2404 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 Frisday, March 3, 2000, 21 commencing at 0905 22 23 24 25 HEARING 26 27 VOLUME 13 28 Les Services StenoTran Services Inc. 613-521-0703 2405 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 2406 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 2407 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 2408 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 2409 1 Toronto, Ontario 2 --- Upon resuming on Friday, March 3, 2000 3 at 0905 4 THE PRESIDING MEMBER: Thank you. Please be 5 seated. 6 PRELIMINARY MATTERS 7 THE PRESIDING MEMBER: Good morning, 8 everybody. Are there any preliminary matters for you, 9 Mr. Rogers? 10 I just have one thing to ask of you in terms 11 of the wrap-up on implementation. 12 MR. ROGERS: Yes. 13 THE PRESIDING MEMBER: To find out when we do 14 that. I just wondered whether -- I don't know whether 15 it will be helpful or not, whether the IMO-OHNC 16 Transmission Operating Agreement might be at least 17 informative, if nothing else, with respect to some of 18 the questions about the role of OHNC with the IMO. 19 I am suggesting maybe discuss it with Board 20 staff, but I'm suggesting that maybe we should at least 21 enter a copy and then we may or may not have -- anything 22 may not turn on it. 23 MR. ROGERS: Yes. 24 THE PRESIDING MEMBER: That's the whole thing, 25 we don't know what it says. It might be relevant. 26 MR. ROGERS: Yes. Well, I'm with you on that 27 latter score. Could I have a look at it and advise the 28 Board? I imagine there's no difficulty at all. Les Services StenoTran Services Inc. 613-521-0703 2410 Preliminary Matters 1 THE PRESIDING MEMBER: Right. 2 MR. ROGERS: Actually, I will be calling Mr. 3 Curtis and Dr. Poray next week as we have discussed. 4 They can perhaps address that issue as well. 5 THE PRESIDING MEMBER: Thanks. 6 MR. ROGERS: Very good, sir. Thank you. 7 THE PRESIDING MEMBER: Thank you. 8 Mr. Campbell. 9 MR. BRUCE CAMPBELL: Mr. Chairman, could I 10 inquire of Mr. Rogers whether he intends to file 11 anything for the implementation panel. If there are 12 going to be submissions or topics covered that haven't 13 be dealt with, that might be helpful. I just wondered 14 if that was going to happen. 15 MR. ROGERS: Yes. I hope to have a document 16 today which will outline the implementation 17 relationships that were discussed during the evidence 18 and puts it all in one place for everyone. 19 THE PRESIDING MEMBER: Okay. That's good. 20 MR. ROGERS: I hope to have that by the end of 21 the day. 22 THE PRESIDING MEMBER: Thank you. 23 No other matters? Then over to you, 24 Mr. Fisher. 25 MR. FISHER: Good morning, Dr. Higgin and 26 Members. I would like to introduce you to -- the 27 closest to you is Don Campbell from Bowater. In the 28 middle is Brian Aranha from Dofasco. On this side is Les Services StenoTran Services Inc. 613-521-0703 2411 Preliminary Matters 1 David Axford from CXY Chemicals. This is the surplus 2 power customers trio. 3 SWORN: DON CAMPBELL 4 SWORN: BRIAN ARANHA 5 SWORN: DAVID AXFORD 6 THE PRESIDING MEMBER: Please proceed. 7 EXAMINATION-IN-CHIEF 8 MR. FISHER: Thank you, Mr. Chairman. 9 Mr. Campbell, please state your name and 10 professional qualifications for the Board. 11 MR. DON CAMPBELL: My name is Don Campbell. I 12 am the Vice-President and Resident Manager of the 13 Bowater Thunder Bay operations. 14 MR. FISHER: And what are your 15 responsibilities? 16 MR. DON CAMPBELL: I am the Resident Manager 17 for the operation, the pulp and paper operation at that 18 site. 19 MR. FISHER: Mr. Campbell, were you involved 20 in the preparation of the evidence and do you understand 21 the evidence in Appendix A submitted by AMPCO on behalf 22 of Bowater? 23 MR. DON CAMPBELL: Yes, I do. 24 MR. FISHER: To the best of your knowledge and 25 understanding, do you believe the contents of the 26 Bowater evidence to be true and accurate? 27 MR. DON CAMPBELL: Yes, I do. 28 MR. FISHER: Mr. Campbell, do you adopt the Les Services StenoTran Services Inc. 613-521-0703 2412 AMPCO PANEL 3, in ch (Fisher) 1 evidence in Appendix E submitted by AMPCO on behalf of 2 Bowater? 3 MR. DON CAMPBELL: Yes. 4 MR. FISHER: So, would you please describe the 5 business activities of Bowater. 6 MR. DON CAMPBELL: Bowater in Thunder Bay is a 7 manufacturer of standard and lightweight newsprint and 8 northern bleached hardwood and softwood kraft pulp. We 9 provide our products primarily in the U.S. market, 10 although we do export somewhat. 11 MR. FISHER: What is your company doing to 12 maintain its competitiveness in the global market? 13 MR. DON CAMPBELL: The pulp and paper industry 14 must compete globally and competition from offshore is 15 intense, specifically because of lower input costs such 16 as labour, taxes, raw materials and energy. 17 As a result of this, we are continuously 18 striving to create economic efficiencies by increasing 19 productivity and reducing manufacturing and freight 20 costs. 21 We have been aggressively dealing with all 22 costs over the last number of years within our control, 23 including the most significant cost associated with our 24 product. Those are electrical energy, fuels, fibre and 25 labour. 26 MR. FISHER: Mr. Campbell, would you please 27 provide the Board with a brief description of the 28 technological developments that occurred in the paper Les Services StenoTran Services Inc. 613-521-0703 2413 AMPCO PANEL 3, in ch (Fisher) 1 industry in the early 1990s. 2 MR. DON CAMPBELL: Yes. In the early 1990s 3 there was a shift in our industry, specifically in the 4 newsprint industry, from chemical sulphite pulp to a 5 thermal mechanical pulping process known as TMP and also 6 to recycle fibre, newsprint and magazines to supply the 7 high speed newsprint machines that were going in at the 8 time. 9 Much of the competition that we faced in 10 Europe and Asia converted at those times to recycle 11 fibre, primarily due to the expense and availability of 12 that fibre. In addition, during that period of time 13 there were MISA regulations implemented that required 14 secondary effluent treatment facilities for all of our 15 mills and we implemented that -- completed all that 16 prior to 1996. 17 MR. FISHER: Thank you. 18 What environmental benefits are associated 19 with the TMP process and other new technologies 20 introduced in the 1980s and 1990s? 21 MR. DON CAMPBELL: Newer technologies allowed 22 for a higher percentage of recycling in the water 23 systems, for example, resulting in significantly less 24 water and heat energy consumption per tonne of 25 production and also a friendlier effluent for our 26 treatment facilities. 27 In addition, the processes that we implemented 28 use less virgin fibre consumption per tonne as compared Les Services StenoTran Services Inc. 613-521-0703 2414 AMPCO PANEL 3, in ch (Fisher) 1 to the chemical pulps that were previously in vogue in 2 the newsprint business. 3 MR. FISHER: What are the energy requirements 4 of TMP? 5 MR. DON CAMPBELL: For electricity, for 6 example, TMP requires approximately four times the 7 electrical energy of recycle pulp and over two times the 8 electrical energy for either sulphite or other chemical 9 pulps per tonne of production. 10 MR. FISHER: How did Bowater meet this 11 increased energy demand? 12 MR. DON CAMPBELL: On the demand side, the 13 Thunder Bay mill worked closely with Ontario Hydro 14 personnel located in the mill site to develop and 15 implement energy reduction strategies, including the 16 purchase of more efficient energy efficient electrical 17 drives, motors, transformers and the like. 18 Successes in the reduction of specific energy 19 per tonne of production on all products has been 20 recognized externally by both Ontario Hydro and the 21 federal government. 22 MR. FISHER: So what kind of recognition did 23 you receive from the federal government? 24 MR. DON CAMPBELL: In 1996 the Thunder Bay 25 mill received recognition as an industrial energy 26 innovator from Natural Resources Canada for energy 27 efficiency achievements and a commitment to continuous 28 improvement in the area of energy usage. Les Services StenoTran Services Inc. 613-521-0703 2415 AMPCO PANEL 3, in ch (Fisher) 1 Over a four year period the mill made a 17 per 2 cent reduction in energy per tonne of product in the TMP 3 process and a 20 per cent reduction in our kraft pulping 4 process. 5 MR. FISHER: Did you also make changes on the 6 supply side? 7 MR. DON CAMPBELL: Yes, we did. On the supply 8 side, the company moved into a lot more risk taking in 9 the electrical supply, including the conversion of firm 10 power to discount demand service and those types of 11 services went with it, risk of interruption. 12 We also increased efficiencies of our 13 cogeneration, our internal cogeneration facilities. A 14 commitment was made in 1991 to a program called the TMP 15 Rate Incentive Program with Ontario Hydro, a program 16 that gradually ratcheted up both demand and energy rates 17 for the power required by the TMP plant. 18 MR. FISHER: How many jobs have remained at 19 the Thunder Bay operation with this plant modernization? 20 MR. DON CAMPBELL: The site continues to 21 employ 1,300 employees with over 700 dedicated to the 22 operation of the newsprint facility alone. 23 MR. FISHER: What does Bowater do when the TMP 24 incentive rates expire? 25 MR. DON CAMPBELL: The final incentive for TMP 26 disappeared on June 30, 1994. Prior to its expiry, the 27 Thunder Bay mill explored and implemented where 28 applicable various rate options, including time of use Les Services StenoTran Services Inc. 613-521-0703 2416 AMPCO PANEL 3, in ch (Fisher) 1 rates and discount demand service. 2 MR. FISHER: When did Bowater enter into the 3 surplus power contract? 4 MR. DON CAMPBELL: Surplus power was made 5 available to us on an eight month experiment in May of 6 1993. The additional load was applied to incremental 7 increases in production due to the optimization without 8 capital expenditure of the new paper and pulp assets 9 installed in 1989 to 1992. 10 MR. FISHER: And what was the term of this 11 contract? 12 MR. DON CAMPBELL: The original experiment 13 began in May of 1993 and there were annual contracts 14 renewed in 1994, 1995 and 1996. In late 1996, 15 implemented in early 1997, a five year extension was 16 initiated. 17 The original premise for the Surplus Power 18 Agreement was maintained at every stage for every annual 19 change and that was with the surplus component remaining 20 applicable to the productivity improvements and the 21 energy continued to be available by Ontario Hydro. 22 MR. FISHER: What was Bowater's expectation at 23 the end of the contract? 24 MR. DON CAMPBELL: At no time was the 25 termination of the present agreement anticipated given 26 that renewals of increasing length began in 1994. 27 Transmission and generation conditions in the northwest 28 continued to support the continued offering of the Les Services StenoTran Services Inc. 613-521-0703 2417 AMPCO PANEL 3, in ch (Fisher) 1 surplus power to the local direct customers. 2 MR. FISHER: How did the surplus power supply 3 contract assist Bowater? 4 MR. DON CAMPBELL: The surplus supply contract 5 allowed the operation to continue to take additional 6 risk in order to maintain newsprint electrical energy 7 competitiveness worldwide. It also allowed for a 8 smoother transition of rates as the TMP incentive was 9 terminated in June of 1994. 10 MR. FISHER: Sir, what is the financial impact 11 of the termination of the Surplus Power Supply Contract 12 upon market opening? 13 MR. DON CAMPBELL: The Thunder Bay operation 14 will experience an immediate increase in cash costs of 15 $3.4 million due to the elimination of surplus power. 16 MR. FISHER: And how would this rate shock 17 influence the long-term decisions for Bowater at its 18 Thunder Bay operations? 19 MR. DON CAMPBELL: The continued unknowns and 20 risks of electricity deregulation continue to influence 21 the strategic decisions in the newsprint operations at 22 our mill, especially around the renewal of energy 23 assets. 24 There have been no significant upgrades of 25 renewals in the Thunder Bay newsprint operations made 26 since 1992, although the company has invested in 27 operations outside of Ontario during this time. 28 We continue to be paralyzed by the lack of Les Services StenoTran Services Inc. 613-521-0703 2418 AMPCO PANEL 3, in ch (Fisher) 1 clarity around the future market here for electricity in 2 Ontario. 3 MR. FISHER: Compared to the rest of the 4 Canadian newsprint industry where does your mill rank? 5 MR. DON CAMPBELL: According to the Canadian 6 Pulp and Paper Association's 1998 newsprint cost study, 7 we rank well above average and, in fact, we are in the 8 top one-third on electrical energy of cost per ton of 9 product. 10 MR. FISHER: And what is the implication of 11 this? 12 MR. DON CAMPBELL: This positioning impedes 13 any decisions to increase production levels of the TMP 14 plant and any other paper machinery. 15 MR. FISHER: And what relief is Bowater's 16 taking at this time? 17 MR. DON CAMPBELL: We are supporting AMPCO's 18 proposal for a 10 year phase-in to the full network 19 charges. This fits with the present market rules and 20 the time lag aligns with the market power mitigation 21 agreement time lines for a truly competitive market. 22 MR. FISHER: Thank you, Mr. Campbell. 