT: Whether that holds up in 21 light of all of the questioning of the first panel is a 22 question that -- 23 MS LEA: Will you let me know when 24 your witnesses know? 25 MR. BRETT: I will let you know in 26 the morning. 27 MS LEA: Mr. Gibbons, what is your 28 preference? To go tomorrow? 738 ADAMSON/CONWAY, presentation 1 MR. GIBBONS: Yes. 2 MS LEA: We will attempt to do that. 3 Can I ask anyone who has questions 4 for Mr. Mondrow, who is making a presentation on behalf 5 of HVAC -- is there anyone who would require his 6 attendance here for questioning if he chooses not to 7 attend specifically to make a presentation? 8 I am sure he is willing to come, but 9 is there anything who requires that he comes? 10 All right. Thank you. That is 11 helpful. We will let him know that there is no 12 requirement as such. 13 Thank you very much. So 9:00 a.m. 14 tomorrow. 15 --- Whereupon the hearing adjourned at 5:12 p.m., 16 to resume on Friday, July 16, 1999 at 9:00 a.m.