2168 1 RP-1999-0044 2 3 THE ONTARIO ENERGY BOARD 4 5 IN THE MATTER OF the Ontario Energy Board Act, 1998; 6 7 AND IN THE MATTER OF an Application by Ontario Hydro 8 Networks Company Inc., for an Order or Orders approving 9 year 2000 transmission cost allocation and rate design. 10 11 12 B E F O R E : 13 R.M. HIGGIN Presiding Member 14 P. VLAHOS Member 15 B. SMITH Member 16 17 18 Hearing held at: 19 2300 Yonge Street, 25th Floor, Hearing Room No. 2 20 Toronto, Ontario on Thursday, March 2, 2000, 21 commencing at 0903 22 23 24 25 HEARING 26 27 VOLUME 12 28 Les Services StenoTran Services Inc. 613-521-0703 2169 1 APPEARANCES 2 JENNIFER LEA/ Counsel to Board Staff 3 MICHAEL LYLE/ 4 5 HAROLD THIESSEN/ Board Staff 6 NABIH MIKHAIL/ 7 COLIN SCHUCK/ 8 KATHI LITT 9 10 DONALD ROGERS/ Ontario Hydro Networks 11 BRYAN BOYCE Company Inc. (OHNC) 12 13 DAVID BROWN Independent Power Producers 14 Society of Ontario (IPPSO); 15 Ontario Natural Gas 16 Association (ONGA) 17 18 JAMES FISHER/ Association of Major Power 19 KEN SNELSON Consumers in Ontario (AMPCO) 20 21 MICHAEL JANIGAN Vulnerable Energy Consumers 22 Coalition (VECC) 23 24 ROBERT WARREN Consumers Association of 25 Canada (CAC) 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2170 1 APPEARANCES (Cont'd) 2 BRUCE CAMPBELL/ Ontario Power Generation 3 JOEL SINGER/ (OPG) 4 JOHN RATTRAY 5 6 LLOYD GREENSPOON NorthWatch 7 8 DAVID POCH Green Energy Coalition (GEC) 9 10 MARK MATTSON/ Energy Probe 11 MIKE HILSON/ 12 TOM ADAMS 13 14 PETER BUDD TransAlta Energy 15 16 MURRAY KLIPPENSTEIN/ Pollution Probe 17 JOANNA BIRENBAUM 18 19 RICHARD STEPHENSON Power Workers Union 20 21 MARK RODGER Toronto Hydro Electric 22 System Ltd. 23 24 PAUL DUMARESQ Ontario Association of Physical 25 Plant Administrators 26 27 SHARON WONG Imperial Oil Ltd. 28 Les Services StenoTran Services Inc. 613-521-0703 2171 1 APPEARANCES (Cont'd) 2 ERIK GOLDSILVER Electrical Contractors 3 Association of the Ontario; 4 Collingwood Public Utilities 5 Commission 6 7 ROGER WHITE Energy Cost Management Inc. 8 9 RICHARD KING Five Nations Energy Inc.; 10 Detroit Edison Co. 11 12 KENNETH LIDDON Suncor Energy Inc. 13 14 GEORGE VEGH/ Amoco Canada (BP Amoco); 15 JEAN-PAUL DESROCHERS Toromont Energy 16 17 KEITH RAWSON/ TransCanada Energy 18 BONNIE ANDRIACHUK 19 20 PAUL VOGEL/ The Chiefs of Ontario 21 CAROL GODBY 22 23 ALAN MARK/ Municipal Electrical 24 KELLY FRIEDMAN/ Association (MEA) 25 MAURICE TUCCI 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2172 1 APPEARANCES (Cont'd) 2 WENDY EARLE/ Brampton Hydro, Cambridge 3 JAMIE SIDLOFSKY and North Dumfries Hydro, 4 Guelph Hydro, Niagara Falls 5 Hydro, Oakville Hydro, 6 Richmond Hill Hydro, 7 Pickering Hydro and Waterloo 8 North Hydro 9 10 RICK COBURN INCO Limited; Ontario Mining 11 Association 12 13 TED COWAN Ontario Federation of 14 Agriculture 15 16 ALECK DADSON Enron Capital Corp. 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2173 1 Toronto, Ontario 2 --- Upon resuming on Thursday, March 2, 2000 3 at 0903 4 THE PRESIDING MEMBER: Good morning, 5 everybody. 6 Are there any preliminary matters? Mr. Brown? 7 MR. BROWN: Thank you, Dr. Higgin. 8 PRELIMINARY MATTERS 9 MR. BROWN: I just wanted to indicate that 10 initially IPPSO had proposed to present two panels, 11 Mr. Robert Fagan and then a panel consisting of 12 representatives of IPPSO. We are obviously off schedule 13 a bit and I am more guilty than others of having 14 exceeded my time estimates, so what I would propose, and 15 I have mentioned this to Board staff and some others, is 16 that I combine all of the IPPSO witnesses together, that 17 we present a panel of four. We will make them available 18 this afternoon when I understand our sort of time will 19 come. I think that will save time at the end of the day 20 if we have the four of them testifying together rather 21 than have two accompanying rounds of cross-examination. 22 THE PRESIDING MEMBER: I think that would be 23 very helpful. I just would note that the Board is quite 24 concerned about the expensive cross-examination of 25 intervenors by other intervenors in this proceeding. 26 That is something that we are quite concerned about. 27 The focus of everything has to be on the 28 applicant's proposal. I agree there are alternatives Les Services StenoTran Services Inc. 613-521-0703 2174 Preliminary Matters 1 that need to be put forward and discussed, and the Board 2 understands that very clearly, but it has become quite 3 expensive, intervenors cross-examining other 4 intervenors. 5 The applicant is sitting in the back and will 6 be sitting there for the next three weeks nearly -- 7 three days, I'm sorry -- 8 --- Laughter 9 THE PRESIDING MEMBER: -- enjoying the show, 10 you know. Ultimately, the Board has to decide on the 11 applicant's proposal. I just put that to you and I hope 12 that we will take that into account in terms of the 13 expense of cross-examination of other intervenors' 14 witnesses. Okay? Thank you. 15 Yes, Ms Wong? 16 MS WONG: Good morning, Mr. Chairman. 17 I just brought in an answer to an undertaking 18 this morning, and I have given copies to the Board 19 staff. This was the one undertaking given by Imperial 20 Oil. 21 THE PRESIDING MEMBER: Could you just outline 22 what it was, which one specifically? 23 MS WONG: Certainly, this was the undertaking 24 to provide the calculations which underlie some of the 25 numbers in one of the pages in the exhibits. It was 26 numbers relating to the deferral case calculation. 27 THE PRESIDING MEMBER: I have it now. Thank 28 you. So this is the answer to question F8.2? Les Services StenoTran Services Inc. 613-521-0703 2175 Preliminary Matters 1 MS WONG: That's correct. 2 THE PRESIDING MEMBER: Okay. That's good. 3 Thank you. 4 Is there anything you need to speak to or is 5 it self-explanatory? 6 MS WONG: I hope it is self-explanatory, so I 7 don't intend to speak to it. 8 THE PRESIDING MEMBER: All right. Thank you. 9 MS WONG: Thank you. 10 THE PRESIDING MEMBER: Any other preliminary 11 matters? No? Then we will resume with these gentlemen. 12 I'm sorry you had to stay over another night, 13 but the weather is probably no better in California, I 14 hear, than here so it is maybe not too bad. 15 Mr. Campbell. Is there anything you want to 16 introduce or do we just resume with Mr. Poch. 17 MR. CAMPBELL: No. We are just ready to carry 18 on to the end. 19 THE PRESIDING MEMBER: Right. 20 Mr. Poch, please. 21 MR. POCH: Thank you, Mr. Chairman. 22 PREVIOUSLY SWORN: BRUCE BOLAND 23 PREVIOUSLY SWORN: REN ORANS 24 CONTINUED CROSS-EXAMINATION 25 MR. POCH: Gentlemen, when we left off 26 yesterday we were discussing your use of Exhibit E, 27 Tab 8, Schedule 19. That was the document that -- the 28 answer from OHNC that had these various descriptions of Les Services StenoTran Services Inc. 613-521-0703 2176 OPG PANEL 2, cr-ex (Poch) 1 capacity additions to the GTA and Ottawa region. I had 2 asked you how you were interpreting this document, that 3 is, were you interpreting the list of MVA values as 4 serving both load growth and the other needs that are 5 mentioned in the descriptive parts of that document. I 6 think you indicated to me you took those numbers as sort 7 of the net amount of capacity that would be available to 8 serve load after those other tasks were handled. 9 Am I correct in my interpretation of where we 10 left off and what you said? 11 MR. ORANS: I believe that's correct. 12 MR. POCH: All right. 13 Now, earlier when we were talking about the 14 lines going from the Darlington area, I think it was 15 Bowmanville to Lennox and Lennox up to Hawthorne, you 16 indicated to me that my concern that they were in series 17 as opposed to parallel wasn't that simple because flows 18 could be transferred at the mid point onto the lower 19 voltage system, the 230 kV system, for example. 20 Correct? 21 MR. ORANS: Yes. I also believe we were 22 talking generally about the GTA area as well. 23 MR. POCH: All right. 24 In fact, the analogy to water is when the 25 transmission system is used for any of these purposes -- 26 that is, moving energy to load or moving energy around 27 for the other purposes that were listed in this 28 document, balancing generation, interconnection, what Les Services StenoTran Services Inc. 613-521-0703 2177 OPG PANEL 2, cr-ex (Poch) 1 have you -- it is going to flow where it will. 2 MR. ORANS: Yes. That's generally correct. 3 MR. POCH: I would like you to look with me at 4 the last page of that answer, this is E-8-19. Would you 5 agree with me that the autotransformers listed there 6 would -- to the extent that the wires are being used for 7 anything other than load meeting capability, load gross 8 meeting capability, it was autotransformers as well as 9 the wires that would be used for that purpose? 10 MR. ORANS: Can you refer me exactly to -- you 11 made a reference to the last page -- 12 MR. POCH: Oh, no. I'm sorry. I wasn't 13 looking at anything specific yet. 14 Following on your last answer, this 15 interrogatory refers in a number of places to other 16 purposes that the new capacity is serving the 17 rebalancing of generation, and I think there is another 18 example here of, yes, under Lennox to Hawthorne, 19 providing system capability, incorporate high capacity 20 interconnection with Quebec, those sorts of purposes. 21 Energy flowing for those purposes would use 22 both the wires and the autotransformers, inevitably. 23 MR. ORANS: I don't know where you -- are you 24 referring still to some -- when you are saying Quebec -- 25 MR. POCH: Oh, I was just taking an example 26 which appears on page 3 of their answer. It was just an 27 example of one of the other purpose which OHNC indicated 28 these capacity additions were serving. The example I Les Services StenoTran Services Inc. 613-521-0703 2178 OPG PANEL 2, cr-ex (Poch) 1 gave is the one that is listed under the Lennox to 2 Hawthorne paragraph two-thirds of the way down the page. 3 I wasn't trying to be specific to that example. I'm 4 just saying if energy is flowing for these other 5 purposes it is going to flow through the 6 autotransformers too. 7 MR. ORANS: I think to some extent most of the 8 parts of the network are interconnected. 9 MR. POCH: Right. So the answer is yes. 10 MR. ORANS: The answer is as I stated. Most 11 of the parts of the network are interconnected. 12 MR. POCH: So if energy is flowing through 13 these additions, these wires for the purposes of these 14 other purposes, it would also be flowing through the 15 autotransformers inevitably because that is just the 16 physics of the situation. Correct? 17 MR. ORANS: Can you restate the question and 18 break it down a little more for me? 19 MR. POCH: Well, OHNC has said they have done 20 these projects. These projects serve a number of 21 purposes. We have agreed on that. Correct? 22 MR. ORANS: Yes, we do. 23 MR. POCH: All right. 24 Obviously, therefore they are anticipating 25 energy flows on the system on these new additions -- 26 MR. ORANS: That's correct. 27 MR. POCH: -- for these other purposes as well 28 as to meet the load meeting capabilities of the -- Les Services StenoTran Services Inc. 613-521-0703 2179 OPG PANEL 2, cr-ex (Poch) 1 MR. ORANS: Of the entire network, yes. 2 MR. POCH: -- entire network and growth in the 3 specific area we are talking about. 4 MR. ORANS: Yes, that's correct. 5 MR. POCH: All right. 6 I'm just confirming to you that if there is 7 going to be some significant flows on this equipment for 8 these purposes other than just serving load growth, for 9 example, the interconnection with Quebec or the 10 balancing of generation giving the outages at Pickering, 11 it is going to flow both on the wires and through the 12 autotransformers to the 230 kV system. 13 MR. ORANS: It is possible, but I'm not sure 14 that an interconnection with Quebec or an 15 interconnection of a new generator flows necessarily on 16 any one of these individual lines or any one of these 17 individual transformers, although it is possible. 18 MR. POCH: All right. 19 Could you look with me at note (2), then, on 20 the last page of their answer. Would you agree with my 21 interpretation of that note that the autotransformer 22 values listed on that table are their nameplate 23 listings? 24 MR. ORANS: Yes, I believe that's correct. 25 MR. POCH: All right. So clearly, to the 26 extent that there is any flow through the auto 27 transformers for purposes other than this load growth 28 medium -- clearly then if there is flow through these Les Services StenoTran Services Inc. 613-521-0703 2180 OPG PANEL 2, cr-ex (Poch) 1 auto transformers for purposes other than meeting the 2 load growth in Ontario, OHNC hasn't deducted it from 3 those numbers on this table because they have given you 4 the name plate ratings. 5 MR. ORANS: I'm not sure that there is any 6 load flow from anything other than the load growth in 7 these areas. Okay? 8 MR. POCH: I will move on then. I will just 9 try to keep this general. It's just taking a lot longer 10 than I anticipated, so I think we will try to keep the 11 questions very general and I think that will help both 12 you and me and help the Board. 13 Do you agree it's possible that we may have 14 needed capacity in, for example, the GTA area due to 15 increased loading of lines from the onset of Darlington, 16 for example? That's a possibility. 17 MR. ORANS: It could decrease parts of the 18 loads on some components and increase parts of the loads 19 on other components. 20 MR. POCH: And capacity may have been needed 21 to address environmental or economic needs to reduce use 22 rights view, for example. 23 MR. ORANS: I will agree with you that 24 anything that affects the generation dispatch could 25 affect the loading on any of these components. 26 MR. POCH: And capacity might have been needed 27 to deal with pre-existing deficiencies in the 28 transmission system. I think I recall when we look Les Services StenoTran Services Inc. 613-521-0703 2181 OPG PANEL 2, cr-ex (Poch) 1 at -- 2 MR. ORANS: Capacity there is in the context 3 of an expansion plan and if there's less load in the 4 system or more load in the system, that would affect 5 whether you need the new expansion. 6 MR. POCH: It's possible that there either had 7 been load growth that has yet to be adequately served or 8 other deficiencies that the transmission planners had 9 been wanting to address for some time and this now 10 addressed those deficiencies. 11 MR. ORANS: I believe I previously stated that 12 I thought these additions are made but for the load 13 growth in here, so without this load growth, you 14 wouldn't need these additions. 15 MR. POCH: That's your understanding, but you 16 would agree with me it's not uncommon, and we saw this I 17 think in the description of why Ontario Hydro is seeking 18 approval for the lines from Bruce in the southwest 19 decision. There they had a load and generation 20 rejection mechanism so they could deal with the 21 possibility of lines overloading if there's a 22 contingency. They felt that wasn't a rigorous approach 23 and so they wanted to beef up the system to deal with 24 what they viewed as inadequacy they were carrying for 25 some time. 26 That's not an unusual situation in 27 transmission planning that you want to have more 28 robustness, you have been carrying on for some time with Les Services StenoTran Services Inc. 613-521-0703 2182 OPG PANEL 2, cr-ex (Poch) 1 what you believe is an inadequate system and you then 2 address it. 3 MR. ORANS: In other places I have seen 4 additions of capacities for reliability purposes, 5 however, these additions I believe are related to load 6 growth. 7 MR. POCH: That's right, but the load growth 8 may have already occurred, correct, and that's why you 9 have got a problem at this point. It might be 10 anticipated in the future, it might already be existing, 11 the problem. 12 MR. ORANS: If they didn't need -- the load 13 growth was at capacity at some point and that's why they 14 added these. I believe that. 15 MR. POCH: Okay. Now, finally on that matter, 16 you expressed the available capacity on these lines and 17 you related it to the number of years of load growth 18 that it could manage, and it was 50 or 100 in the two 19 different regions. Correct? 20 MR. ORANS: As stated yesterday, I divided two 21 numbers, capacity divided by load growth. 22 MR. POCH: Fine. I just want to be clear. 23 The load growth assumption, the number of years you took 24 from how fast load was growing in the period of the 25 nineties. Correct? 26 MR. ORANS: Over the same ten year period 27 during which the additions were made. 28 MR. POCH: Now, I recall earlier in the Les Services StenoTran Services Inc. 613-521-0703 2183 OPG PANEL 2, cr-ex (Poch) 1 hearing we heard that there was a particularly low 2 period of growth. I think it was something like a .1 3 per cent growth era there. Is that your understanding? 4 I don't know if it was the mid or the latter part of the 5 nineties. 6 MR. ORANS: I believe the load growth is 7 relatively small now and relatively small then and I 8 believe the data that OHNC has provided shows their 9 expectation of relatively low load growth, at least in 10 the short term. 11 MR. POCH: All right. And you would agree 12 that to the extent the load growth is higher, obviously 13 the number of years that this available capacity, 14 whatever it may be, can cover is short. 15 MR. ORANS: Yes. I would agree with that. 16 MR. POCH: Fine. Now, I think you have 17 already agreed transmission is a lumpy business. Would 18 you agree that sometimes the lumps are very big as in 19 the graphic you provided us, when you are adding, for 20 example, a whole new right of way and circuit and what 21 have you, but sometimes they can be relatively smaller 22 lumps? 23 MR. ORANS: You can add smaller additions and 24 they can have different levels of cost, as I testified 25 to yesterday. However, I believe OHNC has testified 26 that it takes at least ten years and some time well in 27 excess of ten years to incorporate changes in load into 28 their planning. Les Services StenoTran Services Inc. 613-521-0703 2184 OPG PANEL 2, cr-ex (Poch) 1 I would think it's at least ten to 15 years to 2 even fully incorporate it, independent of the decision 3 on what to build, whether lumpy or more modules. 4 MR. POCH: If you are talking about a new 5 right of way, you might have to go through an 6 environmental assessment process, for example. Correct? 7 MR. ORANS: That's correct. 8 MR. POCH: But if you are talking about, and 9 let me give you some examples here -- I am going to give 10 you a number of examples and maybe you can deal with 11 them as a group. These are examples I want to know if 12 you would agree of improvements in capacity that are 13 relatively smaller steps that may be mirrored in that 14 may not require such a length planning and approval 15 process. 16 Reconductoring an existing line with larger 17 conductors; raising tower to reduce sag and increase 18 thermal limits; adding series capacitors in long lines 19 to increase inter-regional power flow; increasing auto 20 transformer capacity between 5000 and 230 kV systems; 21 adding shunt capacitor banks to support the voltage; 22 rebuilding existing lines that reached the end of their 23 life. 24 MR. ORANS: I think those are such a broad 25 group and it's case specific. I mean if I increased the 26 voltage, that could be a very big issue if I have a 27 clearance issue. If I trigger anything where I have an 28 EIR, as you said, or a new land use or somebody has to Les Services StenoTran Services Inc. 613-521-0703 2185 OPG PANEL 2, cr-ex (Poch) 1 come in before the Board again for a revenue requirement 2 change, that could be a very long period until that is 3 actually incorporated into the new expansion. 4 MR. POCH: Some of these things may require a 5 longer approval, some may not. Is that fair? 6 MR. ORANS: That's fair. 7 MR. POCH: And some of them you may be able to 8 effect in a shorter planning horizon and some longer. 9 Is that fair? 10 MR. ORANS: Yes, but I would still come back 11 to OHNC's own evidence that they believe that in general 12 these load changes take a long time to filter through 13 the planning process for the network system. 14 MR. POCH: Now, looking at the larger lumps, 15 the bigger additions, my understanding of what you said 16 is that there is some economies of scale here and that 17 you would add -- typically it's not uncommon to add more 18 capacity than you need in the immediate future because 19 of the economies of scale when you are building a new 20 line. 21 MR. ORANS: That's correct. 22 MR. POCH: You I think indicated in your 23 graphic, G10.3, you have implied that alternatives that 24 avoid transmission may in some cases be more costly to 25 the extent they precede the need date just because of 26 the time value of money they may be more costly. Is 27 that correct? 28 MR. ORANS: No. I don't believe that's a Les Services StenoTran Services Inc. 613-521-0703 2186 OPG PANEL 2, cr-ex (Poch) 1 correct interpretation of what I said. 2 MR. POCH: Okay. 3 MR. ORANS: I believe I said if you move the 4 period earlier under which you need new investment in 5 capacity, the value of a load reduction when a customer 6 installs embedded generation is higher. If it's out in 7 the future and it takes a longer time, the value is 8 lower. 9 MR. POCH: Okay. That's fine. Is it also 10 true that large transmission investments, these very big 11 lumps of investment, may in some cases be more costly 12 than alternatives, such as embedded generation or 13 conservation, to the extent that the large transmission 14 addition includes a bunch of capacity you don't need 15 right away and you are paying something for that, 16 although it may be a discount because you are doing it 17 at the same time, whereas the alternative may allow you 18 to add capacity in smaller increments. 19 MR. ORANS: Actually we found in most of our 20 studies that the exact opposite is true. The larger the 21 investment you have in the bulk system, so say it's a 22 large generator or large bulk transmission system, the 23 lower cost per kW installed then the more efficient 24 it is. 25 The hurdle rate for small-scale generation, it 26 takes a lower cost small-scale generator. The best 27 application, though, where it is relatively small amount 28 increment you need and it will defer something for a Les Services StenoTran Services Inc. 613-521-0703 2187 OPG PANEL 2, cr-ex (Poch) 1 long period of time. For example, suppose I have what 2 we call a block load change in load growth and I can 3 offset it with a small-scale generator, merchant, 4 embedded, it doesn't matter, for a permanent period of 5 time because there is going to be no load growth. 6 Then I get a really long period of deferral 7 for a small load change. Those are the best 8 applications. In general, the larger the bulk system, 9 the harder it is to offset it with small scale efficient 10 generation if it's there. 11 MR. POCH: I understand your point that the 12 best economics are when you can make a small investment 13 in embedded generation and get a big deferral of 14 transmission. 15 MR. ORANS: That's correct. 16 MR. POCH: I was looking at another situation, 17 where you are looking at a -- the next major investment 18 in the transmission system is quite a big step in 19 capacity. It's quite an expensive addition. It makes 20 sense if you are going to do it. You are going to put 21 in a whole right-of-way and a line. You are only going 22 to need a small amount of it for the first few years. 23 You hope to grow into it. 24 In that scenario you may be able to add a 25 small amount of conservation or generation of some other 26 form. You don't need to defer the whole big step. You 27 just need to defer the need for the initial capacity 28 that would be used on that step. Les Services StenoTran Services Inc. 613-521-0703 2188 OPG PANEL 2, cr-ex (Poch) 1 MR. ORANS: I am sorry to give you a 2 complicated answer. You have asked a fairly complex 3 question. 4 The question here becomes can you avoid a 5 large lump in investment like this? If I need a 6 thousand MVA of capacity to reinforce a large bulk 7 system network for load growth and reliability, does a 8 10 megawatt embedded generator give you any value? Does 9 a 20 megawatt embedded generator give you any value? 10 We are doing a case right now in New York City 11 actually for Con. Ed. -- 12 MR. POCH: Let me interrupt you since you said 13 you are going to give me a long answer. I think you are 14 answering a different question than I asked. 15 I am not suggesting you need a large addition 16 of capacity. I am suggesting you need some portion of 17 the next transmission addition which is a large 18 addition, but the portion you need initially is 19 relatively small. In that scenario you can add a small 20 amount of generation and defer this big investment in 21 transmission because most of that investment in 22 transmission was for stuff you weren't going to need for 23 some time. 24 MR. ORANS: Why would I put in the large 25 investment in the first place then? 26 MR. POCH: All right. Thank you. 27 Let me move on then. Mr. Brown already went 28 through your list of other reasons. I am not sure if it Les Services StenoTran Services Inc. 613-521-0703 2189 OPG PANEL 2, cr-ex (Poch) 1 was yours, Dr. Orans or Mr. Boland's, a list of other 2 reasons why net versus gross, net billing is 3 inappropriate in your view. 4 You listed power quality support backup and 5 the ability to sell excess production. I won't go over 6 that entirely, it has been covered, but I wanted to make 7 sure I understood some of this. 8 The question of access to the market to sell 9 extra power. We are agreed, are we not, that the 10 proposal is -- OHNC's proposal would extract from that 11 generator the same fees, the same contribution for new 12 connection that any other generator would pay? That's 13 your understanding? 14 MR. BOLAND: I think we had a roundabout way 15 with Mr. Brown on this yesterday. I think in the end it 16 came back to at the end we have to look at this from the 17 customer perspective in terms of that embedded 18 generator's connected to the customer. 19 What we are examining here is the mechanism 20 you have here is that transmission costs are paid for by 21 the customers and what's the appropriate way to do that 22 when recognizing that customer has an embedded 23 generator. 24 MR. POCH: Mr. Boland, you have specifically 25 said that the generator or the load, take your pick, 26 that customer was getting value for on those occasions 27 they had excess generation beyond their own needs they 28 were going to have access to the market. You attributed Les Services StenoTran Services Inc. 613-521-0703 2190 OPG PANEL 2, cr-ex (Poch) 1 value to that. Correct? 2 MR. BOLAND: Yes. 3 MR. POCH: All right. 4 MR. BOLAND: That's a new opportunity that's 5 created in the new marketplace. 6 MR. POCH: And you would agree with me that to 7 take that new opportunity they, like any other new 8 generator or OPGI adding added capacity, would have to 9 pay any increased connection charges -- well, will face 10 the same charges that OPGI would face for that 11 incremental generation? 12 MR. BOLAND: In terms of their connection 13 charges I agree, yes. 14 MR. POCH: And in terms of network, to the 15 extent the power goes out on the network, the users of 16 that power are going to pay the same transmission tariff 17 that the users of your power will? 18 --- Pause 19 MR. BOLAND: If I understand the question, I 20 would say the answer to that is yes under gross load 21 billing, yes. 22 MR. POCH: And under net load billing. We are 23 talking about the excess portion that they are selling 24 onto the market. There is no distinction here between 25 gross and net for that portion of the generation. That 26 is what you have styled the excess generation. 27 MR. ORANS: Excuse me, but it's the same 28 customer. So, yes, for the excess piece by itself it Les Services StenoTran Services Inc. 613-521-0703 2191 OPG PANEL 2, cr-ex (Poch) 1 would have the same result. 2 MR. POCH: That's what we are talking about 3 here. 4 MR. ORANS: But the money flows to the same 5 customer. So you have given the customer a benefit for 6 installing the embedded generator on an ongoing basis 7 and the evidence shows we are indicating on Option XVI 8 that's a relatively low amount. And then you are 9 allowing them to sell back into the network and use it 10 on an ongoing basis, the excess at the same level that 11 his merchant generators use it. 12 MR. POCH: That's what I am responding to. I 13 am responding to your suggestion that somehow there is 14 benefit being obtained on the excess portion of 15 generation in a net rather than a gross situation. I am 16 suggesting to you with respect to that excess generation 17 it's the same under either scenario, net or gross. They 18 are getting the same treatment that you and your 19 customers are getting with respect to that excess 20 portion of generation. 21 MR. BOLAND: I think that's correct. 22 MR. POCH: Thank you. 23 There was some discussion, another one of the 24 benefits you have listed was this question of backup and 25 I take it your position is, yes, they would be paying 26 something for use of the network when they happen to use 27 it within the period caught by the particular charge 28 determinant that's used and your concern is that that's Les Services StenoTran Services Inc. 613-521-0703 2192 OPG PANEL 2, cr-ex (Poch) 1 an inadequate payment for the insurance policy of having 2 the backup there all the time. Is that fair? 3 MR. ORANS: Yes, I think we have stated that 4 the 10 cent number was significantly below the $1.33 5 number that exists today. 6 MR. POCH: Just to be clear then, you aren't 7 offering any evidence to suggest that the cost or the 8 value of backup power is equal to the full network 9 charge, is it? 10 MR. ORANS: I think it depends on the 11 frequency of the outage of the generator. If the 12 generator is out frequently, it looks like an 13 intermittent load and it could be equivalent to the full 14 value of the cost of network. 15 MR. POCH: But if he is out frequently he is 16 going to get caught by the charge determinant a lot. 17 Correct? 18 MR. ORANS: No. That's the main difference 19 between Option XVI and Option XVIII. It's an average 20 demand. He is only going to get 3 per cent no matter 21 what. 22 MR. POCH: I can understand your difference, 23 for example, about the charge determinants and I don't 24 want to get into that debate. I am just asking, you are 25 not suggesting you can justify going to gross rather 26 than net? 27 If we thought net made sense for other 28 reasons, you are not suggesting you could justify going Les Services StenoTran Services Inc. 613-521-0703 2193 OPG PANEL 2, cr-ex (Poch) 1 to gross, charging him full network tariff to address 2 the backup question? 3 MR. BOLAND: Let me take that. I mean, I 4 think this answer has two components to it and I think 5 the answer to your question has two components to it. I 6 am referring to our direct evidence. 7 There are two different issues involved here. 8 One is we are looking at the historical sunk costs that 9 are there and for those I think it is purposely 10 appropriate to have a gross load billing form which is 11 in essence full charging, even if that embedded 12 generator is installed. 13 Going forward you need an appropriate charge 14 determinant to reflect the cost the values stand by. 15 MR. POCH: I understand your position. I was 16 just saying with respect to this 3 per cent outage, 17 whatever the outage rate is, you are not saying that the 18 value of that backup is equivalent to the full 19 differential between net and gross, that is the full 20 tariff for network? You are not asserting that? 21 MR. BOLAND: Ignoring the historical costs 22 only and looking on a going forward basis, we are saying 23 now that you need an appropriate charge determinant is 24 not the full value. 25 MR. POCH: Right. Just with respect to what 26 is appropriate, you would agree with me that -- well, 27 let's take the analogy to a load situation. If you have 28 an industrial customer that typically does not take Les Services StenoTran Services Inc. 613-521-0703 2194 OPG PANEL 2, cr-ex (Poch) 1 power on peak, schedules itself to avoid that, and then 2 one month in one year it's selling its product 3 gangbusters and decides to keep production up and uses 4 it at peak, it is going to pay its demand charge in that 5 month, but we don't assess it for that in every other 6 month? That's not the proposal? 7 MR. ORANS: In your example do I know exactly 8 when he is going to be out and does he tell me for 10 9 years forward? Otherwise I have to reserve the capacity 10 for him in the event he goes out every month. 11 MR. POCH: I am saying in Ontario the practice 12 is we don't charge him for that capacity, except when he 13 uses it? 14 MR. ORANS: I believe in Ontario there is also 15 a facilities charge because you do charge him for 16 capacity in advance of the use. 17 MR. POCH: I am not talking about connection. 18 I am talking about network. 19 MR. ORANS: Today's standby rate, replacement 20 backup. 21 MR. POCH: I am not talking about a generator. 22 I am talking about just a load customer. 23 MR. ORANS: I believe there are demand 24 charges. 25 MR. POCH: There is demand charges. 26 MR. ORANS: Demand charges, yes. 27 MR. POCH: And that's it. 28 MR. ORANS: For bundled service that has Les Services StenoTran Services Inc. 613-521-0703 2195 OPG PANEL 2, cr-ex (Poch) 1 everything in it all together. 2 MR. POCH: Fair enough. 3 But it is workable that we not charge that 4 load customer all the time for the one month every year 5 or two that it may use more power on peak. It is 6 workable, is it not, because the system planners, the 7 load forecasters, take into account the diversity of 8 customers? 9 Yes, in one month that industrial customer may 10 go up at peak. We will charge him then. We won't 11 charge him other times because in other months somebody 12 else is going to be up on peak and there is an overall 13 effect that we take into account in the revenue 14 requirements, but we are trusting that there is some 15 diversity to make it workable. Isn't that true that is 16 how we deal with it on the load side? 17 MR. ORANS: I think answering the question 18 directly, there is diversity in the system. However, 19 what we are proposing is a monthly maximum -- well, what 20 OHNC is proposing. We are supporting the applicant's 21 proposal on billing terms. That is monthly maximum 22 demand consistent with the charge determinant today. 23 MR. POCH: All right. I am just referring to 24 this load situation really by analogy. 25 When we go back and we look at the generation 26 system, if we have many small cogenerators, can't we use 27 that same logic that you don't have to build the network 28 to assume that every one of them is going to be out at Les Services StenoTran Services Inc. 613-521-0703 2196 OPG PANEL 2, cr-ex (Poch) 1 once? There is diversity? 2 MR. ORANS: Yes, there is diversity. 3 However, there is a bigger issue associated 4 with reliability. All those generators have significant 5 forced outage rates, much, much larger than forced 6 outage rates on transmission lines. So to get the 7 equivalent level of capacity and reliability from all 8 those generators, you need multiples. 9 As I was stating before, when you asked me, we 10 are doing a case in New York City where there is a large 11 network downtown in Manhattan and you need just to get 4 12 megawatts of additional capacity in the network. Our 13 equivalent calculation for reliability is 19 megawatts 14 of generation. That is not embedded or not. 15 So if it is equivalently adjusted for 16 reliability, it also needs to be equivalently adjusted 17 for diversity, and I would agree with that. 18 MR. POCH: Okay. Thank you. 19 Turning to your 10-year phase-out proposal, 20 very quickly, just to confirm, the 10 years is not from 21 2000 to 2010. It is 10 years on a project-specific 22 basis, that is from the date that any particular 23 generator comes on? 24 MR. BOLAND: That's correct. 25 MR. POCH: So if a generator comes on in the 26 year 2008 he would not get full net until 2018? 27 MR. BOLAND: That's correct. 28 MR. POCH: All right. Les Services StenoTran Services Inc. 613-521-0703 2197 OPG PANEL 2, cr-ex (Poch) 1 What about if the cogen project is announced 2 today to begin operation in 2003? When does the 10-year 3 period start? 4 MR. BOLAND: When does the cogen go in 5 service? 6 MR. POCH: In 2003. 7 MR. BOLAND: In goes in service in 2003? 8 MR. POCH: It is announced today, it goes in 9 service in 2003. 10 MR. BOLAND: And 2003 is your starting point. 11 MR. POCH: So your presumption, then, is that 12 the transmission planners or whatever vehicle does 13 transmission response or planning in future, can't take 14 that into account until it is actually cement in the 15 ground? 16 MR. BOLAND: Well, that's right. I mean, you 17 could construct, I think, a mechanism where they could 18 take it into account. 19 You know, three years from now or whatever, 20 OHNC, the applicant may come forward with some kind of 21 proposal that does take that into account, and 22 presumably there will be penalties associated with not 23 living up to the commitments because they would take 24 that into account. We don't have that case here and it 25 is not our position. 26 MR. POCH: That's not your proposal. 27 Now, we have had some cogen and some NUGs in 28 Ontario for decades. Is it not true that when Les Services StenoTran Services Inc. 613-521-0703 2198 OPG PANEL 2, cr-ex (Poch) 1 transmission planners look at network investment, as 2 opposed to TNC, they do -- they are cognizant of the 3 trends in load, in conservation, and in cogeneration, 4 Dr. Orans? 5 MR. ORANS: I think I have a grey view of the 6 load matters and the generation matters. 7 MR. POCH: They are going to be aware and, in 8 some statistical fashion, take into account the trends? 9 MR. ORANS: Yes, they are going to look at the 10 pattern of the trends. 11 MR. POCH: Thank you, then. Those are my 12 questions. 13 Thank you, Mr. Chairman. 14 THE PRESIDING MEMBER: Thank you, Mr. Poch. 15 I don't remember your name exactly. Could you 16 just identify who is next to Mr. Poch? 17 MR. POCH: This is Mr. Chernick. He will be 18 my witness later today. He has no questions. 19 THE PRESIDING MEMBER: Okay. He didn't have 20 any questions. We have questions for him. It is the 21 other way around. 22 Yes, Ms Friedman, then, would you like to go 23 ahead? 24 CROSS-EXAMINATION 25 MS FRIEDMAN: I will be extremely brief. 26 Good morning, gentlemen. I represent the 27 Municipal Electrical Association. 28 Just following up on Mr. Poch's questions on Les Services StenoTran Services Inc. 613-521-0703 2199 OPG PANEL 2, cr-ex (Friedman) 1 your Exhibit 2.1. Your Exhibit 2.1 looks at the charge 2 determinant Option XVI. 3 Am I correct that one of the implications from 4 your calculation is that we have to have under 5 Option XVI, we would have to have special back-up rates, 6 otherwise a customer who takes back-up transmission 7 service outside of the 50 hours would get that back-up 8 service for free? 9 MR. ORANS: If you give us a moment if we can 10 look at the exhibit you are referring to. 11 MS FRIEDMAN: Certainly. 12 --- Pause 13 MR. ORANS: It is possible that they could get 14 it for free. However, I think it is more reasonable to 15 calculate it on a kind of going-forward expected value 16 basis. The point that we were making with this is, 17 independent of how many hours you choose, 50, 100, 200, 18 if it is an averaged demand basically you are billing 19 for energy. 