23 Turning to you, Mr. Aranha. Would you please 24 state your name, title and responsibilities for the 25 Board. 26 MR. ARANHA: Yes. I am Brian Aranha. I am 27 Assistant Director of Purchasing and Logistics for 28 Dofasco and my responsibilities include all of the Les Services StenoTran Services Inc. 613-521-0703 2419 AMPCO PANEL 3, in ch (Fisher) 1 purchases we make for our steel making operations in 2 Hamilton. 3 MR. FISHER: Sir, were you involved in the 4 preparation of the evidence and do you understand the 5 evidence in Appendix F submitted by AMPCO on behalf of 6 Dofasco? 7 MR. ARANHA: Yes, I was and I do. 8 MR. FISHER: To the best of your knowledge and 9 understanding do you believe the contents of the Dofasco 10 evidence to be true and accurate? 11 MR. ARANHA: Yes, I do. 12 MR. FISHER: Do you adopt the evidence in 13 Appendix F submitted by AMPCO on behalf of Dofasco? 14 MR. ARANHA: Yes, I do. 15 MR. FISHER: Mr. Aranha, would you please 16 describe the business activities of Dofasco Inc. 17 MR. ARANHA: Dofasco Inc. is primarily a 18 steelmaker. We have most of our operations here in 19 Ontario, mainly in Hamilton where we are headquartered. 20 We have some subsidiary operations in Gallatin, 21 Kentucky, as well as in Quebec, but 90 per cent of our 22 net income is attributed to our Hamilton operations, 23 where the main impact of this electricity deregulation 24 will be felt. 25 In that part of our business last year we 26 shipped 3.7 million tons of steel, for total revenues of 27 $2.7 billion. The markets we support are automotive 28 markets, consumer packaging, food cans and the like that Les Services StenoTran Services Inc. 613-521-0703 2420 AMPCO PANEL 3, in ch (Fisher) 1 you might be familiar with, tubular and distribution 2 markets and the construction market as well. 3 Our competitors are from the United States, 4 Canada and around the world, so we are in a globally 5 competitive environment. 6 MR. FISHER: Sir, would you please describe 7 for the Board the competitive environment of the 8 steelmaking business? 9 MR. ARANHA: Yes. The steelmaking business, 10 particularly flat rolled steel, is in a situation where 11 there is oversupply worldwide, but that is not the case 12 in North America. So there is a lot of import 13 penetration into North America. It is highly 14 competitive on that basis and extremely capital intense. 15 Instability in the offshore economies in the 16 latter part of 1998 led to a tremendous oversupply of 17 steel in the world and a lot of it ended up on our 18 shores here in North America and in Canada. 19 Now, the impact of that was extreme price 20 volatility on the revenue side of our business and as a 21 result of that five of the six major integrated plants 22 in the United States, for example, went from positive 23 numbers in terms of earnings before interest and taxes 24 to negative numbers in one year between 1998 and 1999. 25 So the competitive environment that we face is 26 characterized by global oversupply and also by unfair 27 trading practices by offshore traders in our market. 28 MR. FISHER: What is your company doing to Les Services StenoTran Services Inc. 613-521-0703 2421 AMPCO PANEL 3, in ch (Fisher) 1 maintain its competitiveness in the global market? 2 MR. ARANHA: Because of the trading practices 3 of offshore suppliers, the vulnerable end of our 4 business is the low value added end of the market. So 5 our strategy on the revenue side of our business is to 6 move to higher value added markets where we are 7 protected because of what we do from offshore 8 competition and oversupply. That is one area in which 9 we are concentrating our marketing strategy and 10 technology development as well. 11 The other thing we have been concentrating on 12 is eliminating a lot of inefficiencies in our business 13 that add costs that customers will not pay for. So over 14 the last 15 years we have more than doubled our labour 15 productivity. We have reduced our -- improved our 16 energy efficiency rather by more than 31 per cent and we 17 have reduced our steel deal losses by more than 35 per 18 cent, making us world class competitors in these three 19 important areas of cost. 20 All of this work in terms of our market 21 strategy and our cost reduction has been supported with 22 $2.6 billion in capital investments in our Hamilton 23 facilities over the same 15 years. That includes $200 24 million that we have spent on an electric arc furnace 25 steelmaking facility that is the subject of the Surplus 26 Power Agreement. 27 MR. FISHER: Could you please describe some of 28 the conditions that resulted in Dofasco locating the Les Services StenoTran Services Inc. 613-521-0703 2422 AMPCO PANEL 3, in ch (Fisher) 1 electric arc furnace in Hamilton? 2 MR. ARANHA: Yes. In 1993 we shut down about 3 a million tons of obsolete steelmaking capacity and at 4 that point we started to import roughly a million tons a 5 year from offshore of crude steel for rolling and 6 finishing at our operations in Hamilton. 7 At the same time, we determined that there was 8 an oversupply of scrap in Ontario and an oversupply of 9 electricity. Bringing these two factors together we 10 could then construct a facility that would utilize that 11 excess scrap, as well as the excess electrical power, 12 using electric arc furnace technology to replace those 1 13 million tons of imported steel. This gave us an 14 opportunity to invest $200 million at a good rate of 15 return given these conditions. 16 MR. FISHER: What are the benefits of this 17 electric arc furnace to Dofasco and Ontario? 18 MR. ARANHA: Well, with respect to the Ontario 19 economy we have stopped importing those million tons of 20 steel that the electric arc furnace produces. The $250 21 million that we would normally be spending offshore is 22 now spent in Ontario on scrap and on electricity and all 23 the consumables that go into producing that steel. 24 In addition, we have created 220 permanent 25 jobs in Ontario and the indirect jobs that go with it. 26 So overall it has been a great benefit to Dofasco 27 because it was a capital investment with a good rate of 28 return and in the provinces provided jobs and Les Services StenoTran Services Inc. 613-521-0703 2423 AMPCO PANEL 3, in ch (Fisher) 1 opportunities for a lot of people. 2 Also, we have provided 100 megawatts of 3 incremental load that we are consuming which was surplus 4 and in that we pay an income added to Ontario Hydro 5 which has gone towards reducing its costs in total or, 6 in fact, increasing its income that normally would not 7 have been there. 8 MR. FISHER: When did Dofasco enter into the 9 Surplus Power Agreement with the former Ontario Hydro? 10 MR. ARANHA: Our Surplus Power Agreement was 11 effective on August 17, 1996, and discussions with 12 Ontario Hydro began prior to that, probably in 1994. 13 MR. FISHER: What was the term of this 14 contract? 15 MR. ARANHA: The initial term of the contract 16 was five years, with automatic annual renewals to go on 17 beyond that point. 18 At the time of the signing the Surplus Power 19 Agreement we expected that one of two things would be 20 happening at the end of the term. We knew that 21 deregulation was coming over the horizon and that we 22 would either be in a competitive market or the Surplus 23 Power Agreement would continue until the market did 24 become competitive. 25 Those were our expectations at the time we 26 signed the contract. 27 MR. FISHER: What is the rate shock to Dofasco 28 associated with the termination of the Surplus Power Les Services StenoTran Services Inc. 613-521-0703 2424 AMPCO PANEL 3, in ch (Fisher) 1 Agreement? 2 MR. ARANHA: The total rate shock that we will 3 suffer will be in the range of 6.5 to $7 million. The 4 transmission component of this is $3.5 million a year in 5 rate shock that we would have to be taking on at the 6 opening of the market under the currently proposed 7 regulations. 8 MR. FISHER: What is the significance of this 9 rate shock to Dofasco's operation? 10 MR. ARANHA: Well, as I have described before, 11 we are in an extremely competitive market and over the 12 business cycle most steel companies do not return their 13 cost of capital. In a year when there is record demand 14 for our products in North America we are doing well, but 15 over the business cycle we do not expect to return our 16 cost of capital. This additional cost from the surplus 17 power is simply going to be a cost that adds no value to 18 our customers. It is something that they will not pay 19 for and it makes it more difficult for a great Canadian 20 company to return its cost of capital and threatens our 21 long-term viability. 22 MR. FISHER: Thank you, sir. 23 I would now like to turn to Mr. Axford. 24 Would you please state your name and 25 professional qualifications for the Board. 26 MR. AXFORD: My name is David Axford. I 27 graduated from the University of Waterloo with a 28 Bachelor of Applied Science and Chemical Engineering. I Les Services StenoTran Services Inc. 613-521-0703 2425 AMPCO PANEL 3, in ch (Fisher) 1 am a professional engineer, registered in the province 2 of Alberta. 3 MR. FISHER: Sir, what is your title at CXY 4 Chemicals and what are your responsibilities? 5 MR. AXFORD: My title is plant manager. My 6 responsibilities include all aspects of operating a 7 50,000 tonne per year sodium chlorate plant. 8 MR. FISHER: Mr. Axford, were you involved in 9 the preparation of the evidence and do you understand 10 the evidence in Appendix G, submitted by AMPCO on behalf 11 of CXY Chemicals? 12 MR. AXFORD: Yes, I do. 13 MR. FISHER: To the best of your knowledge and 14 understanding, do you believe the contents of the CXY 15 Chemicals' evidence to be true and accurate? 16 MR. AXFORD: Yes. 17 MR. FISHER: Mr. Axford, do you adopt the 18 evidence in Appendix G submitted on behalf of AMPCO of 19 CXY Chemicals? 20 MR. AXFORD: Yes, I do. 21 MR. FISHER: Sir, would you please describe 22 the business activities of CXY Chemicals. 23 MR. AXFORD: CXY Chemicals is a company that 24 owns and operates a total of five sodium chlorate plants 25 in Canada. In addition to that, we also have a sodium 26 chlorate plant in the United States and one in Brazil. 27 In addition to this, we operate two chloralkalide 28 plants, one located in Canada and one in Brazil. Les Services StenoTran Services Inc. 613-521-0703 2426 AMPCO PANEL 3, in ch (Fisher) 1 If you take a look at the North American 2 market specifically, we are the third largest producer 3 of sodium chlorate in North America. 4 MR. FISHER: Thank you. 5 What is your company doing to maintain its 6 competitiveness in the North American market? 7 MR. AXFORD: CXY Chemicals spends an awful lot 8 of time in the area of electricity. The reason for this 9 is that if you take a look at the production of sodium 10 chlorate, and specifically to Amherstburg, 75 per cent 11 of the variable cost of producing a tonne of sodium 12 chlorate is the cost of electricity. Therefore, it is 13 obviously the key raw material in our product. 14 Therefore, we continually try to manage and 15 seek out new opportunities in the area of electricity in 16 the electricity markets in North America. 17 The view that we take is not unique. I know 18 for sure that our competitors have the exact same 19 perspective. Their cost of electricity is again a 20 significant portion of their cost of production as well. 21 What this has led to is the strategic location 22 of plants throughout North America where the cost of 23 electricity is found to be competitive. 24 Within CXY Chemicals specifically, the drive 25 to try to find competitive electricity costs has 26 resulted in significant expansions of our Brandon, 27 Manitoba plant; but in addition to that, it also 28 resulted in the construction and eventual expansion of Les Services StenoTran Services Inc. 613-521-0703 2427 AMPCO PANEL 3, in ch (Fisher) 1 our plant in Bruderheim, Alberta. 2 In general, as you take a look at the overall 3 industry in recent years, the general expansion has been 4 in the southeast United States. Again, the reason for 5 this is twofold, the first being the location being 6 close to the marketplace. Our market is predominantly 7 the pulp and paper market. 8 The second reason is the cost of electricity, 9 and of course the cost of electricity takes the primary 10 role there. 11 MR. FISHER: What is your company doing 12 specific to your plan in Amherstburg to maintain its 13 competitiveness in the North American market? 14 MR. AXFORD: Again, specifically to our plant 15 in Amherstburg, Ontario, there are three significant 16 factors that must be met. I have already mentioned the 17 aspect of electricity which again, by far, takes up the 18 largest part. But in addition to this, there are 19 transportation costs, salt costs and high operating rate 20 and consistent operation. 21 Specific to the Amherstburg plant, we have 22 been very successful in negotiating competitive 23 transportation rates. In fact, we have been able to 24 achieve transportation rates that allow us to compete 25 head to head with some of our southeastern competitors. 26 High operating rates and product quality are definitely 27 a function of electricity prices. Again, the more we 28 interrupt our production, the more quality issues we run Les Services StenoTran Services Inc. 613-521-0703 2428 AMPCO PANEL 3, in ch (Fisher) 1 into. But definitely the cost of power is the primary 2 factor there. 3 Again, the primary aspect relating to the 4 survival of our plant is the cost of electricity. CXY 5 Chemicals was able to obtain competitively priced 6 electricity in Ontario with the introduction of surplus 7 power in 1993. 8 MR. FISHER: So is the Amherstburg plant 9 profitable? 10 MR. AXFORD: I would like to say yes. 11 However, if you take the last ten years, 1990 through 12 1999, we have only been profitable for four of those ten 13 years. You might ask why we would continue to operate a 14 plant that isn't profitable. Well, the loss is 15 marginal, but there are other strategic reasons for 16 wanting to maintain a market presence in this area. 17 However, again it is totally related to the 18 degree of profit or loss. Too much loss and definitely 19 any strategic advantages that we see here would 20 definitely disappear. 21 MR. FISHER: Would you please explain for the 22 Board why sodium chlorate production is energy 23 intensive. 24 MR. AXFORD: Well, the production of sodium 25 chlorate takes anywhere from 5,000 to 6,000 kilowatt 26 hours per tonne to produce. It is an electrochemical 27 process that works on the dissociation of sodium 28 chloride into its individual constituents and then the Les Services StenoTran Services Inc. 613-521-0703 2429 AMPCO PANEL 3, in ch (Fisher) 1 chemical recombination of that into our product, which 2 is sodium chlorate. 3 MR. FISHER: How is CXY competitively situated 4 with respect to energy costs? 5 MR. AXFORD: Well, if I were to take the 6 overall cost structure within our plant, one of the 7 things that has been noted by our company specifically 8 about our plant is that we have done a remarkable job in 9 managing our costs in all areas. The only area where 10 there has been any difficulty is in the area of 11 electricity costs. 12 MR. FISHER: Where does that put your ranking? 13 MR. AXFORD: Again, if you add in the effect 14 of electricity, then it puts us in around the third 15 highest cost plant in North America out of a total of 24 16 plants. 17 MR. FISHER: What benefits does CXY offer to 18 the provincial electricity system? 19 MR. AXFORD: Because of the interesting nature 20 of our process, we are able to offer things to the 21 marketplace and we have done this in other places, in 22 other jurisdictions within North America. And our 23 competitors have done this too. 24 Basically, some of the issues are that we are 25 able to change our load to meet the systems 26 requirements. If there is a high demand on the system, 27 we can drop our load to meet that. We have the ability 28 to be instantaneously interrupted. Les Services StenoTran Services Inc. 613-521-0703 2430 AMPCO PANEL 3, in ch (Fisher) 1 There is the ability for us to be 2 electronically connected into the system such that we 3 can be interrupted in as few as five cycles or 4 one-twelfth of a second. We have a power factor of 5 98 per cent. If economical electricity is available, we 6 have the ability to have over a 98 per cent load factor. 7 Several of our plants in our organization do 8 run at over 98 per cent load factor. Quite a few 9 electricity suppliers have been able to describe us as 10 being the ideal customer because we are so flexible and 11 can meet so many of their needs which most customers 12 cannot do. 13 MR. FISHER: What is the relationship between 14 power prices and production? 15 MR. AXFORD: Again, in general, in general, 16 there is an inverse relationship between power costs and 17 production levels. If you take a look at our evidence 18 that we have submitted, which is Exhibit H, Tab 2, 19 Schedule 1, Appendix G, page 4, it shows a chart of 20 electricity costs and production rate. If you look at 21 it there is a general relationship between the two. 22 That is over a period from 1993 on. 23 MR. FISHER: What happened to the Amherstburg 24 facility in the early nineties? 25 MR. AXFORD: It was shut down or at least half 26 of it was shut down during the early 1990s due to the 27 rapid increase of electricity in the Ontario market. 28 The future of the plant was under serious review. Les Services StenoTran Services Inc. 613-521-0703 2431 AMPCO PANEL 3, in ch (Fisher) 1 MR. FISHER: When did CXY enter into a surplus 2 power agreement and what was the term of the agreement? 3 MR. AXFORD: Okay. We entered into our first 4 surplus power agreement in 1993, and then in 1996 we 5 signed a five-year agreement with Ontario Hydro. 6 MR. FISHER: What did CXY expect to be the 7 circumstances regarding electricity supply at the end of 8 the agreement? 9 MR. AXFORD: Again, we felt that there were 10 several different outcomes that could naturally occur. 11 One was that we would see a natural ending to the 12 surplus power rate sometime in the future. However, 13 according to all indications, including information 14 given to us by Ontario Hydro, we saw the availability of 15 surplus going well into the upper 2000s, not 2999 but 16 2006, 2007, but we also knew that this could end earlier 17 due to deregulation within the marketplace. 18 We fully expected, as we had noted in other 19 jurisdictions, that if deregulation occurred we would 20 have plenty of opportunities available to us to remain 21 quite competitive within this jurisdiction. However, as 22 we stand here today and look out into the future, come 23 November 2000 we don't see the availability of a 24 competitive energy market. There is ostensively only 25 going to be one supplier which is quite contrary to how 26 we looked at things back a few years ago. 27 MR. FISHER: What is the impact of the 28 elimination of the surplus power rate on CXY in terms of Les Services StenoTran Services Inc. 613-521-0703 2432 AMPCO PANEL 3, in ch (Fisher) 1 dollars? 2 MR. AXFORD: There are a lot of different 3 factors that we have all been hearing about that are 4 going to go into the overall determination of the total 5 electricity bill that I might see in the future. 6 However, since this is a hearing about transmission 7 rates only, I'm only going to talk about the 8 transmission aspect of it. I think that it is 9 significant enough. But if we take a look at strictly 10 the transmission costs as proposed by OHNC, then we 11 would be looking at an electricity cost, a total 12 electricity cost increase of approximately 20 per cent. 13 In our case, this would mean almost $2 million. 14 MR. FISHER: How does that rate shock impact 15 the variable costs? 16 MR. AXFORD: Again, if we go back to the 17 original equation that 75 per cent of my variable cost 18 is electricity, that would suggest that my variable 19 costs would increase by 15 per cent, 75 per cent of 20 20 per cent. 21 MR. FISHER: What other aspects of the OHNC 22 application concerns CXY? 23 MR. AXFORD: It is not just the end of the 24 program that concerns us, it is how quickly the end has 25 come. We felt that if OHNC had been proposing a phasing 26 out of surplus power that would take into consideration 27 these rate shocks that we would see, then that would be 28 a little more satisfactory than what they actually did Les Services StenoTran Services Inc. 613-521-0703 2433 AMPCO PANEL 3, in ch (Fisher) 1 propose. 2 Another issue that concerns us is a proposal 3 by them for the non-coincident peak pricing for 4 transmission. Again, as I mentioned earlier in my 5 testimony, one of the values that we bring and one of 6 the values that we use is our ability to shed load 7 during high energy cost times. Unfortunately, those 8 energy cost times occur during the system peaks and 9 therefore we would tend to shed that. However, we would 10 not see any value coming out of that. We would be hit 11 with a demand charge for that transmission as if we had 12 been operating. 13 We were also disappointed that OHNC didn't 14 propose any interruptible transmission rates as has been 15 done in other jurisdictions. I could point out British 16 Columbia, Alberta, Quebec, that have integrated this 17 into their real-time pricing and surplus power energy 18 tariffs. 19 MR. FISHER: What do you believe will happen 20 to the Amherstburg plant if the non-coincident peak 21 charge determinant is imposed along with the termination 22 of the surplus power? 23 MR. AXFORD: If we take a look at the total 24 impact of all the rates that have been proposed, we see 25 an almost doubling of our electricity costs. I don't 26 think it takes too much imagination to know what would 27 happen then. Definitely immediately we would suspend 28 all capital expenditures and then we would, as soon as Les Services StenoTran Services Inc. 613-521-0703 2434 AMPCO PANEL 3, in ch (Fisher) 1 possible -- again, we have to make sure that we take 2 care of our customer needs, but we would seek out 3 alternate sources of supply in order to meet those 4 customer needs. As soon as we did that, then we would 5 close the plant. We would also most likely move that 6 plant to another area of the country where energy prices 7 were competitive. 8 MR. FISHER: Do you believe that high-cost 9 plants under deregulation should be closed in favour of 10 lower cost more competitive plants? 11 MR. AXFORD: I agree that high-cost plants 12 should give way to lower cost producers. However, I 13 have to say that I would be deeply disturbed if our 14 chemical plant, with its jobs and families, were forced 15 out of business by an emerging electricity market that 16 was simply unfair to some customers over the short term. 17 Over the long term we strongly believe that as 18 competition develops and when competition is truly in 19 the Ontario marketplace we will be able to successfully 20 compete in the sodium chlorate industry. 21 MR. FISHER: Is your industry any different 22 from others? 23 MR. AXFORD: No, it's not. 24 MR. FISHER: Thank you, gentlemen. Those are 25 my questions. 26 Dr. Higgin, the panel is now available for 27 cross-examination. 28 THE PRESIDING MEMBER: Thank you, Mr. Fisher. Les Services StenoTran Services Inc. 613-521-0703 2435 AMPCO PANEL 3, in ch (Fisher) 1 I assume Mr. Brown is not going to ask any 2 questions. 3 MR. BROWN: I have no questions, Dr. Higgin. 4 THE PRESIDING MEMBER: We will go to 5 Mr. Stephenson, please. 6 MR. STEPHENSON: Thank you, Dr. Higgin. Just 7 a few questions. 8 CROSS-EXAMINATION 9 MR. STEPHENSON: My name is Richard 10 Stephenson. I am counsel for the Power Workers. 11 These are questions, generally speaking, for 12 the panel. 13 Just to be clear, the surplus power rate that 14 each of you were receiving in the past, can I fairly 15 characterize it as a bundled service, is that fair, 16 energy, transmission and so forth? 17 MR. ARANHA: Yes, it was bundled excluding 18 transmission. 19 MR. STEPHENSON: In the sense that you didn't 20 pay essentially any contribution toward the fixed costs 21 of the transmission system. Is that fair? 22 MR. ARANHA: Our assumption at the time of 23 signing the agreement was that there was transmission 24 capacity that was already paid for, there was generation 25 power that was already paid for, and that we were 26 utilizing surplus generation and transmission assets 27 that would have otherwise been sitting idle in Ontario. 28 MR. STEPHENSON: Fair enough. Les Services StenoTran Services Inc. 613-521-0703 2436 AMPCO PANEL 3, cr-ex (Stephenson) 1 I take it that may have been implicit in the 2 pricing that you received for the service, but, 3 nevertheless, the service itself was a bundled service: 4 you got all of the energy, you got the transmission 5 service, you got any ancillary services that came with 6 that as part of a single price. 7 MR. ARANHA: No, that is not our understanding 8 of the situation. Because when we talked about future 9 pricing for surplus power, it included only changes in 10 the variable component of generation, of the energy 11 component itself. 12 MR. STEPHENSON: That may be because the 13 vendor attributed no value to transmission for the 14 purposes of that in the sense that you were getting 15 transmission for free, but nevertheless you were getting 16 transmission services as a part of the single price you 17 were paying. 18 MR. ARANHA: I cannot agree with the 19 assumption that we were receiving anything for free. We 20 were paying an income adder to Ontario Hydro and that 21 was going into increasing their income. 22 MR. STEPHENSON: Were you paying one price or 23 more than one price, sir, for each unit of consumption 24 that you received? Were you paying one price or more 25 than one price? 26 MR. ARANHA: We were paying one price. 27 MR. STEPHENSON: Okay. Did you reuse the 28 transmission system, sir? Les Services StenoTran Services Inc. 613-521-0703 2437 AMPCO PANEL 3, cr-ex (Stephenson) 1 MR. ARANHA: Yes. 2 MR. STEPHENSON: Okay. Can we agree that in 3 the one price you were paying you were paying -- it 4 included your use of the transmission system? 5 --- Pause 6 MR. ARANHA: What was included in our rate was 7 5 per cent for transmission losses and, as I said 8 earlier, any discussions we had about changes in energy 9 pricing that we would pay for included only changes in 10 the cost of energy. The cost of the transmission system 11 was being borne by the citizens of Ontario whether or 12 not we had a surplus power agreement. 13 MR. STEPHENSON: Fair enough. I don't think I 14 can get any further on that. 15 Let me ask you this question: It was an 16 interruptible service. Is that fair enough? It was 17 interruptible from Ontario Hydro's perspective? 