20 The average demand is the same in every hour, 21 so you can easily calculate the expected bill by just 22 taking the forced outage rate times whatever that charge 23 determinant was. In this case it ends up less than 10 24 cents a kilowatt month in expected bills for an embedded 25 generator for the 3 per cent forced outage rate. 26 MS FRIEDMAN: That leads to the conclusion 27 that we ought to have a back-up rate to capture some of 28 the cost of the back-up service? Les Services StenoTran Services Inc. 613-521-0703 2200 OPG PANEL 2, cr-ex (Friedman) 1 MR. ORANS: Yes, we have proposed, or support, 2 the charge determinant Option No. XVIII proposed by the 3 applicant. 4 MS FRIEDMAN: So any form of non-coincident 5 peak charge determinant would help in capturing that 6 cost of the back-up service? 7 MR. ORANS: Yes, but when you are looking at 8 the non-coincident peak now, it does matter how many 9 hours you have because now it is going to affect the 10 calculations. So we believe the applicant's number of 11 hours as proposed in Option XVIII is more reasonable. 12 MS FRIEDMAN: Thank you. 13 Those are my questions. 14 THE PRESIDING MEMBER: Thank you, Ms Friedman. 15 Does anyone else have questions? Mr. Cowan, 16 could you find a seat, then, please? 17 --- Pause 18 CROSS-EXAMINATION 19 MR. COWAN: Good morning, gentlemen. 20 MR. BOLAND: Good morning. 21 MR. ORANS: Good morning. 22 MR. COWAN: Ted Cowan, I am with the Ontario 23 Federation of Agriculture. My questions are more or 24 less from that perspective. 25 You would agree that the public interests at 26 stake, with respect to net and gross load billing, are 27 the avoidance of costs shifting to consumers who may not 28 benefit from the embedded generation, and in encouraging Les Services StenoTran Services Inc. 613-521-0703 2201 OPG PANEL 2, cr-ex (Cowan) 1 the provision of new generation, both of them? 2 MR. BOLAND: I agree the issue is cost 3 shifting related to transmission customers in Ontario, 4 and also whether or not we are going to be successful in 5 creating a level playing field on the generation side. 6 Yes, those are the two fundamental issues. 7 MR. COWAN: A level playing field on the new 8 generation side has nothing to do with encouraging new 9 generation, the specifics of my question? 10 MR. BOLAND: A level playing field means not 11 distorting incentives for new generation. I am not 12 saying here is one particular request of generation that 13 we are going to treat one way with respect to 14 transmission prices and here is another class that we 15 are going to treat another way. 16 MR. COWAN: Okay. I understand that answer. 17 Thank you kindly. 18 So a new embedded generation then, as I 19 understand it, causes lines to become redundant, 20 primarily in the area where the new plant might be 21 located. It might have effects elsewhere, but primarily 22 in the area where the new plant might be located? 23 MR. ORANS: Primarily, although it, as we went 24 over it this morning, that it could flow out to other 25 parts of the network. 26 MR. COWAN: But I understand there is, 27 depending on the intricacies of the network, that -- 28 MR. ORANS: And the size of the network, Les Services StenoTran Services Inc. 613-521-0703 2202 OPG PANEL 2, cr-ex (Cowan) 1 et cetera. 2 MR. COWAN: -- it is like becoming sick 3 anywhere else, a sore toe may eventually affect your 4 mental outlook? 5 --- Laughter 6 MR. COWAN: Okay, then. So there is a local 7 effect, a geographical concentration of the effect 8 there, perhaps in the toe of the province as opposed to 9 the head. 10 If the lines then near the new generation that 11 was to be built, this new embedded generation, if those 12 lines were already congested in the area around, in the 13 area primarily to be affected, then there would be less 14 redundancy of lines than if the plant were built in the 15 head of the province where there is no congestion 16 whatever, except in my case today I am afraid. 17 MR. ORANS: Generally, that's correct. 18 MR. COWAN: Okay. So under this proposal 19 then, a new generator builder at this congested site 20 would pay for transmission, not only that it would not 21 be using but which, moreover, it was actually reducing 22 the need for and reducing the congestion on, and it 23 would do that for 10 years? 24 MR. ORANS: Are you saying that if the 25 capacity is needed -- 26 MR. COWAN: If we were to build a new embedded 27 generator, under this proposal, in the midst of an area 28 with congested lines, congested transmission, that new Les Services StenoTran Services Inc. 613-521-0703 2203 OPG PANEL 2, cr-ex (Cowan) 1 generator would pay for 10 years gross load billing in 2 spite of the fact that it is relieving the need for new 3 lines and was not using those lines. 4 MR. ORANS: Under our proposal this generator 5 would begin at 100 per cent gross. 6 MR. COWAN: That's right. 7 MR. ORANS: And phase down to 100 per cent net 8 over a 10-year period. If I could go back to the 9 exhibit -- 10 MR. COWAN: It would pay for aspirin it 11 doesn't need to reduce congestion that it is actually 12 relieving. 13 MR. ORANS: No. It would pay for, in the 14 beginning, what we believe is a fair share of embedded 15 costs. And over time it would get larger and larger 16 benefits due to this so-called congestion or due to the 17 shortage and the valuable capacity that it adds to the 18 network. 19 MR. COWAN: Even where there was a clear 20 benefit from the new generation and no cost to the grid, 21 it would pay. That is your answer. 22 MR. ORANS: Are you asking me, in your example 23 to me, is there an immediate benefit? 24 MR. COWAN: The lines from day one are 25 congested and there is a demand for power there from day 26 one. 27 MR. ORANS: And OHNC can immediately reuse the 28 capacity. Les Services StenoTran Services Inc. 613-521-0703 2204 OPG PANEL 2, cr-ex (Cowan) 1 MR. COWAN: The congestion would be relieved, 2 yes. 3 MR. ORANS: Then there would be an immediate 4 benefit; yes, I would agree. And our proposal would, 5 over time, give them a larger and larger benefit due to 6 that benefit. 7 MR. COWAN: And your proposal would 8 immediately charge them, in spite of the benefit. 9 That's understood. 10 MR. ORANS: We don't believe that that is the 11 case generally in Ontario. 12 MR. COWAN: I just wanted to go back then to 13 this idea that things vary from place to place. 14 MR. ORANS: I would certainly agree with that. 15 MR. COWAN: And so this proposal could be 16 counter-indicative in some places. It may be ideal in 17 others. 18 MR. BOLAND: It could conceivably be, although 19 based on the evidence we have that doesn't appear to be 20 the circumstance in Ontario at all. That doesn't mean 21 that there might not be some limited pocket where that 22 could be the case. 23 The alternative to the kind of proposal that 24 we have put forward here, which is a generic proposal, 25 looking at the system as a whole, is obviously going to 26 create -- it is not going to hit everyone perfectly. We 27 have put in ten years. We think that is incredibly 28 conservative based on the evidence we have. It could be Les Services StenoTran Services Inc. 613-521-0703 2205 OPG PANEL 2, cr-ex (Cowan) 1 much, much higher. 2 The alternative would be to not use this kind 3 of general regime but to do a project by project 4 assessment. I think if that regime had some favour, it 5 would mean that proponents of embedded generation 6 projects would be coming in front of this Board very 7 often and there would be lots of studies being done 8 every time. There would be a huge regulatory burden 9 associated with that. It could improve, to some degree, 10 the accuracy, although generally the proposal that we 11 have here is accurate and reflective of the Ontario 12 system as a whole. 13 MR. COWAN: With respect, the regulatory 14 burden -- I am involved in a hog barn that is causing a 15 greater hearing than this. So somehow I feel that a 16 large generating plant might be able to take the burden 17 a little better than hog barn. But there we are. 18 We have new hogs that don't stink in Ontario, 19 genetically modified hogs. 20 --- Laughter 21 MR. COWAN: A final question, gentlemen. 22 You referred frequently yesterday to a level 23 playing field, and again once or twice this morning. 24 Can we build a perfectly level playing field in a place 25 or a stadium where the opposing team is not allowed in? 26 MR. BOLAND: Can you reduce that to something 27 that I can make sure I am understanding your analogy? 28 MR. COWAN: Is it possible -- I gather you are Les Services StenoTran Services Inc. 613-521-0703 2206 OPG PANEL 2, cr-ex (Cowan) 1 an economist? 2 MR. BOLAND: No, I am not, not of the 3 finance -- 4 MR. COWAN: Fortunate fellow. Can we have a 5 barrier to trade, a barrier to entry, that is so 6 insurmountable that however fair it may appear in 7 purpose, in fact there is no trade or competition as a 8 result of that rule? 9 Are such things possible? 10 MR. BOLAND: If we had such a barrier of trade 11 at such a magnitude, I am not sure that it would ever 12 appear fair. 13 MR. COWAN: So it just has to be marginally 14 effective so that it doesn't appear unfair. 15 MR. BOLAND: I'm sorry, I am really not 16 following. 17 MR. COWAN: Okay. I am not that versed in 18 this school either, so I may not have any ability. I 19 started with can we build a playing field that is level 20 but inaccessible. And we may have to leave some 21 questions unanswered. 22 Thank you kindly. 23 MR. BOLAND: Generally, we are attempting to 24 build a level playing field in Ontario, and certainly 25 our proposals are consistent with that entirely. 26 THE PRESIDING MEMBER: Thank you, Mr. Cowan. 27 Does anyone else have questions for these 28 witnesses before Board Staff? Les Services StenoTran Services Inc. 613-521-0703 2207 OPG PANEL 2, cr-ex (Cowan) 1 If not, Mr. Lyle, please. 2 MR. LYLE: Thank you, Dr. Higgin. 3 EXAMINATION 4 MR. LYLE: Good morning, gentlemen. My name 5 is Mike Lyle. I am counsel for Board Staff. 6 I am going to focus my questions on the EWT 7 charge issue. 8 I would turn you first to the document marked 9 as Exhibit G10.2. 10 MR. BOLAND: We have it. 11 MR. LYLE: And specifically to Case 1A and 1B. 12 I understand in Case 1A, congestion payments 13 are $19 with no EWT charge in place. And when we turn 14 to Case 1B there is a $3.00 per megawatt hour EWT charge 15 imposed, and the congestion payments fall by an equal 16 amount, to $16. 17 MR. BOLAND: That is correct. 18 MR. LYLE: If we start with that assumption, 19 that in all cases a $1.00 increase in EWT charge leads 20 to a $1.00 reduction in congestion payments that someone 21 is willing to pay to get across the intertie, are there 22 any scenarios in which transmission customers would be 23 worse off under your proposal than they would be under 24 the OHNC proposal for the flat $1.00 per megawatt hour 25 charge? 26 MR. BOLAND: In my view, that I can think of, 27 there is no circumstance where having a fixed EWT charge 28 can benefit. At best, you will break even, which is Les Services StenoTran Services Inc. 613-521-0703 2208 OPG PANEL 2, ex (Lyle) 1 what we had in Case 1A and in Case 1B; and at worse, 2 economic trade won't take place and the Ontario 3 transmission customer will not be as well off, and 4 neither will the market participants. 5 MR. LYLE: Could I turn you to Dr. Orans' 6 evidence, at page 20, Question 30. I am looking at 7 lines 8 through 10 there, where it states: 8 "If the exporter's total net congestion 9 payment is greater than its minimum bill 10 in any month, as Example 3 above 11 illustrates, the exporter can carry the 12 difference into future months as a credit 13 towards its next minimum bill 14 calculation." 15 When we look up at Example 3, the net 16 congestion payments -- that is up at lines 1 and 2 of 17 the same page -- the net congestion payments were 18 $1.5 million, which exceeded the floor. 19 Sorry, perhaps I will wait until you find it. 20 MR. ORANS: Excuse me, you referred to 21 Example 3. 22 MR. LYLE: First of all, I was referring you 23 to Question 30. Example 3 starts at page 19, but for my 24 purposes the material that is of interest is at the top 25 of page 20. 26 MR. ORANS: Yes, we have it. What was the 27 question? 28 MR. LYLE: The question was: As I understand Les Services StenoTran Services Inc. 613-521-0703 2209 OPG PANEL 2, ex (Lyle) 1 it, in Example 3 the net congestion payment is 2 $1.5 million, which exceeds your floor EWT charge of 3 $1 million. So there would be no EWT imposed, and you 4 would have $500,000 to carry over into a subsequent 5 month. 6 Is that right? 7 MR. ORANS: That is correct. 8 MR. LYLE: If we go to that subsequent month 9 and we assume in this case that once again there is a 10 million megawatt hours of electricity sold by this 11 particular exporter. We will assume for now that in 12 this particular month there are no congestion payments 13 and no transmission rights. 14 In OHNC's proposal it is my understanding that 15 they would then charge the exporter $1 million for those 16 million megawatt hours. 17 In your proposal I take it the floor would 18 come into play, and the charge would be $1 million. But 19 then I take it that there would be a credit of $500,000 20 against that $1 million. 21 Am I understanding that correctly? 22 MR. BOLAND: Yes, I think you are. That is 23 consistent with our understanding of OHNC's proposal. 24 MR. LYLE: So in that case there would be less 25 money flowing back to the transmission customer than 26 there would be under OHNC's proposal. Is that fair? 27 MR. BOLAND: I believe in that case that is 28 correct. And we had an interrogatory undertaking to try Les Services StenoTran Services Inc. 613-521-0703 2210 OPG PANEL 2, ex (Lyle) 1 to contrast those proposals a couple of days ago, and we 2 are working that through right now. 3 MR. ORANS: However, we believe the OHNC 4 proposal has a year's settlement. So it depends on how 5 long the carryover period is. If the customer pays its 6 ER and they have overpaid in its ER market, and if you 7 are giving us a month-to-month example, their proposal 8 could work the same way if it is within the same year. 9 MR. BOLAND: The credit mechanism that we are 10 describing here -- just to give you the theory 11 behind it. 12 We could be paying congestion payments, let's 13 say, of $8.00 per month and then $8.00 the next month 14 and $8.00 the next month, very hefty fees. It is quite 15 possible. And then the next month it comes along and it 16 is .5. And all that money would have been refunded. 17 There is an accounting credit sitting there recognizing 18 that we have paid much more than the $1.00. 19 After having gone through all these months of 20 very high congestion of .8, .8 and .8, and then there is 21 a .5, we didn't want to have to top up the .5 to the one 22 in that case. We wanted to be able to say: Look, let's 23 be able to draw down that credit account for that 24 purpose. The .5 is sufficient for that month. 25 MR. LYLE: Just turning back to Example 3 with 26 respect to the $.7 million that was paid back with 27 respect to transmission rates, I take it that if the 28 exporter had of had transmission rights to cover off the Les Services StenoTran Services Inc. 613-521-0703 2211 OPG PANEL 2, ex (Lyle) 1 entire 1 million megawatt hours they would have been 2 paid back $2 million. Is that correct? 3 MR. ORANS: Transmission customers? 4 MR. LYLE: No, I am talking now with respect 5 to the exporter. The exporter purchased transmission 6 rights for $.2 million and was paid back $.7 million. 7 The congestion payments turned out to be $2 million. 8 What I'm trying to understand is if in fact 9 they had transmission rights with respect to all one 10 million megawatt hours would they have got back an equal 11 amount to the congestion payments? 12 MR. ORANS: They get capped at the 13 $1.00 fee, so -- 14 If you could put it more directly in terms of 15 numbers -- 16 MR. LYLE: Okay. 17 MR. ORANS: -- we could redo the calculation. 18 MR. LYLE: Yes. What I'm really trying to 19 understand is how transmission rates work. I am 20 assuming that if you end up paying $10 a megawatt hour 21 in congestion payments and you have 10 megawatt hours, 22 and that is $100 in total of congestion payment, if you 23 have only 5 megawatt hours of transmission rates my 24 assumption is that you only get credited back $50, 25 whereas if you had 10 megawatt hours of transmission 26 rates you get credit back of the full $100. Is that how 27 it works? 28 MR. BOLAND: That sounded generally correct, Les Services StenoTran Services Inc. 613-521-0703 2212 OPG PANEL 2, ex (Lyle) 1 but at some point I noticed in your question you used 2 the term "transmission rates" to refer to congestion and 3 those are different things. 4 The transmission rate is a hedge, it is a 5 financial instrument -- 6 MR. LYLE: No. I understand. 7 MR. BOLAND: -- around the congestion. 8 MR. LYLE: I understand the transmission rate 9 doesn't give you any right to get across the intertie. 10 MR. BOLAND: This example, I don't recall, was 11 actually making differences in terms of quantity, it is 12 just recognizing that the financial transmission right, 13 the purchase prices that would have been made in that 14 option process, which would take place at a different 15 point in time than the actual real time hour-by-hour 16 access to the export grid. 17 So the amount that you paid for that 18 transmission right could have been more or less than the 19 ultimate value it had. 20 MR. LYLE: I'm not interested right now in how 21 much you paid for the transmission right. I'm just 22 really interested in what you get back. 23 MR. BOLAND: But that is a component. 24 MR. LYLE: Oh, I understand it's a 25 component -- 26 MR. BOLAND: Okay. 27 MR. LYLE: -- but I'm just interested in what 28 you actually get back and I'm trying to understand that Les Services StenoTran Services Inc. 613-521-0703 2213 OPG PANEL 2, ex (Lyle) 1 that is tied to the level of the congestion payments 2 themselves. 3 MR. ORANS: You get back your total payment 4 for congestion and your total net payment for -- your 5 total net congestion payment is what is used here. 6 There is a payment for -- 7 MR. LYLE: Okay, but -- 8 MR. ORANS: There is a payment for 9 transmission rights. 10 MR. LYLE: Maybe I can put it more directly. 11 The $.7 million in Example 3, how would that have been 12 calculated? How would that type of figure be derived? 13 MR. ORANS: I need the quantity levels and -- 14 MR. LYLE: Well, let me take you back, then. 15 Let me take you back then, to G10.2. 16 THE PRESIDING MEMBER: Could you try to not 17 talk at that same time, please. Do not talk at the same 18 time. 19 MR. LYLE: I'm sorry. 20 Let me take you back to G10.2, because -- and 21 Case 3. 22 There you assumed that the TR payment was 23 equal to the congestion payment. 24 MR. BOLAND: Correct. 25 MR. LYLE: That is because there was a 26 transmission right with respect to a megawatt hour. Is 27 that -- 28 MR. BOLAND: No. In this example it's because Les Services StenoTran Services Inc. 613-521-0703 2214 OPG PANEL 2, ex (Lyle) 1 we assumed perfect knowledge that the market 2 participant, when buying the TR, knew what the value of 3 congestion was going to be and so he got it right. He 4 paid $19. 5 MR. LYLE: That's what he paid, but he also 6 received back a TR payment of $19. 7 MR. BOLAND: Okay. The amount he received 8 back is equal to the congestion amount for the quantity 9 of megawatts he holds TRs. 10 MR. LYLE: That is what I was trying to 11 get to. 12 --- Pause 13 MR. LYLE: Now, based on your knowledge, 14 gentlemen, of the likely differences in prices between 15 the Ontario market and the New York and Michigan market, 16 is it your view that it is likely in most cases that the 17 net congestion payments will exceed the $1.00 a megawatt 18 hour floor? 19 MR. BOLAND: I don't think there is a most 20 likely in this. I think you are going to see -- this is 21 happening every hour of the day every year and I think 22 you are going to see examples where there is congestion 23 where the supply and demand forces in Ontario would 24 cause a lower market clearing price in Ontario than in 25 New York or Michigan. 26 We are also interconnected with Minnesota, 27 Manitoba and Quebec. I think you are going to see a 28 wide range over a period of time and it is not always Les Services StenoTran Services Inc. 613-521-0703 2215 OPG PANEL 2, ex (Lyle) 1 going to be the direction that we are showing here. I 2 mean, we are illustrating here exports. There are going 3 to be other times where the market forces in Ontario 4 will have a higher clearing price in that that the 5 congestion will be moving the other way. 6 Now, on average, circulating all that out and 7 looking at the future, I think we have said in the past, 8 we don't know what the congestion payments are going to 9 be and it is also our opinion that we are not aware that 10 anyone in Ontario would be able to come up with that 11 figure. 12 Based on the trades that have happened in the 13 past I could make some assumptions that it would be much 14 higher, higher than $1.00 on average because there are 15 going to be times where that congestion payment is 16 extremely, extremely high. There are going to be other 17 times where the margins are extremely, extremely tight. 18 But we haven't really -- we don't have an open 19 market in Ontario now so that what is happening today is 20 not necessarily representative of what is going to 21 happen in the future. 22 The New York market just opened. Michigan 23 does not yet have an open market, the spot market, but 24 they are moving towards that. 25 MR. ORANS: I would like to add, one very 26 important feature -- there are two things that work 27 together in the proposal. 28 One is that the minimum bill is relatively low Les Services StenoTran Services Inc. 613-521-0703 2216 OPG PANEL 2, ex (Lyle) 1 so it doesn't inhibit too much volume. 2 The other part is the carryover. 3 Let me just explain, kind of in as simple 4 terms as I can, what may happen in a typical day. 5 So suppose the prices are going up. You are 6 sitting in PJM -- because it's most easy to think if you 7 are sitting in PJM or trading into New York or some 8 other place -- and you are trading on an hourly basis 9 and then when loads start to come down eventually 10 everything gets nuclear-on-nuclear, if you, kind of 11 will, if you think about it. That is about $9.00 a 12 megawatt hour. 13 That is where trade stops happening. That 14 usually, on a typical sort of winter day with everything 15 in place and everything, that may happen about seven 16 o'clock. So traders forget their dinner. They work all 17 the way through up to 7:00 and then they remove 18 everybody and they leave one person there because it's 19 all $9.00, $9.00, $9.00 everywhere. 20 Now, if you pick a $3.00 or $4.00 charge here 21 as the fixed fee, these people are going to lose all of 22 that trading volume and all the contribution everybody 23 else has raised. You have basically taken them out 24 during all the other -- they could be leaving at 2:00 in 25 the afternoon on price. Or as soon as that load starts 26 coming down, the prices start coming down, you have 27 taken them out of the market. You have taken the volume 28 out of the market, you have decreased the value of the Les Services StenoTran Services Inc. 613-521-0703 2217 OPG PANEL 2, ex (Lyle) 1 asset and you have hurt, I think, most Ontario 2 customers. 3 MR. LYLE: Yes, and I understand your position 4 with respect to the issue of certain transactions not 5 being dispatched if preset EWT charges are high. 6 I'm just trying to get an understanding, 7 though. An order for the congestion payment could be 8 quite low. The spread on prices on average over a month 9 could only be a couple of dollars and the congestion 10 payments would still be greater than the $1.00 a 11 megawatt hour floor price, though. 12 Is that -- 13 MR. ORANS: Are you saying that -- well, there 14 is going to be a lot more volume in those low -- 15 anything beneath $1.00, there could be a huge amount of 16 volume still. If you settle -- if your control area 17 settles at, you know, $1.20 different from another 18 controller, and you can make a lot of volume between 19 nine and maybe six or seven the next morning, and that 20 is efficient for trade, they will do it unless the fixed 21 charge takes them out of the game. 22 MR. LYLE: Yes. I'm actually thinking now of 23 OPGI's proposal, Dr. Orans. 24 What I'm trying to get at is, in OPGI's 25 proposal there is always a minimum of $1.00 a megawatt 26 hour, no matter -- once matters are settled, no matter 27 what the congestion payments, the net congestion 28 payments actually were. Les Services StenoTran Services Inc. 613-521-0703 2218 OPG PANEL 2, ex (Lyle) 1 What I'm trying to get a sense of is: How 2 often is that floor going to be invoked and how often, 3 in your view, is the floor not going to be invoked 4 because the net congestion payments are significantly 5 higher. 6 MR. ORANS: After the initial set of questions 7 and that, I think I had responded and I was familiar 8 with trading data between different hubs. 9 MR. LYLE: Yes. 10 MR. ORANS: I did go back to my data and look 11 at it again and what you see is you see lots of trade 12 and a lot more volume in the kind of $1.00 and low range 13 here than in the higher ranges. In the higher ranges 14 you see the spikes, but you don't see huge amounts of 15 volume trading. 16 So I would expect there to be lots of 17 efficient trading at that low level on a normal basis. 18 Although this market hasn't formed, if it's like other 19 markets you could have lots of volume lost with a high 20 fixed charge. 21 MR. BOLAND: Let me just add to that in terms 22 of why we came up with $1.00. 23 I think I was asked yesterday in terms of "Why 24 did you come up with that and move away from what the 25 MDC said?", and I said, "Well, we did it as an element 26 of compromise, not because we think it is improving the 27 situation", because I don't think it is improving the 28 situation. Les Services StenoTran Services Inc. 613-521-0703 2219 OPG PANEL 2, ex (Lyle) 1 But at $1.00 we think the amount to which 2 trade will be affected, that's a fairly low number, it 3 shouldn't be that substantial, but it doesn't take long 4 before you get into the two, three, four, five, six, 5 seven, and so on. 6 Now, the other thing to recall in this is, I 7 mean, these simple examples show the export and wheeling 8 through charge is the only fixed charge associated with 9 trade. 10 There is already expected to be an IMO fee 11 related to trade of slightly less than a dollar. I 12 think the IMO's application that is in front of this 13 Board is about .8 cents. On top of that, an IMO uplift 14 will be charged to trade. So before you even get to 15 these examples here and what we do with the EWT charge 16 there is already close to a $3 charge built in. These 17 simple examples don't illustrate that. So you are 18 really moving from about $3 to about $4 through this 19 proposal. You are starting to get into a range where 20 realistically speaking trade will be affected to a fair 21 degree. 22 MR. LYLE: Can I take you back to G10.2 and to 23 Case 3. I'm wondering whether I could get you to 24 undertake to provide the accounting entries for the 25 various entities on the Ontario side of the border as 26 they relate to the transactions that are set out in 27 Case 3. 28 MR. CAMPBELL: Yes, we would be happy Les Services StenoTran Services Inc. 613-521-0703 2220 OPG PANEL 2, ex (Lyle) 1 undertake that. 2 MR. LYLE: And just to add to that, if you 3 could also modify Case 3 so that it is in line with 4 OHNC's proposal and then provide the same accounting 5 entries. 6 MR. CAMPBELL: Yes, we will do that. 7 MR. LYLE: We will make that 8 Undertaking F12.1. 9 UNDERTAKING NO. F12.1: Mr. Campbell 10 undertakes to provide the accounting 11 entries for the various entities on the 12 Ontario side of the border as they relate 13 to the transactions that are set out in 14 Case 3, and also to modify Case 3 so that 15 it is in line with OHNC's proposal and 16 then provide the same accounting entries 17 MR. LYLE: Now, gentlemen, if I could suggest 18 a hypothetical to you. A couple of years from now, if 19 congestion payments are high, indicating that there is a 20 great demand to get exports across interties, the 21 response to that is that it is thought that an upgrade 22 to the intertie, to one or other of the interties, is 23 necessary. I believe you answered to Mr. Poch that in 24 your view it should not be the domestic transmission 25 customers who pays for that, the capital cost of that 26 upgrade. Is that my understanding? 27 MR. BOLAND: My understanding of the proposals 28 related to future transmission investment is they are Les Services StenoTran Services Inc. 613-521-0703 2221 OPG PANEL 2, ex (Lyle) 1 very much going to have to be proponent driven. I'm 2 sure that OHNC will come forward with facilities 3 proposals where they are necessary for reliability 4 purposes and so on, but if a market participant was 5 facing large congestion charges day in and day out over 6 a certain line and eventually came to the conclusion 7 that instead of paying those congestion charges it would 8 make sense to make an investment, it would be the 9 proponents behind that that would ultimately have to be 10 footing the bill for that. 11 MR. LYLE: Also, perhaps a couple of years 12 out, if we move to congestion pricing within Ontario 13 itself, I take it at that point then parties will have 14 to make congestion payments to get energy across certain 15 nodes in the province. Is that essentially how it would 16 work? 17 MR. BOLAND: Yes, if we move to that regime. 18 Yes. 19 MR. LYLE: In that case, would domestic load 20 still be paying transmission rates for the transmission 21 of their loads over the system? 22 MR. BOLAND: Dr. Orans may want to add to this 23 but just, generally, the internal congestion -- and we 24 have talked about how capable within Ontario the system 25 is and how it is capable of meeting a lot of load growth 26 within Ontario -- we generally describe the system as 27 not being that congested. So the congestion payments 28 within Ontario would probably be fairly low, although Les Services StenoTran Services Inc. 613-521-0703 2222 OPG PANEL 2, ex (Lyle) 1 who knows over time what would happen. Those congestion 2 payments would be, in all likelihood, insufficient to 3 recover OHNC's costs on a going-forward basis, so then 4 you would need a mechanism through their revenue 5 requirement to recognize that some revenue is going to 6 be earned through internal congestion payments and an 7 additional fee on top of that. 8 I have described this as sort of a licence 9 plate regime where the customers in one jurisdiction pay 10 for the transmission system in their jurisdiction, the 11 customers in other jurisdictions pay for the one in 12 theirs, and then congestion is done for trade in 13 between. That is sort of the economic maximizing value. 14 To me it is similar to the concept of a car licence. 15 That's why it is called "licence plate". I have the 16 right to drive in Ontario through my driver's licence in 17 Ontario and I paid a fee for that in Ontario, but when I 18 cross the border into New York I continue to have 19 rights, just as when someone who has a New York licence 20 plate and paid the fixed fees associated with that 21 licensing in New York can drive in Ontario and doesn't 22 receive a prorated share of the fixed costs associated 23 with the administration system of licensing drivers in 24 Ontario. That is the regime that is efficient 25 economically and that is what we have here. 26 MR. LYLE: But Ontario customers will be -- I 27 guess Ontario generators will be paying congestion 28 payments and Ontario load customers will be paying Les Services StenoTran Services Inc. 613-521-0703 2223 OPG PANEL 2, ex (Lyle) 1 transmission rates. 2 MR. BOLAND: I certainly think that is 3 appropriate. I mean, the transmission system was built 4 for them, built to serve them, and if the congestion 5 revenue is not sufficient to recover the entire revenue 6 requirement, then they would make up the distance. 7 MR. LYLE: One of your concerns with respect 8 to EWT charges being high is the concern about 9 pancaking. My understanding of that is that as you move 10 energy through several different jurisdictions, as you 11 go you get loaded on all of the costs of the embedded 12 transmission system as you go through jurisdictions, and 13 that is the concern, that you end up with a very high 14 transmission rate at the end of all of that. 15 MR. BOLAND: Yes. And you are really stifling 16 the market at that point. Instead of trying to create a 17 larger regional market, you are really saying let's have 18 a whole bunch of small markets and every once in a while 19 they will be able to trade, but we are going to put up 20 all these barriers. 21 Pancaking is the exact opposite of what I just 22 described in terms of that licensing regime where 23 everyone pays their own and then you pay for incremental 24 costs as you go between. That is the official model. 25 Pancaking is the antithesis of that. 26 MR. LYLE: If Ontario and other neighbouring 27 jurisdictions were to move to distance-based rates in an 28 attempt to deal with the concern about overly high Les Services StenoTran Services Inc. 613-521-0703 2224 OPG PANEL 2, ex (Lyle) 1 transmission rates on exports, would that address your 2 concerns with respect to stifling trade? Would it also 3 more properly reflect the costs that those exporters are 4 imposing on transmission systems? 5 MR. BOLAND: I will answer that very 6 generally, and I think Dr. Orans may want to add because 7 he will have a lot more experience with this kind of 8 megawatt mile type approach. 9 Generally, from a high level, in my 10 perspective, the megawatt mile approach doesn't make a 11 lot of sense when we are talking about recovering fixed 12 costs. It is the most variable type of revenue recovery 13 mechanism you can think of, and yet the cost structure 14 that we have on the transmission system is about the 15 most fixed cost structure you can think of. So at a 16 high level I think that is not an appropriate way to go. 17 MR. ORANS: Are you talking about a zonal type 18 system? You are talking about taking the $1.1 billion 19 and allocating it to various zones inside of Ontario to 20 develop more fair allocations of embedded cost. Is that 21 what your question refers to? 22 MR. LYLE: I'm actually thinking of rates that 23 would be imposed only on power that is being shipped out 24 of the province. I'm assuming postage-stamp rates 25 remaining within the province but for exporters 26 distance-based rates being imposed, and it could be on a 27 zonal basis, as you say. 28 MR. ORANS: Yes. As soon as you do that you Les Services StenoTran Services Inc. 613-521-0703 2225 OPG PANEL 2, ex (Lyle) 1 have done the worst kind of pancaking of embedded costs 2 on top of transaction charges. 3 If I can trade from here to San Diego, for 4 example, if I can pay for losses and administration and 5 everything else, and the transaction, and it makes sense 6 because I have lower cost power here than there, or an 7 emissions constraint or whatever, I should be able to do 8 it. I shouldn't have to get charged ten times all the 9 way through the transaction. 10 The whole point of the RTO movement, which is 11 FERC's kind of second movement after establishing the 12 eight eighty-eight and unbundling of firewalls, et 13 cetera, is to be able to encourage much more volume 14 trading. When FERC reports volume and claims great 15 success on the integrated wholesale market, one of the 16 things you don't see is the same 50 megawatts is traded 17 over and over and over and over and over. 18 But, in general, the problem with the FERC 19 model is, the control areas -- there are roughly 150 20 separate control areas in North America -- the loads and 21 the generators generally all belong to each other -- as 22 Mr. Boland said, they were all built for each other -- 23 and then there are interties for reliability. What FERC 24 wants to do is basically make it much more efficient so 25 everybody can trade on a variable cost basis and just 26 have loads equally pay for the embedded costs of the 27 system. So they are moving exactly opposite the 28 megawatt mile kind of distance base thing because that Les Services StenoTran Services Inc. 613-521-0703 2226 OPG PANEL 2, ex (Lyle) 1 just exacerbates the pancaking. 2 MR. LYLE: If I could turn you, gentlemen, to 3 Exhibit E, Tab 1, Schedule 95 and Exhibit E-31-16. 4 Those were both tables related to EWT rates in other 5 jurisdictions and specifically addressing the issue of 6 discounting. 7 --- Pause 8 MR. ORANS: Yes. I think we have those 9 references. 10 MR. LYLE: Of the jurisdictions that do 11 provide discounts, how often are those discounts 12 applied? In other words, is that the normal course of 13 all EWT transactions, the discount rate is really the 14 real rate? 15 MR. ORANS: Let me try to explain it in the 16 simplest way. There are long term firm rates, so if I 17 have a contract with a municipal utility, for example, 18 Mr. Boland signs a contract with a municipal utility in 19 New York and it's a two year full requirement contract, 20 so typically buy on short system would call a long term 21 firm rate, maybe two years, for the flat part of the 22 load. Okay? Because it's shaped. 23 Then he will wait longer and buy shorter term, 24 typically non firm, at lower discounted rates below the 25 firm embedded cost level to fill out the rest of the 26 load. The muni load that he is serving varies depending 27 on the weather, et cetera, over time. He doesn't want 28 to pay the full amount for the whole thing. Les Services StenoTran Services Inc. 613-521-0703 2227 OPG PANEL 2, ex (Lyle) 1 That's typically the way that you do it. You 2 buy long term firm at the maximum charge and then 3 through the oasis system, that basically is de facto an 4 auction system for the purchase of shorter term non-firm 5 rates and what's called kind of secondary reassigned 6 capacity from network users. 7 So, yes, the short answer is it's typical to 8 see discounted rates for the shorter term transactions. 9 It's not typical to see them for long term firm 10 transactions. 11 MR. BOLAND: I just want to add that. You 12 talked about Mr. Boland using this. With the mechanism 13 we have here, this is not the way -- that's the way it 14 works in the States. You can get a physical -- you can 15 reserve physical capacity for a line. The proposal here 16 very much is you can't reserve ahead of time in this 17 model any capacity for the line. Your energy base 18 determines whether or not you get access to that line at 19 any point in time. 20 This firm, non-firm distinction doesn't hold. 21 There is no equivalent of firm or non-firm service. You 22 only get access to the transmission line through your 23 energy bids. 24 MR. LYLE: And there are no congestion 25 payments then either in any of the neighbouring 26 jurisdiction markets. Is that -- 27 MR. ORANS: No. There are congestion payments 28 in New York and in BJM. Following on this comment here, Les Services StenoTran Services Inc. 613-521-0703 2228 OPG PANEL 2, ex (Lyle) 1 if he were selling, he would say this proposed charge or 2 whatever is adopted here in Ontario, for example, if you 3 were selling into Michigan and you had to buy point to 4 point service, you might have to reserve that long term 5 firm and then shorter term discounted non-firm on a 6 point to point system like Michigan. 