18 MR. ARANHA: Yes, it was. 19 MR. STEPHENSON: Okay. 20 Now, in the new market, post market opening, 21 obviously you are going to be receiving an unbundled 22 service. Correct? In the sense that you will pay for 23 energy and transmission separately? 24 MR. ARANHA: As the regulations are 25 proposed, yes. 26 MR. STEPHENSON: Okay. Moreover, as the 27 regulations are proposed presently, you will be 28 receiving a firm service. You will not be interruptible Les Services StenoTran Services Inc. 613-521-0703 2438 AMPCO PANEL 3, cr-ex (Stephenson) 1 at the behest of either -- well, certainly at the behest 2 of OHNC? 3 MR. ARANHA: I think for all major consumers 4 of electricity in Ontario, interruptibility will be on 5 an economic basis from now on, as it really has been for 6 us through the term of our surplus power agreement. In 7 fact, we elect to self-interrupt when the price of power 8 under the current arrangement has been too high. 9 MR. STEPHENSON: I understand the nature of 10 that, but that is a choice that you as the customer 11 make. Correct? You are seeing prices out in the 12 market, you decide whether or not you are going to take 13 power. That is your choice. Correct? 14 MR. ARANHA: Yes. 15 MR. STEPHENSON: Okay. And that is not a 16 choice of OHNC? 17 MR. ARANHA: No, it is not. 18 MR. STEPHENSON: As I understand your 19 proposal, you are seeking transmission -- I'm sorry, a 20 transition, pardon me, that in effect would continue for 21 a period of time this rate, which was a bundled 22 interruptible rate, notwithstanding the fact that you 23 are now receiving an unbundled firm service. Isn't that 24 right? 25 --- Pause 26 MR. ARANHA: Could you repeat the question, 27 please? 28 MR. STEPHENSON: Yes. The transition you are Les Services StenoTran Services Inc. 613-521-0703 2439 AMPCO PANEL 3, cr-ex (Stephenson) 1 seeking is the continuation, at least for the purposes 2 of transmission, of the rate for a period of time? We 3 all agree on that point. Correct? 4 MR. ARANHA: Yes. 5 MR. STEPHENSON: Okay. And I'm suggesting to 6 you that, in effect, what this transition amounts to is 7 the continuation, in effect their treatment, of a 8 bundled interruptible service under your old rate, 9 notwithstanding the fact you will now be receiving an 10 unbundled firm service? 11 MR. ARANHA: Well, what we are seeking is a 12 transition to a competitive market that does not exist. 13 What we are seeking is relief from the rate shock that 14 we will experience because the market is not 15 competitive. We envision the demise of the surplus 16 power agreement at the point where we would enter a 17 competitive market and we would recover those costs 18 through competition. 19 We are unable to do that now and so we are 20 asking for the transition that is coincident with the 21 time period for the Market Power Mitigation Agreement. 22 That is when it is envisioned that full competition will 23 be in effect, and our position also is that if full 24 competition comes in before 10 years we will be 25 agreeable to changing that transition period. 26 MR. STEPHENSON: I wonder if you could answer 27 my question. 28 My question is: Aren't you seeking Les Services StenoTran Services Inc. 613-521-0703 2440 AMPCO PANEL 3, cr-ex (Stephenson) 1 essentially the continuation of a bundled interruptible 2 price for unbundled firm service? 3 MR. ARANHA: No, I believe I would repeat the 4 same answer that I gave you before. 5 MR. STEPHENSON: All right. 6 Let me ask you about rate shock. 7 Would you agree with me that an appropriate 8 definition of rate shock is somebody who receives a 9 price increase which is both significant and 10 unanticipated? 11 MR. ARANHA: For the purpose of a discussion I 12 suppose we could assume that definition. 13 MR. STEPHENSON: Now, for the purposes of this 14 I am prepared to assume that the rate increase that you 15 face is significant, and so I'm not going to deal with 16 that issue. 17 But what I do have some difficulty 18 understanding is how this rate increase is 19 unanticipated. 20 I think you have all indicated to us that your 21 contracts were for five years and that each of those -- 22 and at the end of those contracts there were renewal 23 terms. 24 First off, maybe I can just confirm: I take 25 it that the renewal term required both parties to agree 26 that the contract would be renewed. Is that correct? 27 MR. ARANHA: Our contract was written in a way 28 that it was if we didn't do anything it just simply Les Services StenoTran Services Inc. 613-521-0703 2441 AMPCO PANEL 3, cr-ex (Stephenson) 1 renewed itself on an annual basis. It didn't require 2 conscious agreement year-after-year. 3 MR. STEPHENSON: Fair enough. But let's talk 4 in terms of Ontario Hydro because they were the 5 signatory. 6 If Ontario Hydro, at the conclusion of the 7 five year period, indicated to you that they did not 8 wish to renew the contract, the contract came to an end. 9 Is that correct? 10 MR. ARANHA: That's correct. 11 MR. STEPHENSON: They did not have to provide 12 you with a particular reason for that. It was their 13 choice. Correct? 14 MR. ARANHA: Yes. 15 MR. STEPHENSON: Okay. So, in essence, it 16 required their either active or passive agreement to 17 continue the contract. Correct? 18 MR. ARANHA: Correct. 19 MR. AXFORD: To continue the agreement? 20 MR. STEPHENSON: Yes. 21 MR. AXFORD: It just required passive 22 agreement. 23 MR. STEPHENSON: One of the two, active or 24 passive. It required one of the two? 25 MR. AXFORD: It required active to end the 26 contract. 27 MR. STEPHENSON: It required either active or 28 passive. Fair enough. It was one of the two and you Les Services StenoTran Services Inc. 613-521-0703 2442 AMPCO PANEL 3, cr-ex (Stephenson) 1 are saying it is one of the two; you say it's passive. 2 Fair enough. But, in any event, it required some form 3 of agreement by them to continue. 4 Now, would you agree with me that as prudent 5 business persons, bearing in mind you knew that they had 6 the unilateral ability at the end of the five-year 7 contract to bring it to an end, that you should -- you 8 could not make any assumption with respect to the 9 ongoing existence of that contract beyond the five-year 10 term? 11 MR. AXFORD: I believe that you could make 12 some assumptions as to what was going to go on after the 13 term of the original contract. 14 Again, I think it has been mentioned that one 15 of the things that we noticed -- and again, when you 16 forecast into the future you try to use all the 17 information available to you, not just one piece of 18 information, and you can't take the contract at absolute 19 face value that it will end in five years, period. 20 There are other indicators that give you an impression 21 as to whether things should continue on or whether they 22 will end. 23 One of the things that gave us an impression 24 that things would continue was that Ontario Hydro kept 25 on giving everybody the impression that surplus capacity 26 would be available well into the 2000 range, and I think 27 in HR-23 they noted that this would go on until 28 approximately 2010. Les Services StenoTran Services Inc. 613-521-0703 2443 AMPCO PANEL 3, cr-ex (Stephenson) 1 We entered our contract in 1996 which was 2 after HR-23 and we had good cause to think that there 3 would be a longer period of time than the original five 4 years. 5 MR. STEPHENSON: Okay. Now, insofar as you 6 made any assumption regarding the ongoing existence of 7 some form of surplus power agreement beyond the five 8 years, is it fair to say as prudent business people that 9 you understood that that was a business risk to you, 10 that you had accepted, based upon the information you 11 had, as risk-taking business people, that you were 12 prepared to accept that risk for certain business 13 planning purposes, but you understood nevertheless that 14 that was a business risk you were assuming. Is that 15 fair? 16 MR. DON CAMPBELL: This was not an 17 unreasonable risk to take from a business point of view. 18 First of all, if you look back at the history of what we 19 experienced with the surplus power agreements, they 20 started in 1993. They were passively extended year 21 after year after year to the point in 1997 where it was 22 extended for five full years in light of the predictions 23 by Ontario Hydro for energy availability in the Province 24 of Ontario. 25 In addition, we did not really know until 26 October of 1999, four months ago, what the OHNC position 27 would be on this transmission. I believe it was 28 reasonable to assume, and we were managing our business Les Services StenoTran Services Inc. 613-521-0703 2444 AMPCO PANEL 3, cr-ex (Stephenson) 1 to assume, that it would continue. 2 MR. STEPHENSON: Okay. Now, you would agree 3 with me that sometimes even prudent business risks 4 sometimes turn our to be wrong. Is that fair? 5 MR. ARANHA: By definition, that is what a 6 risk is. 7 MR. STEPHENSON: And that at the end of the 8 day, if you don't get your way in this case, what's 9 turned out here. You took a prudent business risk and 10 it turned out to be wrong. Fair? 11 MR. ARANHA: I can't talk to this as a prudent 12 business risk that turned out to be wrong because we are 13 in the -- 14 MR. STEPHENSON: It's not a prudent business 15 risk? 16 MR. ARANHA: Because we are in the process of 17 trying to effect the outcome of this process. 18 MR. STEPHENSON: I understand that. If you 19 turn out to be unsuccessful in this case, what we have 20 got here is a prudent business risk that you willingly 21 assumed and you turned out to be wrong. Fair? 22 MR. ARANHA: Well, I cannot agree with your 23 characterization of the nature of the risk and how we 24 took it. 25 MR. STEPHENSON: You are disagreeing with me 26 about the nature of the risk is that you don't agree 27 with me it was prudent? 28 MR. ARANHA: We willingly took a risk that was Les Services StenoTran Services Inc. 613-521-0703 2445 AMPCO PANEL 3, cr-ex (Stephenson) 1 estimated to be on the basis of what we knew from 2 Ontario Power at the time, an ongoing surplus of power. 3 They projected for us what the rates would be. They 4 have submitted documents in evidence to the OEB about 5 what would happen in 2010 when new power generation will 6 be required. We just referenced that evidence. This is 7 the basis upon which we proceeded. 8 MR. STEPHENSON: Let me move on. I understood 9 all of you, I think, to say that at the end of the day, 10 you readily acknowledge there was no guarantee this was 11 going to carry on, but that you had understood that if 12 it didn't carry on, in essence it would be replaced with 13 a reasonably vibrant competitive market for electricity. 14 Did I capture that more or less? 15 MR. AXFORD: I think I would agree with that, 16 that we felt that if the surplus power rate was not 17 extended that that would be because there was a 18 deregulated competitive marketplace where we would be 19 able to see those values. 20 MR. STEPHENSON: Would you agree with me that 21 insofar as we do not wind up with an adequately 22 competitive electricity generation marketplace at market 23 opening that that has arisen, at least in the short 24 term, by virtue of essentially government policy 25 decisions in terms of how we have has implemented the 26 restructuring, in particular by maintaining OPG as a 27 single generating company and perhaps not having 28 decontrol proceed as aggressively as you would have Les Services StenoTran Services Inc. 613-521-0703 2446 AMPCO PANEL 3, cr-ex (Stephenson) 1 hoped. 2 --- Pause 3 MR. ARANHA: I think we need that question 4 repeated once, please. 5 THE PRESIDING MEMBER: Could you just repeat 6 it? 7 MR. STEPHENSON: I will try. How is that. 8 Insofar as we -- you are telling us that you 9 don't consider the generation marketplace at market 10 opening to be as competitive as you would want. Fair? 11 MR. ARANHA: Yes. 12 MR. STEPHENSON: Okay. I'm asking you to 13 agree with me that that has arisen at least in very, 14 very large part by virtue of government policy decisions 15 and in particular two government policy decisions that I 16 think you will recognize. Number one, the maintenance 17 of OPG as essentially the single holder of Ontario 18 Hydro's generating assets and, number two, setting a 19 decontrol schedule that is not as aggressive as perhaps 20 you would like. That's the reason you don't have a 21 sufficiently competitive generation marketplace meeting 22 your standards. 23 MR. AXFORD: I wish these microphones were a 24 little longer. Actually, I don't know where the system 25 failed. It has obviously failed somewhere. However, as 26 I remember, there were certain potential things that 27 were created in order to try to alleviate any negative 28 situation that happened due to whatever it was that Les Services StenoTran Services Inc. 613-521-0703 2447 AMPCO PANEL 3, cr-ex (Stephenson) 1 caused things to happen the way they did. 2 One of them was that OHNC was supposed to try 3 design their rates to prevent any significant rate 4 impact on any customer. Obviously in our case I think 5 it's pretty obvious that they didn't do a very good job 6 of that. 7 MR. STEPHENSON: Sorry. Let me just stop you 8 there. 9 MR. AXFORD: Number two -- 10 MR. STEPHENSON: Sir, can I just deal with 11 these one at a time. I am happy to have you give me the 12 full answer, but I would just like to deal with them one 13 at a time. 14 What are you referring to, sir? Is this some 15 piece of paper that you can direct us to indicating a 16 government dictate on an Ontario Hydro Services Company 17 in the manner you refer to? 18 MR. AXFORD: In their rate proposal, within 19 their rate proposal they had certain objectives that 20 they were going to attain and one of them was to 21 minimize any impact on any particular customer. 22 MR. STEPHENSON: Okay. So that's an OHSC 23 stated objective. 24 MR. AXFORD: That's right. 25 MR. STEPHENSON: Okay. Thank you. 26 MR. STEPHENSON: And then the other part was 27 that it was certainly hoped by us that the OEB has the 28 ability to again -- to assist in the development of the Les Services StenoTran Services Inc. 613-521-0703 2448 AMPCO PANEL 3, cr-ex (Stephenson) 1 rate in order to try to encourage a competitive 2 marketplace. 3 MR. STEPHENSON: I'm going to suggest to you, 4 sir, that at the end of the day your real complaint here 5 is with the government for not breaking out OPG into 6 smaller, more competitive chunks. At the end of the day 7 that's really where your beef is. Isn't that right, 8 sir? You want a more competitive marketplace and you 9 think that the government has failed you by choosing to 10 restructure in this particular fashion as opposed to 11 some other fashion. Isn't that right? 12 MR. ARANHA: No. That's not right. What we 13 are here to do is explain the impact of the regulations 14 that are being proposed to this Board on our companies 15 so that you can take them into account while making your 16 ruling. 17 Mr. STEPHENSON: All right. I hear you there, 18 sir, but you have said to us that the reason you need 19 the regulatory relief is the absence of a competitive 20 market in generation. Correct? That's why you have 21 said that? 22 MR. ARANHA: Yes. What we have said is we 23 would like the ratcheting down of the Surplus Power 24 Agreements to be coincident with what is the anticipated 25 onset of a competitive market. 26 MR. STEPHENSON: And if we had a genuinely 27 competitive marketplace as of market opening you 28 wouldn't need this at all. Correct? Les Services StenoTran Services Inc. 613-521-0703 2449 AMPCO PANEL 3, cr-ex (Stephenson) 1 MR. ARANHA: That's correct. 2 MR. STEPHENSON: And the party that was 3 responsible for determining the degree of competition in 4 the marketplace, I submit to you at market opening, was 5 the government. Isn't that right? 6 MR. ARANHA: I could not postulate on the 7 responsibility of who is responsible for that. 8 MR. STEPHENSON: Well, they determined what 9 OPG was, what assets they would have. The government 10 decided that. Wasn't that right, sir? 11 MR. ARANHA: Well, that is your evidence. I 12 guess that's okay. I am here to talk about the effect 13 of surplus power on us, not to figure out how we have 14 ended up in a situation where the market is not 15 competitive. 16 MR. STEPHENSON: What I am going to suggest to 17 you, sir, is that insofar -- and I am going to ask you 18 that now, to assume that I am correct that the 19 government is responsible for the market structure we 20 have -- on the basis of that assumption isn't the 21 appropriate thing for you to do is to go to the person 22 that's responsible for the problem, from your 23 perspective which is the government, and ask them for 24 some specific relief insofar as you require specific 25 relief, rather than play around with transmission rates 26 in order to give you your transitional assistance? 27 MR. DON CAMPBELL: I can't say that I will not 28 take that assumption, so I cannot take that position. Les Services StenoTran Services Inc. 613-521-0703 2450 AMPCO PANEL 3, cr-ex (Stephenson) 1 MR. STEPHENSON: It's not something that you 2 have been asked to accept or not. I am telling you to 3 accept it, sir. And on the basis of that assumption 4 isn't that the appropriate place to seek relief? 5 MR. DON CAMPBELL: I cannot agree. 6 MR. ARANHA: On the basis of that assumption 7 it also says that the OEB has no role with respect to 8 listening to the evidence we have on this subject. 9 The OEB has made a decision to hear our 10 evidence because it is relevant to the subject at hand. 11 That is the assumption that goes along with the 12 assumption you have given us. 13 MR. STEPHENSON: What I would suggest to you, 14 sir, is that insofar as somebody else is responsible for 15 your problem, regardless of whether the OEB may have a 16 role, I would suggest to you that they should not choose 17 to exercise it because you should be going somewhere 18 else to seek the relief. Isn't that the appropriate way 19 for this Board to proceed? 20 MR. ARANHA: That is not a question I can 21 answer. 22 MR. STEPHENSON: Those are my questions. 23 Thank you very much. 24 THE PRESIDING MEMBER: Thank you, 25 Mr. Stephenson. 26 Mr. Campbell, do you have some questions? 27 MR. BRUCE CAMPBELL: Just a very few, 28 Mr. Chairman. Les Services StenoTran Services Inc. 613-521-0703 2451 AMPCO PANEL 3, cr-ex (Campbell) 1 CROSS-EXAMINATION 2 MR. BRUCE CAMPBELL: I think, Mr. Aranha, it 3 is probably easier if I just direct them to you than to 4 the panel generally. You are saying that for Dofasco 5 losing the surplus will have an impact of about 3.5 6 million? 7 MR. ARANHA: Yes. 8 MR. BRUCE CAMPBELL: And you understand that 9 the revenue requirement that the OHNC is collecting 10 through this cost allocation and rate design that we are 11 discussing is -- 12 --- Laughter 13 THE PRESIDING MEMBER: That is the best 14 Freudian slip of the whole hearing, Mr. Campbell. 15 MR. BRUCE CAMPBELL: That that revenue 16 requirement is fixed, it was fixed in a previous 17 hearing? 18 MR. ARANHA: That is my understanding. 19 MR. BRUCE CAMPBELL: So that to the extent 20 that $3.5 million is allowed, if you will, to you for 21 surplus rate relief, it will be collected from others. 22 This is a fixed pie. 23 MR. ARANHA: The assumption that it will be 24 collected from others, the assumption is that they are 25 looking for relief. Our simple situation is that our 26 costs are about to increase by $3.5 million given what 27 is on the table. 28 MR. BRUCE CAMPBELL: One of the topics we Les Services StenoTran Services Inc. 613-521-0703 2452 AMPCO PANEL 3, cr-ex (Campbell) 1 spent a lot of time on, and this is customer impact or 2 impact on all customers, different parts of the 3 customers and you understand that your $3.5 million 4 would have to be collected somewhere else? 5 MR. ARANHA: Our $3.5 million would continue 6 to be collected from the places it is being collected 7 from now and there will be no change. 8 MR. BRUCE CAMPBELL: In the total amount 9 collected, but its distribution amongst customers would 10 be different? 11 MR. ARANHA: I have to repeat my answer. What 12 we are looking at is an increase of $3.5 million in our 13 costs given the way it stands today relative to what is 14 being proposed. 15 What is being proposed is not the basis from 16 which we are starting. Our cost structure is what it is 17 today. 18 MR. BRUCE CAMPBELL: I understand that, but 19 assuming you continue with your production and under 20 OHNC's proposal there would have been an extra $3.5 21 million collected from you, to the extent that it's not 22 collected it will have to be collected from other 23 customers. You do understand that? 24 MR. DON CAMPBELL: On the basis of the present 25 structure it is being collected from the other customers 26 now. 27 MR. BRUCE CAMPBELL: I am talking about the 28 proposal that you are here speaking to. Your complaint Les Services StenoTran Services Inc. 613-521-0703 2453 AMPCO PANEL 3, cr-ex (Campbell) 1 is that the existing structure is different from the 2 future structure. I am saying, okay, I understand that. 3 I am not arguing with that. I am saying under the 4 future structure, the one that OHNC is here talking 5 about, that $3.5 million, if you are granted the relief 6 that you are asking for, will be collected from other 7 customers? 8 MR. ARANHA: We are not seeking relief -- we 9 are seeking relief relative to something that is going 10 to be imposed on us. So the assumption in your question 11 is that we are seeking relief from something. 12 Yes, we are seeking relief from something that 13 is to be imposed on us, that is correct. 14 MR. BRUCE CAMPBELL: And to the extent that 15 the change -- I will step away from the word "relief" if 16 you want. I will step away from this word "relief" if 17 it is causing you concern. 18 To the extent that there is a change in the 19 distribution of OHNC's revenue requirement because the 20 proposal is changed so that that $3.5 million isn't 21 collected from you and to the extent this Board grants 22 that change, it will be collected from someone else. 23 MR. ARANHA: Yes. 24 MR. BRUCE CAMPBELL: And just in terms of 25 customer impact for that change, there is a difference 26 between types of customers, at least to this extent, 27 that for companies like yourself that $3.5 million 28 expense, if it is borne, is an expense that is taken Les Services StenoTran Services Inc. 613-521-0703 2454 AMPCO PANEL 3, cr-ex (Campbell) 1 into account in taxes. You can get -- you can reduce 2 your taxable income by that expense and there are some 3 customers who can't. A residential customer, for 4 instance, does not get a deduction for their energy bill 5 when they are filling out their tax return, but you do? 6 MR. ARANHA: Yes. 7 MR. BRUCE CAMPBELL: Thank you, Mr. Chairman. 8 Those are my questions. 9 THE PRESIDING MEMBER: Thank you, 10 Mr. Campbell. 11 Are there any other questions for this panel? 12 Mr. White, do you have some? Please find a 13 mic. 14 CROSS-EXAMINATION 15 MR. WHITE: This question is addressed to each 16 of the members of the panel separately. When surplus 17 power became available for your company, as part of that 18 were there any facilities which had to be constructed to 19 supply that surplus power? 20 MR. AXFORD: No. 21 MR. ARANHA: No. 22 MR. DON CAMPBELL: A portion of the facility 23 that we are presently running has been modified since as 24 a result. 25 MR. WHITE: The supply side services or 26 services within your plant? 27 MR. DON CAMPBELL: Within our plant. 28 MR. WHITE: Okay. I was asking the question Les Services StenoTran Services Inc. 613-521-0703 2455 AMPCO PANEL 3, cr-ex (White) 1 regarding the Ontario Hydro supply. 2 MR. DON CAMPBELL: I'm sorry, I 3 misinterpreted. Could you repeat that again, please? 4 MR. WHITE: Were there any Ontario Hydro 5 supply facilities constructed to make surplus power 6 available to your plant? 7 MR. DON CAMPBELL: No. 8 MR. WHITE: That being the case, the 9 facilities which supply your plants respectively were 10 constructed under a prior regime, a prior pricing 11 regime. Now, were capital contributions made by your 12 firms to the original construction of those facilities? 13 MR. ARANHA: I don't believe we made any 14 direct capital contributions from Dofasco, but insofar 15 as the rates that we were paying included the cost of 16 capital I would say yes. 17 MR. AXFORD: I don't know. 18 MR. DON CAMPBELL: I don't have knowledge as 19 well on the past investment in the transmission side, 20 although I do know that from the transformation side, 21 yes, we own it all. 22 MR. AXFORD: And the same with myself on the 23 transformation side. 24 MR. WHITE: If the supply facilities were 25 constructed to supply your respective facilities on the 26 basis of a regime that relied on firm rates to produce 27 the revenue stream to support that capital investment, 28 did the surplus power regime that came into play Les Services StenoTran Services Inc. 613-521-0703 2456 AMPCO PANEL 3, cr-ex (White) 1 represent a reduction in that revenue stream to Ontario 2 Hydro to support, in part, that transmission facility? 3 MR. AXFORD: In our case, in 1996 we underwent 4 a third party review to determine the validity to our 5 statement that our production facility was no longer 6 economical and that it was going to be shut down unless 7 we were able to obtain surplus power. 8 Then we obtained an LRER contract with Ontario 9 Hydro in 1996 once it was shown that our facility would 10 cease to exist. Therefore, since 1996 we have been able 11 to contribute to Ontario Hydro a net income adder that 12 should we not have been on the surplus power rate they 13 would not have received, because we would have ceased to 14 exist. 15 THE PRESIDING MEMBER: Just to be clear, are 16 you in the category of load retention contract or 17 surplus power, Mr. Axford? I am confused when you said 18 that. 19 MR. AXFORD: Our surplus power is available 20 under a load retention contract. 21 THE PRESIDING MEMBER: So you are somewhat 22 different than these other gentlemen in that regard. 23 If you have looked at the evidence, we are 24 looking at load retention and surplus power as two 25 separate categories. There are numbers in -- well, 26 let's just look at it. 27 Excuse me, Mr. White. Let's get this 28 cleared up. Les Services StenoTran Services Inc. 613-521-0703 2457 AMPCO PANEL 3, cr-ex (White) 1 MR. WHITE: Certainly. 2 THE PRESIDING MEMBER: If you look at G5.6, I 3 think -- let me just get it right. 4 If you look at G5.9, if you could find that -- 5 maybe Mr. Rogers can help you. It is information 6 provided by OPGI on all of the special power contracts 7 which lists the number of customers and -- 8 MR. ROGERS: We have it; thank you. 9 THE PRESIDING MEMBER: I will give you a 10 minute to look at that listing. 