7 MR. LYLE: Are you saying that New York and 8 PGM have moved towards a system which is more analogous 9 to Ontario then in terms of allocation of the interties? 10 MR. ORANS: No. I was saying that Michigan -- 11 excuse me, that PGM and New York have congestion 12 charges. So it's more now than it is through the system 13 here and they have pools. 14 MR. LYLE: Okay. So the New York and PGM 15 congestion charges are based on a similar method to what 16 is being proposed in Ontario. You are bidding for 17 allocation of the interties. Is that fair? 18 MR. ORANS: They have zones and people bid for 19 the right to export. Yes. 20 MR. LYLE: Okay. I understood in your 21 evidence, and maybe this has changed since you filed 22 your evidence, I understood in your evidence, Dr. Orans, 23 that -- I will turn you to it. It's question 36 of your 24 prefiled evidence. 25 --- Pause 26 MR. LYLE: It's at lines 24 and 25. It says 27 in both New York and PGM, the exporter is responsible 28 for paying both congestion and fees from an export Les Services StenoTran Services Inc. 613-521-0703 2229 OPG PANEL 2, ex (Lyle) 1 tariff. 2 MR. ORANS: Yes. 3 MR. LYLE: Is that still the case? 4 MR. ORANS: Yes, it is, and typically today's 5 stance the transaction can't go through. There's an 6 opportunity to discount the fixed transmission export 7 fee on a real time basis through an oasis type system. 8 MR. LYLE: I see. When we look at these 9 numbers in these two tables, they include some portion 10 of payments related to congestion. Is that correct or 11 is that totally separate? 12 MR. ORANS: Well, the source of B31.16 comes 13 from the initial table that is in Tab E -- that is in 14 Exhibit E, Tab 1, Schedule 95, page 2 of 2. It 15 specifically comes from the footnote "non-firm rates" in 16 footnote No. 4. These relate not to congestion, but to 17 the fixed charges for export. 18 MR. LYLE: Okay. 19 MR. ORANS: They are maximum and can change at 20 an hour to hour basis. There's a huge amount of 21 variability in those estimates. 22 MR. LYLE: All right, gentlemen. I just want 23 to finish off with a couple of questions. I just want 24 to follow up with a couple of questions related to the 25 issue of Ontario Hydro contracts. 26 I understand that OPGI is now contract holder 27 for the surplus power LRER and backup power rates. 28 MR. ORANS: That's correct. Les Services StenoTran Services Inc. 613-521-0703 2230 OPG PANEL 2, ex (Lyle) 1 MR. LYLE: We had evidence from the applicant 2 that all of the surplus power contracts were set to 3 expire in the year 2002. Can you tell us when the last 4 LRER contract will expire? 5 MR. ORANS: I don't know that. 6 MR. LYLE: Is that something you can undertake 7 to provide? 8 MR. CAMPBELL: Yes. We will. 9 MR. LYLE: And similarly with respect to the 10 date when the last backup power contract will expire? 11 MR. BOLAND: About the backup? 12 MR. LYLE: Yes. This is assuming that they 13 are not killed off by the legislation. 14 MR CAMPBELL: Sorry. What's the final request 15 now on backup? 16 MR. LYLE: It's with respect to the backup 17 power contracts. The question is in what year will the 18 last backup power contract expire? 19 MR. CAMPBELL: I think on your backup rates, 20 they are tariff rates, so they go year to year. I don't 21 think they will survive market opening. 22 MR. LYLE: So there is no signed contract for 23 backup power contracts? 24 MR. CAMPBELL: There may be one or two 25 customers with long term backup and there is a longer 26 term commitment there. 27 MR. LYLE: Is it possible for those customers 28 we could get that last date? Les Services StenoTran Services Inc. 613-521-0703 2231 OPG PANEL 2, ex (Lyle) 1 MR. CAMPBELL: I think rather than do this 2 piecemeal, we will take a look at this and make sure 3 it's answered comprehensively in that same undertaking. 4 MR. LYLE: We will make that 5 Undertaking F12.2. 6 UNDERTAKING NO. F12.2: Mr. Campbell 7 undertakes to provide when the last LRER 8 contract will expire and when the last 9 backup contract will expire 10 MR. LYLE: Finally, Mr. Boland, if any of 11 these contracts, such as the LRERs, are safe by 12 regulation, given that they are -- in other words, the 13 legislation currently says that they will cease to have 14 effect on market opening, but there's a provision which 15 allows the government to save them by regulation and 16 keep them in place. 17 If any of them are saved by regulation, given 18 that they are bundled power contracts, is it your 19 understanding that OPGI would then be responsible to 20 underwrite the transmission costs of those customers? 21 MR. BOLAND: No, that's not my understanding 22 at all. 23 MR. LYLE: Thank you. 24 Those are all of my questions, Mr. Chair. 25 THE PRESIDING MEMBER: Thank you, Mr. Lyle. 26 I was wondering whether to take the break or 27 proceed? Do you have many questions? 28 MR. ROGERS: No, I don't, you will be happy to Les Services StenoTran Services Inc. 613-521-0703 2232 OPG PANEL 2 1 hear. I expect to be 15 minutes, sir. 2 THE PRESIDING MEMBER: I think we will go 3 ahead and see how that goes. Then, of course, we have 4 Board questions after, but let's proceed. 5 MR. ROGERS: Thank you very much. 6 CROSS-EXAMINATION 7 MR. ROGERS: Mr. Boland, I think you can help 8 me with these questions. It has to do with export and 9 wheel through transactions. I must confess I am a 10 little confused about your proposal and how it relates 11 to my client's proposal. I know you have an undertaking 12 coming that will help to explain the difference. 13 I am also concerned about some implementation 14 issues and the responsibility of this Board, as opposed 15 to the IMO. So I would like to clarify that with you. 16 First of all, can you agree with me that the 17 IMO will collect three separate sets of charges; namely, 18 transmission congestion, transmission rights and EWT 19 charges as proposed by my client, the EWT charge, 20 assuming my client's position is accepted? 21 MR. BOLAND: Yes. If there is an EWT charge I 22 believe that would flow through the IMO accounts, 23 collecting it on behalf of your client. There would be 24 a TR. There would be proceeds associated with the 25 auction of the TR and there would be congestion amounts 26 and also payments to the TR holders for the valuing of 27 the congestion that they have to pay. It's the offset 28 of that hedge. Les Services StenoTran Services Inc. 613-521-0703 2233 OPG PANEL 2, cr-ex (Rogers) 1 MR. ROGERS: I want to walk through each of 2 those very slowly. First then, my understanding is that 3 the current set of market rules do not make any 4 allowance for EWT charges as proposed by OHNC? 5 MR. BOLAND: I believe that's correct. 6 MR. ROGERS: The existing IMO settlement 7 process will administer the transmission rights and the 8 congestion payments irrespective of whether there is or 9 is not an EWT charge? 10 MR. BOLAND: That's correct. 11 MR. ROGERS: And generators will be 12 compensated for congestion payments if they purchase 13 transmission rights? 14 MR. BOLAND: That's correct. 15 MR. ROGERS: So you would agree, would you 16 not, that there should be no additional requirement to 17 compensate generators in this respect? 18 MR. BOLAND: No additional agreement to 19 compensate generators beyond what rights -- then they 20 say all the transmission rights, the rights that that 21 gives them? 22 MR. ROGERS: No. Generators will be 23 compensated for congestion payments if they purchase 24 transmission rights that we have agreed upon. 25 MR. BOLAND: That's right, if they hold the 26 TR. 27 MR. ROGERS: Would you not, therefore, agree 28 that there is no additional requirement to compensate Les Services StenoTran Services Inc. 613-521-0703 2234 OPG PANEL 2, cr-ex (Rogers) 1 generators in that respect? 2 MR. BOLAND: That's right. The TR gives them 3 the right to the congestion for holding the TR and 4 nothing more or less. 5 MR. ROGERS: Now, for all intents and purposes 6 can we say that the charges and payments associated with 7 congestion are really a zero sum game and that for the 8 most part only the funds associated with transmission 9 rights auction will remain in the transmission rights 10 clearing account? 11 MR. BOLAND: No, I can't say that because you 12 don't necessarily have to buy a TR. You can conduct 13 trade without buying a TR if that's your choice, or if 14 you are unsuccessful in the TR market you will have no 15 option if you continue to trade than to go through. So, 16 they can offset and in case three, the example we showed 17 there was with perfect certainty it shows how generally 18 they offset and you are left back with that $19. 19 MR. ROGERS: All right. 20 Will the IMO settlement process take care of 21 any payments that it may make from the TR clearing 22 account to transmission paying customers to credit them 23 for transmission charges if there is sufficient funds 24 left over after the IMO settles all accounts for 25 congestion and transmission rights? 26 MR. BOLAND: Yes, there is a settlement 27 account associated specifically with these three 28 components. The proceeds from the TR, the congestion Les Services StenoTran Services Inc. 613-521-0703 2235 OPG PANEL 2, cr-ex (Rogers) 1 payments and then the payments for the TR holders. All 2 of those are in one IMO settlement account that would be 3 at times determined by the IMO Board, rebated or 4 credited back to the transmission customer in Ontario. 5 MR. ROGERS: I am thinking now about what this 6 Board will have to approve at the end of this case, Mr. 7 Boland. So it's correct to say then that the IMO and 8 only the IMO will manage collections and payments with 9 respect to congestion and transmission rights? 10 MR. BOLAND: When you say the IMO and only the 11 IMO will manage it, I mean each company involved in 12 trading are going to manage their own accounts and be 13 very much involved in this. But the particular clearing 14 account that's outlined in the market rules is an IMO 15 administered clearing account, to recognize that it's 16 these three components bundled together that really 17 create the credit going back to the Ontario transmission 18 customer. 19 It's not one component the transmission 20 customer sees or two components. It's all three of the 21 components bundled together. From the transmission 22 customer's perspective that's what is relevant and 23 that's why our proposal, the OPG proposal, recognizes 24 and uses that account consistent with the rules and 25 doesn't look at one component. 26 MR. ROGERS: The EWT charge is something quite 27 distinct from the congestion and transmission rate 28 charges in payments, isn't it? Les Services StenoTran Services Inc. 613-521-0703 2236 OPG PANEL 2, cr-ex (Rogers) 1 MR. BOLAND: If it was proposed it would -- as 2 proposed, like in the example here, I have in front of 3 me the example with the $3 charge, that would be above 4 and beyond, but as the illustration makes it would have 5 an impact on the value of congestion and an impact on 6 the value of TRs. 7 MR. ROGERS: Right. 8 Does this Board in this case have jurisdiction 9 over the way that these transmission congestion charges 10 and transmission rights are set and rebated, or is that 11 something that is done by the IMO subject to whatever 12 supervision it has? 13 MR. BOLAND: I am not entirely certain where 14 the jurisdiction of the Board, the OEB, ends and begins 15 and the IMO Board picks up. 16 Certainly the IMO Board is responsible for 17 developing market rules, but they would be consistent 18 with any ruling that this Board made in a matter where 19 this Board had jurisdiction. 20 MR. ROGERS: Fair enough. I suppose you can 21 address this in argument, but under your proposal are 22 you asking this Board to approve your approval in this 23 case to include some treatment of transmission 24 congestion and transmission rights rebate? 25 MR. BOLAND: Yes. In our proposal there is 26 recognition that this account is an appropriate 27 reference account to use with respect to that $1 per 28 megawatt standard that we have set as a minimum, and Les Services StenoTran Services Inc. 613-521-0703 2237 OPG PANEL 2, cr-ex (Rogers) 1 that if the congestion is below that that we would top 2 it up up to this total and it recognizes all three. 3 As I understand the applicant's proposal, it 4 is looking at only one of these three lines, the actual 5 amount from the purchase of the TRs and it is ignoring 6 the congestion. 7 My understanding from listening to the witness 8 from OHNC was that the feeling from OHNC was that the 9 congestion amounts relate to the commodity. 10 I am perplexed by the distinction that they 11 are drawing, quite frankly, and I have been perplexed 12 with this for a while because it all relates to the 13 commodity and the trade that is happening. The TR is a 14 financial derivative instrument based on the underlying 15 commodity. 16 I haven't in my own mind been able to find the 17 rationale for why you would exclude the congestion 18 amounts, but include the amounts related to a financial 19 hedge associated with those congestion amounts. 20 MR. ROGERS: I am trying to understand the 21 difference between your proposal and my client's 22 proposal and I am looking forward to the answer to the 23 interrogatory, but is not the main difference between 24 OHNC's proposal and yours that the OHNC proposal is 25 dealt with outside the IMO's transaction rights clearing 26 account, whereas you wish to have everything dealt with 27 within that one account? 28 MR. BOLAND: I think that's right, that under Les Services StenoTran Services Inc. 613-521-0703 2238 OPG PANEL 2, cr-ex (Rogers) 1 the OHNC proposal because it's not using the whole 2 account, it's using only one component of it, it would 3 have to set up a separate account and track that in 4 addition to what the IMO is doing. I believe that's 5 correct. 6 I will think about that further and will 7 include it in the undertaking that we are currently 8 doing on this issue. 9 MR. ROGERS: Thank you very much. 10 Am I right that the OHNC proposal make 11 provision for crediting not only the load customers who 12 pay full transmission charges in Ontario, but also 13 generators paying EWT charges who also buy transmission 14 rights? 15 MR. BOLAND: I am not sure I followed that. I 16 am not familiar with what you are suggesting to us. 17 MR. ROGERS: All right. You can't agree with 18 me if you don't follow that. 19 One last question on this point. For the 20 moment, forget the domestic customers of the system. 21 What is the difference from OPG's eyes between your 22 proposal and my client's proposal? What financial 23 difference or what financial impact will my client's 24 proposal have on your company that you don't like? 25 MR. BOLAND: Well, again, I think a formal 26 comparison of this is underway. I am not sure I can 27 answer that completely until I have completed the 28 analysis in response to that undertaking. Les Services StenoTran Services Inc. 613-521-0703 2239 OPG PANEL 2, cr-ex (Rogers) 1 Primarily, the difference is -- and quite 2 frankly, we don't understand the logic behind the 3 proposal. You are saying forgetting the transmission 4 customer, but I think that the real difference here is 5 the transmission customer. I think it is more there 6 than it is on the generator. I think by looking at only 7 of the three components here you might get some weird 8 effects. We are analysing that in terms of if there is 9 subtle differences under different circumstances. I 10 expect there will be. 11 But the primary logic behind the difference 12 and the concern we have, and the difference between our 13 proposal and yours, relates to the impact on the 14 transmission customer. 15 MR. ROGERS: Thank you. 16 I, of course, never would suggest that we 17 should forget the transmission customer. I just find it 18 sometimes instructive to know what impacts these various 19 proposals will have upon the proponent. So will you 20 include in your undertaking answer the financial impact 21 on your company of my client's proposal as compared to 22 your own? 23 MR. BOLAND: We fully expect to do that. Just 24 to reemphasize my point, the very fact that I can't do 25 that today says the rationale for what we came up with 26 was based on the impact on the transmission customer, 27 not based on our impact. 28 But we will analyze in the undertaking any Les Services StenoTran Services Inc. 613-521-0703 2240 OPG PANEL 2, cr-ex (Rogers) 1 subtle differences that are created between your 2 proposal and our proposal on the generator. 3 MR. ROGERS: Thank you. 4 I just have a couple more questions and this 5 is on net/gross load billing. 6 It is hard to think of new questions to ask on 7 this issue, gentlemen, but Mr. Poch touched on one point 8 I wanted to make. That is that under your proposal this 9 10-year wind down is on a site-specific basis? 10 MR. BOLAND: Project by project. 11 MR. ROGERS: Project by project. So that a 12 project that goes into place in 2009 will not be down to 13 zero net billing until 2019? 14 MR. BOLAND: Correct. 15 MR. ROGERS: How about a project that is put 16 in 2015 if no changes take place in the meantime? Would 17 that go up to 2025? 18 MR. BOLAND: Two thousand and twenty-five, 19 yes. 20 MR. ROGERS: Now, do you think that my 21 client's proposal, which as you know gives a 50 per cent 22 access discount or charge, depending on which side of 23 the debate you are on, would be more encouraging to 24 cogeneration in the short term in the first five years 25 in your proposal? 26 MR. BOLAND: It would be more encouraging 27 relatively, whether that encouragement is appropriate or 28 not I think we have been over time and time again. Les Services StenoTran Services Inc. 613-521-0703 2241 OPG PANEL 2, cr-ex (Rogers) 1 MR. ROGERS: Right. 2 All right, sir. Thank you. 3 Those are my questions. Thank you, sir. 4 THE PRESIDING MEMBER: Thank you, Mr. Rogers. 5 I think we will take the break now and come 6 back at five after eleven. The Board has a few 7 questions. We will review them in the break and try and 8 make sure they are focused. 9 Thank you. 10 --- Upon recessing at 1043 11 --- Upon resuming at 1108 12 THE PRESIDING MEMBER: Thank you. Please be 13 seated. 14 Okay. We will go to Board questions. We will 15 start with Mr. Vlahos. 16 MEMBER VLAHOS: Mr. Boland, I had a lot of 17 questions through the last few days about the workings 18 of the model on the export charge. I would rather wait 19 for the response to the undertaking. Perhaps the 20 Presiding Member would consider asking you to come back 21 once you are able to complete that response. At that 22 time, if there are any questions then I would reserve 23 those for that time. 24 MR. BOLAND: Certainly. 25 MEMBER VLAHOS: There is just one question on 26 this area that I have. 27 That is, the role of the financial 28 transmission rights and to what extent those costs -- Les Services StenoTran Services Inc. 613-521-0703 2242 OPG PANEL 2 1 that is, those payments are going from the exporters to 2 the IMO fund -- and the payments that come from the IMO 3 to the exporters, to what extent do those streams of 4 payments affect the credits to the transmission 5 customers? Do they? 6 Can you answer that question now, whether they 7 do or not? 8 MR. BOLAND: Yes, they do. They both do. 9 They are both part of that clearing account, that IMO 10 clearing account, as well as the actual congestion 11 payments themselves. 12 So there is the full three components. The 13 proceeds from the auction, it is the IMO that is holding 14 the auction. The IMO receives the funds. They go into 15 that account. Now that the IMO has sold those TRs, 16 those TR holders have a right to receive an amount equal 17 to congestion payments. So if congestion at that time 18 turns out to be 10, by holding the TR they would have a 19 right to receive a payment of 10. All of those three of 20 those things are in that account. 21 MEMBER VLAHOS: So although those are simply 22 financial transactions for the benefit or, I guess, the 23 potential harm to the participants in that market, they 24 do impact the credit for transmission? 25 MR. BOLAND: Yes, the TR is strictly a 26 financial instrument. The actual congestion is based on 27 physical access to the line and that is more than 28 financial. Les Services StenoTran Services Inc. 613-521-0703 2243 OPG PANEL 2 1 MEMBER VLAHOS: Okay. 2 So I will reserve those questions then until 3 after we receive your response to the undertaking. 4 Just one question on the gross versus net. I 5 believe you were here when I was asking the president 6 whether there is the 10-year phase out or phase in, 7 depending where you are starting from, whether that is 8 something that has a -- there is dates certain in that 9 10-year period. 10 You seem to be quite definitive in your 11 evidence that it is going to be only 10 years and the 12 date will not be exactly the same for all. It would be 13 10 years from the commencement of each project. So I 14 took that as being quite definitive in your proposal. 15 But I am not sure from Mr. Osborne's remarks 16 whether he was that definitive about the termination 17 date, that this Board may revisit the whole issue of 18 gross versus net at the end of the time. I am not sure 19 now, based on your evidence today, whether that time is 20 not the same 10-year period starting today. It is a 21 10-year period for each project, which makes it even 22 more cumbersome if this Board were to ask for a 23 visitation of the issue. 24 Do you understand what my concern is? 25 MR. BOLAND: Yes. Let me explain our 26 proposal. 27 Our proposal clearly is a project-by-project 28 basis. We feel that is appropriate because whenever Les Services StenoTran Services Inc. 613-521-0703 2244 OPG PANEL 2 1 that project comes in the fact is that the facilities 2 had been built based on the size of that customer load 3 before the embedded generation was put in. So the 4 facilities are there and you have this cost-shifting 5 issue based on the full amount at that time. That might 6 happen year one, it might happen year six, it might 7 happen year seven. Regardless, it is meant to be a 8 project-by-project mechanism. So the accounting would 9 take place on a project-by-project basis, phasing out 10 over that 10-year period. 11 I took Mr. Osborne's comments -- I agree, he 12 was not clear one way or the other in just talking about 13 the ending -- I took him to be thinking in terms of the 14 larger picture of things may change. 15 I mean, the applicant has said they may come 16 forward with a new kind of regime three years from now. 17 I think our method and, frankly, I think the proponent's 18 method, you could both find transition mechanisms to get 19 from the current proposal to any new regime that might 20 be considered at a future date. 21 MEMBER VLAHOS: All right. 22 Thank you for those answers. 23 THE PRESIDING MEMBER: Thank you, Mr. Vlahos. 24 Mr. Smith, please. 25 MEMBER SMITH: Just back to the export charge, 26 and it is a process question. 27 All of these charges, however they work out in 28 permeations and combinations, all end up in the lap of Les Services StenoTran Services Inc. 613-521-0703 2245 OPG PANEL 2 1 the IMO. I should have asked the proponent this when I 2 had a chance and I did not, but I am going to ask you. 3 That is, are you or is anybody, having 4 discussions with the IMO, who are a party to this 5 hearing but they do not come, in terms of their views 6 about administrative feasibility? Because, I would take 7 it, that one way or the other they are the organization 8 that must administer this. From the degree of debate 9 going on about how these charges be structured, I gather 10 that may be no small task initially to get all the dials 11 set correctly so that the thing works smoothly, is 12 understood, and does not produce anomalies. 13 I am asking you to comment on where the IMO is 14 in all of this. Are they an empty vessel into which 15 this Board pours a policy and it automatically goes 16 ahead? Or would they have, to your knowledge, 17 significant issues and concerns about administration and 18 policies, for that matter? 19 MR. BOLAND: Let me answer this from the 20 perspective of my role on OPG. I am on the IMO board, 21 but I an not a spokesperson for the IMO in any capacity. 22 So I am not answering from that perspective. 23 From my role in OPG, I can look to the market 24 roles, and I am familiar with where they are at in terms 25 of development. The TR rules and the development of 26 that account is hard-coded in the rules and it has now 27 been approved through the board. That is going to 28 happen, and the work is under way to make sure that that Les Services StenoTran Services Inc. 613-521-0703 2246 OPG PANEL 2 1 account exists. 2 You are right, it is one of many, many, many 3 things that are being done to get ready for the market. 4 But that particular account is very much under way and 5 will be part of the market that we have in Ontario, 6 regardless of the decisions that are made here today. 7 MEMBER SMITH: My concern is that at the end 8 of the day -- to get back to Mr. Rogers' point -- what 9 is on the table here? Is it the charge itself -- the 10 yea or nay and how much? Or is it the whole structure? 11 What is our piece? What is the IMO's piece, and so? 12 MR. BOLAND: I would see the OEB as making a 13 ruling on the appropriate charge mechanisms, the 14 appropriate charge determinants, and the appropriate 15 allocation of fixed costs, if any, to export trade. The 16 IMO would take that direction and build in the systems 17 to be able to implement and track what is required to 18 implement the Board's decision. 19 MEMBER SMITH: By fixed costs, do you mean an 20 EWT charge? 21 MR. BOLAND: If there were to be an EWT charge 22 coming out this. 23 MEMBER SMITH: That would be the fixed cost we 24 would allocate or not. The others are not fixed costs. 25 MR. BOLAND: That is correct. 26 MEMBER SMITH: Thank you. 27 THE PRESIDING MEMBER: Thank you. 28 I think you will understand that the Board has Les Services StenoTran Services Inc. 613-521-0703 2247 OPG PANEL 2 1 some difficulty when you, OPG and OHNC, are not ad idem 2 on the details of how the clearing account is going to 3 work and be administered. You can understand where we 4 are having some difficulty regarding that. 5 If you guys who are in the trenches designing 6 all the detail of this can't agree, then it leaves us in 7 a difficult position. That is why we are asking these 8 questions. 9 MR. BOLAND: I can understand that. My own 10 understanding of issues -- I am not sure we have a 11 distinction between or that we disagree on how the 12 clearing account will operate. 13 As I understand the distinction between our 14 proposals, it is that we are proposing, for purposes of 15 that $1 minimum, keeping an eye on what is happening in 16 that account and comparing it to the $1 million in the 17 account that already will exist in the IMO board; 18 whereas I understand the proponent's case to be that a 19 separate tracking should be done only based on the TR 20 amounts. 21 But I don't think we disagree about what the 22 market rules actually say with respect to what the IMO 23 will be doing with its TR clearing account. 24 THE PRESIDING MEMBER: We will wait for the 25 undertaking. 26 I wonder if you could please turn up OPG 27 responses to Pollution Probe, which I have, I hope, as 28 E31. I am going to specifically go to Question 9. Les Services StenoTran Services Inc. 613-521-0703 2248 OPG PANEL 2 1 MR. BOLAND: We have it. 2 THE PRESIDING MEMBER: Just looking at the 3 table at the foot of the page, my question is: If we 4 look at say 1999, start there, where there is an average 5 export price of about $43.50, if we go through the math, 6 the question I have is: Do you have any idea what the 7 transmission component of that was relative to one buck 8 per megawatt hour? 9 MR. BOLAND: Are you asking me what the value 10 of the transmission line, the access, was from Ontario 11 to -- 12 THE PRESIDING MEMBER: It is at the high 13 level. You made so much revenue, $43 per megawatt hour. 14 And that is a roll-in price for the export. 15 The question is: Do you have any idea, 16 relative to a dollar, whether transmission is more or 17 less than $1.00 in that money? 18 MR. BOLAND: Well, today, we have OPG making 19 the sale. We don't get have open access. OPG has sold 20 rights to the transmission lines. 21 THE PRESIDING MEMBER: Right. That is what I 22 am saying. 23 MR. BOLAND: The extent to which OHSC is being 24 paid for exports would be determined through a revenue 25 allocation agreement. 26 THE PRESIDING MEMBER: I am talking about 27 1999: $43 actual revenue per megawatt hour of export, a 28 bundled price. Les Services StenoTran Services Inc. 613-521-0703 2249 OPG PANEL 2 1 MR. BOLAND: Right. 2 THE PRESIDING MEMBER: I asking: Have you any 3 idea, relative to a dollar, how much of that price could 4 be allocated to transmission? 5 MR. BOLAND: Well, looking in 1999, and before 6 April when Ontario Hydro was an integrated company, the 7 transmission cost allocated to that would have been 8 zero. It would only have been losses that would have 9 been considered in determining whether or not that trade 10 was profitable. 11 Losses continue to be applied through the IMO 12 uplift charge in the going forward case as well. So you 13 always have losses there. 14 But when Ontario Hydro, as an integrated 15 utility, was making the decision about whether or not an 16 export was profitable, other than losses the 17 transmission cost was zero. 18 THE PRESIDING MEMBER: Let's look at 1998. 19 The average price there was $30 per megawatt hour. That 20 is $12.50, thereabouts, less. 21 So your margin went up from $30 to $43 per 22 megawatt hour. 23 MR. BOLAND: Presumably the margins went up by 24 the same amount, but we don't have here the cost of the 25 generation of providing this. The per-unit revenue went 26 up that amount. The margins may have changed somewhat, 27 depending on what -- 28 THE PRESIDING MEMBER: I don't think fuel Les Services StenoTran Services Inc. 613-521-0703 2250 OPG PANEL 2 1 costs and all those other costs went up by that amount. 2 If you take $12 on $30, that is a heck of a lot; right? 3 MR. BOLAND: It is a heck of a lot, and the 4 fuel cost can change a heck of a lot depending on what 5 is in the margin at any point in time as well. It is 6 really extremely variable. When a nuclear unit is on 7 margin, the incremental cost is extremely low. 8 When a fossil unit is on the margin in terms 9 of being generated, if that is the next unit that would 10 have to be called on, the margins could be extremely 11 low. 12 You are going to have trades that are 13 happening on different days under different conditions. 14 Actually, it is fairly variable. 15 THE PRESIDING MEMBER: Okay. I have your 16 answer. 17 The question -- and this will relate to the 18 undertaking, and tell me whether you are going to be 19 able to include this in qualitative or directional 20 terms. 21 First of all, taking your proposal and then 22 comparing with OHNC's proposal, what I would like to 23 know is: What will OPG's average netback, which we will 24 call so much per megawatt hour, be under your proposal 25 versus under OHNC's proposal? 26 Do you understand the concept of netback? 27 MR. BOLAND: Netback? I am not sure. 28 THE PRESIDING MEMBER: The netback is really Les Services StenoTran Services Inc. 613-521-0703 2251 OPG PANEL 2 1 the difference between all of the costs -- it is the 2 margin before tax. We will call it the before-tax 3 revenue. 4 MR. BOLAND: The margin that the exporter 5 would make under the different scenarios. 6 THE PRESIDING MEMBER: Yes, per megawatt hour. 7 MR. BOLAND: Per megawatt hour. 8 THE PRESIDING MEMBER: Are you going to be 9 able to do something like that in the -- 10 MR. BOLAND: I think we can construct examples 11 that will -- we can do that and we can construct 12 examples that would illustrate different scenarios, 13 using numbers, yes. 14 THE PRESIDING MEMBER: Thank you. 15 You have come with your proposal for the 16 pricing of EWT transactions from the transmission's 17 perspective. Do you have any comments on if and when we 18 should consider marginal pricing at the regime and the 19 factors that would affect that? 20 MR. BOLAND: I think the path that we are on 21 is appropriate. I was on the MDC, and I supported the 22 direction from the MDC, which was -- there is a heck of 23 a lot going on right now to create this market. If we 24 add in at the outset the complexity of locational 25 marginal pricing within the province, and also 26 considering some of the equity impacts that might have, 27 given that this system wasn't constructed thinking that 28 we would ever have that, I thought it was premature to Les Services StenoTran Services Inc. 613-521-0703 2252 OPG PANEL 2 1 do that directly, immediately. 2 I do think, however, as we are trying to 3 create larger regional markets across North America, and 4 consistent with the direction of FERC, exploring 5 locational marginal pricing and the impacts it would 6 have in Ontario is appropriate and the right thing to 7 do. 8 I think the notion that we have here that we 9 are going to use the first 18 months to analyze what is 10 happening when the market operates, and the IMO will be 11 responsible for publishing some zonal or nodal prices, 12 locational prices during that time period, and from that 13 making an assessment, I think that is the right path to 14 be on. 15 THE PRESIDING MEMBER: Thank you. If it is in 16 the evidence somewhere, could you point to it. What is 17 the point to point charge in the New York zone? 18 Is it somewhere in there? 19 MR. ORANS: I don't believe it is in the 20 evidence. I pulled it up yesterday or the day before. 21 There is, I think, certainly in excess of 22 seven or eight different transmission owners in New York 23 and they post on a monthly basis, depending on the 24 volumes they have. So they adjust. 25 I think the highest one, subject to check, is 26 about $10 a megawatt hour actually, and the lowest one 27 is $1.00 or $1.50 or something. Those change by month 28 depending on what the sales and volume is. You can Les Services StenoTran Services Inc. 613-521-0703 2253 OPG PANEL 2 1 actually access them on the Web and see what the actual 2 charges are. 3 THE PRESIDING MEMBER: What does that say 4 about reciprocity? 5 MR. ORANS: Well, remember, in their system, 6 the way it is set up is the transmission owner who wants 7 to maximize its return or its net margin back on its own 8 assets and will adjust that if it starts losing margin, 9 because it has a revenue target to meet each time. 10 So the have, if you will, a flexible dynamic 11 system through OASIS to adjust the prices so that they 12 don't start losing transactions. But they also have 13 full locational marginal pricing and zonal rate, 14 et cetera, and they have been operating this and working 15 on it for a much longer period of time. 16 THE PRESIDING MEMBER: Thank you. 17 Mr. Boland, just to ask you a question, a 18 follow-up on the question of decontrol of initially 19 fossil and then nuclear plants, which I have done here, 20 that 4,000 megawatts of fossil generation and 3,000 21 megawatts of nuclear. 22 My question is really straightforward, as to 23 how will that affect or effect the terawatt hour cap of 24 106 terawatt hours per year if that amount of 25 decontrol -- i.e., 7,000 megawatts, is decontrolled. 26 MR. BOLAND: The mechanism in place is that 27 when -- I might use the word "sale" interchangeably with 28 "decontrol". I think it is an easier word. Les Services StenoTran Services Inc. 613-521-0703 2254 OPG PANEL 2 1 When you sell a plant, that plant has 2 associated with it, under the Market Power Mitigation 3 Agreement, certain quantities of production. We would 4 apply -- OPG would apply to the OEB under our licence if 5 we want to have the queues reduced to recognize that 6 that plant is no longer -- the quantity is reduced, to 7 recognize that that plant is no longer owned or 8 controlled by OPG. 9 But OPG would have to come forward and make 10 that application and the Board -- if the Board were to 11 determine that the sale or the decontrol of that plant 12 qualified as decontrol, then the queues for that plant 13 would be removed from the 105-106 terawatt obligation. 14 THE PRESIDING MEMBER: Okay. 15 MR. BOLAND: The specific quantities that you 16 referred to, the obligation is that within three 17 and-a-half years of market opening 4,000 megawatts have 18 to be controlled of fossil with an option that OPG can 19 substitute up to 1,000 of hydroelectric. 20 The nuclear that you referred to, and Ron 21 Osborne referred to yesterday, relates to the Bruce 22 Plant which is currently under consideration for 23 accepting proposals, but that does not affect, in any 24 way, that three and-a-half year target. That is related 25 to the 10-year target of ultimate decontrol. 26 THE PRESIDING MEMBER: That accelerated 27 program, I think you have answered, will affect the 28 105-106 terawatt hours and you have indicated how. Les Services StenoTran Services Inc. 613-521-0703 2255 OPG PANEL 2 1 MR. BOLAND: Yes. 2 THE PRESIDING MEMBER: I would like to just 3 ask you a couple of more questions about gross versus 4 net. It has been beaten to death so I will try to keep 5 them short. 6 If we could start with your Exhibit G10.3. 7 That is the -- also, Dr. Orans evidence which we would 8 like to look at is Attachment 2 to that, which is the 9 last page which talks about the transmission upgrades 10 over the period, depending on how you calculate it, 1989 11 to the present. A very straightforward question. 12 First of all, did you inquire what the load 13 forecast and the growth in those areas was at the time 14 that these facilities were planned? Let's say, did you 15 inquire about that? 16 MR. ORANS: Prior to the installation? 17 THE PRESIDING MEMBER: Yes. 18 MR. ORANS: That's when they were? 19 THE PRESIDING MEMBER: Yes. 20 MR. ORANS: The 10-year period? No, I just -- 21 THE PRESIDING MEMBER: Did you inquire? 22 MR. ORANS: I just inquired about the 10-year 23 period during which -- the same decade during which they 24 were being installed. 25 THE PRESIDING MEMBER: Okay. You would know 26 from history that there were some big changes in the 27 load forecast from Ontario Hydro during that point? 28 MR. ORANS: Yes. Les Services StenoTran Services Inc. 613-521-0703 2256 OPG PANEL 2 1 THE PRESIDING MEMBER: That is my point. So 2 there was at least some potential that as a result of 3 that these assets were oversized relative to what 4 actually transpired in terms of the actual seen load 5 growth. Correct? 6 MR. ORANS: I think it's fair to say they 7 probably expected higher load growth over that same 8 period than actually occurred. 9 THE PRESIDING MEMBER: That's right. 10 So that was one point I wanted to just confirm 11 with you. 12 The other was, did you inquire how much new 13 embedded generation was installed during that time in -- 14 let's take the GTA area. Did you inquire from OPG? 15 MR. ORANS: From OHNC? 16 THE PRESIDING MEMBER: No, from OPG. 17 MR. ORANS: From either OPG? 18 THE PRESIDING MEMBER: Yes. 19 MR. ORANS: I don't believe I have estimates 20 of the amount of embedded generation installed during 21 the same period. 22 THE PRESIDING MEMBER: Okay. So 23 directionally, then, you would have seen that that would 24 have reduced the load gross growth to the 124 megawatts 25 per year that you calculated. So the actual load -- 26 that number has got in it so much embedded generation, 27 whatever it was that was installed during that period? 28 MR. ORANS: Yes. It's the net. Les Services StenoTran Services Inc. 613-521-0703 2257 OPG PANEL 2 1 THE PRESIDING MEMBER: It's the net number. 