11 My question was: Are you in the load 12 retention which the three, excluding generation 13 deferral, or you -- are you in the SPP, which is called 14 surplus power category? 15 That is what I am trying to determine for your 16 plant. 17 Can you help them, Mr. Fisher, or not? Do you 18 know? 19 MR. FISHER: I believe Mr. Axford is SPP. Are 20 you not? 21 --- Pause 22 THE PRESIDING MEMBER: Sorry, Mr. White. I 23 didn't think it was going to be as long -- 24 MR. AXFORD: Can I get -- 25 THE PRESIDING MEMBER: An undertaking to get 26 back to us, so that we can clearly determine. As the 27 evidence has been filed by the Applicant and by AMPCO, 28 it is material as to which group you fall into. Les Services StenoTran Services Inc. 613-521-0703 2458 AMPCO PANEL 3, cr-ex (White) 1 Could we have an undertaking to clarify that, 2 please. 3 MS LEA: Certainly. Is that an undertaking 4 from all three witnesses, for each of them? 5 THE PRESIDING MEMBER: No. It is Mr. Axford. 6 I think for the other ones, I am sure -- I think I know. 7 MS LEA: That is F13.1, then, please. 8 THE PRESIDING MEMBER: Thank you very much. 9 UNDERTAKING NO. F13.1: Mr. Axford to 10 determine whether his company is in the 11 surplus power category 12 THE PRESIDING MEMBER: Sorry, Mr. White. 13 Would you please carry on. 14 MR. WHITE: Not a problem. It is possible, 15 when the evaluation is done, that we may find that that 16 particular individual resides in both camps. 17 THE PRESIDING MEMBER: Yes. 18 MR. WHITE: Can I take you back a little bit, 19 then. We say there was no transmission facility built 20 specifically for the supply of these facilities, so that 21 the transmission facilities that were constructed were 22 constructed to supply firm power as opposed to surplus 23 power. 24 MR. ARANHA: Actually, I don't know what they 25 were constructed to supply, if they were surplus. It is 26 an assumption that they were constructed to supply firm 27 power. But they were sitting there idle at the point in 28 time when we made our agreements. Les Services StenoTran Services Inc. 613-521-0703 2459 AMPCO PANEL 3, cr-ex (White) 1 So it is anybody's assumption as to what they 2 were originally constructed for at this point in time. 3 MR. WHITE: Perhaps I can go down a slightly 4 different road with the gentleman from Dofasco. 5 When we all fill up our tanks at the gas pump 6 these days, we are getting what some people might 7 describe as sticker shock. Is the change in oil price 8 going to improve the competitive nature of your business 9 with respect to offshore steel? 10 The transportation cost associated with 11 delivering offshore steel to North America will 12 presumably increase as a result of what is happening in 13 the oil market. Is that correct? 14 MR. ARANHA: That is probably correct. 15 MR. WHITE: Was that anticipated by Dofasco 16 when you entered into the Surplus Power Agreement? 17 MR. ARANHA: I can't say. I don't know what 18 all the assumptions were in our future view of the world 19 at that point in time, and oil prices being one of them. 20 MR. WHITE: I heard as part of your evidence 21 that the competitive influence of offshore steel was 22 significant in the viability and the necessity, in fact, 23 for surplus power for your company. So I am assuming 24 that there was a fairly significant evaluation of 25 offshore steel and f.o.b. North America costs in that 26 evaluation and that support. 27 MR. ARANHA: I should elaborate that when it 28 comes to fair competition, we are competitive with Les Services StenoTran Services Inc. 613-521-0703 2460 AMPCO PANEL 3, cr-ex (White) 1 anyone in the world. Our issue is not with fair traders 2 in our marketplace when it comes to offshore 3 competition. Our issue is with unfair traders, and we 4 have filed cases with the federal government that 5 support our position. 6 Those unfair traders from 11 countries around 7 the world must either now trade at fair pricing or face 8 punitive duties imposed by the Canadian federal 9 government. 10 It is the full context of the competitive 11 environment that needs to be understood when discussing 12 whether we are competing. We are not particularly 13 afraid of offshore competition; we welcome it. It is 14 not a problem for us unless it is unfair. 15 MR. WHITE: Is there anything to prevent any 16 of the three companies represented here in the new 17 marketplace from entering into bilateral contracts for 18 energy delivery that might be at competitive rates with 19 surplus power rates, either from OPGI or from other 20 suppliers in the Ontario and North American market? 21 --- Pause 22 MR. ARANHA: Could you repeat that question 23 one more time, please, just to refresh us on this one? 24 MR. WHITE: Is there anything in the regime 25 that is currently being put in place that prevents any 26 of the three parties from entering into bilateral 27 agreements with energy suppliers which may be 28 competitive with your current surplus power rates, Les Services StenoTran Services Inc. 613-521-0703 2461 AMPCO PANEL 3, cr-ex (White) 1 whether it be supplied by OPGI or other competitors, 2 both within the Ontario marketplace and the broader 3 North American marketplace? 4 MR. ARANHA: Okay. What we would like to do, 5 first of all, is separate out those agreements with 6 competitive suppliers in the energy marketplace that 7 deal with the energy component of -- with the cost of 8 energy itself, this transmission charge is something 9 separate from those, just so that we are clear about 10 what we are talking about. 11 At this point in time, no one has approached 12 us to make any kinds of offers. We regard the market to 13 be not competitive, and because it is not competitive 14 and we are unable to actually see a competitive 15 situation for some time to come, we are looking for the 16 transmission rate to be changed, the surplus power 17 transmission rate to be changed in a way that is 18 coincident with the onset of competition in the energy 19 market to offset the two, one against the other, so that 20 the rate shock that we will experience will be somewhat 21 less than what is proposed. 22 MR. WHITE: Have any of the three firms here 23 issued a request for proposal for prices for competitive 24 energy to replace the surplus power rate should that 25 become necessary? 26 MR. AXFORD: We did approximately two years 27 ago and we had no bids. Everybody declined to reply. 28 MR. WHITE: And the other gentlemen? Les Services StenoTran Services Inc. 613-521-0703 2462 AMPCO PANEL 3, cr-ex (White) 1 MR. ARANHA: Can you ask your question again 2 because I'm not sure what you mean by "a competitive bid 3 to replace the surplus power rate"? 4 MR. WHITE: You know, I hear from each of you 5 that you need a truly competitive marketplace and I hear 6 from each of you that it doesn't exist. I'm saying, 7 have you really tested the marketplace so that you know 8 whether it exists or not? 9 MR. ARANHA: We have approached the only 10 supplier in Ontario at this point in time and they have 11 not come forward with any proposals. 12 MR. WHITE: I would suggest that there is more 13 than one supplier available in the post open market 14 environment than existed in the pre open market 15 environment. 16 MR. AXFORD: Again, our own company has 17 approached several suppliers in the marketplace and to 18 date nobody has expressed any interest. As a matter of 19 fact, certain parties have specifically said that they 20 will not enter into any bilateral contracts with anybody 21 in Ontario. 22 MR. WHITE: Did they give you any whys? 23 MR. AXFORD: Not particularly, no. 24 MR. DON CAMPBELL: Certainly, from Bowater's 25 position, we are fully prepared. We have spent over a 26 year preparing for this deregulation, getting ready for 27 requests for proposals, and we do not truly know who 28 those competitors are? Les Services StenoTran Services Inc. 613-521-0703 2463 AMPCO PANEL 3, cr-ex (White) 1 MR. ARANHA: I can support the same position. 2 From Dofasco's vantage point we have looked even outside 3 the province, but no one has made any offers just yet. 4 MR. WHITE: If you entered into a contract 5 that had a finite term, and if that finite term produced 6 some benefits reflecting a situation that existed when 7 the contracts were entered into on the basis of both 8 parties benefiting, do you not think it is prudent, from 9 a business perspective, to consider the likelihood of 10 the termination of that contract should the environment 11 change, assuming it reaches a normal termination date? 12 If you had a contract yourselves to supply -- 13 whether it be steel or sodium chlorate or whatever -- at 14 a marginal cost below market price and if in fact that 15 contract came to an end, would you not look to sell that 16 product at market price to other customers? 17 MR. DON CAMPBELL: If we have a product 18 available we will attempt to sell it at market price. 19 MR. WHITE: The gentleman from Dofasco? 20 MR. ARANHA: Could you repeat that again? I'm 21 trying to understand the full range of the hypothesis 22 you are putting forward. 23 MR. WHITE: Let me rephrase it the way I got 24 the first answer. 25 If you have a product, would you not try and 26 sell that product at fair market price if an unbundling 27 or if a change happens in the marketplace that permits 28 you to access markets where you can get a fair market Les Services StenoTran Services Inc. 613-521-0703 2464 AMPCO PANEL 3, cr-ex (White) 1 price? 2 MR. ARANHA: In a free market that is 3 unconstrained by regulations of various kinds, yes. But 4 we would also take into account the impact on customers 5 that we currently have while making such decisions. 6 MR. AXFORD: Again, I would agree with my 7 friend from Dofasco. In an open market where there is 8 true competition, that would determine what the fair 9 market value was, and as we look out into the future we 10 do not see a fair open market occurring. 11 MR. WHITE: No further questions. Thank you. 12 THE PRESIDING MEMBER: Thank you, Mr. White. 13 Anyone else before Board staff? No? 14 Ms Lea, please. 15 MS LEA: Thank you, Mr. Chairman. Our 16 questions were ably asked by Mr. Stephenson. We have 17 none remaining. Thank you. 18 THE PRESIDING MEMBER: Okay. 19 Mr. Rogers, what do you think? Will you go to 20 the break or are you going longer? 21 MR. ROGERS: I don't think I will be very 22 long. I will probably be about 15 or 20 minutes, and I 23 would be quite willing to do it now if you can stand it. 24 --- Laughter 25 THE PRESIDING MEMBER: Our colleague says he 26 would like a break, so why don't we do that. 27 MR. ROGERS: Very well. 28 THE PRESIDING MEMBER: We will come back at Les Services StenoTran Services Inc. 613-521-0703 2465 AMPCO PANEL 3 1 five minutes to, please. 2 --- Upon recessing at 1036 3 --- Upon resuming at 1059 4 THE PRESIDING MEMBER: Okay, Mr. Rogers. 5 MR. ROGERS: Thank you, Dr. Higgin. 6 CROSS-EXAMINATION 7 MR. ROGERS: Gentlemen, my name is Rogers. I 8 represent the Applicant in this case and I have a few 9 questions for you. 10 First of all, I would like to just deal with 11 each of you to be sure I understand what the impact of 12 this proposal is on each of your companies. 13 Mr. Campbell, as I understand your evidence, 14 you say that the proposal before the Board will result 15 in a $3.4 million increase in your electric bill with 16 respect to transmission charges? 17 MR. DON CAMPBELL: Yes, with respect to 18 transmission charges applied to surplus energy. 19 MR. ROGERS: You have a total electricity bill 20 of around $60 million per year? 21 MR. DON CAMPBELL: Yes. 22 MR. ROGERS: Mr. Aranha, your evidence is that 23 for Dofasco this proposal will result in an increase of 24 about $3.5 million for transmission rates? 25 MR. ARANHA: Yes, that is correct. 26 MR. ROGERS: What is your total electricity 27 bill, sir? 28 MR. ARANHA: About $105 million. But with Les Services StenoTran Services Inc. 613-521-0703 2466 AMPCO PANEL 3, cr-ex (Rogers) 1 respect to the surplus power transmission it is 30 per 2 cent of the total bill. 3 MR. ROGERS: So you have 30 per cent of your 4 electricity supplies through this surplus power 5 arrangement, is it? 6 MR. ARANHA: Yes, that's correct. 7 MR. ROGERS: All right. Thank you. 8 Mr. Axford, your evidence is that your company 9 will face increased transmission costs of $2 million per 10 year? 11 MR. AXFORD: Of nearly $2 million, yes. 12 MR. ROGERS: What is your total electricity 13 bill? 14 MR. AXFORD: Approximately $10 million. 15 MR. ROGERS: Now, I'm not sure I understand 16 how you calculate these increases. 17 Let me start with you, Mr. Aranha. I think 18 you dealt with it in your evidence. 19 Have you assumed that in the surplus power 20 rates you now have that there is no charge for the 21 transmission in the bundled rate? 22 MR. ARANHA: Yes. 23 MR. ROGERS: So the $3.5 million increase is 24 compared to zero? 25 MR. ARANHA: Yes. 26 MR. ROGERS: My client is asking you for the 27 first time with respect to these rates to pay something 28 towards the fixed costs of transmission, Mr. Aranha. Is Les Services StenoTran Services Inc. 613-521-0703 2467 AMPCO PANEL 3, cr-ex (Rogers) 1 that right? 2 MR. ARANHA: Your client is asking us to 3 absorb costs that we currently don't have. 4 MR. ROGERS: I know that, and I'm sorry we 5 have to do that -- 6 --- Laughter 7 MR. ROGERS: -- but you do understand, don't 8 you, that under your analysis you have been getting a 9 free ride on the system for this power. You haven't 10 paid for it, for the transmission component of it, 11 Mr. Aranha. 12 MR. ARANHA: Well, I can't agree with your 13 characterization of getting a free ride because we have 14 been paying Ontario Hydro what is known as a net income 15 adder which has added $1.6 million a year to their 16 bottom line. 17 MR. ROGERS: To Ontario Hydro's bottom line? 18 MR. ARANHA: Yes. 19 MR. ROGERS: Well, I know, that's so you say 20 and I'm sure they are very grateful to you -- if they 21 were still in existence. 22 You do appreciate that my client is not the 23 party who contracted with you? 24 MR. ARANHA: Yes. Well, I suppose so, yes. 25 MR. ROGERS: By the way, was Mr. John Fox 26 involved in negotiating your contract, Mr. Aranha? 27 --- Laughter 28 MR. ARANHA: I can't answer that question. I Les Services StenoTran Services Inc. 613-521-0703 2468 AMPCO PANEL 3, cr-ex (Rogers) 1 don't know who was directly involved at the time. I can 2 find that out for you. 3 MR. ROGERS: Do you know John Fox? 4 MR. ARANHA: Not personally. 5 MR. ROGERS: Have you heard about him? 6 MR. ARANHA: I have heard his name. 7 MR. ROGERS: How about you, Mr. Campbell. Was 8 Mr. Fox involved in negotiating these special contracts 9 with your company? 10 MR. DON CAMPBELL: I can't answer that either. 11 I'm not personally aware. 12 MR. ROGERS: Mr. Axford? 13 MR. AXFORD: Axford. 14 MR. ROGERS: Axford, I'm sorry. 15 MR. AXFORD: No, I'm not aware of Mr. Fox 16 being involved. 17 MR. ROGERS: As I say, he works for OPG now 18 and I will be glad to give you a telephone number. 19 --- Laughter 20 MR. ROGERS: In looking at these impacts what 21 have you assumed your energy costs will be with respect 22 to this power that you are now getting under the surplus 23 power arrangement? 24 MR. AXFORD: In determining the impact I just 25 took my recent historical energy bill or electricity 26 bill and then took a look at what was being proposed by 27 OHNC and they gave me an estimate that the impact to my 28 bill would be just under $2 million. Les Services StenoTran Services Inc. 613-521-0703 2469 AMPCO PANEL 3, cr-ex (Rogers) 1 MR. ROGERS: I understand. We have been 2 through that, thank you. I understand that. 3 But in looking at the total impact of open -- 4 well, let's say, open access, how do I know your energy 5 costs won't be less than they now are? 6 I will start with you, Mr. Axford. 7 MR. AXFORD: There is no guarantee as to where 8 the energy costs will be since it will be on a 9 spot-market basis. 10 MR. ROGERS: Right. Isn't the object of open 11 access to make those energy costs go down? 12 MR. AXFORD: Over the long run as competition 13 is introduced to the marketplace that is definitely the 14 idea and that is why we have made the proposal that we 15 have. 16 MR. ROGERS: Were you here the other day when 17 the President of OPG testified? 18 MR. AXFORD: No, I'm sorry, I didn't have that 19 privilege. 20 MR. ROGERS: According to him, they are 21 divesting themselves of their generation more quickly 22 than required. They really have a strong desire to do 23 that to create competition. 24 MR. AXFORD: Well, again, if you go to the 25 body of our evidence, we have suggested that if true 26 competition were to occur earlier than the 10 years, 27 then of course our request would also adapt to that. 28 MR. ROGERS: Well, Mr. Axford, how do we know Les Services StenoTran Services Inc. 613-521-0703 2470 AMPCO PANEL 3, cr-ex (Rogers) 1 that upon open access on November 1 that the energy 2 charges to you aren't going to be somewhat less than 3 they are now where there is a total monopoly? 4 MR. AXFORD: Well, under a total monopoly 5 there is nothing there to drive the price down from 6 other than what was suggested at 3.8 -- 7 MR. ROGERS: Just dealing with you and then I 8 will move along to the other panel members -- 9 MR. AXFORD: -- if there is no contribution. 10 MR. ROGERS: You see, I am concerned about the 11 total impact on your company of open access, but if your 12 energy costs go down -- and the energy costs in your 13 case are by far the smallest proportion compared to the 14 others, but still -- 15 MR. AXFORD: Did you say costs are smaller? 16 MR. ROGERS: Compared to the others in terms 17 of relative to your transmission costs. You are going 18 to start paying transmission costs of $2 million on a 19 total electricity bill of $10 million. Twenty per cent. 20 Is that correct? 21 MR. AXFORD: Correct. 22 MR. ROGERS: Well, Dofasco is $3.5 million on 23 $105 million. Do you see my point? 24 MR. AXFORD: The impact to my company will be 25 significantly greater at about 20 per cent. 26 MR. ROGERS: That may be, but that's not my 27 point. It doesn't really matter. 28 My question is this: You have a total Les Services StenoTran Services Inc. 613-521-0703 2471 AMPCO PANEL 3, cr-ex (Rogers) 1 electricity bill of around $10 million. Suppose you can 2 go to Mr. Fox, or whoever it is at OPG that will be 3 selling power, and can arrange a discount of $2 million 4 of access? 5 MR. AXFORD: That would be wonderful. 6 However, we have been approaching our OPGI 7 representative and he continues to tell us that they are 8 not prepared to do anything less than 3.8. However, if 9 I'm willing to sign something for significantly more 10 than 3.8 he would probably be happy to sign something 11 with me. 12 MR. ROGERS: What is 3.8? 13 MR. AXFORD: Three-point-eight is the level at 14 which the MDC suggested that the rebate mechanism for 15 OPGI occur at. 16 MR. ROGERS: I see. Anyway, you are in 17 negotiations, then, with OPGI about your energy costs 18 come open access? 19 MR. AXFORD: We are not in current 20 negotiations. I would like to characterize it as we are 21 wanting to have some meaningful discussion with any 22 energy supplier out there, however no energy supplier 23 has expressed any interest in any meaningful discussion 24 to date. 25 MR. ROGERS: Well, meaningful discussions. 26 Have you been contacted by anybody right up to the 27 present time about maybe making an arrangement with your 28 company? Les Services StenoTran Services Inc. 613-521-0703 2472 AMPCO PANEL 3, cr-ex (Rogers) 1 MR. AXFORD: We had been contacted two years 2 ago about whether or not we would be interested in a 3 project, however that project has been put on hold for a 4 variety of reasons. Other than that, nobody has come to 5 us and nobody has presented us with any bona fide 6 offers. 7 MR. ROGERS: Well, bona fide offers, of course 8 not. But has anybody contacted you to negotiate, to 9 discuss, to start the process? 10 MR. AXFORD: No -- 11 MR. ROGERS: Anybody? 12 MR. AXFORD: -- nobody has come to us to 13 negotiate or discuss, no. 14 MR. ROGERS: So you haven't had one phone 15 call, not one letter, not one inquiry? Is that your 16 evidence really? 17 MR. AXFORD: As I said, I had one call over 18 two years ago, however that discussion lasted 19 approximately five minutes. 20 MR. ROGERS: All right. Thank you. 21 MR. AXFORD: If that is an indicator of a 22 competitive market, then it causes me great concern. 23 MR. ROGERS: So at the present time, then, the 24 only people you are negotiating with is OPG? 25 MR. AXFORD: Again, I would not characterize 26 that as negotiation since they do not seem to be willing 27 to discuss going forward. 28 MR. ROGERS: Well, how about you, Mr. Aranha, Les Services StenoTran Services Inc. 613-521-0703 2473 AMPCO PANEL 3, cr-ex (Rogers) 1 have you contacted OPG about what rates you are going to 2 pay upon access? 3 MR. ARANHA: Yes, we have. 4 MR. ROGERS: You don't know Mr. Fox, but I'm 5 sure they have other people there. What do they say 6 about helping you in your plight with respect to these 7 arrangements that were negotiated with you by Ontario 8 Hydro? 9 MR. ARANHA: Right now we are in the same 10 situation as my colleague on the left here. There are 11 no negotiations taking place. OPGI has not put forward 12 any proposals. They fact that they get together and 13 talk is just that. There's nothing substantial being 14 discussed, so assumptions regarding open competition 15 right now, there is no open competition. 16 MR. ROGERS: You realize that the government, 17 and you were asked some questions about the government 18 scheme previously, as I understand it, the government 19 arrangements here have resulted in these contracts that 20 you are talking about being assigned to OPG. Do you 21 understand that, Mr. Aranha? 22 MR. ARANHA: Yes. I'm thinking about your 23 question. 24 MR. ROGERS: Well, these surplus contracts, as 25 I understand it, are between you and OPG now. 26 MR. ARANHA: I can't answer that question, but 27 I will accept your assumptions for the moment. I don't 28 know that technical detail about the contract. Les Services StenoTran Services Inc. 613-521-0703 2474 AMPCO PANEL 3, cr-ex (Rogers) 1 MR. ROGERS: By the way, when you were 2 testifying earlier, just dealing with this transmission 3 system, and you realize that in this case we are only 4 dealing with the transmission rates -- Mr. Aranha, you 5 understand that -- not the energy component, just the 6 transmission rates. 7 MR. ARANHA: Yes. I am aware of that. 8 MR. ROGERS: You said that when you entered 9 into these surplus power contracts, it was your 10 assumption that the transmission system had been paid 11 for. Those were your words. Right? 12 MR. ARANHA: No. It was not our assumption 13 that the transmission system had been paid for. It was 14 that it was installed. 15 MR. ROGERS: That's true. 16 MR. ARANHA: And it was in existence. 17 MR. ROGERS: Right. You agree that it had not 18 been paid for. 19 MR. ARANHA: I don't know how you would define 20 paid for. It was installed and operating. 21 MR. ROGERS: I would say that the capital cost 22 recovery from the customers would pay for it. 23 MR. ARANHA: I'm not aware of what the 24 situation was in terms of capital cost recovery at that 25 point in time. 26 MR. ROGERS: If you did say that it was paid 27 for, you were mistaken then, were you? That's what I 28 thought you said. Les Services StenoTran Services Inc. 613-521-0703 2475 AMPCO PANEL 3, cr-ex (Rogers) 1 MR. ARANHA: My intent was to explain the fact 2 that it was in existence physically. 3 MR. ROGERS: Well, that's true. I don't want 4 to be too much longer. These contracts have been a 5 matter of some controversy for many years here, as I am 6 sure you all know. Have you testified here before, any 7 of you? 8 MR. AXFORD: No, I haven't. 9 MR. DON CAMPBELL: No. 10 MR. ARANHA: No, I have not. 11 MR. ROGERS: I haven't been around back in the 12 1990s, the 1996 period or so, when this was being 13 discussed, in around that time, I think. Would you 14 agree with me that from what you understand, these were 15 very controversial contracts at the time? 16 MR. ARANHA: Not for us they were not. They 17 were a win-win situation for Ontario Hydro at the time. 18 They got income from this contract that they have with 19 us. 20 MR. ROGERS: No, my question was -- 21 MR. ARANHA: It generated jobs and employment. 22 MR. ROGERS: I know that you favour the 23 contract, but didn't some of the other customers have 24 serious concerns about it? 25 MR. ARANHA: They didn't bring any of those 26 concerns forward to us. 27 MR. ROGERS: Are you aware of whether or not 28 these contracts were a matter of some controversy before Les Services StenoTran Services Inc. 613-521-0703 2476 AMPCO PANEL 3, cr-ex (Rogers) 1 this Board over the years? 2 MR. ARANHA: I'm not aware of that. There 3 might have been. There might be facts and evidence to 4 support that, I'm not aware of them. 5 MR. ROGERS: Okay. You see, here's the 6 problem that I have with just listening to your evidence 7 and not having been here when these were negotiated -- 8 by the way, these contracts are not in evidence, are 9 they? You filed the contracts? 10 MR. ARANHA: No, they are not. They are 11 commercially sensitive information that we don't wish to 12 put in the public domain. 13 MR. ROGERS: I see. My client is going to 14 recover, hopefully if they have done the math correctly, 15 their revenue requirement from all the customers on the 16 system, Mr. Aranha. Do you understand that? Excluding 17 yourself for the moment. I'm not including you in that 18 equation right now, but all the customers in the system, 19 however this Board decides this, will have to pay my 20 client for the revenue requirement which this Board has 21 approved. Do you understand that? 22 MR. ARANHA: Yes. 23 MR. ROGERS: So that in many ways my client is 24 indifferent financially to whether you get surplus rates 25 or not. Do you understand that? 26 MR. ARANHA: If you say so. 27 MR. ROGERS: Well, I do. The problem is that 28 other customers are going to get the bill. Do you Les Services StenoTran Services Inc. 613-521-0703 2477 AMPCO PANEL 3, cr-ex (Rogers) 1 understand that? 2 MR. ARANHA: I understand that under the 3 proposal there's three and a half million dollars of 4 additional costs being imposed on us in this type of 5 proposal. 6 MR. ROGERS: I can understand why you don't 7 like that, but as Mr. Campbell was asking or pointing 8 out to you, somebody is going to have to pay that three 9 and a half million dollars. Do you see that, Mr. 10 Aranha? 