2 MR. ORANS: Yes. 3 THE PRESIDING MEMBER: Right. 4 MR. ORANS: It's the total net. 5 THE PRESIDING MEMBER: So I just wanted to get 6 to that. 7 Now, prior to October 31, 1998, generators 8 installed prior to that date, they get network net 9 billing. Correct? 10 MR. ORANS: Yes. However, they also have 11 standby charges -- 12 THE PRESIDING MEMBER: Yes. 13 MR. ORANS: -- depending on whichever standby 14 option they are on. 15 THE PRESIDING MEMBER: They get net billing. 16 Any generation after that, which is your 17 proposal as well as the Applicant's, with the twist on 18 the 50 per cent access fee, will see gross billing? 19 MR. ORANS: Without an extra standby charge. 20 THE PRESIDING MEMBER: Right. 21 So the question is: Since these assets were 22 already committed during the 1980s and during that time 23 embedded generation was installed, is it fair -- this is 24 the question you are being asked -- to treat those 25 generators differently than generators that will, on a 26 going-forward basis, be the gross billed? That is the 27 question. Do you have any comment? 28 MR. ORANS: Yes, and I would come back to what Les Services StenoTran Services Inc. 613-521-0703 2258 OPG PANEL 2 1 the customer -- looking at it from the customer's 2 perspective. 3 So you have a customer who was on the system 4 during -- both before and then during and now after, and 5 then you have a customer who doesn't have the ability to 6 install embedded generation, even same size or smaller, 7 and I think if you are looking at what those two 8 customers should pay for the previous forecast and then 9 net generation and everything else that is in the 10 forecast, if it turns out that the forecast was lower 11 than expected, as you have suggested here, then the 12 rates are going to be higher to both kinds of customers. 13 I think it is unfair to allow one customer to 14 avoid -- one customer who installs embedded generation 15 to avoid that higher rate and another customer to have 16 to pay it. 17 The second customer who doesn't install the 18 embedded generator, they pay for two things in this 19 case. They pay for the load that didn't accrue until 20 the network rate is higher than it otherwise would have 21 been, and then they pay for this other piece that the 22 embedded generator now is allowed to avoid. They pay, 23 in effect, double, lower load than expected and a load 24 transfer. 25 THE PRESIDING MEMBER: One of the arguments 26 that is in front of us is that the facilities were built 27 to serve the customers' load. These facilities were 28 planned and during that time I don't think they would Les Services StenoTran Services Inc. 613-521-0703 2259 OPG PANEL 2 1 have known in detail how much embedded generation was 2 installed. That was the regime that was in play before 3 1998 when the system was planned. Correct? 4 There was an allowance, I think, for new 5 embedded generation to go in because Hydro was, maybe 6 under government urging, trying to encourage 7 cogeneration and embedded generation in the early 1990s. 8 That was part of the policy. 9 MR. ORANS: And conservation -- 10 THE PRESIDING MEMBER: Yes, all those things. 11 MR. ORANS: Yes. 12 THE PRESIDING MEMBER: So that is one of the 13 counter arguments to this position. Do you agree? 14 MR. ORANS: Yes. Yes, I agree. 15 If you look, I have sat through two years of 16 hearings over a long drawn out process in Vancouver. 17 Vancouver has a very large transmission network system. 18 There were two professors of economics that 19 sat on the commission, and they wanted to strike this 20 careful balance between embedded cost and 21 forward-looking cost. My initial testimony in Vancouver 22 was that the installation of embedded generation had 23 relatively low value for the same reasons here, they are 24 large, lumpy. So you could do it but they are 25 relatively low. 26 They sent us back after the first case and 27 they said, "Well, even if the values are low, we would 28 like you to set up a design that when they go larger, as Les Services StenoTran Services Inc. 613-521-0703 2260 OPG PANEL 2 1 you moved in time" -- or as Mr. Cowan put it to us -- 2 "if there were an area where it were valuable, we would 3 like to see it encouraged, efficient siding of new 4 generation." They were both economists. So we worked 5 through what we call a general two-part rates 6 structure -- Ontario Hydro actually has the same thing 7 in one of their RTP two-part rate structures -- where we 8 have a fixed access fee and then we have an incremental 9 cost-based signal and you make a reservation zone to 10 zone. 11 Initially, when Mr. Boland and I talked about 12 this for here we thought that might work, however, the 13 problem with doing that here is that you have to do then 14 a zonal break-up of the whole system and look at the 15 long-term reservations. You need a whole bunch of data 16 that I have questions on on load flows and the amount of 17 capacity, et cetera. 18 But the long and the short of the B.C. Hydro 19 experience, I think, to take away from that, is we had 20 six zones in their whole system. Five of the six zones 21 for the next ten years having a load change equal to 22 500 megawatts -- about 500 megawatts, it varied by 23 zone -- had no value within the ten-year period. In one 24 of the zones coming from the east, all the way down 25 through the Vancouver area if you were shipping power to 26 BTA, that was constrained in the tenth year. So that 27 point (b) in my exhibit that you refer to is about ten 28 years out. So we gave a small benefit if you could ship Les Services StenoTran Services Inc. 613-521-0703 2261 OPG PANEL 2 1 between those, and the rest of them were zero. 2 If you look at the revenue requirement, in 3 excess of 95 per cent of the revenue requirement was in 4 the fixed gross charge, and then about 5 per cent, but 5 it was concentrated in that one zone, so it got the 6 right efficient response. That was the balance of the 7 two objectives there. 8 THE PRESIDING MEMBER: I understand. We don't 9 fortunately have an application that has that type of 10 zonal situation here. 11 Thank you very much for your responses. I 12 will just ask your counsel if he has any more in 13 redirect. 14 MR. CAMPBELL: I have a few questions and they 15 always suffer from being totally mundane after the 16 Board's questions, but they are little matters I would 17 like to clear up. 18 RE-EXAMINATION 19 MR. CAMPBELL: Mr. Boland, in the transcript, 20 and it can be found at page 2100, you were asked, in a 21 question from Mr. Poch, about a recommendation of the 22 Market Design Committee which indicated that 23 environmental regulation should be tightened and put in 24 place prior to market opening. The recommendation was 25 never specifically identified and I would ask you to 26 confirm, please, that the recommendation that you and 27 Mr. Poch were discussing was Recommendation 5-1 which 28 can be found in the Market Design Committee Report at Les Services StenoTran Services Inc. 613-521-0703 2262 OPG PANEL 2, re-ex (Campbell) 1 the second interim report. 2 It is the one that Mr. Poch and I came to talk 3 to you about at the break. 4 MR. BOLAND: Yes. 5 MR. CAMPBELL: Mr. Chair, if this 6 recommendation is going to be referred to, is it best 7 that I just make copies of the page and get an exhibit 8 number for that page? 9 THE PRESIDING MEMBER: It is not in any of the 10 material we have already? 11 MR. BOLAND: I don't think it is. 12 THE PRESIDING MEMBER: Then that probably 13 would be a good idea. 14 MR. LYLE: We will give that Exhibit 15 No. G12.1. 16 EXHIBIT NO. G12.1: Photocopy of page 17 containing Recommendation 5-1 found in 18 the Second Interim Report of the Market 19 Design Committee 20 THE PRESIDING MEMBER: You can decide whether 21 you need just the paragraph or you need some context 22 around it. 23 MR. CAMPBELL: Okay. 24 Now, Mr. Boland, there have also been 25 discussions here about this clearing account. Is that 26 the clearing account that is called the -- is the 27 clearing account that you are referring to the account 28 that is known as the TR clearing account that can be Les Services StenoTran Services Inc. 613-521-0703 2263 OPG PANEL 2, re-ex (Campbell) 1 found at section 4.18 of the market rules? 2 MR. BOLAND: That is my recollection, yes. 3 MR. CAMPBELL: Mr. Chairman, just so that the 4 Board is aware of exactly where to find that, if you go 5 to our Exhibit G6.1 that was filed, it is found at 6 page 3 and there is a description of that account at 7 that point. 8 THE PRESIDING MEMBER: Yes. I think I did see 9 that, yes. 10 MR. CAMPBELL: Finally, Mr. Boland, the most 11 difficult question of all. This morning when you were 12 answering questions, at one point you said the IMO 13 uplift on exports was just under a dollar. Then about 14 two sentences later you said it was .8 cents. Which is 15 correct? 16 MR. BOLAND: The IMO uplift -- are you talking 17 about IMO uplift or IMO fees? There is a distinction. 18 The IMO -- 19 MR. CAMPBELL: I think what you said was that 20 the IMO -- at one point you said the IMO uplift was just 21 under a dollar and then you said that the IMO uplift is 22 .8 cents. Just to not waste any more time on this, are 23 we talking 80 cents or .8 cents? 24 MR. BOLAND: Just under a dollar, 80 cents, 25 for the IMO fees. The uplift is a higher amount and 26 something different on top of that. 27 MR. CAMPBELL: Thank you very much, 28 Mr. Chairman. Those are my questions. Les Services StenoTran Services Inc. 613-521-0703 2264 OPG PANEL 2, re-ex (Campbell) 1 THE PRESIDING MEMBER: Thank you, 2 Mr. Campbell. 3 Thank you very much, gentlemen, for your 4 evidence. I hope you have a good trip back. Thank you. 5 MR. POCH: Perhaps while the panels are 6 changing over I could ask Mr. Chernick to come forward 7 and be sworn. 8 THE PRESIDING MEMBER: Mr. Campbell, I didn't 9 repeat my friend's request for Mr. Boland to return with 10 the undertaking if possible. I didn't repeat that but I 11 meant to. All right? 12 MR. CAMPBELL: Mr. Boland, I can tell you 13 without even asking him, will be delighted to do that if 14 the Board wishes him to after having looked at the 15 undertaking. 16 THE PRESIDING MEMBER: Okay. Thank you. 17 SWORN: PAUL CHERNICK 18 THE PRESIDING MEMBER: I think things have 19 just about settled down, Mr. Poch, so would you like to 20 start with your in-chief. 21 Thank you. 22 MR. POCH: Thank you, Mr. Chairman. 23 EXAMINATION-IN-CHIEF 24 MR. POCH: Mr. Chernick, you are responsible 25 for Exhibit H/5/1 in these proceedings and interrogatory 26 responses in the E-46 and E-50 series. Is that correct? 27 MR. CHERNICK: Yes, that's correct. 28 MR. POCH: Yesterday we handed out, Les Services StenoTran Services Inc. 613-521-0703 2265 GEC PANEL 1, in-ch (Poch) 1 Mr. Chairman, a proposed exhibit which has yet to 2 receive a number. It is a three-page exhibit which is 3 entitled "Ontario Power Generation Export Examples 4 Corrected". I'm just looking to Board staff to make 5 sure that the panel has received those. 6 MS LEA: Yes, I have them. One moment. 7 --- Pause 8 MS LEA: I think we were at G12.2 for this 9 exhibit please. 10 EXHIBIT NO. G12.2: Document entitled 11 "Ontario Power Generation Export Examples 12 Corrected", three pages inclusive 13 MR. POCH: Mr. Chernick, you prepared this 14 exhibit? 15 MR. CHERNICK: Yes, I did. 16 MR. POCH: And I take it that this is a 17 tabular extension of the OPGI Exhibit G10.2 with some 18 additional columns. Could you take us through this 19 briefly? 20 MR. CHERNICK: Yes. What I was doing there 21 was responding to OPG's assertion through that exhibit 22 that somehow transmission customers in Ontario were 23 uniformly better off or at least certainly never any 24 worse off with their proposal in that exhibit anyway. 25 It was just to use congestion charges versus a $3 per 26 megawatt hour EWT charge. 27 Now, what they have done is correct for 28 certain limited conditions on the system. I show that, Les Services StenoTran Services Inc. 613-521-0703 2266 GEC PANEL 1, in-ch (Poch) 1 for example, in the first page of my exhibit. I show 2 there example OPGI 1A, OPGI 1B and show that in fact 3 their proposal does work out as well or better for the 4 transmission ratepayers under very narrow conditions. 5 Those narrow conditions are, first, that the 6 transmission interface from Ontario to New York in this 7 example is congested, so they are congested revenues. 8 If it's not congested, there are no congestion revenues 9 and clearly the transmission customers within Ontario 10 are worse off, get less export revenue under the OPGI 11 proposal. 12 The other condition is that you have to assume 13 that there is no effect on energy prices in Ontario as a 14 result of exporting massive amounts of power. I do some 15 relatively modest export calculations here using the 16 capacity of the lines to New York, the current capacity. 17 I understand those are being upgraded for the future, 18 that 1,700 megawatts that I'm talking about would be 19 even larger. 20 If the system is not congested, the 21 implication is that Ontario prices have to come all the 22 way up to the external price, which means that customers 23 in Ontario are going to pay much more for their energy. 24 If it is congested, it will come up somewhat compared to 25 having no transmission take list. 26 Now, the fact is there really isn't much 27 difference between the proposal in case one because if 28 the differentials are large enough, OPG or whoever is Les Services StenoTran Services Inc. 613-521-0703 2267 GEC PANEL 1, in-ch (Poch) 1 generating in Ontario is going to want to sell. 2 Regardless of how you are charging for transmission, 3 they will sell everything they can get through the 4 lines. 5 In case two, this is actually a significant 6 benefit to the transmission customers of having a $3 7 charge per export and that is that in some cases where 8 the differentials are small, the export doesn't take 9 place. Prices in the province don't rise, energy 10 prices, and customers wind up being much better off then 11 they would have been with the OPG proposal. 12 Right now I have a page of notes explaining 13 where these things came from. Obviously this is just an 14 example. It's based as closely as possible on OPG's 15 exhibit. The real situations are much more complicated 16 with many different actual levels of load, with more 17 interconnections, with much larger opportunities for 18 export. 19 Certainly, if we ever get to the point where 20 there are 4,000 megawatts of export capacity on the 21 system and it's congested by exports flowing out, that 22 additional 4,000 megawatts is slowed. It's certain to 23 increase energy prices in Ontario and to be detrimental 24 to Ontario's energy consumers. 25 MR. POCH: Could you just point us in these 26 tables to the column which represents that overall 27 impact in your examples of the effect on Ontario 28 ratepayers? Les Services StenoTran Services Inc. 613-521-0703 2268 GEC PANEL 1, in-ch (Poch) 1 MR. CHERNICK: That effect is shown in column 2 8 under the change in net revenue and that's the change 3 from the case in which there is no transmission system 4 at all. Again, with the large price differential, both 5 the $3 EWT and the congestion charge have similar 6 effects so long as the system is congested. If the 7 system is not congested, then the EWT is somewhat 8 preferable. 9 The biggest effect on the customers is not how 10 you charge for the use of the transmission, but the fact 11 that the existence of the transmission, the subsidy of 12 the transmission, the provision of low prices for 13 transmission on power going out of Ontario raises prices 14 to customers in Ontario. 15 MR. POCH: And the extent of those prices then 16 would be shown in the last -- the change would be shown 17 in absolute dollars in the last column. Is that 18 correct? 19 MR. CHERNICK: The last column actually adds 20 together two factors and that's detailed in note 11 on 21 the third page. The last column adds together what the 22 additional charge is to the customers in Ontario and the 23 additional revenues from sales to New York. That's the 24 impact on the exporter. On the generators, not even 25 necessarily the exporter, it is all of the generators in 26 Ontario. 27 For example, if the new owner or operator of 28 Lennox is making the export and by doing so drives up Les Services StenoTran Services Inc. 613-521-0703 2269 GEC PANEL 1, in-ch (Poch) 1 the price in Ontario, then OPG, even though it's not 2 involved in an export transaction, winds up getting the 3 benefit of that higher price. 4 This is the incremental revenues to all the 5 generators in the province as a result of each of these 6 conditions taking place. As you can see, the case with 7 no price response, there is a very small increase in 8 generator revenue, but where there is a price response 9 on the Ontario side of the transaction, which is almost 10 certain to occur, then the effect on generator revenues 11 is much more dramatic. 12 MR. POCH: All right. Can you just explain to 13 me, under the net revenue column, the dollars, million, 14 .540 and so on, explain to me whose pocket that is going 15 into or coming from. 16 MR. CHERNICK: That's the net effect on the 17 transmission customers, the domestic customers, and 18 that's the sum of what they are paying for market energy 19 purchases in that hour, plus or minus, or minus whatever 20 revenues they are getting from the exporter for the use 21 of the transmission system. 22 MR. POCH: Just so we are clear on this, the 23 higher that number is, the more it is costing Ontario 24 customers. 25 MR. CHERNICK: That's right. And as you see 26 in the very restricted OPGI cases, which I have 27 labelled, the first case under each of the two pricing 28 schemes, again on page 1 there's a 6 per cent reduction Les Services StenoTran Services Inc. 613-521-0703 2270 GEC PANEL 1, in-ch (Poch) 1 in the total bill for provincial customers in that hour 2 because it's assumed that their energy price doesn't go 3 up and that they get the transmission revenues which are 4 driven by congestion and since it's about $3 a megawatt 5 hour, it turns out to be the same price in both pricing 6 schemes. 7 It's an identical benefit and then in the 8 other cases where you assume some price response in 9 Ontario, both cases result in harm to the customers from 10 increased exports. 11 MR. POCH: Thank you. Could you comment 12 briefly on the discussion -- there has been a discussion 13 about a concern with respect to pancaking. Can you add 14 anything to that? 15 MR. CHERNICK: Well, just to put the 16 terminology in context, the use of that term in the 17 United States has traditionally referred to the charging 18 of transmission charges based on system average costs by 19 a number of systems through whose thin pancake-like 20 slices of the transmission system a transaction must 21 flow. 22 For example, a generator in southern Maine or 23 Central Maine Power, which serves central Maine -- 24 southern Maine, would have to under the older scheme 25 have to pay a transmission charge to public service at 26 New Hampshire to get through a few miles of New 27 Hampshire and then pay New England Electric for a 28 stretch of transmission of maybe 10 or 20 miles and then Les Services StenoTran Services Inc. 613-521-0703 2271 GEC PANEL 1, in-ch (Poch) 1 pay Boston Edison and then pay one or two more utilities 2 perhaps before getting to an ultimate customer, perhaps 3 a municipal utility. 4 So to go a hundred miles perhaps you could pay 5 five rates, each of which was based on the costs of the 6 entire transmission system not for a mile or so, but for 7 the entire system. 8 And so you have these large costs being 9 allocated to very thin pancake like slices of the 10 system. And it became uneconomic to send power over 11 relatively small distances. 12 Now pancaking has been eliminated or largely 13 eliminated in the areas that have ISOs and are using 14 some simplified rate, an averaged rate or a zonal rate 15 to make sure that if you are sending power over -- again 16 within this relatively small area, you are only paying 17 once. 18 The term "pancaking" in the way I have heard 19 it used in the past never applied to the concept that if 20 you are sending power thousands of miles and causing 21 thousands of miles of load flows, that you shouldn't pay 22 more than if you are sending it 10 miles. That 23 distinction between 10 miles and a thousand miles, 24 that's not pancaking, but once you have a system that 25 spans hundreds of miles I don't think the term pancaking 26 applies any more if you are talking about charges from 27 two or more of those to deliver power across a long 28 stretch of transmission line. Les Services StenoTran Services Inc. 613-521-0703 2272 GEC PANEL 1, in-ch (Poch) 1 MR. POCH: There has been some discussion 2 about the comparability of the proposed dollar EWT 3 charge and what's occurring in neighbouring and next to 4 neighbouring jurisdictions. Do you have anything to add 5 to that discussion? 6 MR. CHERNICK: Well, just that the full 7 service charge in Ontario that has been proposed is 8 comparable to even the discounted rates in most of the 9 jurisdictions that there is any evidence for on the 10 record. 11 MR. POCH: When you say full you mean not the 12 dollar but the equivalent? 13 MR. CHERNICK: The full average embedded cost 14 rate, especially when you take into account the 15 distinction between U.S. and Canadian dollars. 16 By the way, I have reviewed the Hydro-Qu‚bec 17 transmission rate that's listed as $11.35 in Exhibit 18 E24.10 and the tariff says it's $16.60 or something like 19 that. So it's possible that all of these values have 20 been put in U.S. dollars, even the ones that are from 21 Canadian utilities. So, if anything, some of the 22 numbers on this table that OHNC provided should be 23 bumped up somewhat. 24 But even without that, clearly the $4, $4.85 25 is in the ball park for charges of neighbouring 26 utilities. 27 MR. POCH: And what about the added revenues 28 that may flow from congestion? Les Services StenoTran Services Inc. 613-521-0703 2273 GEC PANEL 1, in-ch (Poch) 1 MR. CHERNICK: It's my understanding that 2 those would be additive in either case. They are 3 treated the same way, either they are netted back on an 4 annual basis or a monthly basis, but it's a different 5 calculation. These rates shown in Exhibit E24.10 are 6 comparable to the dollar versus $4.85 discussion that we 7 have been having. 8 MR. POCH: Turning to net versus gross, you 9 have included in your evidence a number of concerns with 10 the applicant's rate shift analysis. You have talked 11 about avoided costs of transmissions not being 12 considered, avoided costs of losses in maintenance, 13 potential for reuse of any freed up capacity for EWT and 14 other uses and load growth, the impact on domestic 15 energy prices and the assumption of no embedded 16 generation being in that other LDC category. You have 17 critiqued on all those fronts. 18 I am not going to ask you to go over that in 19 the interests of time. I would just ask you to comment 20 on that first one, the avoided cost of transmission in 21 light of Dr. Orans' evidence, when he suggested that 22 there is such a large amount of capacity out there that 23 it is effectively of very low value. 24 MR. CHERNICK: Yes, I think Dr. Orans' 25 analysis is very speculative on that point. He takes 26 the wrong kind of data and adds it up in a way that is 27 clearly inappropriate. 28 He doesn't present, even though he is Les Services StenoTran Services Inc. 613-521-0703 2274 GEC PANEL 1, in-ch (Poch) 1 representing one of the successor companies from Ontario 2 Hydro, he doesn't present the Ontario Hydro transmission 3 planning studies that show that no load related 4 transmission is necessary over a 10-year period from any 5 point in the past. Instead he takes numbers that you 6 can't add together and adds them together. 7 A simple example of that is the Bowmanville to 8 Lennox line and the Lennox to Ottawa line that are 9 listed in his table in his attachment and also in the 10 OHNC discovery response. Those two lines are linked in 11 a chain, as are many of the other elements that he adds 12 together. 13 While it may be true that the Lennox to 14 Bowmanville line can carry 2,000 megawatts from 15 Bowmanville, basically Darlington to Lennox, and that 16 the next line down the chain can carry 750 megawatts up 17 to Hawthorne, which is basically in Ottawa, those two 18 facts may be correct, but if you are concerned about the 19 Ottawa load then those two lines together -- 20 THE PRESIDING MEMBER: Mr. Chernick, I will 21 have to ask you to take the floor mic if it's active, 22 this one here on the stand. 23 MR. CHERNICK: I can sit down right now. I 24 will use that if we need it again. 25 It certainly is possible that some of the 26 power that is delivered to Lennox can be delivered to 27 Ottawa some other way or, alternatively, if you are 28 looking at all of eastern Ontario and you include Lennox Les Services StenoTran Services Inc. 613-521-0703 2275 GEC PANEL 1, in-ch (Poch) 1 in eastern Ontario that you can deliver 2,000 megawatts 2 to eastern Ontario. 3 There is no way you can add those two numbers 4 together and get a meaningful delivered capacity value 5 to any point. If you are talking about eastern Ontario, 6 an area that's broad enough to include Lennox, then 7 being able to take power from Lennox to Hawthorne adds 8 nothing to your import ability. You have already got 9 the power in eastern Ontario. You are talking about 10 transmission within eastern Ontario. 11 Alternatively, if you are concerned about 12 Ottawa, the question is how much can you get to Ottawa 13 and that's either the 800 megawatts on the Lennox to 14 Hawthorne line or the 750 megawatts of transformation at 15 Hawthorne that you add, or possibly if there are other 16 routes that have excess capacity, possibly the 2,000 17 megawatts from Lennox to Bowmanville if there are other 18 routes beyond that to Ottawa. 19 And then for all of those you have to adjust 20 for first contingency or second contingency 21 considerations and you have to bear in mind that this is 22 a network and, as I think Dr. Orans said repeatedly, 23 things are complicated and the fact you build lines that 24 can carry certain amounts of load doesn't mean that they 25 can all carry that load simultaneously and meet load in 26 the pocket you are trying to reach. 27 MR. POCH: Turning then to the question of 28 environmental implications of all this, does the Les Services StenoTran Services Inc. 613-521-0703 2276 GEC PANEL 1, in-ch (Poch) 1 existence of environmental regulation in Ontario obviate 2 the need in your view for this Board to consider the 3 environmental implications of the export tariff or of 4 the net versus gross decision? 5 MR. CHERNICK: No, that is an argument that I 6 have heard many times over the last decade or so, back 7 when various U.S. jurisdictions were determining 8 externality values and adders of various sorts for 9 environmental effects in generation planning. 10 The fact that the regulators may have, the air 11 quality regulators, may have done everything that they 12 could find within their bag of tricks to reduce 13 pollution cost effectively, that is, requiring addition 14 of equipment, requiring coal plants to switch to gas, 15 they may have found that was not cost effective. They 16 may have found that carbon injection for mercury 17 emissions was not cost effective. 18 That does not mean that there is no cost of 19 mercury. The coal plant still emits mercury. It still 20 winds up in the food. It winds up in wildlife and in 21 human beings, but the costs of controlling it, given the 22 tools available to the regulators, are limited. Those 23 costs are just too high for them to justify it. 24 There are still costs and there are still 25 benefits of reducing generation. There are costs of 26 increasing generation. 27 MR. POCH: Now, how should this Board take 28 that concern into account, first in the context of the Les Services StenoTran Services Inc. 613-521-0703 2277 GEC PANEL 1, in-ch (Poch) 1 net versus gross discussion? 2 MR. CHERNICK: In terms of the net versus 3 gross, there are, I think, conflicting equity arguments, 4 as there often are with equity issues, what seems fair 5 to one person will seem unfair to another. 6 In most situations where you are dividing up a 7 fixed number of dollars, there are also arguments about 8 the magnitude of the effects and the other benefits that 9 accrue, as I point out in my testimony from the net load 10 billing. 11 But if the Board is in a situation where it 12 can see several arguments on one hand and several 13 arguments on the other hand, and some uncertainties 14 about how the various proposals would play out for 15 various interest groups, then the environmental effect 16 is one more factor that would weigh on the side of the 17 net load billing in encouraging efficient, cleaner 18 generation to be developed, all other things being about 19 balance, the environmental considerations would tip the 20 decision toward net load billing. 21 MR. POCH: I take it you are not saying all 22 the other things are balanced. But if -- 23 MR. CHERNICK: No. As a matter of fact, I 24 think that even without the environmental 25 considerations, net load billing makes sense. 26 MR. POCH: All right. How should I take 27 account of this concern about the environment in the 28 context of its decision with respect to EWT rates? Les Services StenoTran Services Inc. 613-521-0703 2278 GEC PANEL 1, in-ch (Poch) 1 MR. CHERNICK: Well, there again, the higher 2 EWT charge is justified by its benefits to Ontario 3 customers. But if the Board is weighing some kind of 4 benefits to the generators against the benefits to the 5 customers, again, the environmental benefit falls in the 6 side of the higher EWT charge and not generating the 7 extra electricity, at least in the short term primarily 8 from coal to serve export markets. 9 MR. POCH: Finally, Dr. Poray raised a concern 10 with the model you have suggested for how shared 11 connection and transformation facilities, that is shared 12 by a generator and a load, how that burden be allocated. 13 Can you just comment on that? I think he had 14 a concern with respect to that your proposal required 15 them to look at the capacity as opposed to the charge 16 determinant load? 17 MR. CHERNICK: Yes, I saw that in the 18 transcript and I didn't really understand the concern 19 there. The figure GA2, I think, properly applies my 20 proposal on the basis of costs. I was talking about 21 costs to avoid an extra layer of explanation. For each 22 example I was giving I didn't talk about the costs of a 23 certain number of megawatts. I think I used a little 24 shorthand which may have confused him. 25 But I am talking about how you divide up the 26 costs and not about necessarily dividing up megawatts. 27 But the megawatts are the units used for the allocation 28 of the costs. Les Services StenoTran Services Inc. 613-521-0703 2279 GEC PANEL 1, in-ch (Poch) 1 MR. POCH: Thank you, Mr. Chairman. 2 Mr. Chernick is available for 3 cross-examination. 4 THE PRESIDING MEMBER: Thank you, Mr. Poch. 5 We will go to Mr. Fisher. Thank you. 6 MR. FISHER: AMPCO has no questions. Thank 7 you. 8 THE PRESIDING MEMBER: Thank you. 9 Mr. Greenspoon, do you have any? 10 MR. GREENSPOON: No, thank you, doctor. 11 THE PRESIDING MEMBER: Then I will go to 12 Mr. Adams. Do you have some? 13 Thank you. 14 CROSS-EXAMINATION 15 MR. ADAMS: Thank you, Mr. Chairman. 16 I have a couple of brief questions. 17 --- Pause 18 MR. ADAMS: Mr. Chernick, I just want to touch 19 on a couple of areas and see if you can help me sort 20 through some of this stuff. 21 Just as preliminary matters, just to make sure 22 that we are communicating right, would you agree with me 23 that there is no way we can have a user pay system for 24 historic costs. Forward-looking cost recovery -- 25 MR. CHERNICK: I think I have seen something 26 like that in the record. I don't understand what that 27 term means. 28 In general, total revenue requirements have to Les Services StenoTran Services Inc. 613-521-0703 2280 GEC PANEL 1, cr-ex (Adams) 1 be tied to historic costs, to embedded costs. But then 2 within that total revenue requirement level you can give 3 signals about what the users are imposing in the future, 4 or for that matter what they are using today, and what 5 you spent to provide that service. So whether you are 6 using marginal or you are using embedded, you can 7 certainly cost for it for doing your rate design. You 8 certainly look at who is using the equipment and charge 9 it to the user of the equipment. 10 MR. ADAMS: I think I understand your answer. 11 Let me just follow up on one of your questions 12 in direct examination. You were talking about pancaking 13 of transmission service charges. 14 First, just a note of clarification. You said 15 that, if I understand it correctly, you were talking 16 about the concern originally arising with regards to 17 thin sliced pancakes? 18 MR. CHERNICK: Right. 19 MR. ADAMS: But that, in your view, distance 20 mattered and once distance became significant there was 21 no concern with regard to pancaking? 22 MR. CHERNICK: Well, I don't know if it is a 23 matter of no concern. But if somebody wants to use the 24 American Electric Power system to transport power from 25 Ohio all the way across Ohio and Indiana into Michigan, 26 several hundred miles, and they have to pay that charge 27 in addition to a wheeling charge at the point of origin 28 or at the point of destination, that is not what people Les Services StenoTran Services Inc. 613-521-0703 2281 GEC PANEL 1, cr-ex (Adams) 1 would call pancaking. That is not a pancake. That is a 2 whole cake in there between the sending system and the 3 receiving system. 4 MR. ADAMS: Okay. So at what point does a 5 pancake turn into cake or what is the magic -- what is 6 the sweet spot? 7 MR. CHERNICK: Well, again, the problem had to 8 do with -- and the pancake, again, is a good visual 9 image. 10 You have a system, say American Electric Power 11 because we were just talking about that, which spanned 12 at least parts of seven states, quite a large system. 13 If you are being charged an average rate for using an 14 average length of their transmission system, you are 15 cutting across a large part of their system, then their 16 rate for their equipment may make perfectly good sense. 17 If, on the other hand, you are at the 18 periphery of their system and what you need to use is 19 four miles of transmission line between your sub-station 20 and the sub-station of the customer that you are trying 21 to sell to, and AEP says, "Well, we have a wheeling rate 22 and it is based on the average cost of our transmission 23 from Kentucky to Michigan and from Indiana to Ohio. We 24 are going to charge you for that little piece", that is 25 turning the pancake on its side, if you will, and 26 charging for a quarter of an inch as if it were four or 27 five inches. 28 MR. ADAMS: But my question was: When does Les Services StenoTran Services Inc. 613-521-0703 2282 GEC PANEL 1, cr-ex (Adams) 1 the pancake turn into cake? 2 MR. CHERNICK: Well, it's a matter of matching 3 the costs to the charges. Again, if you are talking 4 about using a very small portion of the system, being 5 charged an average rate for the system doesn't make 6 sense. 7 I guess there is a continuum in between there. 8 There is the customer who wants to use 10 miles, the 9 customer who wants to use 100, the customer who wants to 10 use 400, and the customer who wants to use 1,000. The 11 customer who wants to use 1,000 certainly should have no 12 argument with the average transmission charge for the 13 system. The one who is using 10 miles does. In 14 between, there is some point where it fairly reflects 15 the way that the rate was calculated. 16 MR. ADAMS: Let me try to come a different way 17 around. 18 Can we agree that the only person who ought to 19 pay for transmission is the customer, a user? Somebody 20 who draws off the power system is the person who pays 21 for use of the transmission system. Injectors don't 22 pay. 23 MR. CHERNICK: Well, since injectors can 24 increase the costs of the transmission system, I don't 25 think that makes sense. 26 MR. ADAMS: I should have asked my question 27 more precisely. That is the confusion that is cropping 28 up in this discussion a lot of places, I think. Les Services StenoTran Services Inc. 613-521-0703 2283 GEC PANEL 1, cr-ex (Adams) 1 Let's talk about not with regard to 2 incremental cost, we will talk about historic cost. And 3 we will talk about fixed cost only. 4 With regard to fixed cost only, isn't it an 5 appropriate regulatory principle that withdrawers only 6 pay for transmission service, not injectors? 7 MR. CHERNICK: I don't know why that would be 8 a particularly appropriate rule. Whoever is using the 9 system, that is transmitting on the system or using the 10 system for voltage, or whatever, should be paying for 11 it. People who use it should pay for it. 12 MR. ADAMS: The only purpose of making 13 electricity in the first place is for consumers; right? 14 We don't do it for producers; we do it for 15 consumers. People use electricity. That is why we make 16 it. And ultimately consumers pay all the costs of the 17 supply. 18 MR. CHERNICK: I suppose you could say -- yes. 19 Then in that case it doesn't really matter who you 20 charge the rates to. The ultimate consumer is going to 21 wind up paying for it one way or the other. 22 That also depends on whose margins you are 23 eating into. So I am not even sure that is true. 24 If all of those costs were being flowed 25 through on the old cost of service ratemaking basis, 26 then you would expect that the buyers would wind up 27 paying for the transmission regardless of who you 28 charged it to. Les Services StenoTran Services Inc. 613-521-0703 2284 GEC PANEL 1, cr-ex (Adams) 1 But that is not the way other things are done. 2 You don't -- there are tolls on roads. There are road 3 use taxes in gasoline prices. Those are charged to the 4 trucks that use the roads, not to the customers who are 5 buying the equipment delivered on the trucks. 6 And there is no necessary connection between 7 whether it is the purchaser of the service, the creator 8 of the service, an intermediary. There is not one of 9 those roles that necessarily should be paying for the 10 transmission system. 11 I don't know of any standard regulatory rule 12 that makes that point. 13 THE PRESIDING MEMBER: Mr. Chernick, you do 14 know that the Applicant's proposal is that the load 15 customers only should pay for the network in this case. 16 MR. CHERNICK: I am aware of that, and that 17 the exception to that is the export payments, however 18 those are eventually recovered. 19 THE PRESIDING MEMBER: So you are clear in 20 responding to Mr. Adams, that is the proposal that is 21 central here to the Applicant's case. 22 MR. CHERNICK: Yes. And also to be clear, I 23 wasn't necessarily criticising that way of doing it. I 24 just don't see that as being -- and it may be 25 administratively simple. There may be many reasons to 26 do it. But some overarching administrative or 27 regulatory principle -- if one exists, I am not aware of 28 it. Les Services StenoTran Services Inc. 613-521-0703 2285 GEC PANEL 1, cr-ex (Adams) 1 MR. ADAMS: I want to see if I can draw on 2 your -- your CV is quite long. You have been around 3 these regulatory matters for lots of years, and I want 4 to see if we can draw on your experience here to help us 5 sort out some of the very basic issues underneath this 6 electricity restructuring and the role of the Board. 7 One of the things that confuses me, frankly -- 8 and maybe you can help straighten me out. There seems 9 to be contradictory stuff in the Electricity Act. 10 The Ontario Energy Board has a bunch of 11 general objectives that are set out in the Act, things 12 like promoting competition and facilitating the 13 transition to a competitive electricity market. Yet the 14 title of the Act is that it is an Act to create jobs and 15 protect consumers. 16 What would happen -- we can construct lots of 17 hypotheticals, I am sure, and I won't go to the effort 18 unless you ask me to -- where the objective of creating 19 jobs might conflict with the objective of economic 20 efficiency, or might conflict with the objective of 21 protecting customer interests? Or the objective of 22 minimizing rates might potentially conflict with some 23 definition of facilitating energy efficiency. 24 How should the Board weigh these various 25 objectives? 26 MR. CHERNICK: You would really have to look 27 at a particular issue to determine that. And to provide 28 a broad disclaimer, in general, I interpret statutory Les Services StenoTran Services Inc. 613-521-0703 2286 GEC PANEL 1, cr-ex (Adams) 1 language only when it is absolutely necessary for my 2 technical analysis. I don't purport to be an attorney. 3 It is certainly not in the nuances of construction of 4 Ontario legislation. 5 With that disclaimer, I would read that 6 statement about jobs and consumers as we want to promote 7 a competitive efficient marketplace which will provide 8 future electric supply at lower prices and therefore 9 will have more jobs in manufacturing and more jobs in 10 the retail industry, and all kinds of other things, 11 because electricity will be cheaper; it will stimulate 12 the economy. More firms will move here for industrial 13 and commercial operations. 14 The place where you get conflict between jobs 15 and consumer interests tends to be greatest if you are 16 talking about jobs in the utility sector, the energy 17 sector. For example, protecting the jobs of people who 18 handle coal from competition against new gas combined 19 cycle plants with fewer employees, that might conflict 20 with the objective of bringing in the gas combined 21 cycled plants where they are cheaper than the coal 22 plants. 23 I don't see that there is a strong conflict 24 between those particular items in most cases. But you 25 really have to get down to the detail of the situation 26 and ask how are jobs being affected, how are consumers 27 being affected. 28 MR. ADAMS: Let me take one specific out of Les Services StenoTran Services Inc. 613-521-0703 2287 GEC PANEL 1, cr-ex (Adams) 1 the context of this case. One of the other intervenors 2 who has taken a position parallel to your own on the net 3 load billing is a chlorine producer. They have some 26 4 jobs, according to their evidence, located at some 5 facility in eastern Ontario. 6 How much weight should the Board give to the 7 26 jobs at the chlorine plant when they are making their 8 decision as to whether to go for gross or net? It 9 supports your case. 10 MR. CHERNICK: The 26 jobs in themselves, I 11 must say, don't move me a whole lot in the context of 12 Ontario's utility system. But if that is an example of 13 an important secondary effect of this decision, which is 14 that many manufacturers will be able to stay in business 15 because self-generation, cogeneration will be cost 16 effective under net load billing but wouldn't be under 17 gross billing -- and there are many Ontario 18 manufacturers whose profitability is on a knife edge. 19 That would be another factor like the 20 environmental effects that I would say might be very 21 hard to quantify in any way that you could add -- you 22 know, you could balance numerically, but certainly add 23 to the benefits of the net load billing. 24 MR. ADAMS: Let me try a different area 25 with you. 26 You are involved in many aspects of the energy 27 industry. Do you have any observations about where you 28 think distributed power production is going? Is small Les Services StenoTran Services Inc. 613-521-0703 2288 GEC PANEL 1, cr-ex (Adams) 1 scale local production really a viable option? Have you 2 seen it? 3 MR. CHERNICK: I believe it is where the 4 utility -- the distribution utility primarily, in some 5 cases also the transmission entity -- take into account 6 the potential for savings in the delivery system as a 7 result of the development of the right kind of 8 distributed generation resources. 9 MR. ADAMS: Do you support locational marginal 10 pricing for transmission -- locational marginal pricing 11 for energy over transmission. 12 MR. CHERNICK: That's a complicated issue and 13 you can do that locational pricing on levels so fine 14 that it becomes almost impossible to administer. 15 But in general locational prices will give 16 better signals to generators and will help to avoid 17 disputes between the generators and the IMO when 18 generators are squawking about being dispatched out of 19 order and not being fully compensated and the IMO has to 20 dispatch them out of order because of local constraints, 21 local pricing will help to counter that problem. 22 MR. ADAMS: No more questions. 23 Thank you. 24 THE PRESIDING MEMBER: Thank you, Mr. Adams. 25 I think Mr. Klippenstein wanted to come up. 26 There are three good seats up front, Mr. Klippenstein. 27 --- Pause 28 MR. KLIPPENSTEIN: Thank you, Mr. Chairman. Les Services StenoTran Services Inc. 613-521-0703 2289 GEC PANEL 1, cr-ex (Adams) 1 CROSS-EXAMINATION 2 MR. KLIPPENSTEIN: My name is Murray 3 Klippenstein appearing for Pollution Probe and I have a 4 few questions on the question of export revenues and 5 they connect, perhaps, to what Dr. Higgin was inquiring 6 about in the previous panel. 7 Is it fair to say that Ontario Hydro is 8 planning to use the revenues from electricity exports to 9 lower the rates for domestic customers. I understand 10 that is the general practice. 11 MR. CHERNICK: I understand that there is some 12 mechanism for flowing increased revenues. 13 MR. KLIPPENSTEIN: If that is the case, is it 14 true that, all other things being equal, it's in the 15 financial self-interest of Ontario Hydro's domestic 16 customers for Ontario Hydro to maximize its revenues 17 from electricity exports. 18 MR. CHERNICK: Well, if you could hold 19 everything else equal, then I think that would be the 20 case, yes. 21 MR. KLIPPENSTEIN: I would like to ask, then, 22 about what OPG's past export revenues were. These were 23 touched on by Dr. Higgin before. 24 I don't think you need to turn up the 25 Pollution Probe Interrogatory No. 9 again, which is at 26 Exhibit E, Tab 31, but perhaps you can take it subject 27 to check that in 1999 OPG exported 4,616,700 megawatt 28 hours of electricity. Will you take that subject to Les Services StenoTran Services Inc. 613-521-0703 2290 GEC PANEL 1, cr-ex (Klippenstein) 1 check? 2 MR. CHERNICK: That sounds like the number I 3 have seen, yes. 4 MR. KLIPPENSTEIN: And its export revenues in 5 that year were 200 million, also from that same chart. 6 Does that sound right to you? 7 MR. CHERNICK: Yes. Or about $43 a megawatt 8 hour, I believe, Dr. Higgin kept saying. 9 I haven't done that calculation myself, but it 10 looks about right. 11 MR. KLIPPENSTEIN: I would like to compare 12 that with OHNC's export revenues at the domestic 13 transmission rate. 14 That rate is proposed for $4.85 per megawatt 15 hour. Is that right? 16 MR. CHERNICK: Yes. 17 MR. KLIPPENSTEIN: Assuming that standard 18 transmission rate for domestic customers of $4.85 per 19 megawatt hour, and assume that exports remain at the 20 1999 level that we just looked at, in other words 21 4,616,700 megawatt hours, would you agree with me that 22 Ontario Hydro's revenues from exports in total would be 23 approximately 22.4 million? 24 MR. CHERNICK: About that. 25 MR. KLIPPENSTEIN: Is that right? 26 Just for comparison, if I compare that 27 22.4 million to the total OPG exports back in 1999, the 28 22.4 million is about 11 per cent of the 200 million we Les Services StenoTran Services Inc. 613-521-0703 2291 GEC PANEL 1, cr-ex (Klippenstein) 1 saw before? 2 MR. CHERNICK: Yes. 3 MR. KLIPPENSTEIN: Okay. I would like to 4 compare that, then, to OHNC's export revenue at the 5 proposed $1.00 rate. 6 Suppose if, as is proposed, Ontario Hydro's 7 tariff rate for export is only $1.00 per megawatt hour 8 instead of the $4.85 that we just looked at, would you 9 agree that Hydro's total revenues from exports of 10 electricity will fall unless the quantity of electricity 11 exports increases proportionately, that is from 12 4,616,700 megawatts to 22,400,000 megawatts. That's a 13 simple math balance, right? 14 MR. CHERNICK: Yes. And this assumes that you 15 have the same amount of congestion revenues on either 16 side and that may or may not be true, but -- 17 MR. KLIPPENSTEIN: Okay. Make those 18 simplifying assumptions then. 19 MR. CHERNICK: Yes. 20 MR. KLIPPENSTEIN: So is it true, then, just 21 to follow up on that equation, that export quantities 22 would have to rise by 4.85 times just to maintain 23 Ontario Hydro's transmission revenues at the previous 24 count levels? 25 MR. CHERNICK: With the assumptions you have 26 laid out, that would be the case. 27 MR. KLIPPENSTEIN: Okay. Do you have a view 28 on whether it is reasonable to assume that Hydro's total Les Services StenoTran Services Inc. 613-521-0703 2292 GEC PANEL 1, cr-ex (Klippenstein) 1 export revenues will in fact be higher if it's export 2 rate is $4.85 per megawatt hours instead of $1.00 per 3 megawatt hour? 4 MR. CHERNICK: That its revenues would be 5 higher. 6 Its exports would probably be somewhat lower, 7 but its revenues would almost certainly be higher. 8 Whatever the exports in the future would be at $1.00 a 9 megawatt hour, it's hard to believe that they would be 10 increased by a factor of almost five at that level as 11 opposed to the charge of $4.85. 12 MR. KLIPPENSTEIN: All right. 13 Those are all my questions, Mr. Chair. 14 Thank you. 15 THE PRESIDING MEMBER: Thank you, 16 Mr. Klippenstein. 17 I think we are up to Mr. Campbell next. 18 MR. CAMPBELL: Given the hour, Mr. Chair, and 19 this witness' evidence in-chief, I am going to ask that 20 I commence after the lunch break. 21 THE PRESIDING MEMBER: Okay. That's fine. 22 Well, we could take the lunch break now. I 23 think my colleague would prefer that. 24 So then we will come back at five minutes to 25 2:00 then, okay, with Mr. Campbell. 26 Thank you. 27 --- Upon recessing at 1237 28 --- Upon resuming at 1401 Les Services StenoTran Services Inc. 613-521-0703 2293 GEC PANEL 1 1 THE PRESIDING MEMBER: Mr. Rogers, you have 2 something preliminary? 3 MR. ROGERS: Yes, sir, I do. Just one matter. 4 Mr. Curtis asked me to draw this to the 5 Board's attention. At page 1315 of the transcript he 6 was asked about Mr. Rod Taylor, and whether or not he 7 was a director of OHNC, and I think that Mr. Curtis said 8 no. He has checked and advised me -- asked me to please 9 advise the Board that he is sorry, he was incorrect, and 10 that Mr. Taylor is a member of the board of networks. 11 THE PRESIDING MEMBER: That jives with what I 12 saw in the news release that I had in front of me. 13 MR. ROGERS: Oh. I'm going to instruct 14 Mr. Curtis to read the paper before testifying from now 15 on. 16 --- Laughter 17 THE PRESIDING MEMBER: Well, also, maybe his 18 company press releases anyway. 19 MR. ROGERS: He apologizes. He was under a 20 misapprehension. 21 THE PRESIDING MEMBER: Yes. All right. Thank 22 you. 23 All right. We are now going to Mr. Campbell. 24 We will start straight in if you are ready. 25 MR. CAMPBELL: Thank you, Mr. Chairman. 26 CROSS-EXAMINATION 27 MR. CAMPBELL: Mr. Chernick, not surprisingly, 28 I would like to start with the exhibit that you entered Les Services StenoTran Services Inc. 613-521-0703 2294 GEC PANEL 1, cr-ex (Campbell) 1 this morning, Exhibit G12.2. 2 MR. CHERNICK: I have that. 3 MR. CAMPBELL: In looking at the charts, 4 moving from left to right, you have a series of three 5 columns for market energy. 6 MR. CHERNICK: Yes. 7 MR. CAMPBELL: The next three columns to the 8 right are export transmission and you show a price, 9 megawatt hours and revenue. 10 MR. CHERNICK: Yes. 11 MR. CAMPBELL: Am I correct that under those 12 three columns, under the heading "Export 13 Transmission" -- and I'm just going to work from your 14 first page -- there is always a credit to the 15 transmission customer? 16 MR. CHERNICK: Sometimes it is zero. 17 MR. CAMPBELL: Let's just work through the 18 example on the first page so we don't have to keep going 19 back and forth. 20 MR. CHERNICK: Well, the bottom line has zero 21 for the revenue. 22 MR. CAMPBELL: Oh, I'm sorry. There is one. 23 But it is either zero or a credit. 24 MR. CHERNICK: Yes. 25 MR. CAMPBELL: And that would be so whether 26 the charge was $1, $2 or $3, it would always be zero or 27 a credit? 28 MR. CHERNICK: Yes. Les Services StenoTran Services Inc. 613-521-0703 2295 GEC PANEL 1, cr-ex (Campbell) 1 MR. CAMPBELL: That is so according to the 2 examples we have here. If I look down the first column 3 identifying the cases, that is so whether in the 4 circumstances there is congestion or not? 5 MR. CHERNICK: That's correct. If there are 6 exports and you are charging for exports in any way, 7 then there is some revenue which is credited against the 8 transmission costs. 9 MR. CAMPBELL: All right. So am I correct, 10 then, that the conclusion I can draw from this table is 11 that if generators are allowed to freely raise domestic 12 prices it will increase the customers' electricity 13 bills? 14 MR. CHERNICK: If exports increase the market 15 clearing price in Ontario -- aside from whether 16 generators are freely increasing or not, just the normal 17 operation of a market will increase energy bills. 18 MR. CAMPBELL: I think my point is somewhat 19 simpler than that, Mr. Chernick. 20 Isn't it so that on the chart that you have 21 set out here the impact in Ontario is entirely due to 22 price? Everything else between your columns [7] and [8] 23 and the market energy prices is a credit to the 24 customer. So if there is an impact on the customer it 25 is entirely due to market price. Correct? 26 MR. CHERNICK: If there is an adverse effect 27 of exports overall, yes. If you are comparing between 28 options for recovering transmission costs, obviously Les Services StenoTran Services Inc. 613-521-0703 2296 GEC PANEL 1, cr-ex (Campbell) 1 there can be differences. But, yes, the major effect is 2 the internal market price. 3 MR. CAMPBELL: In the first page of the chart 4 that we are dealing with, the only thing that results in 5 a higher price to Ontario consumers is the increase in 6 the market price. Everything else is a credit, is it 7 not? 8 MR. CHERNICK: You have to compare two cases. 9 Going from the no interconnection case to any of the six 10 cases down below, that's correct. If you look between 11 the various cases down below, there are other things 12 going on. 13 MR. CAMPBELL: Well, I'm going to look at the 14 cases we are dealing with. 15 In a competitive market in Ontario, looking 16 down your market energy price column, how is it that in 17 a competitive market in Ontario the price got up to $49, 18 your third line down? How did that happen? 19 MR. CHERNICK: Because given OPG's assumption 20 that there is a market price of $49 in New York, and 21 that you are going to export from Ontario to meet that 22 market, you could bring the market price in Ontario up 23 to meet New York's. 24 MR. CAMPBELL: So is what you are saying that 25 Ontario Power Generation raised the Ontario market price 26 to $49? 27 MR. CHERNICK: The exports raised the price. 28 MR. CAMPBELL: No. We are talking about the Les Services StenoTran Services Inc. 613-521-0703 2297 GEC PANEL 1, cr-ex (Campbell) 1 internal price in Ontario. 2 MR. CHERNICK: Right. 3 MR. CAMPBELL: How does that price get to $49? 4 MR. CHERNICK: I'm sorry. I'm assuming here a 5 future in which there is a workably competitive market. 6 I'm not assuming any abuse of market power here at all. 7 You could have 200 generators each with 100 or 8 200 megawatts of generation. If Ontario were isolated 9 from the rest of the world the market clearing price in 10 a particular hour might hypothetically be $30 a megawatt 11 hour, but when New York starts calling on exports from 12 Ontario, then the market price in Ontario could go up 13 to $49. 14 MR. CAMPBELL: So there is no suggestion of 15 abuse of market power here; this is just the markets 16 operating perfectly competitively the way they are 17 supposed to? 18 MR. CHERNICK: You can get similar effects 19 from market power, but that is not what I'm talking 20 about here. 21 MR. CAMPBELL: And that is happening in 22 Ontario even where there may be constraints between the 23 Ontario market in New York? 24 MR. CHERNICK: In the congested case, I show 25 the price in Ontario rising towards New York but not 26 getting there. For example, the price might go from $30 27 a megawatt hour to $39 where the New York price is $49, 28 whereas if you continue to export and don't hit a Les Services StenoTran Services Inc. 613-521-0703 2298 GEC PANEL 1, cr-ex (Campbell) 1 constraint, then the Ontario price could go up to 2 the $49. 3 MR. CAMPBELL: Okay. How does that happen in 4 the uncongested case where the price goes up to $49, 5 given that there is a constraint -- 6 MR. CHERNICK: I'm sorry, "uncongested" means 7 there is no constraint. 8 THE PRESIDING MEMBER: The prices will 9 equilibrate, that is Economics 1, if there is no 10 constraint. 11 MR. CAMPBELL: Well, I'm at Economics -- 12 between zero and 1. I'm trying hard and I will make 13 mistakes along the way, but that is where I am. 14 MR. CHERNICK: Right. 15 MR. CAMPBELL: All right. 16 Now, how do these prices flow together, how do 17 they match up, given that there is a limited amount of 18 transmission capability or transferred capability 19 between Ontario and New York? 20 MR. CHERNICK: Well, there are two 21 possibilities. Either you use all of that limited 22 transmission capacity -- which is now something like 23 1,700 or 1,750 megawatts and, as I understand, it is 24 supposed to go up to well over 2,000 megawatts -- you 25 either hit that limit or you don't. If you hit that 26 limit then you have a case such as the one that I 27 illustrated in the second possibility, the congested 28 case with an Ontario price response where Ontario prices Les Services StenoTran Services Inc. 613-521-0703 2299 GEC PANEL 1, cr-ex (Campbell) 1 go up but remain below the price in New York and 2 exporters continue to bid for the rights to use the 3 transmission line, there is congestion, there are 4 congestion revenues, but you are exporting as much as 5 you can in that hour. 6 The other possibility is you get to the point 7 where the prices equilibrate between the two regions, 8 Ontario prices equal New York prices, and you haven't 9 filled up the line, and then the Ontario price stops 10 rising, they just stay at the same level, you have no 11 congestion revenues and you have the same price in New 12 York and Ontario. 13 MR. CAMPBELL: All right. 14 Wouldn't it also be the case if I had a price 15 of $50 in Ontario and $30 in New York, the prices would 16 equilibrate there as well to the benefit of the Ontario 17 consumer? 18 MR. CHERNICK: That's correct. Imports into 19 Ontario will tend to reduce Ontario prices. 20 MR. CAMPBELL: In exactly the same way under 21 your model that they do -- if they equilibrate up they 22 will equilibrate down. 23 MR. CHERNICK: That is the general pattern, 24 yes. 25 MR. CAMPBELL: So that would be an example 26 again of where trade is a good thing. 27 MR. CHERNICK: Well, that doesn't have 28 anything to do with Ontario EWT charges. But to the Les Services StenoTran Services Inc. 613-521-0703 2300 GEC PANEL 1, cr-ex (Campbell) 1 buyers' economy, energy is beneficial -- to the 2 consumers in the buying region. It doesn't matter 3 whether they are buying the power or not. To any 4 consumer in New York, purchases by New York from Ontario 5 reduce New York prices and are good. Exports from New 6 York to Ontario raise New York prices and are bad for 7 New York consumers. 8 MR. CAMPBELL: So if I look at the two cases, 9 no trade or trade, prices in Ontario could go up or down 10 depending on the relative prices in the two markets. 11 MR. CHERNICK: That's correct. By the way, 12 I'm not sponsoring this exhibit with the intention that 13 the Board order OHNC to blow up all its 14 interconnections. 15 MR. CAMPBELL: All right. Could you get -- 16 are you order with FERC Order 2000? 17 MR. CHERNICK: In a general way. I have read 18 perhaps summaries of it. I haven't gotten into all the 19 detail of the order itself. 20 MR. CAMPBELL: You haven't reviewed the order 21 itself? 22 MR. CHERNICK: No. 23 MR. CAMPBELL: You would agree with me that 24 what that FERC order does is that it contemplates large 25 regional transmission organizations. 26 MR. CHERNICK: Such as the New York ISO yes, 27 on that regional scale. 28 MR. CAMPBELL: Would you get in front of you, Les Services StenoTran Services Inc. 613-521-0703 2301 GEC PANEL 1, cr-ex (Campbell) 1 please, G5.3, Exhibit G5.3 That's the FERC order 2000. 2 MR. CHERNICK: Yes, I have that. 3 MR. CAMPBELL: And could you go to page 513, 4 please. I'm glad you included only excerpts in it. 5 MR. CHERNICK: What page, please? 6 MR. CAMPBELL: 513. You see there's a section 7 there called "Pancake rates". 8 MR. CHERNICK: Yes. 9 MR. CAMPBELL: And could you read the first 10 two sentences of that? Well, read the first sentence, 11 please. 12 MR. CHERNICK: Okay. 13 "As described in the NOPR, the 14 elimination of rate pancaking for large 15 regions is a central goal of the 16 Commission's RTO policy, and has been a 17 feature of all five ISOs the Commission 18 had approved." 19 MR. CAMPBELL: And could you carry on, please, 20 where FERC goes on in the next sentence dealing with 21 this rate pancaking and describes what it is. 22 MR. CHERNICK: Yes. 23 "Ratepaying pancaking occurs when a 24 transmission customer is charged separate 25 access charges for each utility service 26 territory the customer's contract path 27 crosses." 28 MR. CAMPBELL: Well, would you agree with me Les Services StenoTran Services Inc. 613-521-0703 2302 GEC PANEL 1, cr-ex (Campbell) 1 that at least in terms of your discussion of pancaking 2 this morning, that notion of pancaking being very 3 limited in its application does not comport with FERC's 4 definition and that in fact FERC is concerned about fat 5 pancakes as well as thin pancakes. 6 MR. CHERNICK: No. I think this confirms my 7 description completely. Well, one of those five ISOs 8 the Commission approved was the New England ISO which 9 eliminated pancaking in New England so that you don't 10 have to go through five or six separate utilities, 11 utilities, not ISOs, utilities, five or six separate 12 utilities to go a hundred miles or so from southern 13 Maine to the middle of Massachusetts. 14 MR. CAMPBELL: But doesn't FERC describe as a 15 central goal of its policy the elimination of rate 16 pancaking for large regions? We are not just talking 17 about little wee areas, are we? 18 MR. CHERNICK: If you are saying that -- you 19 are trying to read that sentence in a particular way 20 which is inconsistent with what is read in the rest of 21 the sentence. The first sentence says the elimination 22 of rate pancaking has been a feature of all five ISOs 23 the Commission had approved. Those ISOs are the New 24 York ISO with seven utilities and the New England ISO 25 with I think about a hundred utilities. Not all of them 26 own transmission. 27 The PG ISMO with eight or nine transmission 28 owning utilities, California with three or four Les Services StenoTran Services Inc. 613-521-0703 2303 GEC PANEL 1, cr-ex (Campbell) 1 utilities and so on. That sentence says the point is 2 within a large region, and they say that means within 3 regions like the ISOs we have defined, the State of New 4 York or the six states of New England, we eliminate rate 5 pancaking, that's our objective. 6 That is the only logical reading that I can 7 make of that sentence. Now, you are right that the 8 phrase "elimination of rate pancaking for large regions" 9 could mean different things, depending upon whether you 10 mean even if you go across many large regions or as 11 opposed to within each large region. It could also mean 12 different things depending upon what you mean by 13 "large". 14 The rest of the sentence clarifies that they 15 are talking about what they have achieved for the five 16 ISOs. That's my reading of what's on the page. I don't 17 know what's in -- 18 MR. CAMPBELL: From your description this 19 morning, we had talked about sort of snipping a little 20 corner of the state on the way to snipping a little 21 corner of another state. What I'm suggesting to you 22 here is that they are not just talking about snipping 23 little corners. They are talking about transfers over 24 entire regions. 25 MR. CHERNICK: No. They are talking about 26 transfers over entire utilities. Now, I suppose that you 27 could also apply this in a situation where you are going 28 from one end of the utility's service territory to Les Services StenoTran Services Inc. 613-521-0703 2304 GEC PANEL 1, cr-ex (Campbell) 1 another and using more than an average amount of 2 transmission and then going to the next utility and 3 using more than the average amount. 4 MR. CAMPBELL: And that would be consistent 5 with what FERC is talking about here. 6 MR. CHERNICK: Right. That kind of, that 7 broader kind of pancaking, has also been eliminated, 8 whether efficiently or not, has been eliminated within 9 the ISOs. 10 MR. CAMPBELL: Okay. Now, when you were 11 preparing your testimony and to file your testimony and 12 preparing to come up here, what documents did you 13 consider or familiarize yourself with to set yourself up 14 to speed on the Ontario contract? 15 MR. CHERNICK: I didn't really make a list of 16 all the documents. I reviewed a number of documents 17 that I had from my earlier work with respect to Ontario 18 Hydro. 19 MR. CAMPBELL: When was that work? 20 MR. CHERNICK: In the early nineties. 21 MR. CAMPBELL: Yes. 22 MR. CHERNICK: Transmission plans, avoided 23 cost studies and so on. I reviewed numerous documents, 24 certainly not everything in the record of the current 25 case. 26 MR. CAMPBELL: Did you review the Market 27 Design Committee report? 28 MR. CHERNICK: No, I haven't. Les Services StenoTran Services Inc. 613-521-0703 2305 GEC PANEL 1, cr-ex (Campbell) 1 MR. CAMPBELL: And did you review the 2 government's white paper dealing with restructuring of 3 the electricity market in Ontario? 4 MR. CHERNICK: I believe I looked at that some 5 time ago, but I didn't review it specifically for this 6 case. 7 MR. CAMPBELL: And did you review this Board's 8 decision establishing the applicant's revenue 9 requirement? 10 MR. CHERNICK: No, I didn't. 11 MR. CAMPBELL: What did you review to make 12 yourself familiar with the structure of the developing 13 electricity market in Ontario? 14 MR. CHERNICK: I think there are a lot of 15 materials in this case that discuss the relationship 16 between the parties, the expected role of the IMO. I 17 believe it's primarily documents that were filed in this 18 case. 19 MR. CAMPBELL: So do you consider yourself 20 very familiar with the structure of the developing 21 electricity market in Ontario? 22 MR. CHERNICK: Not very familiar. Familiar in 23 a general sense with the direction, but since the 24 development of the market is going on as we speak, since 25 it doesn't exist, I think the only people who could say 26 they were very familiar were the people who were 27 designing it from now until the time the market opens 28 and beyond. Les Services StenoTran Services Inc. 613-521-0703 2306 GEC PANEL 1, cr-ex (Campbell) 1 MR. CAMPBELL: And with respect to the 2 regulation of electricity in Ontario, do you consider 3 yourself familiar with the regulatory regime and the 4 policy choices that have been made in Ontario that go 5 behind that regulatory regime? 6 MR. CHERNICK: Well, that's a pretty broad 7 question. I am familiar with portions of it. I was 8 involved in the electric utility PBR proceeding, but 9 there are many facets of policy and I am sure I am not 10 familiar with all of them. 11 MR. CAMPBELL: Let's deal with a couple. I 12 take one sort of thrust of your testimony to be that the 13 development of environmentally preferred sources of 14 generation is an important policy or social goal for 15 Ontario. Would you agree with that as a fair 16 characterization of one thrust of your testimony? 17 MR. CHERNICK: Well, I point out that there is 18 a legislative mandate for the Board to support the 19 development of efficient generation. I don't think I 20 would do a lot of arguing on that particular point, so I 21 wouldn't describe it as a thrust. It certainly is 22 mentioned in my testimony. 23 MR. CAMPBELL: In your discussion in your 24 testimony, however, isn't it correct that the 25 environmental benefits that you have described for 26 various sources of generation is what is put forward by 27 you as a major benefit? Do you believe it is a major 28 benefit? Les Services StenoTran Services Inc. 613-521-0703 2307 GEC PANEL 1, cr-ex (Campbell) 1 MR. CHERNICK: I believe it certainly can be a 2 major benefit. 3 MR. CAMPBELL: You believe it is? 4 MR. CHERNICK: Well, whether it is or not 5 depends on the extent to which it's developed, but -- 6 MR. CAMPBELL: And you are suggesting it ought 7 to be developed? 8 MR. CHERNICK: Because, for example, in the 9 net load billing versus gross load billing decision that 10 if the arguments looked about equally good on each side, 11 then the environmental benefits should tilt the Board 12 towards selecting net load billing for efficient 13 generation. 14 MR. CAMPBELL: All right. 15 If I can take you to your testimony to deal 16 with this, can I take you to page 3 please. 17 MR. CHERNICK: That sounds like a good idea. 18 I have it. 19 MR. CAMPBELL: At line 17 you say: 20 "Transmission rates can encourage or 21 discourage -- 22 a number of things, one of which is the continued use -- 23 many of which involve environmental benefits. Correct? 24 MR. CHERNICK: Yes. 25 MR. CAMPBELL: So, as I understood your 26 testimony, I am a little surprised you are having as 27 much difficulty with this as you are, but as I 28 understood your testimony one of the things you are Les Services StenoTran Services Inc. 613-521-0703 2308 GEC PANEL 1, cr-ex (Campbell) 1 saying is that it's an important policy objective to 2 encourage environmentally beneficial sources of 3 generation when you are testifying for the Green Energy 4 Coalition. 5 MR. CHERNICK: Yes, I am. 6 MR. CAMPBELL: And it's at least their 7 objective? 8 MR. CHERNICK: I think you would have to talk 9 to Mr. Poch about the objectives of the Green Energy 10 Coalition. The question and answer that you are looking 11 at here on page 3 of my testimony answers the question 12 you are asking to some extent. 13 I realize that given the nature of the matters 14 discussed in the bulk of my testimony, somebody who just 15 picked it up might wonder whether the wrong cover had 16 been placed on it and whether this really was some other 17 party's testimony and would say, "Well, what does net 18 load versus gross load have to do with environmental 19 effects?". 20 So the question and answer were there just to 21 help people understand why these issues are important 22 from an environmental perspective. I wasn't really 23 trying to get on a soap box and proclaim the importance. 24 I thought the importance of environmental considerations 25 was already clear to the Board. 26 MR. CAMPBELL: Mr. Chernick, I certainly had 27 no trouble determining which side you are on from your 28 testimony. Isn't it fair to say that if we go down the Les Services StenoTran Services Inc. 613-521-0703 2309 GEC PANEL 1, cr-ex (Campbell) 1 bullet points on page 3, you are talking about 2 encouraging or discouraging first bullet, continued use 3 of polluting existing generation. 4 Now, your testimony here, I take it, is to 5 discourage the continued use of polluting existing 6 generation. That's one of the things it says ought to 7 be accomplished through the various things that are 8 discussed in the submission. 9 MR. CHERNICK: Well, you certainly don't want 10 to design transmission rates to encourage continued use 11 of polluting existing generation. That shouldn't be one 12 of your objectives. 13 MR. CAMPBELL: That's right. So your 14 testimony is to discourage that. 15 MR. CHERNICK: The reason I am having problems 16 with these questions is that you are asking them from a 17 context that is completely different from that in which 18 I wrote the testimony. 19 I wrote the testimony on the issues that I 20 deal with in the testimony. I didn't set out to say, 21 well, how can we discourage polluting existing 22 generation, to call upon the Board to find every way it 23 could to crank down existing polluting generation. 24 I am pointing out here why environmentalists 25 worry about which way the playing field is tilted. I am 26 not trying to make a bigger deal about these things. I 27 am not testifying on the relative importance of each of 28 these items and so your questions just don't make a Les Services StenoTran Services Inc. 613-521-0703 2310 GEC PANEL 1, cr-ex (Campbell) 1 whole lot of sense to me. 2 I am sorry, I am not trying to be difficult, 3 but my testimony here is my testimony and I agree that 4 transmission can have all of these effects, but that 5 does not mean that I am calling upon the Board to use 6 the transmission system first and foremost as an 7 environmental tool. 8 You start with a cost recovery problem. You 9 have equity issues. There are lots of other things 10 going on here, but one of the considerations that you 11 should bear in mind is the environmental. 12 MR. CAMPBELL: I understand that, but you set 13 up the two-way choice in your testimony. I didn't. You 14 said transmission rates can be used to encourage or 15 discourage and I am asking you what do you want them to 16 do? Do you want them to encourage each of these points 17 or do you want to discourage and maybe we can go down 18 that. That's why I am asking you. 19 Now, all other things being equal, if you have 20 two policies, one of which would encourage additional 21 pollution and the other one would discourage it, I would 22 be in favour of discouraging it and that would be that 23 you would make the same, all other things being equal if 24 I took you down each of these points, that would be your 25 view. You would look at each of them and say, "All 26 other things being equal, you might encourage or 27 discourage the thing that is good or bad." 28 MR. CHERNICK: Yes. Les Services StenoTran Services Inc. 613-521-0703 2311 GEC PANEL 1, cr-ex (Campbell) 1 --- Pause 2 MR. CAMPBELL: Just picking up on one of the 3 things you mentioned about equity and so on, as I 4 understand your testimony, while you disagree with OHNC 5 about the amount of the cost shifting that would occur 6 as a result of embedded generation, I take it you do 7 agree that there will be some cost shifting? 8 MR. CHERNICK: You want to define what you 9 mean by "cost shifting"? 10 MR. CAMPBELL: It is simply that as a result 11 of a customer putting in an embedded generator some 12 costs will be shifted to other customers. 13 MR. CHERNICK: That in that sense, net load 14 billing will have a different effect than gross load 15 billing. In the sense that OHNC approaches it in its 16 load shifting study, it is not necessarily true because 17 we don't know where the efficient embedded generators 18 will be and in fact the net effect may be essentially no 19 shift. But if you are talking about one particular 20 customer, yes, one particular customer's load will be 21 lower under net load billing and, therefore, somebody 22 else's rates will be higher. 23 Of course, many other things change at the 24 same time but there is a difference. 25 MR. CAMPBELL: In dealing with, though, 26 embedded generation going in generally, do you think 27 that if embedded generation goes in generally there will 28 be cost shifting, some cost shifting? I am not asking Les Services StenoTran Services Inc. 613-521-0703 2312 GEC PANEL 1, cr-ex (Campbell) 1 you to accept the estimates that are in the evidence. I 2 am just asking you to agree that there will be some cost 3 shifting. 4 MR. CHERNICK: Again, not in the sense that 5 OHNC's study concludes, that it is not necessarily 6 between classes because you may have about the same 7 amount, the same percentage of load going in for each 8 class. But certainly, there will be some individual 9 customers who have more embedded generation on their 10 system, new efficient embedded generation on their 11 system, than some other customers. They would all be in 12 the same class, but there will be some differences. 13 MR. CAMPBELL: When that new embedded 14 generation goes in it will shift costs? 15 MR. CHERNICK: Yes, I guess, in the customer 16 to customer as opposed to class to class sense. I think 17 that is inevitable with any change in your rate design. 18 Somebody is going to better off and somebody is going to 19 be worse off. 20 MR. CAMPBELL: Now, one of the other things 21 that you talked about transmission rates doing was to 22 encourage or discourage greater air emissions and water 23 pollution in the province. I take it, though, that you 24 are aware that Ontario has emission regulations that do 25 establish standards for both air and water emissions? 26 MR. CHERNICK: Yes, that's my understanding. 27 MR. CAMPBELL: Are you also aware that the 28 Minister of the Environment has recently announced that Les Services StenoTran Services Inc. 613-521-0703 2313 GEC PANEL 1, cr-ex (Campbell) 1 these regulations will be further tightened when the 2 market opens? 3 MR. CHERNICK: Are you talking about the acid 4 gas caps, cap and trade system? 5 MR. CAMPBELL: I am asking what you are aware 6 of. 7 MR. CHERNICK: Well, I am aware of a -- it is 8 not quite a proposal yet, but an announcement that there 9 will be a proposal worked out on a cap and trade system 10 for NOx and SO2. That may be the new controls that you 11 are talking about. 12 MR. CAMPBELL: Notwithstanding all of these 13 regulations and the government's announced policy to 14 further restrict emissions at market opening, do you 15 believe that adjusting transmission rates -- and I guess 16 the question is, why do you believe that adjusting 17 transmission rates is an appropriate method of achieving 18 environmental goals? Why is that tool preferred? 19 MR. CHERNICK: Why is that tool preferred to 20 what tool? 21 MR. CAMPBELL: To the ongoing regulation 22 process that the government imposes on all emitters in 23 the province. 24 MR. CHERNICK: I am not suggesting that the 25 ongoing process should be eliminated or suspended in 26 favour of transmission rate design. 27 I explained this morning why it is that there 28 is residual emissions even after the air regulators or Les Services StenoTran Services Inc. 613-521-0703 2314 GEC PANEL 1, cr-ex (Campbell) 1 the water regulators have done what they can within 2 their purview that they find to be cost effective, why 3 there are still dispatch-related costs that 4 environmental regulators generally can't get a handle on 5 directly. 6 MR. CAMPBELL: What makes transmission rates a 7 particularly good, or even a good tool, for this? I 8 would have thought that the preferable approach was to 9 deal with these things much more broadly through 10 appropriate government regulations, just as we are 11 seeing happen now. 12 MR. CHERNICK: I am sorry. I just explained 13 that I am not -- I don't see transmission rate design as 14 being an alternative to environmental regulation, and 15 so, we are not disagreeing about that. 16 I have also said that there are residual 17 emissions that result from the dispatcher power plant 18 even when they have all of their permits, and you don't 19 seem to be disagreeing with that statement. So I don't 20 know why you are asking the question then. 21 MR. CAMPBELL: But why if there is a desire to 22 deal even with those residual emissions is it a good 23 idea to do that through transmission rates, as opposed 24 to a broader process of saying, "Now, we are going to go 25 address those residual emissions"? Why isn't that a 26 better solution? 27 MR. CHERNICK: Well, I am not quite sure who 28 you think would address the residual emissions or how Les Services StenoTran Services Inc. 613-521-0703 2315 GEC PANEL 1, cr-ex (Campbell) 1 they would address them. 2 But if in fact the residual emissions from 3 generation were brought to zero -- that is, there was a 4 100 per cent effective, verifiable, offset from any 5 emissions. So therefore, however the power plants were 6 dispatched air quality would not suffer -- then there 7 would be nothing left to even take into account in 8 choosing between your alternatives in transmission. 9 But you seem to assume that there is a 10 dichotomy here between a world in which we have no 11 effect on environmental outcomes and this strange world 12 that Chernick has imagined in which transmission rate 13 design has an effect on -- 14 MR. CAMPBELL: I am asking you what choice you 15 would make. 16 MR. CHERNICK: Well, I am telling you that the 17 Board will make a choice. It will even decide to 18 promote OPG's use of its coal plants which increase 19 emissions in Ontario, or it will decide to promote those 20 less. It will do one of those things. It will choose 21 about something that effects the environment. The Board 22 should know that. 23 Now, given two choices which hypothetically 24 the Board feels are equally good, they have arguments on 25 both sides, the one with smaller environmental effects, 26 I think, is clearly to be preferred, assuming that they 27 are equally good otherwise. 28 MR. CAMPBELL: What if those same Les Services StenoTran Services Inc. 613-521-0703 2316 GEC PANEL 1, cr-ex (Campbell) 1 environmental benefits could be far more cheaply 2 achieved through another change to the regulation, or a 3 broadening of the regulation in some other area, which 4 ended up dealing with maybe not this problem, maybe 5 another problem, maybe a different tradeoff. 6 Why isn't that a better solution than trying 7 to back all these things into a particular mechanism? 8 MR. CHERNICK: I'm sorry, would you like to 9 point to where I am trying to back all of these things 10 into a particular mechanism? 11 MR. CAMPBELL: I am saying we have a choice 12 here. 13 MR. CHERNICK: We have a choice here. Given 14 the choice between two alternatives which the Board 15 finds to be comparable overall, before taking the 16 environment into account, if the Board finds that one of 17 them has environmental benefits -- I don't know whether 18 you are telling me that I am wrong, or you are 19 suggesting that a reasonable person would differ from 20 this position. 21 But given that A is about equal to B, and that 22 A is better environmentally, then why would anyone not 23 choose A? I don't understand from your questions what 24 part of my explanation you don't understand. 25 MR. CAMPBELL: Sometimes I am just a slow 26 learner, Mr. Chernick, and you have to give me patience. 27 What you are saying is that the -- 28 MR. CHERNICK: I realize that it is after Les Services StenoTran Services Inc. 613-521-0703 2317 GEC PANEL 1, cr-ex (Campbell) 1 lunch, so we may all be a little slower. 2 MR. CAMPBELL: The time that you would bring 3 this environmental concern into the equation is only 4 after you had struggled with all of these other factors, 5 the cost shifting, all the things we have been arguing 6 about in the hearing. And then if it is an equal choice 7 either way, you take a look at that and it may tip the 8 balance. 9 Am I understanding you correctly now? 10 MR. CHERNICK: Yes, roughly, except for the 11 fact that there are probably several factors that you 12 can't actually add up in any very rigorous way, but the 13 Board will want to be aware of. 14 Those include things like the recovery of 15 OHNC's costs, administrative feasibility, the various 16 ways of looking at equity, the various legislative 17 mandates that the Board has, and, considering how the 18 options affect those things and the environment, making 19 a decision. 20 Again, you sort of characterized my position 21 as being one of: You set out to design a transmission 22 system, a transmission cost recovery system, to maximize 23 environmental benefits. And that certainly isn't what I 24 have done or what I have suggested. 25 What I have talked about is situations in 26 which either A is clearly preferable to B -- and by the 27 way, it also has environmental benefits. Or there are 28 arguments back and forth, but A is certainly a viable Les Services StenoTran Services Inc. 613-521-0703 2318 GEC PANEL 1, cr-ex (Campbell) 1 alternative to B and it has environmental benefits. 2 MR. CAMPBELL: So the judgment we are talking 3 about -- and I agree with you, the Board has all kinds 4 of things, quantifiable and non-quantifiable, that it 5 has to bear in mind when it is making its judgment. 6 As I understand now what you are saying, it is 7 that having borne all of those other things in mind, if 8 it comes down to it and they are wavering back and forth 9 on the fence this way and that, that is when the 10 environmental considerations would come into play. And 11 you are telling them to fall off on the side of 12 environmental benefits. 13 Have I learned my lesson now? 14 MR. CHERNICK: Yes. I guess the only 15 clarification is that, as we both have said, a lot of 16 things are very similar to the environmental in terms of 17 being judgmental factors that don't add up directly with 18 any of the other components. It is not like there are a 19 bunch of other things that you can weigh and then the 20 environmental is just one unique factor that you apply 21 at the end if the decision is close. 22 You can make the same argument, I am sure, 23 about a whole range of equity effects on one group or 24 customers in one situation or another, where you would 25 say: Well, we don't know how often this occurs or how 26 important it really is, but this argues a little bit for 27 doing it this way because it seems fairer. 28 Conceptually, I would say that that is about Les Services StenoTran Services Inc. 613-521-0703 2319 GEC PANEL 1, cr-ex (Campbell) 1 right. If a proposal is a non-starter on some other 2 very important bases -- it doesn't collect OHNC's 3 revenues, it is going to create chaos in the market, it 4 is going to prevent competition from developing -- then 5 the fact that that may be somewhat better 6 environmentally doesn't strike me as being likely to 7 change the Board's view of which is the appropriate 8 option. 9 MR. CAMPBELL: If I can sort of shift gears a 10 bit, given your review of this case, I would like to 11 explore some boundaries. 12 If OHNC had brought forward a proposal that 13 all efficient generation, embedded or merchant, be given 14 a 50 per cent credit on their connection costs to 15 support the development of new environmentally preferred 16 generation, would you have supported that proposal? 17 MR. CHERNICK: Well, I guess you have to look 18 at how big the impact of that benefit is likely to be in 19 terms of cost to other customers, and see whether it is 20 worthwhile. 21 Again, there is a legislated mandate to 22 encourage. It doesn't say how far the Board should go 23 to encourage efficient generation. But that is 24 certainly something that I would look at. 25 MR. CAMPBELL: What about 100 per cent credit, 26 so that the generators would be completely exempted from 27 connection costs? Would you support that kind of a 28 proposal? Les Services StenoTran Services Inc. 613-521-0703 2320 GEC PANEL 1, cr-ex (Campbell) 1 MR. CHERNICK: The question has to do with the 2 magnitudes -- for example, if OHNC came in and said 3 look, we have talked to a lot of freestanding combined 4 cycle plants, that people want to build those, we have 5 talked to the developers of renewables, we have talked 6 to people who might be interested in developing smaller 7 cogeneration facilities with higher efficiencies, and 8 nobody is interested, given the Ontario market. 9 We think in order to fulfil our legislative 10 obligation, we are going to have to give very large 11 incentives, and we will still have a fairly small 12 response. But it will start the ball rolling. 13 So we are proposing that for the next two 14 years or three years, customers who sign contracts with 15 us, projects that get their construction permits, or 16 some other benchmark, should be exempt, maybe with a cap 17 on the total number of megawatts, so that once the 18 mechanism has been effective it turns itself off 19 automatically. 20 That might be a reasonable response to those 21 sets of facts. 22 If on the other hand OHNC says the only people 23 who have talked to us about interconnection are 24 cogenerators and windmills, and we think that is the 25 wave of the future and efficient generation will be 26 overwhelming the province, then I think you would have a 27 hard time justifying any big discount on anything for 28 those kinds of generators. Les Services StenoTran Services Inc. 613-521-0703 2321 GEC PANEL 1, cr-ex (Campbell) 1 So it is really a fact driven analysis. 2 MR. CAMPBELL: I would take you, then, to some 3 of the transmission costs that are discussed in your 4 evidence. The first thing, just to ask you to agree as 5 a general proposition that transmission costs are 6 largely fixed. 7 MR. CHERNICK: Well, once you have spent the 8 money on the investment, that cost is fixed. 9 MR. CAMPBELL: And that is what we are dealing 10 with here, a large proportion of fixed costs. 11 MR. CHERNICK: Well, fixed costs have 12 different meanings. Fixed sometimes means it was done 13 in the past and it is a continuing cost, like debt 14 service and therefore it is fixed today. It can also 15 mean that we are going to go out and put some fixed 16 costs into the ground. We are going to go build 17 something, and then they will be fixed. 18 Certainly in the latter sense it is true that 19 the bulk of the costs are fixed. 20 Now, what is avoidable within the future fixed 21 costs is another question for which we don't have very 22 good information right now. 23 MR. CAMPBELL: But when we are dealing with 24 these large fixed costs, we are dealing with costs, are 25 we not, that don't vary with output? 26 MR. CHERNICK: That is another definition of 27 fixed. 28 There are three kinds of costs basically, if Les Services StenoTran Services Inc. 613-521-0703 2322 GEC PANEL 1, cr-ex (Campbell) 1 you want to think about it that way. One is the cost of 2 building the facility, then there is the cost of the 3 line losses across it and, third, there is the cost of 4 the wear and tear on heavily loaded facilities from the, 5 basically, heat build up of carrying high loads. 6 Depending on the particular situation, the 7 losses and the wear factor may be fairly high and those 8 vary with energy output, at least at times. 9 MR. CAMPBELL: Of OHNC's revenue requirement, 10 how much do you see as varying with output? 11 MR. CHERNICK: Oh, well maybe before I 12 answered the previous question I should have asked 13 another clarifying question. 14 Are you talking about in a particular day 15 or week? 16 MR. CAMPBELL: I'm talking of their annual 17 revenue requirement of $1,163,000,000? 18 MR. CHERNICK: Over the course of that year? 19 MR. CAMPBELL: Yes. Of that amount how much 20 do you see as being attributable to -- 21 MR. CHERNICK: Okay. But are you talking 22 about in the year 2000 due to 2000 operations or costs 23 that will occur over the next 10 years, say, due to the 24 year 2000 operation? Because, for example -- 25 MR. CAMPBELL: I'm talking this year. 26 MR. CHERNICK: Okay. If you ignore the wear 27 and tear and its affect on early replacement in the 28 future, and you ignore the line losses that customers Les Services StenoTran Services Inc. 613-521-0703 2323 GEC PANEL 1, cr-ex (Campbell) 1 pay but OHNC doesn't, then OHNC's revenue requirement 2 this year is essentially fixed this year. 3 MR. CAMPBELL: So it's all fixed costs. 4 MR. CHERNICK: In that very narrow sense. You 5 define "fixed" as meaning only this year, and you have 6 defined -- so you take away all of the time element and 7 you have limited it to OHNC's costs, then I think you 8 are right. 9 MR. CAMPBELL: Just making sure we are on the 10 same wavelength, regardless of what happens with OHNC's 11 load this year, you are saying its costs are what its 12 costs are. They are not reducible. 13 MR. CHERNICK: It's revenue requirement in 14 2000 does not depend much on its load in 2000. That's 15 correct. 16 --- Pause 17 MR. CAMPBELL: As we move through time, if you 18 look at each year individually, the same circumstance 19 would apply? 20 MR. CHERNICK: The actual costs incurred in 21 the year 2005 by OHNC, not at the customers, are 22 dependent large -- are largely independent of OHNC's 23 actual load in 2005. That would also be correct. 24 --- Pause 25 MR. CAMPBELL: Now, am I correct, then, that 26 your view expressed at page 11 of your testimony -- and 27 I think you will find this in lines 4 and 5 -- in the 28 sense that I'm looking at it in a year-by-year look at Les Services StenoTran Services Inc. 613-521-0703 2324 GEC PANEL 1, cr-ex (Campbell) 1 it, the statement you make there that says: 2 "Hence demand reductions reduce cost even 3 where no load related additions are 4 planned..." (As read) 5 That isn't correct in all circumstances, then, 6 is it? 7 MR. CHERNICK: Well, that's only because in 8 your question you constrained cost so narrowly. 9 If you say "Not changing my oil this year has 10 no cost this year", the oil in my car, well, that may be 11 true, but a few years from now when your engine blows, 12 not changing your oil this year is going to have been 13 very expensive. The same thing is true for the 14 transformer that you have heavily loaded, and taking, 15 you know, a few days off its life, a few weeks off its 16 life every summer. 17 The same thing -- and line losses, hey, the 18 customers pay line losses, why should OHNC care. 19 If that is the perspective you are taking and 20 that is not a cost, then it doesn't reduce costs. 21 It's not a perspective I would advise the 22 Board to take. 23 MR. CAMPBELL: In reviewing the material for 24 this case, how much of OHNC's costs -- what proportion 25 of OHNC's costs do you see as variable O&M or just 26 the -- 27 MR. CHERNICK: What do you mean by "variable 28 O&M"? Again, during -- in the year 2000 as the result Les Services StenoTran Services Inc. 613-521-0703 2325 GEC PANEL 1, cr-ex (Campbell) 1 of 2000 load determinants? 2 MR. CAMPBELL: Yes. Variable with load within 3 the year 2000. 4 MR. CHERNICK: I don't have an estimate of 5 that, but it's probably very small. 6 MR. CAMPBELL: In your testimony, I think you 7 will find at pages 17 and 18 you have identified as what 8 you saw as a flaw in OHNC's analysis in that the 9 analysis did not vary the revenue requirement with load 10 growth. Is that correct? 11 MR. CHERNICK: That's correct. 12 MR. CAMPBELL: We asked an interrogatory about 13 this and I would like to go through the response that we 14 got with you. It can be found at E-46-4. 15 --- Pause 16 MR. CHERNICK: I have that. 17 --- Pause 18 MR. CAMPBELL: What I understand you to be 19 saying here is that embedded generation reduces load on 20 the transmission system and so the value of that 21 generation to the transmission system is equal to the 22 avoided transmission cost. Do I have that generally 23 correct? That is kind of the thesis you are advancing 24 in your answer? 25 MR. CHERNICK: Yes. 26 MR. CAMPBELL: In the answer you address this 27 question of the value of adding transmission or, to put 28 it another way, the value of avoiding that transmission Les Services StenoTran Services Inc. 613-521-0703 2326 GEC PANEL 1, cr-ex (Campbell) 1 investment by installing embedded generators. 2 MR. CHERNICK: Yes. 3 MR. CAMPBELL: Am I correct? 4 MR. CHERNICK: Yes. 5 MR. CAMPBELL: You identified in the answer 6 development additions to the transmission system which 7 you understand to be gross related network additions. 8 MR. CHERNICK: Yes. 9 MR. CAMPBELL: You calculated and avoided 10 costs for those additions, I believe of $725 a kilowatt. 11 MR. CHERNICK: Yes. 12 MR. CAMPBELL: That can be found in -- 13 MR. CHERNICK: That's correct. 14 MR. CAMPBELL: You apply that $725 to the 15 1,150 megawatts of efficient generation that has been 16 talked about in this case to estimate a saving on the 17 network of $834 million. Is that correct? 18 MR. CHERNICK: Yes, in avoided investment. 19 --- Pause 20 MR. CAMPBELL: Mr. Chernick, I'm looking at 21 that 725 number. It is dependent on these development 22 additions that you spoke of at the beginning. Is that 23 correct? 24 MR. CHERNICK: Yes. 25 MR. CAMPBELL: If it was the case that the 26 development additions for the network are split between 27 two components, the first being for existing lines and 28 the second for network, you would agree, would you not, Les Services StenoTran Services Inc. 613-521-0703 2327 GEC PANEL 1, cr-ex (Campbell) 1 that it would be only the network additions portion that 2 should be taken into account in doing your calculation? 3 MR. CHERNICK: Well, investment in the 4 existing lines that are development-related, that is, to 5 allow more load, would be relevant, as would new load. 6 I don't understand why you are contrasting existing 7 lines versus network. There is an existing network 8 system. 9 MR. CAMPBELL: But what we were talking about 10 here was investments for capacity expansion. Correct? 11 MR. CHERNICK: That is what "development" 12 would usually mean. Network development investments, 13 according to OHNC, would normally mean to -- as opposed 14 to sustaining, that is, their contracts. They divide 15 their investments into sustaining and development. 16 MR. CAMPBELL: What we are talking about here 17 is investments that are gross-related network additions. 18 I think we have been back -- we have talked about that 19 several times. 20 MR. CHERNICK: Right. 21 MR. CAMPBELL: So could you go, then, to 22 Interrogatory Response E-15-3, which has an attachment 23 to it? 24 --- Pause 25 MR. CHERNICK: I have that. 26 MR. CAMPBELL: If you look at this table you 27 will see there is a section called "Development". 28 MR. CHERNICK: Yes. Les Services StenoTran Services Inc. 613-521-0703 2328 GEC PANEL 1, cr-ex (Campbell) 1 MR. CAMPBELL: And under that a section called 2 "Network". 3 MR. CHERNICK: That's correct. 4 MR. CAMPBELL: You see that in terms of the 5 network addition it is split between investment on 6 existing and investment on capacity expansion, and the 7 capacity expansion figure is $1.3 million. Do you see 8 that figure? 9 MR. CHERNICK: I see that figure. 10 MR. CAMPBELL: That figure is for the year 11 2000, what we have been talking about here. Correct? 12 That is what the table says. 13 MR. CHERNICK: The table says it is for 2000. 14 It is not consistent with the company's cost-of-service 15 study, but it does say it is for 2000. 16 MR. CAMPBELL: Would I not be correct that if 17 I redid your calculations in Exhibit E-46-4, with a 18 capacity expansion network investment amount of 19 $1.3 million as opposed to the $19 million that you have 20 assumed for $2,000, the number would decline 21 dramatically, would it not, the avoided cost? 22 MR. CHERNICK: The number would be much 23 smaller if you used a smaller input. 24 MR. CAMPBELL: It would be less than a tenth? 25 MR. CHERNICK: That's correct. By the way, 26 the question that I was responding to was a question 27 from you, from OPG, asking: Please demonstrate that 28 these effects that you have identified could be Les Services StenoTran Services Inc. 613-521-0703 2329 GEC PANEL 1, cr-ex (Campbell) 1 material? I said, "Oh, well, look at this. Here is a 2 simple back-of-the-envelope calculation using OHNC's 3 numbers that they have sponsored as part of their 4 revenue claim in this case. 5 MR. CAMPBELL: And you think it is a 6 reasonable thing -- 7 MR. CHERNICK: Excuse me. I'm not through. 8 MR. CAMPBELL: I'm sorry. 9 MR. CHERNICK: The question was: Is it 10 material? Now, whether the true answer is that this one 11 effect would be four times as large as the effect of net 12 load billing for network services, the maximum possible 13 effect on a class, whether it would be four times as 14 large or whether it would be only half as large, by 15 itself that effect is still material. So, as I say, 16 even a small fraction of a 13 per cent cost reduction 17 would be material. 18 And I do want to enter my protest at using the 19 1.3 instead of the $19 million investment in network 20 development that Ontario Hydro used in its cost 21 allocation spreadsheet for ratemaking purposes in this 22 case as opposed to whatever this tabulation is supposed 23 to be. 24 MR. CAMPBELL: The $19 million is all 25 development charges and, similarly, on -- 26 MR. CHERNICK: I'm sorry, I don't see that 27 $19 million on the table that you gave me. 28 MR. CAMPBELL: No. I think there is a 16.5 Les Services StenoTran Services Inc. 613-521-0703 2330 GEC PANEL 1, cr-ex (Campbell) 1 total on that table. You are quite correct. 2 MR. CHERNICK: Yes. So something has been 3 left out of here. Furthermore, I haven't seen any 4 explanation in the record of what "existing development" 5 might mean. That might mean development for existing 6 customers. It might mean that it is meeting new loads 7 of existing customers as opposed to expanding the 8 system. I really don't know. 9 MR. CAMPBELL: I'm not trying to be unfair 10 here, Mr. Chernick; I'm really not. I take it that you 11 did not know about this number and this split of the 12 development between existing and capacity expansion when 13 you did your calculation. 14 MR. CHERNICK: That's correct. Since at that 15 point the opportunities to ask OHNC discovery on this 16 issue had passed, I wouldn't have had an opportunity to 17 review this data as opposed to the data they used in 18 this application prior to responding to your discovery 19 question. 20 In any case, even if you started with the 21 $1.3 million, the effect would be material and my answer 22 to your discovery question would be, yes, it is 23 material. 24 MR. CAMPBELL: I don't want to argue with you, 25 Mr. Chernick, but it is, I think, correct to say that 26 this is an OHNC interrogatory response and therefore was 27 available, I believe, before Christmas when they issued 28 their interrogatory answers to the Board. Les Services StenoTran Services Inc. 613-521-0703 2331 GEC PANEL 1, cr-ex (Campbell) 1 MR. CHERNICK: That's true. I hadn't seen 2 this, and that is my responsibility. 3 On the other hand, I just want you to know 4 that I did not sponsor the 13 per cent cost reduction 5 due to the avoided cost effect in my direct testimony. 6 This is not an issue that I planned on going into. 7 You asked this question. You asked the 8 question and I answered it under very tight time 9 constraints. It really doesn't matter whether the 10 answer is a 13 per cent cost reduction or a 1 per cent 11 cost reduction, it is still material when we are 12 concerned about whether we are exceeding a 5 per cent 13 reasonable cost-shifting limit that OHNC expressed its 14 concern about. 15 MR. CAMPBELL: And if you reduce that figure 16 by 90 per cent, do you still think it is material? 17 MR. CHERNICK: I just said whether it is 18 13 per cent or 1 per cent, that is a material portion of 19 a number where OHNC says 5 per cent is the limit on what 20 is reasonable. Or it may be 3.4 per cent with net 21 billing on the network. That strikes me as being a 22 material effect. That is maybe a third of the likely 23 effect -- or the alleged effect. 24 MR. CAMPBELL: All right. If we can go to the 25 thrust of what you are saying, your argument in the 26 response or your demonstration in the response, I guess 27 my question -- my other question was this: Why do you 28 assume that the presence of embedded generators will in Les Services StenoTran Services Inc. 613-521-0703 2332 GEC PANEL 1, cr-ex (Campbell) 1 fact allow OHNC to avoid network upgrades? 2 MR. CHERNICK: Because you know OHNC's 3 planning according to Exhibit E5.12, I'm looking at the 4 updated version. 5 "In general OHNC's current practice with 6 regard to generation outage assumptions 7 in studying transmission adequacy is to 8 consider the condition where with all 9 transmission facilities in service, the 10 two largest or the most impactive 11 generation units in the constraint area 12 are out of service at the time of 13 critical demand." 14 So any smaller units that are being added 15 would not affect transmission planning at all. 16 MR. CAMPBELL: Well, if they are not going to 17 affect transmission planning, how do they affect -- 18 MR. CHERNICK: I'm sorry, the possibility of 19 the plant, of the units being out does not affect 20 transmission planning. The transmission system is 21 planned with those units in place. Their addition 22 avoids transmission. OHNC does not plan for a situation 23 in which all generators are out simultaneously. 24 MR. CAMPBELL: How big do they have to be in 25 this situation that you are positing? 26 MR. CHERNICK: Well, for a plant in the 27 Toronto area, I guess they would have to be larger than 28 the Lakeview units, so they would have to be in the Les Services StenoTran Services Inc. 613-521-0703 2333 GEC PANEL 1, cr-ex (Campbell) 1 hundreds of megawatts. I forget how large Lakeview is. 2 I'm not sure exactly how Toronto, this Greater Toronto 3 Area is defined, but depending on which constraint you 4 are looking at, you might even have Pickering inside the 5 constraint, so it would be a larger unit than the 6 Pickering units. 7 MR. CAMPBELL: If I could have a moment, 8 please. 9 --- Pause 10 MR. CAMPBELL: And would that larger than 11 Lakeview size unit, would that also apply to the export 12 circumstance that you talked about in your testimony 13 where you indicate that such units would create 14 additional opportunities for exports by freeing up room 15 on the transmission system? It would be the same, 16 wouldn't it? 17 MR. CHERNICK: I'm not quite sure what you are 18 asking. I'm not sure how that second contingency 19 criterion affects the export issue. Any generator of 20 any size that in a particular hour reduces the loading 21 on some critical interface on the way to exports allows 22 more power to flow over those lines on the way to the 23 export market. 24 It could be a large unit that would actually 25 have to be taken into account in transmission planning. 26 It could be a small unit. 27 MR. CAMPBELL: But isn't it the case that if 28 the current transmission system doesn't act in any way Les Services StenoTran Services Inc. 613-521-0703 2334 GEC PANEL 1, cr-ex (Campbell) 1 now as a constraint on the volume of export or wheel 2 through transactions, freeing up additional internal 3 transmission capacity wouldn't support or in any way 4 affect additional -- 5 MR. CHERNICK: Oh, okay. 6 MR. CAMPBELL: -- wheel through transactions. 7 MR. CHERNICK: Okay. I don't see the same 8 thing. Maybe it is in some ways and I just got lost. 9 You're right. If there aren't any constraints that are 10 affected by Ontario load, then it certainly would be -- 11 there is no change in the EWT revenues as a result of 12 the reduction of Ontario load. 13 If there are no constraints on exports due to 14 Ontario load, then there would be no increase in EWT 15 revenues as a result of reductions in Ontario load. 16 There may be hours when that's the case and others would 17 not. 18 MR. CAMPBELL: I mean have you done any 19 analysis to see how many hours might be on one side and 20 how many on the other? 21 MR. CHERNICK: No. I don't believe I have any 22 information. 23 MR. CAMPBELL: You are just saying this as a 24 general proposition. 25 MR. CHERNICK: Yes. I just don't think I have 26 a single number that would be helpful in dealing with 27 that other than number of hours in the year. 28 MR. CAMPBELL: Too many of which are passing Les Services StenoTran Services Inc. 613-521-0703 2335 GEC PANEL 1, cr-ex (Campbell) 1 right now. 2 MR. CHERNICK: We agree on something. 3 MR. CAMPBELL: Now, in your response to 4 interrogatory E46.4, maybe you should get that in front 5 of you? 6 MR. CHERNICK: Isn't that the one we were 7 tasking about? 8 MR. CAMPBELL: The same one. 9 MR. CHERNICK: The same one. Okay. Yes. 10 MR. CAMPBELL: Just turn through a few pages 11 to page 3. 12 MR. CHERNICK: I did that. 13 MR. CAMPBELL: I take it that you have not 14 been able to identify specific costs incurred to support 15 export and wheel through transactions. 16 MR. CHERNICK: I'm sorry. Is this related to 17 something in this response? 18 MR. CAMPBELL: No. Just a moment. I think we 19 may be on the wrong one. Just a moment. Just a second. 20 We will get the right one. 21 --- Pause 22 MR. CAMPBELL: I have obviously had a little 23 problem in my numbering system here. In any event, do I 24 understand the situation correctly that you have not had 25 or you have not been able to identify costs incurred to 26 support export and wheel through transactions, that is 27 network transmission costs. 28 MR. CHERNICK: No. I found some facilities Les Services StenoTran Services Inc. 613-521-0703 2336 GEC PANEL 1, cr-ex (Campbell) 1 that seem to have been built at least partially for that 2 purpose, but I don't have costs for individual 3 facilities. 4 MR. CAMPBELL: Well, can I take it from your 5 testimony that if no costs have been incurred to support 6 export and wheel through transactions that you would 7 agree then -- on that hypothetical that you would agree 8 then with the MDC recommendation to price these 9 transactions at marginal cost? 10 MR. CHERNICK: First of all, as I said, I can 11 identify facilities that were being built for that 12 purpose among others, but -- 13 MR. CAMPBELL: Just take it as an assumption. 14 MR. CHERNICK: All right. 15 I am not quite sure that that follows because 16 under the user pay principle that I was discussing with 17 Mr. Adams earlier, there is certainly an argument for 18 charging some of the facility costs to the people who 19 use them now, regardless of why they were originally 20 built. 21 You do this all the time. In doing cost 22 allocations a transmission line may have been built to 23 serve an industry that's long out of business and now 24 that transmission line is serving growing residential 25 communities. You don't forget about the cost of lines 26 because it was originally built for this purpose. 27 MR. CAMPBELL: Let me just take you back to 28 your Exhibit H5.1. If I read page 5 quickly, and I Les Services StenoTran Services Inc. 613-521-0703 2337 GEC PANEL 1, cr-ex (Campbell) 1 think you will find this around lines 24 to 26, it's 2 your view that charges for EWT transactions would be 3 more appropriately derived from interconnection costs 4 incurred to support such transactions. Do you see that 5 part of your testimony? 6 MR. CHERNICK: Right. 7 MR. CAMPBELL: And if I give you the 8 assumption that the interconnection cost incurred to 9 support export transactions was zero, then wouldn't it 10 follow that you and that statement must be taken as 11 agreeing with the MDC recommendation to price these 12 transactions at marginal cost, zero? 13 MR. CHERNICK: No. I mean I don't believe 14 they are zero, so I really didn't think about that in 15 light of this point. 16 MR. CAMPBELL: Given my assumption -- 17 MR. CHERNICK: If they were zero, then I think 18 you would look at the equity of the situation and ask 19 the question is it appropriate for the transmission 20 customers of Ontario who are going to be hurt by exports 21 to hand over the transmission system to exports for free 22 without any compensation, other than just making up the 23 marginal cost? 24 MR. CAMPBELL: But didn't you in your 25 testimony tell us that charges for those transactions 26 would be more appropriately derived from the 27 interconnection costs incurred to support them? All I 28 am asking you -- I am not asking you to believe they are Les Services StenoTran Services Inc. 613-521-0703 2338 GEC PANEL 1, cr-ex (Campbell) 1 zero. I am not asking you to testify that they are 2 zero. 3 MR. CHERNICK: I understand that. 4 MR. CAMPBELL: I am saying assume they are 5 zero. Aren't you telling me in that statement that if 6 that's the case, then they ought to be set at zero? 7 MR. CHERNICK: No, that wasn't my intent. 8 You have a point that this part of my 9 testimony isn't very clear, but basically what I was 10 saying is it sure would be nice to identify those costs, 11 look back at the projects, look back at the project 12 justifications and try and get a sense of how much was 13 actually being built for interconnection purposes and 14 charge the interconnection costs on that basis. 15 Then there is also the question of all the 16 rest of the system which the EWT transactions share with 17 native load transactions and there you have out 18 allocation of common costs and it's probably impossible 19 even in principle to identify what particular purpose 20 individual pieces were built for and everybody uses 21 everything. 22 If it turned out that the interconnection cost 23 of the EWT charge was quite high, then you might say, 24 "Okay, fine, pay for that and you can use the internal 25 network for free." If, on the other hand, it were very 26 low, then that argues for a different approach to 27 dividing up the costs of the internal network. 28 But it's useful information and this response Les Services StenoTran Services Inc. 613-521-0703 2339 GEC PANEL 1, cr-ex (Campbell) 1 is part of a response to a question about segregating 2 costs for the purpose of better understanding where 3 OHNC's cost came from in the first place. In that 4 context it would be useful information. It doesn't end 5 the inquiry into setting EWT rates. 6 MR. CAMPBELL: If you could go then to page 15 7 and 16 of your testimony. Have you got that? 8 MR. CHERNICK: Yes. 9 MR. CAMPBELL: You see there you are talking 10 about a customer who is adding 100 megawatts of new load 11 in two years, 50 megawatts a year in your example? 12 That's what you are discussing there? 13 MR. CHERNICK: Yes. 14 MR. CAMPBELL: Do you think it likely that a 15 customer would add 100 megawatts of new load in two 16 years, 50 megawatts a year in your example, absent some 17 major expansion of its business, such as the addition of 18 new equipment or some other plant expansion? It's a lot 19 of load, isn't it? 20 MR. CHERNICK: Well, in this case it's a total 21 10 per cent increase over a two-year period, so, yes, it 22 is. 23 MR. CAMPBELL: So it would involve some major 24 expansion of the business? 25 MR. CHERNICK: I guess if you are talking 26 about a direct service customer or some expansion of 27 what is going on within the LDC. 28 MR. CAMPBELL: In any event, 50 megawatt loads Les Services StenoTran Services Inc. 613-521-0703 2340 GEC PANEL 1, cr-ex (Campbell) 1 don't get added in one year without a major expansion, 2 do they? 3 MR. CHERNICK: A 50 megawatt load I think is a 4 major expansion of something, yes. 5 MR. CAMPBELL: And a business that was adding 6 that load wouldn't stay in business long if it didn't 7 anticipate and plan for load growth? 8 MR. CHERNICK: I am really not sure what you 9 mean. 10 MR. CAMPBELL: I guess my simple problem with 11 your example is this. You have got a business that is 12 making a major investment -- 13 MR. CHERNICK: Or an LDC in which major 14 projects are being built. 15 MR. CAMPBELL: We are talking major projects 16 here, in any event. 17 MR. CHERNICK: At the level of these 18 particular numbers 50 megawatts is large and you could 19 divide everything by 10 also. We use a lot of nice 20 round numbers for examples. 21 But anyway, yes, if you have a 50 megawatt 22 load coming on line, certainly within a direct service 23 customer you would expect that they would know about 24 that a year or two in advance and for an LDC you 25 probably have some siting and licensing requirement that 26 requires some lead time, so you know about it somewhat 27 in advance. 28 MR. CAMPBELL: And wouldn't you think that Les Services StenoTran Services Inc. 613-521-0703 2341 GEC PANEL 1, cr-ex (Campbell) 1 unlike the problem raised in your example, that someone 2 who was putting that kind of effort into that kind of 3 project would co-ordinate the load growth and the new 4 generation, particularly if they had the incentive to do 5 that in a timely and co-ordinated way by being able to 6 avoid gross load billing? Wouldn't that be your normal 7 expectation that they would try and do that? 8 Your example posits that they don't. What I 9 am saying -- 10 MR. CHERNICK: I am trying to understand what 11 your question would mean. Are you saying that they 12 would take the 100 megawatt generator and cut it in 13 half, or that if they had the opportunity to put four 25 14 megawatt cogenerators on a heat load that they would not 15 put them all on at once. They would hold a couple of 16 them back, maybe put them on site, but not connect the 17 wire for an extra year until their load had grown high 18 enough and that it would be economically efficient for 19 them to not get the efficiency savings and not generate 20 the electricity for a year, just so that they can meet 21 some arbitrary rule of OHNC about timing, which by the 22 way I think OHNC has clarified isn't its intent? 23 I thought you were going to ask me to retract 24 this testimony because OHNC has said they didn't intend 25 this effect. 26 MR. CAMPBELL: I will accept that as -- 27 MR. CHERNICK: Okay. Can we then stop talking 28 about it? Les Services StenoTran Services Inc. 613-521-0703 2342 GEC PANEL 1, cr-ex (Campbell) 1 MR. CAMPBELL: I am very glad you said that. 2 MR. CHERNICK: I thought you were going to ask 3 me -- the testimony is true. It may just not apply to 4 OHNC. 5 MR. CAMPBELL: Thank you, Mr. Chairman. Those 6 are my questions. 7 THE PRESIDING MEMBER: Thank you, 8 Mr. Campbell. 9 We will start with Board staff. 10 MS LEA: Board staff has no questions. Thank 11 you. 12 THE PRESIDING MEMBER: Mr. Cowan? 13 CROSS-EXAMINATION 14 MR. COWAN: Actually, if I may -- 15 MR. CHERNICK: But for the record, I like 16 pigs. 17 --- Laughter 18 MR. COWAN: All right, I won't ask you if 19 there is any broader sense of that statement. I am sure 20 we all do. 21 Ted Cowan for Ontario Federation of 22 Agriculture. 23 Mr. Chernick, then, just cap things a bit for 24 my benefit -- your evidence introduced a third public 25 interest which is human health and environmental health 26 in its broad sense, possibly, also, as sort of the 27 fourth public interest of price in and of itself, but I 28 am not entirely sure, and maybe a fifth, trade relations Les Services StenoTran Services Inc. 613-521-0703 2343 GEC PANEL 1, cr-ex (Cowan) 1 with the U.S.A. So I can understand that things got at 2 bit convoluted. 3 Now, in a slightly more perfect world than the 4 one we were born into, would you prefer to address air 5 pollution more directly with taxes, limits or 6 prohibitions on pollutants, taxes or limits or 7 prohibitions, where appropriate in your view? 8 MR. CHERNICK: Well, prohibitions are not 9 often really viable and limits leave behind some 10 pollution that you have to deal with in some other way. 11 But taxes, caps on total emissions, those kinds of 12 things can be very effective environmental tools. 13 MR. COWAN: Your first preference, then, would 14 be to address the pollutant itself, deal directly with 15 the evil? 16 MR. CHERNICK: Yes. 17 MR. COWAN: Okay. Then as a second 18 preference, would you prefer to address pollution 19 somewhat more directly with taxes, limits or 20 prohibitions, or caps as appropriate, on activities that 21 use pollutants? 22 MR. CHERNICK: You mean that generate the 23 pollution or that -- the output of the polluting? 24 MR. COWAN: Well, in my case, as a farmer 25 would you care to some way limit the way I farm so I 26 don't use captive, for example? 27 --- Pause 28 MR. CHERNICK: There are situations where it Les Services StenoTran Services Inc. 613-521-0703 2344 GEC PANEL 1, cr-ex (Cowan) 1 makes sense to give incentives of some sort downstream 2 to try and effect -- 3 MR. COWAN: You could never tempt the farmer 4 with an incentive, but -- 5 MR. CHERNICK: I was thinking about 6 differential rates on grain elevators depending upon 7 whether you had or had not pre-treated the grain in a 8 particular way. 9 MR. COWAN: Okay. 10 MR. CHERNICK: You can imagine that 11 incentives, or assistance of some sort, to make it 12 easier to do things in the preferred way would have an 13 environmental benefit at a reasonable overall cost and 14 perhaps get around the administrative problems that you 15 encounter with your preferred approach or the equity 16 impacts. It may be easier to provide the preferred 17 grain elevator for the farmers rather than taxing them 18 on using the chemical you don't want them to use. 19 MR. COWAN: So in sum then, you would revert 20 to this more indirect, second approach when it seems 21 somehow administratively or more effective or efficient 22 than the direct tax-the-pollutant approach or whatever 23 that might have been. 24 MR. CHERNICK: Yes. 25 MR. COWAN: Okay. 26 And then you have offered us this third 27 approach to dealing with pollutants, which would be to 28 intervene at the transportation stage, that is, to tax Les Services StenoTran Services Inc. 613-521-0703 2345 GEC PANEL 1, cr-ex (Cowan) 1 the transportation or prohibit the transportation or 2 limit the transportation of goods that somehow entail 3 pollution either in their end use or in their 4 production. 5 I would just say in passing that this seems an 6 unusual way of dealing with pollution, but may we go 7 through a parallel example which I was trying to think 8 of, and ask you whether this parallel in some way 9 represents a reasonable parallel on what you are trying 10 to achieve. 11 Suppose we were to discover that cars pollute 12 and we wished to do something about it. By limiting 13 transports in cars for some marginal use, for example, 14 driving on a day of rest we could have a costly licence 15 sticker which discourages such driving, a big "S" for 16 Sabbath on the licence plate, if you owned such a thing. 17 If you did not, you could not drive on a Saturday or a 18 Sunday, according to your faith. Would that in fact 19 deal with some marginal aspects of pollution by 20 addressing transport? 21 MR. CHERNICK: Yes. I don't think that is a 22 particularly well designed one in terms of other social 23 costs but you certainly -- that is an approach that has 24 been used perhaps in some desperation by Mexico City and 25 some other areas with very high pollution. 26 MR. COWAN: It might also limit inter-family 27 strife with visits to mothers-in-law. 28 --- Laughter Les Services StenoTran Services Inc. 613-521-0703 2346 GEC PANEL 1, cr-ex (Cowan) 1 MR. COWAN: I take it -- 2 MR. CHERNICK: There may be some families that 3 would be very pleased to have this in effect. 4 MR. COWAN: You would pay extra for such a -- 5 --- Laughter 6 MR. CHERNICK: Not me personally, but I am 7 sure there are some. 8 --- Laughter 9 MR. COWAN: Okay. I take it then that within 10 the proposal that you have been discussing that you are 11 looking for some sort of a licence sticker to discourage 12 the extra pollution that comes from exported power, a 13 marginal use? 14 MR. CHERNICK: Well, no. I think that is too 15 strong a statement. It is more a matter of not making 16 the export pipeline any easier to use than seems fair 17 because the exports cost Ontario energy consumers. They 18 have pollution effects. 19 So if you are unsure about whether you are 20 going to get more revenues for the transmission system 21 out of a 5 -- charge $5 per megawatt hour -- or out of a 22 $1 per megawatt hour charge, then the benefits to the 23 ratepayers, the electricity consumers, and the benefits 24 to the environment seem to tilt you strongly in terms of 25 the higher charge. 26 I am not talking here even about what kind of 27 power is being exported. It really doesn't matter 28 whether you are exporting hydro or you are exporting Les Services StenoTran Services Inc. 613-521-0703 2347 GEC PANEL 1, cr-ex (Cowan) 1 coal power. If you export more you will earn more coal 2 in the province to meet the balance of load supply and 3 there will be more pollution and your prices will likely 4 go up. 5 MR. COWAN: Okay. Then moving to a more 6 general set of questions. 7 If power is made in Canada and used in Canada 8 or in Ontario as the case may be, in both instances, are 9 the economic impacts in Canada greater than if the power 10 is made in Canada and used elsewhere? 11 MR. CHERNICK: That depends on a lot of 12 details of the system. Under the old regulatory regime 13 there were benefits to Canada in terms of employment, in 14 building and operating the power plant. It used to be 15 that Canadian coal was mined for the coal plants. It is 16 my understanding it is basically all American coal now. 17 There could be net benefits to -- New 18 Brunswick took this approach of building power plants, 19 selling the power to New England, getting the Americans 20 to pay for most of it, and meanwhile they have jobs, 21 they have some cash flow. 22 MR. COWAN: So in short it can be a sop. It 23 can go either way? 24 MR. CHERNICK: That was the world. But in the 25 new world of competitive energy markets if you sell your 26 low cost power to the States, you are going to have to 27 replace it with higher cost power in Canada, 28 specifically in Ontario. The same is true if you sell Les Services StenoTran Services Inc. 613-521-0703 2348 GEC PANEL 1, cr-ex (Cowan) 1 the power to Quebec or you sell the power to Manitoba. 2 But sales drive up the cost of power and, therefore, the 3 cost being paid by all of the electricity consumers. 4 Now, the generators get greater profits, but 5 tracing how much of that winds up going back into the 6 Ontario economy and how much goes to owners in New York 7 or Houston or somewhere else is difficult and will 8 certainly change over time. Meanwhile, the consumers in 9 Ontario are shelling out their money and seeing their 10 prices rise. 11 MR. COWAN: Right. Understood. If the power 12 is made in Canada, though, the pollutants are likely to 13 stay here. They will not be exported with the power. 14 MR. CHERNICK: Well, certainly where the power 15 goes doesn't affect where the pollutants go, depending 16 upon the kind of pollutant. CO2 affects the whole 17 world. Mercury has local effects, but some of it also 18 will travel around the world. So it is a mix. 19 But the fact that you are exporting the power 20 does not make the mercury or the particulates leave the 21 province. 22 MR. COWAN: And a few questions of fact which 23 may or may not be within your area of expertise or 24 knowledge, but we will hope. And if they are not, they 25 are not and that's that. 26 Does crop bronzing increase with air pollution 27 from coal plants? 28 MR. CHERNICK: Crop bronzing? Les Services StenoTran Services Inc. 613-521-0703 2349 GEC PANEL 1, cr-ex (Cowan) 1 MR. COWAN: Yes. 2 MR. CHERNICK: I am trying to remember whether 3 that is one of the terms that was used from the effect 4 of SO2 deposition on leaves. 5 MR. COWAN: That's right. 6 MR. CHERNICK: Nearby plants tend to have more 7 of that effect than faraway plants. 8 MR. COWAN: Which is one of the main reasons 9 why the scrubber was put in at Lambton rather than at 10 Nanticoke -- 11 MR. CHERNICK: I can't speak to the exact 12 chain of the decision. But certainly one of the 13 benefits is reduced SO2 emissions. 14 MR. COWAN: But the answer is in the 15 affirmative. 16 MR. CHERNICK: Yes. 17 MR. COWAN: Last summer, around 1999, were 18 there days when Ontario Environment warned children and 19 the elderly and the ill to stay indoors because of air 20 quality warnings? 21 MR. CHERNICK: I can't answer that 22 specifically. I know that air quality in adjacent areas 23 tended to be quite bad. So I wouldn't be surprised if 24 it were true for major metropolitan areas in Ontario as 25 well. But I don't know. 26 MR. COWAN: There were in fact warnings for 27 all of southwestern Ontario last summer. 28 MR. CHERNICK: As I say, I can't confirm that. Les Services StenoTran Services Inc. 613-521-0703 2350 GEC PANEL 1, cr-ex (Cowan) 1 But it wouldn't surprise me. 2 MR. COWAN: Within the area of our expertise. 3 Is it your view that exported power may increase the 4 number of air quality warning days, thereby depriving at 5 least some people of the benefits of a summer day? 6 MR. CHERNICK: It certainly could have that 7 effect, yes. 8 MR. COWAN: Will there be more summer days as 9 a result of power exports? 10 MR. CHERNICK: Well, in the long term there 11 may be more warm days as a result of burning more coal, 12 and warmer warm days. But that takes a while. And that 13 is a mixed blessing in itself. 14 MR. COWAN: If there are no extra summer days, 15 how might the loss be compensated? Free skiing lessons? 16 MR. CHERNICK: Compensation for environmental 17 effects if very difficult. 18 MR. COWAN: That is really all I have to ask. 19 Thank you very much. Those are the things I wanted to 20 bring out. 21 Thank you for your time, Mr. Chernick. Thank 22 you, Mr. Chairman. 23 THE PRESIDING MEMBER: Thank you. We will 24 take the break now and come back at five after four. 25 --- Upon recessing at 1547 26 --- Upon resuming at 1610 27 THE PRESIDING MEMBER: We will go to 28 Mr. Rogers. Les Services StenoTran Services Inc. 613-521-0703 2351 GEC PANEL 1, cr-ex (Cowan) 1 MR. ROGERS: Thank you, sir. I am mindful of 2 the timing constraints, and I will try to be relatively 3 quick here. 4 I have spoken to Mr. Chernick and his counsel 5 over the break, and I think we can jointly shorten this. 6 CROSS-EXAMINATION 7 MR. ROGERS: I will be using two documents. 8 The first is a document that was handed out on Friday, I 9 believe, entitled "Generation Connection Cost 10 Allocation", setting the context. It is a two-page 11 diagrammatic depiction. 12 Do you have that? 13 What would be the exhibit number for that? 14 MS LEA: Has it already been made an exhibit? 15 MR. ROGERS: It was distributed a day or two 16 ago, but we have not got an exhibit number for it. 17 MS LEA: It has not yet got an exhibit number. 18 All right. Well, the exhibit number you will get now is 19 G12.3, please. 20 EXHIBIT NO. G12.3: Document entitled 21 "Generation Connection Cost Allocation" 22 MR. ROGERS: Does the Board have a copy of 23 that? 24 THE PRESIDING MEMBER: Okay. We are ready. 25 MR. ROGERS: I will also be referring to an 26 interrogatory answer, E50 -- or a series of 27 interrogatory answers by Mr. Chernick. 28 THE PRESIDING MEMBER: Thank you. Les Services StenoTran Services Inc. 613-521-0703 2352 GEC PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: Mr. Chair and Members of the 2 Board, the focus of my cross-examination will be 3 relatively narrow. I wish to discuss with Mr. Chernick 4 the issue of generation connection cost allocation. It 5 is a bit of a dry topic, but it is important to my 6 client. 7 Mr. Chernick, what I want to talk to you 8 about, sir, is your proposal in your evidence concerning 9 functionalization of shared line connection costs 10 between what are used by generation and what are used by 11 line connections. 12 Do you understand that? 13 MR. CHERNICK: Yes. This is specifically 14 where they share a particular piece of connection 15 equipment. 16 MR. ROGERS: That is correct. And you have a 17 proposal which differs from that of my client as to how 18 those costs should be allocated. 19 MR. CHERNICK: That is correct. 20 MR. ROGERS: I think it starts at page 6 of 21 our testimony. 22 MR. CHERNICK: Yes. 23 MR. ROGERS: And it follows for a few pages. 24 Mr. Chernick, I want to just set the stage in 25 order of magnitude here. What is at issue on this topic 26 is how much of the costs of shared connection assets -- 27 that is, assets which are shared by both generation and 28 load -- should be transferred out of the connection pool Les Services StenoTran Services Inc. 613-521-0703 2353 GEC PANEL 1, cr-ex (Rogers) 1 to the network pool so that load customers in the 2 connection pool are not the only ones who have to pay 3 for these connection costs. 4 Would you agree with that? 5 MR. CHERNICK: That is the immediate effect. 6 Then there is the potential effect as new generators are 7 added as well. 8 MR. ROGERS: Let's just deal with existing for 9 the moment, if we could. I can tell you quite candidly, 10 as I told you over the break, my client's principal 11 concern with this is administrative complexity and 12 difficulty, and I want to explore that with you for a 13 few moments. 14 We have given you a two-page exhibit which has 15 now been marked as Exhibit G12.3. On our exhibit, as we 16 discussed over the break, we have shown two types of 17 situations. 18 If you look at the top line, you will see a 19 heavy line marked "network". The generation above that 20 line -- you will see a circle with generation and an 21 arrow pointing to it above the long line? 22 MR. CHERNICK: Yes. 23 MR. ROGERS: This is intended to depict all 24 the major nuclear and fossil units in the province of 25 Ontario connected to the network. 26 Do you understand that, sir? 27 MR. CHERNICK: Yes. 28 MR. ROGERS: As the note indicates, this, I am Les Services StenoTran Services Inc. 613-521-0703 2354 GEC PANEL 1, cr-ex (Rogers) 1 instructed, accounts for about 80 per cent of the 2 generation in the province of Ontario by installed 3 megawatts. 4 MR. CHERNICK: That seems like a reasonable 5 number. 6 MR. ROGERS: What we are talking about is the 7 remaining generation; that is, the 20 per cent or so 8 that is not consisting of the large units which are 9 directly connected to the transmission system. 10 MR. CHERNICK: Yes. 11 MR. ROGERS: And that we have tried to show on 12 the bottom part of this page diagrammatically. I am on 13 the first page of G12.3. 14 MR. CHERNICK: Yes, that's what you have 15 there. 16 MR. ROGERS: Good. Is it logical to assume 17 that in many cases this generation -- that is, the 18 generation at the bottom of the page -- would comprise 19 stations that have installed generation which is 20 approximately the same order of magnitude as the load in 21 the surrounding area? That is to say, you would not 22 have large 4,000 megawatt generators in this situation, 23 typically. 24 MR. CHERNICK: No, that wouldn't be the most 25 common situation, although you certainly could have a 26 small load being served off of a connection built for a 27 large generator. 28 But typically, they would be of the same order Les Services StenoTran Services Inc. 613-521-0703 2355 GEC PANEL 1, cr-ex (Rogers) 1 of magnitude. 2 MR. ROGERS: What we are talking about here 3 are connection facilities which are used both by a 4 generator to dispense load into the system and by a 5 customer who takes electricity off the system. 6 MR. CHERNICK: Yes, at least conceptually in 7 terms of the flows. The generator may not actually get 8 the power into the system. 9 MR. ROGERS: All right. But it is a generator 10 hooked up to the same line. 11 MR. CHERNICK: It's hooked up, yes. 12 MR. ROGERS: That is all I need, to make sure 13 of one's understanding. 14 Now, I understand that these smaller stations 15 today comprise about 80 sites in the Province of 16 Ontario. 17 Would you have any reason to disagree with 18 that? 19 MR. CHERNICK: That sounds plausible. There 20 are a lot of individual Hydro sites, sir. 21 MR. ROGERS: Of course, in future the number 22 of sites and units may increase substantially. Wouldn't 23 you agree? 24 MR. CHERNICK: Yes. 25 MR. ROGERS: Now, what I want to deal with is 26 these relatively smaller stations and understand your 27 proposal and what the practical impact will be or effect 28 will be of allocating costs for them as proposed. Les Services StenoTran Services Inc. 613-521-0703 2356 GEC PANEL 1, cr-ex (Rogers) 1 Mr. Chernick, you understand how the energy 2 market will operate in Ontario after open access? By 3 that, I don't mean in detail, but you understand, do 4 you, as I understand it anyway, that the operation of 5 the system will depend upon market conditions and that 6 the primary responsibility for planning and the need for 7 new transmission investment will be residing with the 8 IMO and others? 9 MR. CHERNICK: It's my understanding the IMO 10 will have a transmission planning role, yes. 11 MR. ROGERS: OHNC will, of course, have input, 12 but that will be primarily in matters of transmission 13 alternatives in the new world? 14 MR. CHERNICK: It sounds like you are 15 suggesting that OHNC would be operating sort of as the 16 staff to the IMO, as a consultant? 17 MR. ROGERS: No, I wouldn't suggest that. 18 MR. CHERNICK: Well, actually, my experience 19 with the transition in various parts of the United 20 States are that the existing structure, the existing 21 utilities tend to provide those functions to the ISO 22 which then ultimately makes a decision but based upon 23 cost information and feasibility information from the 24 technical people, which at this -- would be OHNC. 25 MR. ROGERS: All right. I think that's more 26 or less the way it will likely work here. 27 Now, I will tell you candidly that my client 28 has had some difficulty in understanding fully your Les Services StenoTran Services Inc. 613-521-0703 2357 GEC PANEL 1, cr-ex (Rogers) 1 written evidence and, therefore, they submitted several 2 interrogatories to you. That is the interrogatory that 3 I referred to at the beginning of this discussion. 4 E-50-2 is actually the one that I wish to refer to. 5 --- Pause 6 MR. ROGERS: Your response at E-50-2 states: 7 "The flow..." 8 This is to calculate allocations: 9 "...would be based on levels on which the 10 generator might operate." (As read) 11 Just so the Board can follow this, your 12 methodology requires that the flow from a generator be 13 used to determine how the costs would be allocated in 14 some way? 15 MR. CHERNICK: Well, that is -- generally the 16 capacity would be used in either of our allocation 17 methods. So yes, what the generator can actually 18 put out. 19 MR. ROGERS: Is this done on a forecasted 20 basis for purposes of this cost allocation? 21 MR. CHERNICK: Well, I don't know. You might 22 do it on a contractual basis requiring that the 23 generator notify OHNC if it is going to increase its 24 capacity and that it would be charged in a month based 25 upon its capacity in a month. So if it increases its 26 capacity it would be charged more. 27 That's the way that I envisioned it. You 28 could implement it with a lot of different details. Les Services StenoTran Services Inc. 613-521-0703 2358 GEC PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: The thing is, the administrative 2 difficulty for my client is, if the Board accepts your 3 proposal who will decide the level at which the 4 particular generator might operate then? 5 MR. CHERNICK: Well, I think that's a problem 6 with either kind of allocation. We have to have some 7 measure of the generator capacity. When I got this 8 question from OHNC about how you do it I was thinking 9 "Well, you know, there may be some hydro plants where 10 there are four or five units but in fact it is never 11 feasible to operate all of them simultaneously because 12 of the -- at full capacity because of the size of the 13 pen stock or some other limit and so, therefore, the 14 effective capacity for which the customer requires an 15 interconnection and which OHNC is providing would be a 16 smaller number. 17 But in general we are talking about the 18 capacity of the plant. 19 MR. ROGERS: I'm instructed that in my 20 client's methodology the installed capacity is what is 21 used, not the forecast outflow. 22 MR. CHERNICK: Well, I guess maybe I'm a 23 little confused about what that would mean. If the 24 installed capacity isn't what the plant can put into the 25 system, then I'm not quite sure what exactly it does 26 mean. If it means that some of -- the generator 27 nameplates say that's the wrong unit to use for this 28 kind of allocation because sometimes generator Les Services StenoTran Services Inc. 613-521-0703 2359 GEC PANEL 1, cr-ex (Rogers) 1 nameplates are well above what the plant can actually 2 produce and sometimes they are below. So -- 3 MR. ROGERS: How about registered installed 4 capacity. Do you know what that term means? 5 MR. CHERNICK: It sounds like something that 6 would be used by the IMO to determine how much capacity 7 is available on the system and that sounds very similar 8 to what I'm talking about. I doubt there would be any 9 substantial difference. 10 In terms of the level you mean? 11 MR. ROGERS: Wouldn't it be the -- 12 MR. CHERNICK: In terms of the -- probably in 13 terms of the definition. 14 MR. ROGERS: Wouldn't it be administratively 15 easier, though, to use registered installed capacity 16 rather than levels at which the operator might operate, 17 which is what is your proposal is? 18 MR. CHERNICK: Well, without knowing exactly 19 what registered installed capacity means I guess I have 20 some difficulty answering that question. 21 If there is a -- but I would agree that if 22 there is a number that is about right that really does 23 pretty much represent the potential generation level 24 from the plant, you would want to use that. 25 MR. ROGERS: All right. And you would be 26 content to let my client choose that? 27 MR. CHERNICK: So long as it is fulfilling 28 that general function, yes. Les Services StenoTran Services Inc. 613-521-0703 2360 GEC PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: Let's move on. 2 The next interrogatory is E-50-3, the next 3 page, and there you were asked to clarify what is meant 4 by minimum generation as applied to calculate the net 5 power flow and you said: 6 "This would be the minimum generation 7 used in transmission planning." 8 (As read) 9 Now, can we just, for a brief moment, consider 10 existing connection facilities of which my client -- for 11 which we are actually all trying to determine the 12 appropriate cost allocation methodology. 13 Let us consider that these facilities were 14 placed in service a decade or two ago -- maybe even 15 longer -- and assume as well, please, that the 16 generation was placed in service a decade or decades 17 ago. Assume that at this point in time, the year 2000, 18 having one generator or two generators out of service 19 does not matter much for the immediate system. 20 Do you understand the assumptions? 21 MR. CHERNICK: Yes. 22 MR. ROGERS: In that case, Mr. Chernick, can 23 you please clarify for us what is meant by minimum 24 generation as applied to calculate the net power flow 25 and transmission planning? 26 MR. CHERNICK: Well, all I was saying was that 27 the -- if in fact the load is not likely to ever use the 28 transmission connection for its full load, because the Les Services StenoTran Services Inc. 613-521-0703 2361 GEC PANEL 1, cr-ex (Rogers) 1 generator will always be operating and supplying some of 2 that load. Then you want to take out of the load share 3 of allocators, you want to take out the part that is 4 going to be met by the generator at a minimum. 5 I suggest in my testimony you want to do the 6 same thing the other way around. If the generator is so 7 small that it is never going to send power back out the 8 line, because even the minimum load is always greater 9 than the generator's capacity, then it really does use 10 the transmission line and you want to take that into 11 account. 12 MR. ROGERS: How will OHNC know when the 13 plants will be operating? 14 MR. CHERNICK: In general, that -- that issue 15 is really the same issue as the transmission planning 16 issue, that if you are going to count on the plants 17 operating, and therefore you don't have to build the 18 transmission line -- or you don't have to reinforce the 19 transmission line, you don't have to add to capacity 20 because you assume that some of these -- what example 21 did we use? Five generators. 22 Some of these five generators are always going 23 to be running and therefore you don't have to have a 24 larger transmission line to serve the load, then you can 25 use that same assumption for the allocation. 26 Basically, if you are not planning or building 27 transmission to serve one of these two functions, then 28 you shouldn't be allocating costs to it. Les Services StenoTran Services Inc. 613-521-0703 2362 GEC PANEL 1, cr-ex (Rogers) 1 Now, if you simply don't have any information 2 about the situation, you can just assume that the 3 generator will be off sometimes when the load is on 4 peak, and that it will be at full capacity sometimes 5 when the load is very low. 6 MR. ROGERS: Very well. Thank you. 7 Let's move on, if we could, to the next 8 interrogatory answer which is E-50-6. It is over a few 9 pages. 10 I need to go into some detail here. I think 11 we can do this fairly simply by looking at our diagram. 12 Can you turn the page of Exhibit G12.3. 13 MR. CHERNICK: Yes, I have that. 14 MR. ROGERS: What I think we have done here, 15 Dr. Higgin and Members of the Board, is we have taken -- 16 my clients have taken the information from the 17 interrogatory answer and then portrayed it on a chart on 18 the second page of Exhibit G12.3 for ease of reference. 19 Do you understand that, Mr. Chernick? 20 MR. CHERNICK: Yes. 21 MR. ROGERS: I am instructed that the example 22 shown as number (a) in the top left-hand corner is the 23 same as Scenario 1 in the response you made to 24 Interrogatory Request E-50-6. 25 MR. CHERNICK: Yes. That seems to be the case 26 for (b) and 2, and (c) and 3 as well. 27 MR. ROGERS: Yes. That's right. I think that 28 is correct. Les Services StenoTran Services Inc. 613-521-0703 2363 GEC PANEL 1, cr-ex (Rogers) 1 Now, just dealing with (a), this example 2 assumes a 120-megawatt peak load and a generating 3 station rated at 40 megawatts sharing the line 4 connection asset. Right? 5 MR. CHERNICK: Yes. 6 MR. ROGERS: So we have a diagram there that 7 shows the load of 120 megawatts and then sharing the 8 same facilities is a generation station with a 9 40-megawatt output -- 10 MR. CHERNICK: Right. 11 MR. ROGERS: -- or rating. 12 Now, under the OHNC methodology, the 13 connection pool and the load served by the connection 14 pool would be allocated 75 per cent of the cost of the 15 connection asset and the remainder would be allocated to 16 generation. Correct? 17 MR. CHERNICK: Yes. 18 MR. ROGERS: That is shown on the allocation 19 of connection costs to the right of the schematic 20 diagram. 21 MR. CHERNICK: That's correct. 22 MR. ROGERS: Because 25 per cent was allocated 23 generation, it would therefore fall into the large 24 network pool which applies to all users of the system. 25 MR. CHERNICK: That is the effect currently 26 for the existing generation connection costs. That may 27 change in the future for the existing and may be 28 different for new generation. Les Services StenoTran Services Inc. 613-521-0703 2364 GEC PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: Yes. That's right. We are just 2 talking about the existing load now. The rationale I 3 think for that is that the generator provides energy to 4 the whole market and so it should not just be the line 5 connection pool that bears the cost allocated to 6 connecting the generator. Do you understand the 7 rationale for that approach? You may not agree with it, 8 but do you understand the rationale? 9 MR. CHERNICK: Yes. 10 MR. ROGERS: Now, your response in your 11 interrogatory answer is shown on the right-hand side of 12 this page. As I understand it, the result of applying 13 your approach shows that 100 per cent of the costs of 14 the connection will remain with the line connection 15 pool. Is that right? 16 MR. CHERNICK: Yes. 17 MR. ROGERS: So that of those shared 18 facilities, under your methodology all of the costs are 19 borne by the load and none of the costs are born by the 20 generator. 21 MR. CHERNICK: In this particular case. Yes. 22 MR. ROGERS: Do you think in this case it is 23 fair that the full cost for existing facilities to 24 connect the generator to the system, the generator which 25 is used by the whole market, should be borne only by the 26 customers in the line connection pool? 27 MR. CHERNICK: To tell you the truth, this is 28 not a very important issue for the existing customers in Les Services StenoTran Services Inc. 613-521-0703 2365 GEC PANEL 1, cr-ex (Rogers) 1 any case. We are allocating it to almost the same group 2 of customers. Not all of the load is in the line 3 connection pool, so there is a little difference. But 4 basically we are allocating it to about the same people 5 the same way. 6 My concern is much more in terms of the 7 precedent that this allocation sets for new generators 8 and it is with that in mind that I thought this through. 9 The issue that you raise is an interesting 10 take, that the generators have to connect to somebody. 11 On the other hand, in this diagram, the generator is 12 connected probably within a few feet of the substation 13 busbar to where the load is connected. So essentially 14 the generator helps relieve the load on the substation 15 and the transmission connection. It never sends power 16 out through that substation, never uses the transformer, 17 never uses the connection line, and it seemed to me to 18 be inequitable to charge the generator for that cost. 19 Now, for the existing plants the generator 20 isn't charged anyway, so it is sort of a moot point 21 under the current scheme. But if we go to a future 22 scheme that charges the existing generators, and 23 certainly if we are going to charge new generators for 24 an allocated share of a secure connection, then I think 25 this kind of consideration is much more important. 26 MR. ROGERS: I know it is important to your 27 client in this matter that connection costs to 28 generators be allocated to generators. This is a little Les Services StenoTran Services Inc. 613-521-0703 2366 GEC PANEL 1, cr-ex (Rogers) 1 different topic I understand. 2 MR. CHERNICK: It is. 3 MR. ROGERS: But would you agree with me that 4 this issue in the context of what we are dealing with in 5 this case is relatively minor and really could wait 6 until a future case when the responsibility for 7 generation connections, for example, might be 8 considered? 9 MR. CHERNICK: Well, I think it would be good 10 to give the small generators who might be in this kind 11 of situation, small potential generators, many of whom 12 will tend to be efficient cogenerators or small because 13 they are matched to their load. They might be biomass 14 plants. I see our friend from the farm bureau has left, 15 but a lot of agricultural waste product plants might fit 16 into this kind of category where they are too large to 17 be embedded in the load, but they would share the 18 connection facilities with an existing load. It would 19 be nice to give them the signal that to the extent that 20 they are not requiring the connection to be upgraded 21 they are not going to be paying a large share of that 22 cost. 23 But certainly the broader context of your 24 question, of the issues that I raise in my testimony, 25 this is the one that I think could most easily be 26 deferred for later treatment, although I would like to 27 see the Board at least nod in the direction of 28 recognizing that small generators that serve -- that Les Services StenoTran Services Inc. 613-521-0703 2367 GEC PANEL 1, cr-ex (Rogers) 1 share connections don't impose very large costs and 2 that, similarly, a large generator that shares a 3 connection with a small existing load should be paying 4 the vast bulk of that and perhaps everything. 5 MR. ROGERS: I don't think we need to go 6 through the other examples, Mr. Chernick. I think we 7 have agreed now how to apply your data to the diagrams 8 and we can deal with that in argument if it is thought 9 to be important enough. 10 Can you help me just before we finish off on 11 this point. Have you been involved in this case 12 throughout the stakeholdering process at all? 13 MR. CHERNICK: No, I wasn't. 14 MR. ROGERS: Are you aware of any other 15 intervenor in this proceeding? You commented to me that 16 there is an awful lot of them. Are you aware of anybody 17 else, any other stakeholder, who is advocating what you 18 are advocating with respect to allocating these line 19 costs? 20 MR. CHERNICK: I'm not. I'm not either. 21 Sorry. 22 MR. ROGERS: Do you know of any jurisdiction 23 in North America where I could look to see where your 24 methodology is being used for this particular problem 25 with an electricity system? 26 MR. CHERNICK: I think that, for example, in 27 the New England Power Pool a similar approach is being 28 used for new generators. Les Services StenoTran Services Inc. 613-521-0703 2368 GEC PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: For new generators? 2 MR. CHERNICK: Yes. That if you interconnect 3 and you are not adding to the transmission requirements, 4 if your generation is smaller than the load that is 5 already there, the fact is that you are going to have to 6 pay for the cost of the actual interconnection of wiring 7 you in, putting in protective switches and so on at the 8 substation, for example, but you are not going to share 9 the cost of the connection back to the network. So this 10 is not so different than normal practice. 11 MR. ROGERS: Well, if I went to the New 12 England tariff, I would find this methodology 13 underlying it. 14 MR. CHERNICK: There is language in the tariff 15 about identifying the incremental costs of the 16 interconnection and so on. Yes. 17 MR. ROGERS: I suppose the counter argument to 18 this, some people are going to say that there's a free 19 ride being given here. 20 MR. CHERNICK: Well, yes. It depends upon 21 what you mean by a ride. There is no free ride in terms 22 of being able to use the transmission system to carry 23 power because in Example A, the generator would never 24 actually be sending electronics back into the system 25 because load is always going to be pulling them down. 26 On the other hand, the generator does connect 27 to the system. It then can become a market participant. 28 While it's really creating paper rather than electrons, Les Services StenoTran Services Inc. 613-521-0703 2369 GEC PANEL 1, cr-ex (Rogers) 1 it can participate. 2 I guess you can argue that they are getting a 3 benefit and maybe they ought to chip in a little bit. 4 MR. ROGERS: Would you agree with me, just 5 finally, that in certain circumstances theoretical 6 perfection must give way to administrative practicality. 7 MR. CHERNICK: Yes, and I certainly had no 8 intention of making this administratively onerous on 9 your client. 10 MR. ROGERS: Thank you, Mr. Chair. 11 You may go as far as I'm concerned. I'm 12 through. 13 MR. CHERNICK: Thank you. 14 MR. ROGERS: But others will have questions 15 for you. 16 THE PRESIDING MEMBER: Thank you, Mr. Rogers. 17 The Board may have a question or two. 18 Mr. Vlahos. 19 MEMBER VLAHOS: Mr. Chernick, just one 20 question. Can you tell us the reasons why you want this 21 Board only to use environmental considerations only to 22 keep the balance, as you called it, as opposed to use 23 the environmental considerations as an integral part of 24 the equations that the Board has to address in coming to 25 a decision. 26 MR. CHERNICK: Well, unfortunately, many of 27 the considerations that I would hope you take into 28 account in making your determinations are very hard to Les Services StenoTran Services Inc. 613-521-0703 2370 GEC PANEL 1 1 put into the calculations in an explicit way. 2 You can do calculations such as those that the 3 company, OHNC, and I have done of the -- on the net load 4 billing effects, for example, and try and get a sense of 5 how under various circumstances costs might be 6 distributed between various groups of customers, but 7 nobody really knows the probabilities of various amounts 8 of generation being built in various places. 9 You are left with a wide range of qualitative 10 considerations that have to go into the analysis. So, 11 while you can quantify some things, you can come up with 12 a specific method that gives you exactly $4.85, the 13 decision about whether to apply that to exports or to 14 really discount it requires consideration of a number of 15 things that you can't necessarily calculate dollar 16 values for easily. 17 In principle, you could put dollar values on 18 some of the environmental effects and I have done that 19 in other cases. I haven't done it here. Adding those 20 into rate design and cost allocation purposes is a 21 fairly major step that might have very large allocatives 22 and equity effects. 23 In general, my expectation would be that the 24 Board would look at the simple quantification and then 25 take these other factors into account, most of the 26 factors actually, into account in a qualitative way in 27 deciding which end of the spectrum to select or where 28 along it to pick a number. Les Services StenoTran Services Inc. 613-521-0703 2371 GEC PANEL 1 1 MEMBER VLAHOS: I recall previous evidence by 2 you and others that attempts to quantify those 3 externalities and make them part and parcel of the 4 Board's deliberations on several issues. 5 I would just like to know as to what is 6 different at this time in your view because, as you can 7 also appreciate, there are other intervenors here that 8 would also like us to use the numbers. 9 MR. CHERNICK: Well, that's an interesting 10 question and perhaps I wasn't imaginative enough in 11 putting together my testimony, but I think it's a 12 relatively minor step for the Board to say in reviewing 13 conservation program proposals, we will take into 14 account the environmental benefits, or even in giving 15 guidance to the distribution companies and OHNC about 16 when loss reduction technologies would be cost effective 17 on their systems and when we want them to overbuild to 18 reduce line losses, we can tell them "Use 40 hours per 19 ton for carbon and these other values for other 20 pollutants". 21 It is a much larger step to go from 22 quantifying the effects in DSM or in the supply planning 23 using those values for rate design or cost allocation. 24 You could certainly do those -- I could do those 25 calculations for you and show you what the values that 26 have been accepted in the gas conservation program, how 27 that would affect some of these determinations. 28 I think you would still want to take those Les Services StenoTran Services Inc. 613-521-0703 2372 GEC PANEL 1 1 numbers and put them into your qualitative weighting. I 2 don't think that they are numbers that you want to 3 simply plug right into the rate design because it will 4 have a big effect on the outcome. You want to think 5 about it carefully. 6 MEMBER VLAHOS: But you are suggesting there 7 are some numbers -- 8 MR. CHERNICK: There are numbers. 9 MEMBER VLAHOS: -- that may not be 10 quantifiable, but there are numbers. Why wouldn't you 11 ask the Board, to say "Well, Board, there are some 12 numbers. I cannot quantify them with the same degree of 13 precision, but I want you to arrange and put those into 14 the equations that you are considering in order to find 15 that balance as opposed to using externalities only to 16 keep the balance" I should say "keep the imbalance if 17 you cannot come to the conclusion given all of the other 18 known environmental considerations". 19 MR. CHERNICK: Well, I'm afraid I can't come 20 up with a good reason why I shouldn't have done that. 21 Now that you have pointed it out, my clients may be 22 irritated with me for not having thought of it myself. 23 As I said, if you would like me to show you 24 what those numbers would look like for some of these 25 cost elements, I could try and give you a sense, but I'm 26 not sure that you want to use those numbers 27 specifically, the resulting values. 28 MEMBER VLAHOS: I don't mean that we want any Les Services StenoTran Services Inc. 613-521-0703 2373 GEC PANEL 1 1 numbers produced in that regard, but you went at length 2 with a number of people today to give us the impression 3 that it is only keeping the balance that you are 4 interested in. It is not exclusively incorporating the 5 externalities which appears to me to be different 6 testimony from what we will probably hear from others 7 based on the cost determination by some intervenors or 8 from your own position of past testimony. 9 MR. CHERNICK: Well, I don't think I have ever 10 taken the position that for cost allocation or for rate 11 design that quantifying externalities really makes sense 12 and certainly not plugging them into the formula really 13 makes sense. 14 You certainly can do that just to give 15 yourself a sense of how big the effect would be, but in 16 many cases the effect would be so large on the way you 17 would allocate costs that it's not going to be 18 acceptable in terms of the continuity of rates and of 19 charges. 20 I don't know of any regulator that has really 21 gone in that direction whereas many of the same 22 regulators have been quite comfortable, including this 23 one, having externality values added into a decision 24 about energy conservation or a decision between two 25 power supply options or something like that. Is that at 26 all helpful? 27 MEMBER VLAHOS: Yes, it helps, but I do want 28 to follow it up. Les Services StenoTran Services Inc. 613-521-0703 2374 GEC PANEL 1 1 You have never testified before the Board 2 about inverse rates or a rise in block rates in terms of 3 conservation, the impact of conservation or this feeling 4 of fixed charge versus say energy charge and why it 5 should be most appropriate from a conservation 6 perspective? 7 MR. CHERNICK: I have testified on those and I 8 believe it has always been based upon projections or 9 estimates of incremental cost or on a general argument 10 that if you move too much of the cost recovery into the 11 customer charge or the inner blocks then you are not 12 going to have much of an incentive to control energy 13 use. 14 By the way, that also has environmental 15 effects. I said it also has environmental effects, but 16 I don't recall a situation in which I said you should 17 take this average rate of three cents and you should 18 raise it to seven, eight or ten cents to cover the 19 environmental costs and then have some kind of large 20 monthly credit to the customers to make a revenue 21 requirement work. 22 That's further than even I as one of the 23 leading proponents of quantifying externalities has felt 24 comfortable going with them, but largely because of the 25 rate continuity effect and the equity effects of doing 26 that. 27 MEMBER VLAHOS: So you are talking about rate 28 structure and that is, of course, allocation and rate Les Services StenoTran Services Inc. 613-521-0703 2375 GEC PANEL 1 1 design issue? 2 MR. CHERNICK: Rate structure and allocations 3 to various groups of customers. I think you are much 4 more constrained there than you are in determining the 5 cost effect of this test for DSM programs or for 6 transmission upgrades, for example. 7 MEMBER VLAHOS: It is just that I was taken 8 aback by your comment that you have never really dealt 9 with the cost allocation rate design issues. 10 MR. CHERNICK: Oh, I have dealt with those, 11 but I haven't advocated putting an externality value 12 into that. 13 MEMBER VLAHOS: So we are talking about rate 14 structure you may have argued, but as opposed to the 15 specific quantification as to what should be on each 16 block, et cetera? 17 MR. CHERNICK: Yes. For example, I may have 18 said that the rate should be five cents and a $5 19 customer charge and some other party may have said, no, 20 it should be four cents with a $10 customer charge. I 21 said, well, the five cents better reflects incremental 22 cost, marginal cost and if you understate that then you 23 will not give enough incentives to customers to 24 conserve. They will use more energy. There will be 25 more pollution and it's a bad thing. That's another 26 reason why you should use my five cents which, 27 generally, would be based on the cost to the utility of 28 providing that service, rather than the broader social Les Services StenoTran Services Inc. 613-521-0703 2376 GEC PANEL 1 1 costs. 2 MEMBER VLAHOS: Yes. 3 You mentioned that the Board should consider 4 the environmental considerations if everything else is 5 equal. I don't know whether other things can be equal. 6 MR. CHERNICK: As I said, there are a lot of 7 things that fall in that same category. Basically, I 8 was responding I believe to Mr. Campbell's 9 characterization of my testimony. Again, I probably 10 mischaracterized his cross here a little bit, but, 11 basically, he was suggesting that my testimony stood for 12 the proposition that transmission, cost allocation and 13 rate design should primarily serve the purpose of 14 environmental improvement. 15 I start with that premise and then everything 16 I propose is directed towards maximizing that effect. 17 My answer was no. There are a lot of things here which 18 I say that were if you think that reducing pollution is 19 a good thing, if you think that encouraging new, cleaner 20 generators to enter the competitive market is a good 21 thing, then these are policies that are justified by the 22 numbers and help to support those objectives. 23 But I certainly wasn't turning the process on 24 its head and saying let's use transmission rate setting 25 primarily as an environmental tool. 26 So if, for example, the Board thought that net 27 load billing was simply inequitable, it was just going 28 to have terrible effects, greatly increase the rates to Les Services StenoTran Services Inc. 613-521-0703 2377 GEC PANEL 1 1 customers who didn't install embedded generation and it 2 was a vast effect, no board believes that no 3 transmission assets would be avoidable for 50 or 100 4 years, and that the rate impacts were going to be 5 staggering for customers who didn't install embedded 6 generation, then I am not arguing that environmental 7 considerations trump that. 8 But I don't think the record shows that any of 9 those things are true. So you are in that kind of grey 10 area where there are arguments in favour of gross load 11 billing and arguments in favour of net load billing and 12 environmental considerations I think weigh in favour of 13 net load billing for the efficient generator. 14 MEMBER VLAHOS: Lastly, sir, so your reading 15 of the Act and the Board's mandate under the Act has not 16 really prompted you to argue more forcefully for an 17 integration of environmental considerations in our 18 deliberations. Is that what I understood from your -- 19 MR. CHERNICK: I think that's one. The 20 environmental concern is one concern that the Board 21 should have in mind, but it's not the primary focus of 22 this case, but it's not one that should be lost either. 23 MEMBER VLAHOS: Thank you for those answers. 24 Thank you, Mr. Chair. 25 THE PRESIDING MEMBER: Thank you, Mr. Vlahos. 26 The Board has no other questions. 27 Your counsel may have some redirect, if he 28 does. Les Services StenoTran Services Inc. 613-521-0703 2378 GEC PANEL 1 1 MR. POCH: Just one question, Mr. Chairman. 2 RE-EXAMINATION 3 MR. POCH: Mr. Campbell constructed some 4 questions to you, Mr. Chernick, where he asked you about 5 the effect on revenue requirement and he constrained his 6 questions to say once you are in the year and the effect 7 in that year. So after the revenue requirement is set 8 and so on. He said does it matter if it's in 2000 or 9 2005 and you answered no. I just want to make sure that 10 answer is understood. 11 I am asking you about the effect then of 12 embedded generation on revenue requirements down the 13 road, not in the year of the actual event. Can you just 14 comment very briefly? Is there a distinction there? 15 MR. CHERNICK: Yes, there is a very important 16 distinction. I kept pointing out to Mr. Campbell that 17 he had taken all the interesting aspects out of the 18 questions he was asking and that embedded generation 19 that is installed in the year 2000 or other things that 20 reduce load in the year 2000 may very well affect 21 revenue requirements in the year 2005. 22 And they also affect customers' payments for 23 line losses in the year 2000, but those were out of 24 Mr. Campbell's question. 25 MR. POCH: Thank you very much. 26 Those are my questions in re-examination. 27 Thank you, Mr. Chairman. 28 THE PRESIDING MEMBER: Thank you, Mr. Poch. Les Services StenoTran Services Inc. 613-521-0703 2379 1 Thank you, Mr. Chernick, for your evidence and 2 have a good trip back. 3 We are now, of course, at five o'clock and as 4 always plans have gone awry. I look to Mr. Greenspoon 5 and say what do you want to do, sir? 6 MR. GREENSPOON: Well, I think we could deal 7 with Mr. Rabago very quickly. I have talked to my 8 friends about their cross-examination and I don't think 9 they will be lengthy. I anticipate about 20 minutes in 10 direct. 11 He is from Denver and he has already missed 12 the 5:55, I think that's pretty clear, but there is a 13 possibility that he can get a flight to Chicago and take 14 his chances to get to Denver sometime this evening. He 15 would like to be home. 16 THE PRESIDING MEMBER: We don't have any 17 arrangement to run as late as you are suggesting with 18 the court reporters, apart from everything else as well. 19 So really we cannot sit more than about 20 minutes and 20 that's about tops. So we are just not going to do it. 21 I think that's basically where we are at. 22 MR. GREENSPOON: I could do him in five or ten 23 minutes, Dr. Higgin. He really needs to be home and we 24 will go to twenty after and that will be it. 25 THE PRESIDING MEMBER: That's if other counsel 26 agree and there is no point putting testimony on the 27 record that can't be subject to cross-examination. 28 MR. GREENSPOON: Yes. Les Services StenoTran Services Inc. 613-521-0703 2380 1 THE PRESIDING MEMBER: Ms Lea, do you have any 2 views? Can you help us? I don't think so. 3 MS LEA: No. It is a bit of a conundrum. 4 Can people give us their estimates of 5 cross-examination time, please. 6 MR. POCH: I have no questions, Mr. Chairman. 7 MR. CAMPBELL: I think unless there are some 8 real surprises in direct we won't take any time. 9 MS LEA: Sorry, you won't have any questions 10 unless there are surprises? 11 MR. CAMPBELL: Yes. 12 MS LEA: Yes. 13 MR. FISHER: We won't have any questions 14 either. 15 MS LEA: All right, then. 16 I have two questions so we will just see how 17 it goes. 18 THE PRESIDING MEMBER: Well, let's start and 19 see how it goes given that. 20 Thank you. 21 --- Pause 22 SWORN: KARL R. RABAGO 23 THE PRESIDING MEMBER: Thank you. 24 Would you like to start? 25 EXAMINATION-IN-CHIEF 26 MR. GREENSPOON: Thank you, Dr. Higgin. 27 Mr. Rabago, firstly, will you adopt your 28 evidence that is found at Exhibit H, Tab 18, Les Services StenoTran Services Inc. 613-521-0703 2381 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 Schedules 1, 2 and 3? 2 MR. RABAGO: Yes, I will, and thank you very 3 much for your dispensation. I do formally adopt that 4 testimony offered. 5 MR. GREENSPOON: All right. Schedule 2 is 6 your cv, which I won't go into detail, but just briefly 7 could you tell the Board what your involvement has been 8 in the electric industry in the past? 9 MR. RABAGO: The greatly summarized version is 10 that I spent the last 10 years involved in both the 11 regulatory and kind of the emerging market side of what 12 is going on in the electricity business. I have served 13 as a public utility commissioner for the state of Texas. 14 I oversaw research and development programs in renewable 15 energy technologies for the United States at the 16 Department of Energy in Washington. 17 I have served as an advocate for environmental 18 organizations and as a consultant with private 19 corporations. I have also kept my fingers in the 20 emerging green market. I worked to oversee the green 21 "E" certification mark for green power products in the 22 United States. 23 MR. GREENSPOON: You were a commissioner on a 24 commission or a board similar to this in the state of 25 Texas? 26 MR. RABAGO: Yes. We were an appointed board. 27 I was appointed by the Governor of Texas, confirmed by 28 the Senate, the standard kind of U.S. approach to most Les Services StenoTran Services Inc. 613-521-0703 2382 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 commissions that regulated the cooperatives and the 2 industrial utilities in the state of Texas, about $16 3 billion worth of annual revenues and utilities for the 4 about $16 million people who lived in Texas at the time. 5 MR. GREENSPOON: Having presided over similar 6 hearings with others to this hearing? 7 MR. RABAGO: Yes, although, I would have to 8 say this is a step further along in the sense of taking 9 the separated transmission company -- we were just 10 starting with ERCOT, the infamous ERCOT, the island 11 system in the United States and transitioning them 12 towards operating as a virtual ISO, if you will, 13 independent system operator, in preparation for 14 competition. That work has accelerated in the wake of 15 legislation passing to introduce competition just within 16 the last two years. 17 MR. GREENSPOON: Have you been following this 18 hearing after you had prefiled -- after you received the 19 exhibits that OHNC sent you when you prefiled your 20 evidence have you been following the hearing? 21 MR. RABAGO: Yes, I have. 22 In addition to the materials that I cited in 23 my testimony that I have reviewed part of his testimony, 24 I have also taken advantage of the great Internet system 25 to try to keep up to date, though I am far from 26 memorized, but have read through most of the transcripts 27 that have been posted there. 28 MR. GREENSPOON: Based on what you have read, Les Services StenoTran Services Inc. 613-521-0703 2383 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 are there any modifications to your evidence? 2 MR. RABAGO: No, there are no substantiative 3 modifications. There is one point that I would 4 stress -- is that what we attempted to do in my 5 testimony was to set up the idea that you are kind of 6 going from the very high to the very mundane of even 7 line-by-line comments on the applicant's petition -- was 8 that there is this increasing trend towards 9 sustainability that actually is practically equivalent 10 to economic efficiency. In fact, some may argue that 11 taking economic efficiency and just giving it a long 12 enough view isn't the same thing as sustainability. 13 As evidenced in the kind of natural capitalism 14 principles that we set out, specifically going down a 15 level, as evidenced in the increasing number of benefits 16 being recognized by distributed energy resources, then 17 leads us to our most direct conclusions about the 18 treatment of embedded generation in this application. 19 The only additional point is that there is -- 20 I haven't seen a great deal of emphasis on the important 21 regional differences even within Ontario. These are 22 very important to NorthWatch, the idea that embedded 23 generation, for example, may be a critical part of the 24 opportunity to efficiently and economically expand 25 generation in the region. 26 I do know that there is some good testimony 27 from the people at Kimberly-Clark that gives you very 28 specific numbers about those kinds of impacts, but that Les Services StenoTran Services Inc. 613-521-0703 2384 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 is an important point to NorthWatch that this is a 2 critical part of the economic development of their 3 infrastructure in the future. 4 MR. GREENSPOON: One of the issues that was 5 raised by Ontario Hydro Networks Corporation in their 6 interrogatory, which I think you have a copy of there. 7 It is the only interrogatory that we were asked, 8 Interrogatory No. 1, Exhibit H18.1. 9 OHNC was concerned about how in your evidence 10 you asked for the Board to delay the decision and what 11 Ontario Hydro Networks was concerned is how does that 12 deal with implementation. I think that is a general 13 concern of this Board, is how do they deal with your 14 evidence in implementation? 15 MR. RABAGO: The position we advocated in the 16 testimony was, of course, the stark one, meant to kind 17 of call attention to the fact, or to our argument -- not 18 a fact -- to our argument, I will say, that there was 19 insufficient attention paid to the potential benefits of 20 embedded generation in considering things like the net 21 versus gross billing issue. For that reason, we 22 suggested put a stop on it, get the better analysis and 23 go forth. The practical implications of having to move 24 forward into the design and implementation of the retail 25 access system, of course, are an important 26 countervailing factor. 27 What I would suggest is that perhaps the whole 28 train doesn't need to be stopped or derailed for this Les Services StenoTran Services Inc. 613-521-0703 2385 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 issue, but it is critically important that we not lay 2 down precedents in this interim that are antithetical to 3 the goals we are trying to achieve. My testimony lays 4 out how we think there are problems with the approach 5 proposed being inconsistent with the policy goals that 6 guide the Board under the legislation. 7 We could keep the work going, but be very 8 careful about actually putting into effect anything that 9 we know we may want to undo or that we don't know we 10 have enough information to impose. 11 MR. GREENSPOON: With respect to economic 12 efficiency, in your evidence at page 20 you set out the 13 criteria from the Act. 14 If you could turn to page 20, starting at line 15 19, you are listing basically the six sections of the 16 Energy Board Act that indicate what should guide the 17 Board. Is that correct? 18 MR. RABAGO: Yes. 19 MR. GREENSPOON: The fourth one, found at line 20 1 of page 21 of your evidence, is promoting economic 21 efficiency in the generation, transmission and 22 distribution of electricity. 23 How has OHNC, in their evidence, addressed 24 that issue of economic efficiency? 25 MR. RABAGO: Again, because NorthWatch is 26 concerned primarily with environmental issues, that is a 27 big part of it. And as I said, this sort of translates 28 into this concept of long-term sustainability being Les Services StenoTran Services Inc. 613-521-0703 2386 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 relatively equivalent to long-term economic efficiency. 2 That is to say, if you impose environmental 3 costs, you are going to have to pay for them, maybe not 4 today or tomorrow, but certainly some day for sure. 5 Our concern is this concept of how do these 6 rates, how does this cost allocation impact a continuing 7 progressive shift towards long-term economic efficiency 8 and sustainability? Those considerations do not appear 9 in the evidence that I reviewed in preparation for this 10 case. 11 So both from the perspective of how does the 12 company operate but, most importantly, how do these 13 rates, these treatments affect those concerns? Do they 14 help or do they hinder the broader public policy goal of 15 advancing towards economic efficiency? 16 The big issue is that we just don't know, and 17 we haven't attempted to figure out. We really should, 18 we believe, in order that we will feel comfortable that 19 the outcome of this procedure will keep us moving in 20 that positive direction. 21 MR. GREENSPOON: And with the three examples 22 that I think are in your evidence: first, charge 23 determinants. 24 MR. RABAGO: Right. The charge determinants 25 do a good job of trying to balance competing concerns, 26 as evidenced in the stakeholder issues. But it was our 27 concern again, in looking at these charge determinants, 28 at no point do the Applicants say: And if we do this it Les Services StenoTran Services Inc. 613-521-0703 2387 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 will enhance or advance, or encourage or discourage, for 2 example, increased reliance on energy efficiency, or 3 increased reliance on efficient generation. 4 There are some measures, like the one-megawatt 5 measure for a small distributor embedded generation. 6 But other than that, when comparing the trade-offs on 7 the various charge determinants we simply can't tell. 8 Is this good for efficiency or not? Will it stimulate 9 this industry or not? We need more exploration of that. 10 MR. GREENSPOON: And likewise, in net versus 11 gross. 12 MR. RABAGO: Absolutely. 13 MR. GREENSPOON: Lastly, there was some 14 discussion about the benefits of lowering the load. 15 MR. RABAGO: Right. 16 MR. GREENSPOON: We reviewed the transcript 17 where Mr. Campbell put to Mr. Curtis on his 18 cross-examination that those benefits were not material. 19 I think he got into a similar discussion that you heard 20 with Mr. Chernick. 21 MR. RABAGO: Yes. 22 MR. GREENSPOON: What have you to say about 23 the materiality of those? 24 MR. RABAGO: I generally, not surprisingly, 25 would sort of endorse what Paul Chernick was offering in 26 this regard. And I think it really does kind of focus 27 on this idea of feeling completely confined to the 28 annual revenue requirement, and the impacts on it, Les Services StenoTran Services Inc. 613-521-0703 2388 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 versus taking that longer term view. He used the 2005 2 example. 3 Our feeling is that over long term, while you 4 may not see the immediate benefit because they 5 regulatorily would have to collect a certain amount of 6 revenue, and we are not likely to have a proceeding 7 within the year to adjust that, we will be laying down a 8 different base line to the cost of operating the system. 9 The original revenue requirement includes over 10 $300 million worth of operations, maintenance and 11 administrative costs. So we know there is a big chunk 12 there that could be affected. 13 We need to be paying attention to those 14 benefits that may accrue, that we have been able to 15 observe in other places in other situations and ask 16 whether or not they in fact accrue to load reduction 17 through energy efficiency or efficient embedded 18 generation, or load management, or any of those 19 techniques here. 20 The big importance is to take that longer view 21 towards how these things may accrue benefits and not 22 ignore them in addressing that important issue of net 23 versus gross load billing, among other things. 24 MR. GREENSPOON: Thank you, doctor. Those are 25 the questions I have. 26 THE PRESIDING MEMBER: Thank you, 27 Mr. Greenspoon. 28 Have you changed your mind at all, Les Services StenoTran Services Inc. 613-521-0703 2389 NORTHWATCH PANEL 1, in-ch (Greenspoon) 1 Mr. Campbell, or are you sticking with that? 2 MR. CAMPBELL: I think in the interests of 3 time and the time I have been taking today, I will not 4 change my mind. 5 THE PRESIDING MEMBER: Thank you. 6 Ms Lea, then. 7 MS LEA: Thank you. 8 EXAMINATION 9 MS LEA: Mr. Rabago, your evidence in-chief 10 has helped clarify both my questions. So I hope they 11 remain fairly narrow. 12 At page 8 of your evidence, in the first seven 13 lines, you indicate that the application by OHNC fails 14 to account for the trend towards sustainability, and you 15 also indicate that there is a possibility that the 16 proposed cost allocation and rate design may create 17 incentives for or barriers against the increased pursuit 18 of sustainability and resource efficiency. 19 Do I take it from your evidence that we simply 20 don't know whether that is going to happen? Or do you 21 have a specific example of something in OHNC's 22 application that could create such a barrier? 23 MR. RABAGO: Our primary concern was the lack 24 of. We don't know. 25 It doesn't sit there and say -- and by using 26 this particular form of charge is determinant, for 27 example. We know we will be creating an incentive for 28 small commercial users to increase their reliance on Les Services StenoTran Services Inc. 613-521-0703 2390 NORTHWATCH PANEL 1, ex (Lea) 1 energy efficiency. 2 We do know, generally speaking, as has been 3 batted around today, that 15 per cent or something of 4 the total charge for electricity service might be 5 represented in transmission charges, but how that 6 balances out we are not sure. 7 We do have a very stark example, of course, in 8 the gross load billing issue that says: Don't consider 9 adding your own generation, however efficient, over 10 1 megawatt if you can't get past that 50 per cent 11 charge. So we know that is a barrier. The rest is 12 projection. 13 But we really haven't looked at it and that is 14 our main concern. 15 MS LEA: Okay. 16 The second question I had deals with the 17 recommendations at the very end of your evidence on 18 pages 22 and 23. 19 Having heard your evidence this afternoon, I 20 think I understand that, okay, the first of your 21 recommendations can be carried out by the Board in this 22 particular order, but the latter three are really 23 forward-looking. 24 MR. RABAGO: Yes, they are. 25 MS LEA: They are asking the Board to look at 26 new studies or require new studies. 27 MR. RABAGO: Right. 28 MS LEA: I gather that is because you do not Les Services StenoTran Services Inc. 613-521-0703 2391 NORTHWATCH PANEL 1, ex (Lea) 1 want us to set a precedent now that rules out the 2 benefits from sustainability and efficient generation. 3 MR. RABAGO: That is very much true. It is 4 very much like a hippocrates kind of thing, you know: 5 First, do no harm and then take advantage of the next 6 application to really develop the record so that those 7 judgments can be made in the future. 8 MS LEA: Thank you. 9 Thank you, Mr. Chairman. 10 THE PRESIDING MEMBER: Thank you, Ms Lea. 11 Mr. Rogers, please. 12 MR. ROGERS: Thank you. 13 CROSS-EXAMINATION 14 MR. ROGERS: I have just a few questions, sir. 15 My client does not want to do harm, it just 16 wants to allocate the costs and recover the revenue 17 requirements. 18 I must say, I don't have much time, but I have 19 seldom seen a more interesting r‚sum‚ than yours. 20 MR. RABAGO: Thank you. 21 MR. ROGERS: I see that -- I mean no 22 disrespect, but some of the things you are not is an 23 economist -- 24 MR. RABAGO: I am not an economist or an 25 engineer. 26 MR. ROGERS: -- or an engineer or an 27 accountant. 28 MR. RABAGO: Yes. Les Services StenoTran Services Inc. 613-521-0703 2392 NORTHWATCH PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: What you are -- 2 MR. RABAGO: Although I should say I have 3 played an economic regulator. 4 MR. ROGERS: Yes. No, I see that. I see 5 that. 6 Your principal training, though, has been in 7 the law I see. 8 MR. RABAGO: Yes, sir. 9 MR. ROGERS: You have concentrated on 10 environmental law matters throughout most of your 11 career. Right? 12 MR. RABAGO: And administrative law by virtue 13 of my military career. 14 MR. ROGERS: Yes. And also I saw you had a 15 military career too in which you practised law as well. 16 MR. RABAGO: Yes. 17 MR. ROGERS: You are a prosecutor? 18 MR. RABAGO: I was for a short while. 19 MR. ROGERS: So you are a traveller -- 20 MR. RABAGO: I was. 21 MR. ROGERS: -- among other things, and an 22 advocate 23 MR. RABAGO: Yes, I was. 24 MR. ROGERS: Would it be fair for me to say 25 that you were an advocate for environmental causes? 26 MR. RABAGO: I have professionally held that 27 title and I am unabashedly an environmentalist. I am 28 quite proud of everything I can do to make the world Les Services StenoTran Services Inc. 613-521-0703 2393 NORTHWATCH PANEL 1, cr-ex (Rogers) 1 safe for the grandchildren I don't yet have. 2 MR. ROGERS: All right. 3 Now, as I understand your evidence, you don't 4 quarrel with my client's preoccupation with cost 5 allocation in order to recover the revenue requirement. 6 What your concern is is that they have not adequately 7 addressed, in your mind, environmental repercussions of 8 some of their proposals. 9 MR. RABAGO: Right. Primarily characterized 10 through issues like energy efficiency or the efficient 11 use of alternative embedded generation. Is it not -- I 12 think I said it explicitly in several places in the 13 testimony, as far as it goes it looks like a reasonable 14 allocation. 15 I was impressed by the stakeholder process and 16 the attempt to weigh these kind of qualitative views 17 that come up in some of these issues. I am very 18 sympathetic, having been a regulator before, to exactly 19 the kinds of tensions before you. 20 On behalf of my client, however, I am 21 advocating, in this case strenuously, for a more -- a 22 broader reach in the consideration of potential impact, 23 as I mentioned. 24 MR. ROGERS: It would be fair to say, however, 25 would it not, that my client, at least on the evidence 26 you have seen, has attempted to accommodate concerns of 27 stakeholders, including environmentalists? 28 MR. RABAGO: I think that is fair to say, yes. Les Services StenoTran Services Inc. 613-521-0703 2394 NORTHWATCH PANEL 1, cr-ex (Rogers) 1 MR. ROGERS: Thank you. 2 Those are my questions. Thank you. 3 THE PRESIDING MEMBER: Thank you. 4 MEMBER VLAHOS: Mr. Rabago, if I could just 5 ask a question. 6 I'm looking at your conclusions in your 7 testimony on page 22 and based on the direct examination 8 by your counsel do you still stand by those conclusions 9 as they are? 10 I thought I heard something about go ahead 11 with this proceeding and make decisions, but don't set a 12 precedent. So I'm not sure whether your conclusions 13 still stand. 14 MR. RABAGO: I was actually -- I was offering, 15 I suppose, a compromise against the rather strong 16 position that I took in my testimony. 17 In a perfect world I would suggest -- I think 18 I used the word "remand", that's a judicial term -- 19 maybe an abatement or something like that to more fully 20 develop the record. 21 But in recognition of the reality of the 22 schedules and the timing of subsequent proceedings and 23 kind of in keeping with the response on the 24 interrogatory, it seems that we might be able to, by not 25 putting in place things like the gross load billing 26 charge, be able to use this time to more fully develop 27 the record so that on the onset of competition these 28 issues are addressed. But there is a penalty for that Les Services StenoTran Services Inc. 613-521-0703 2395 NORTHWATCH PANEL 1 1 and that is why I offered this as a compromise. 2 MEMBER VLAHOS: I understand. 3 But would one of the penalties also be that 4 the industry would not have any certainty going forward? 5 MR. RABAGO: I think that is definitely a 6 case. It is certainly a tradeoff that I'm glad is on 7 your plate. Do you go forward with a record that, in 8 our opinion, is not as fully developed as it should be 9 and do something or do you wait until you have the 10 better situation? 11 Again, we don't right now, in Ontario, as I 12 understand it, have specific barriers like the gross 13 load billing against the installation of embedded 14 generation. My argument would be let's not put that in 15 place during this interim period because you are not yet 16 certain that that is really the best thing to do and we 17 could continue going until we get that resolution. That 18 may delay some plans on both sides of the street, but I 19 think in the end you are on a noble cause. I completely 20 agree with the idea of moving towards a more competitive 21 environment for your electricity industry, as I have 22 argued in a number of different places. I think there 23 are benefits for everyone in that increased competition. 24 So I tend to defer on moving in that direction as much 25 as possible. 26 MEMBER VLAHOS: Finally, in your first 27 conclusion, the first point, I'm having difficulty 28 understanding the latter part of that point, quote: Les Services StenoTran Services Inc. 613-521-0703 2396 NORTHWATCH PANEL 1 1 "...and suspend or disapprove the 2 application of net load billing to 3 inefficient or highly polluting embedded 4 generation." (As read) 5 Are you talking about forward-looking embedded 6 generation or existing? 7 MR. RABAGO: Forward-looking. 8 MEMBER VLAHOS: Forward-looking. 9 MR. RABAGO: Yes. 10 MEMBER VLAHOS: Okay. I wasn't sure of that. 11 MR. RABAGO: Yes, sir. 12 MEMBER VLAHOS: All right. Thank you for that 13 clarification. 14 Thank you. 15 THE PRESIDING MEMBER: Thank you, Mr. Vlahos. 16 I don't really have a question. I noted on 17 line 14 again in your conclusions -- I like the term 18 there, we can probably adopt that, "gross net 19 pilling(sic)" -- 20 MR. RABAGO: Billing. 21 --- Laughter 22 THE PRESIDING MEMBER: Yes. I'm sorry. Thank 23 you. 24 MR. RABAGO: Thank you for the -- 25 THE PRESIDING MEMBER: That should please 26 everybody if we could adopt that. 27 MR. RABAGO: Everyone would be happy with that 28 one. Les Services StenoTran Services Inc. 613-521-0703 2397 NORTHWATCH PANEL 1 1 For the record that should be "gross load 2 billing". Thank you for catching that, and thank you 3 again for your dispensation on the time. 4 THE PRESIDING MEMBER: Thank you. 5 Mr. Greenspoon, do you have any questions, any 6 redirect? 7 MR. GREENSPOON: No. Thank you very much, 8 doctor. 9 THE PRESIDING MEMBER: Okay. 10 We would like to thank you for your rather 11 hurried testimony and your appearance here. We hope you 12 make the plane. Thank you very much. 13 MR. RABAGO: I will make some plane. I really 14 appreciate it. Thank you. 15 THE PRESIDING MEMBER: With that we will not 16 even consider what we are going to do tomorrow except 17 come here at nine o'clock. We hope I think to start 18 with the AMPCO panel. After that all bets are open. 19 --- Laughter 20 THE PRESIDING MEMBER: Thank you. 21 --- Whereupon the hearing adjourned at 1720, 22 to resume on Friday, March 3, 2000 at 0900 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2398 1 INDEX OF PROCEEDING 2 PAGE 3 Upon resuming at 0903 2173 4 Preliminary Matters 2173 5 6 OPG PANEL 2 7 PREVIOUSLY SWORN: BRUCE BOLAND 2175 8 PREVIOUSLY SWORN: REN ORANS 2175 9 Continued Cross-Examination by Mr. Poch 2175 10 Cross-Examination by Ms Friedman 2198 11 Cross-Examination by Mr. Cowan 2200 12 Examination by Board Counsel 2207 13 Cross-Examination by Mr. Rogers 2232 14 Upon recessing at 1043 2241 15 Upon resuming at 1108 2241 16 Questions by the Board 2241 17 Re-Examination by Mr. Campbell 2261 18 19 GEC PANEL 1 20 SWORN: PAUL CHERNICK 2264 21 Examination-in-Chief by Mr. Poch 2264 22 Cross-Examination by Mr. Adams 2279 23 Cross-Examination by Mr. Klippenstein 2289 24 Upon recessing at 1237 2292 25 Upon resuming at 1401 2292 26 Cross-Examination by Mr. Campbell 2293 27 Cross-Examination by Mr. Cowan 2342 28 Upon recessing at 1547 2350 Les Services StenoTran Services Inc. 613-521-0703 2399 1 INDEX OF PROCEEDING (Cont'd) 2 PAGE 3 Upon resuming at 1610 2350 4 Cross-Examination by Mr. Rogers 2351 5 Questions by the Board 2369 6 Re-Examination by Mr. Poch 2378 7 8 NORTHWATCH PANEL 1 9 SWORN: KARL R. RABAGO 2380 10 Examination-in-chief by Mr. Greenspoon 2380 11 Examination by Board Counsel 2389 12 Cross-Examination by Mr. Rogers 2391 13 Questions by the Board 2394 14 Upon adjourning at 1720 2397 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2400 1 EXHIBITS 2 NO. PAGE 3 G12.1 Photocopy of page containing 2262 4 Recommendation 5-1 found in 5 the Second Interim Report of 6 the Market Design Committee 7 8 G12.2 Document entitled "Ontario Power 2265 9 Generation Export Examples 10 Corrected", three pages inclusive 11 12 G12.3 Document entitled "Generation 2351 13 Connection Cost Allocation" 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2401 1 UNDERTAKINGS 2 NO. PAGE 3 F12.1 Mr. Campbell undertakes to 2220 4 provide the accounting entries 5 for the various entities on the 6 Ontario side of the border as 7 they relate to the transactions 8 that are set out in Case 3, and 9 also to modify Case 3 so that it 10 is in line with OHNC's proposal 11 and then provide the same accounting 12 entries 13 14 F12.2 Mr. Campbell undertakes to provide 2231 15 when the last LRER contract will 16 expire and when the last backup 17 contract will expire 18 19 20 21 22 23 24 25 26 27 28 Les Services StenoTran Services Inc. 613-521-0703 2402 1 ERRATA ADDENDA 2 3 Volume 5, Tuesday, February 22, 2000 4 PAGE LINE 5 774 2 6 "peak demand for the connections. Pool of costs" s/b 7 "peak demand. For the connections pool of costs" 8 790 10 9 "at alternatives to transmission plants." s/b 10 "at alternatives to transmission plans." 11 812 11 12 "that today the IMO builds those customers" s/b 13 "that today the IMO bills those customers" 14 861 18 15 "export market which we see taking place at load" s/b 16 "export market which we see taking place at node" 17 863 18 18 "into the export market at load P2 where the" s/b 19 "into the export market at node P2 where the" 20 882 3 21 "what those congestual rentals might be" s/b 22 "what those congestion rentals might be" 23 883 7 24 "transmission rights of the proxy to estimate" s/b 25 "transmission rights as a proxy to estimate" 26 885 22 27 "IMO will pay out from that account two generators" s/b 28 "IMO will pay out from that account to generators" Les Services StenoTran Services Inc. 613-521-0703 2403 1 ERRATA ADDENDA (Cont'd) 2 PAGE LINE 3 889 6 4 "depending on the flow of the mirror" s/b 5 "depending on the flow on the power" 6 940 21 7 "MR. PORAY: That assumes interactive demands" s/b 8 "MR. SCHNEIDER: That assumes inelastic demand" 9 940 28 10 "MR. PORAY: If you make that assumption, yes." s/b 11 "MR. SCHNEIDER: If you make that assumption, yes." 12 13 Volume 6, Wednesday, February 23, 2000 14 1029 6 15 "after-the-fact settlement rather than a priority." s/b 16 "after-the-fact settlement rather than a priori." 17 1035 20 18 "network service chargers used a charge" s/b 19 "network service charges used as a charge" 20 21 Volume 7, Thursday, February 24, 2000 22 1240 5 to 7 23 "to stop providing the assets or having them pooled into 24 the regulated connection pools with potentially a 25 capital contribution to keep the pool full." s/b 26 "to self providing the assets or having them pooled into 27 the regulated connection pools with potentially a 28 capital contribution to keep the pool whole."