11 MR. ARANHA: The three and a half million 12 dollars is being paid today. 13 MR. ROGERS: That's right. It's being paid by 14 the other customers who aren't too happy about it. Are 15 you aware of that? 16 MR. ARANHA: I'm not aware of their state of 17 mind about it. No. 18 MR. ROGERS: Well, read the arguments in this 19 case. I think you will see that the other customers by 20 and large have grave concerns about these contracts. 21 This is a revelation to you, sir? 22 MR. ARANHA: No. 23 MR. ROGERS: One of the things I think they 24 are going to say is that in effect what you are doing 25 here is attempting to boost yourself or hoist yourself 26 by your own boot straps. Are you familiar with that 27 colloquial phrase? 28 MR. ARANHA: It sounds familiar, but I would Les Services StenoTran Services Inc. 613-521-0703 2478 AMPCO PANEL 3, cr-ex (Rogers) 1 not agree with it. I would again say what they are 2 looking at is the imposition of three and a half million 3 dollars of new costs that they don't have. 4 MR. ROGERS: Yes. 5 MR. ARANHA: And it represents no value to the 6 customers who keep us in business. 7 MR. ROGERS: I understand what you are saying 8 but, you see, the counter argument that I think we will 9 hear is that when you entered into these contracts with 10 old Ontario Hydro, it was done so on a temporary basis 11 and that everyone understood that. Do you agree with 12 that proposition? 13 MR. ARANHA: As I have explained before, our 14 contract was for a five year term with an annual 15 automatic renewal. 16 MR. ROGERS: Yes. You have explained that 17 before. Aren't you aware that representations were made 18 that this was a temporary arrangement? 19 MR. ARANHA: I can again go back to the cause 20 of the contract which was that it was for five years 21 with automatic renewal and the projections of surplus 22 power pricing and surplus power went well beyond the 23 term of the contract, so our understanding was that the 24 contract would continue until open competition occurred. 25 MR. ROGERS: Okay. Let's deal with the 26 contract. If you prefer to do that, that's fine with 27 me. You negotiated the contract with Ontario Hydro. 28 Right? Your company? Les Services StenoTran Services Inc. 613-521-0703 2479 AMPCO PANEL 3, cr-ex (Rogers) 1 MR. ARANHA: My company did, yes. 2 MR. ROGERS: None of the rest of us were party 3 to that contract in this hearing. 4 MR. ARANHA: I'm assuming that. 5 MR. ROGERS: You and Ontario Hydro decided to 6 have a five year term to the contract. 7 MR. ARANHA: With automatic renewal at the end 8 of the five years. Yes. 9 MR. ROGERS: Right. And as has already been 10 developed at length, that means that either party could 11 terminate it if they wanted to after five years. Right? 12 MR. ARANHA: Yes. 13 MR. ROGERS: Now, beyond that five year 14 agreement, you have no legal right whatsoever to the 15 continuation of surplus power, do you? 16 MR. ARANHA: The contract would continue 17 unless Ontario Hydro or us decided that we didn't want 18 it to. 19 MR. ROGERS: Well, if Ontario Hydro decided or 20 was told that it couldn't renew the contract, you would 21 have no legal rights beyond the term of the contract, 22 would you? 23 MR. ARANHA: So we are here to ask that they 24 not be told to do that. 25 MR. ROGERS: I know that, but just answer my 26 question. You do agree, don't you, that this contract 27 that you and Hydro negotiated between yourselves with 28 none of the rest of us present gave you rights for five Les Services StenoTran Services Inc. 613-521-0703 2480 AMPCO PANEL 3, cr-ex (Rogers) 1 years and only five years unless it was renewed. 2 MR. ARANHA: Five years plus an automatic 3 renewal at the end of that term, unless one of us 4 decided not to enter into the agreement any further. 5 MR. ROGERS: And now the contract has come to 6 an end by reason of government mandate or will come to 7 an end. Correct? 8 MR. ARANHA: We are in here in fact with 9 respect to a change in that contract. 10 MR. ROGERS: I know you are, but the fact of 11 the matter is -- let's do this in steps. The fact of 12 the matter is that the government has said, for whatever 13 reason, that these contracts should terminate upon 14 access. Isn't that correct? 15 MR. ARANHA: That is what we understand. 16 Right. 17 MR. ROGERS: And you are here asking this 18 Board to find a way to help you get around that 19 direction from the government by tinkering with the 20 transmission rate system. Isn't that right, Mr. Aranha? 21 MR. ARANHA: Could you repeat the question, 22 please? 23 MR. ROGERS: Yes. You are asking this Board 24 to find a way to relieve from the effect of the 25 government mandate to terminate these contracts by 26 modifying the electricity transmission rate for your 27 company. 28 MR. ARANHA: Our assumption is that the Board Les Services StenoTran Services Inc. 613-521-0703 2481 AMPCO PANEL 3, cr-ex (Rogers) 1 is in a position to make recommendations to the 2 government and we are making our opinion known to the 3 Board so that they can do that. 4 MR. ROGERS: So is the answer to my question 5 yes? 6 MR. ARANHA: The answer to your question is 7 that we are making our opinion known to the Board and it 8 is our assumption that the Board makes recommendations 9 to the government after taking in the opinions of the 10 people at this hearing. 11 MR. ROGERS: That's correct. I am sure they 12 will. Thank you very much. Those are my questions. 13 Thank you, gentlemen. 14 THE PRESIDING MEMBER: Thank you, Mr. Rogers. 15 The Board may have some questions. 16 Mr. Vlahos. 17 MEMBER VLAHOS: Mr. Aranha, to follow up on 18 this last exchange you had with counsel, now I am a 19 little confused about the request for relief and exactly 20 what you are seeking for this Board to do. 21 Do you want this Board to make recommendations 22 to the government with respect to what specifically? 23 MR. ARANHA: We are asking that the position 24 put forward by AMPCO for relief for phasing in of the 25 surplus power rate reduction, if you want to call it 26 that, or the demise of the Surplus Power Agreements be 27 phased in over 10 years, to be coincident with open 28 competition in the marketplace is what we are asking Les Services StenoTran Services Inc. 613-521-0703 2482 AMPCO PANEL 3 1 for. 2 MEMBER VLAHOS: So that relief then is not 3 only tied to the transmission component? 4 MR. ARANHA: We are making it specific to the 5 transmission component, that the transmission rate be 6 adjusted over 10 years. 7 MEMBER VLAHOS: There is no need then for a 8 recommendation to the government. This Board or this 9 panel does have the authority to set the transmission 10 rates. 11 MR. ARANHA: Thank you for that clarification. 12 MEMBER VLAHOS: Now, just sticking with the 10 13 year phase in as proposed by AMPCO which you support. I 14 understand that's the proposal by any of the three 15 companies. Correct? 16 MR. ARANHA: Yes. 17 MEMBER VLAHOS: Now, some of you have some 18 additional relief and I want to go through that in a 19 little while. By sticking with the 10 year phase in, so 20 you are starting with zero and that's your base? 21 MR. ARANHA: Yes. 22 MEMBER VLAHOS: And you want to be phased in 23 in 10 years? 24 MR. ARANHA: Correct. 25 MEMBER VLAHOS: So whatever transmission rate 26 would apply this year, your rate would be, say, zero and 27 next year would be 10 per cent of whatever applies. Is 28 that how mechanically it would work? Les Services StenoTran Services Inc. 613-521-0703 2483 AMPCO PANEL 3 1 MR. ARANHA: Yes. 2 MEMBER VLAHOS: Now, I have also noted in Mr. 3 Axford's evidence that there is some discussion about 4 interruptible rates or lack of, Mr. Axford. 5 MR. AXFORD: Yes, and I realize that this is 6 not within the purview of the Board, but we were 7 expressing a concern that OHNC did not propose an 8 interruptible transmission rate as has been done in 9 other localities. This has been shown to be of value in 10 other jurisdictions for a variety of reasons. 11 Again, because we are the type of customer we 12 have, we have the ability to interrupt. We design our 13 plant to try to be slightly over capacity because we 14 know there is opportunities in most markets to interrupt 15 at times. 16 MEMBER VLAHOS: Do you, Mr. Aranha or Mr. 17 Campbell, also support or are you concerned about the 18 lack of interruptible rates in the proposed rate design? 19 MR. DON CAMPBELL: For us it would be 20 attractive to have that, simply because we share the 21 same position as the other customers, that having the 22 load type that we have for our interruptible, and I 23 would like to clarify that our interruptible, our 24 service is about 20 per cent of our total load. 25 We do have 80 per cent of our load on firm and 26 are paying or will pay the normal transition price for 27 that, but the fact that it can come off should add 28 benefit in a free and open market in terms of possibly Les Services StenoTran Services Inc. 613-521-0703 2484 AMPCO PANEL 3 1 avoiding capital expenditures on future transmission if 2 it's interruptible. So we see that as a value to the 3 transmission company and as a result would expect in a 4 free market to share in that value. 5 MEMBER VLAHOS: Mr. Aranha. 6 MR. ARANHA: Yes, Mr. Vlahos, we are also in 7 support of interruptible rates in the new design. 8 MEMBER VLAHOS: Mr. Axford, you went through 9 the discussion of the lack of interruptible rates in the 10 proposal, but are you suggesting that there should be 11 interruptible rates as part of the decision of the Board 12 in this proceeding? 13 MR. AXFORD: Again, I am not an expert in all 14 the aspects that the Board is capable of doing. I put 15 it in more for food for thought for the future because 16 we realize that these hearings are very important and 17 that the ability to have a truly competitive marketplace 18 in Ontario is very important. We just wanted to make 19 sure that we were able to bring forward some of our 20 experience in other jurisdictions and that was our 21 purpose. 22 MEMBER VLAHOS: Thank you. 23 Have you discussed with AMPCO as to whether 24 AMPCO should propose that there should be interruptible 25 rates as part of their submission? 26 MR. AXFORD: When we discussed the overall 27 AMPCO proposal there was some discussion of that in the 28 evidence. However, it came up in other forums and it Les Services StenoTran Services Inc. 613-521-0703 2485 AMPCO PANEL 3 1 was decided by consensus, by substantive consensus, that 2 we try to make a recommendation or a proposal to the 3 Board that would try to be as simple as possible, 4 realizing the constraints that are in the system. 5 MEMBER VLAHOS: To your understanding were 6 there any constraints in this Board instituting 7 interruptible rates? 8 MR. AXFORD: I understand that the MDC report 9 did not have any discussion of interruptible rates. As 10 far as the Board, I am sorry, I don't know. 11 MEMBER VLAHOS: Thank you for that. 12 Mr. Axford, I will start with you again, you 13 also -- one of the reliefs that you are seeking is -- 14 well, you are arguing for a coincident peak charge 15 determinant as opposed to a non-coincident peak. 16 MR. AXFORD: That's correct. 17 MEMBER VLAHOS: What about the other two 18 companies? Do they have a position on that? 19 MR. ARANHA: I am not familiar enough with 20 other companies' position on that point, but if need be 21 I can clarify it later. 22 MEMBER VLAHOS: Mr. Campbell. 23 MR. DON CAMPBELL: It's the same with me, I am 24 not 100 per cent familiar with that particular point. 25 That wasn't the issue I was dealing with. 26 MEMBER VLAHOS: Let me just turn to Mr. 27 Axford. Mr. Axford, I note in your evidence that the 28 load factor of your company is quite high. I think in Les Services StenoTran Services Inc. 613-521-0703 2486 AMPCO PANEL 3 1 your direct testimony today you mentioned over 95 per 2 cent or 98 per cent, whether it is load factor or power 3 factor and I must say that you have to explain to me 4 exactly what the difference is. Do you know what the 5 difference is? 6 MR. AXFORD: One is the efficient conversion 7 of electricity within the plant through transformation. 8 The other one is the ability to operate at a high 9 operating rate. Again, I mention that when there is 10 economic electricity available our plants have shown 11 significant capability in being able to operate at high 12 load factors. It is a function of electricity rates. 13 MEMBER VLAHOS: And to your understanding a 14 rate structure or a rate design usually looks at -- the 15 other day the amount of money you have to pay depends on 16 your load factor. That's a typical rate design, a 17 typical rate structure. Correct? And if you are a very 18 high load factor customer, as you are, then does it 19 really matter whether it is coincident or non-incident 20 peak? 21 MR. AXFORD: Well, there needs to be a little 22 bit of clarification there on my part. The very high 23 load factor is directly related to the price of the 24 power. I am willing to admit that if the price of power 25 is very high, then our load factor will indeed be lower. 26 Again, I would point out the chart that I did 27 earlier showing the relationship between electricity 28 price and our actual production, which is our load Les Services StenoTran Services Inc. 613-521-0703 2487 AMPCO PANEL 3 1 factor or -- our load factor, yes. 2 Again, if there was an economic rate we would 3 have a very high load factor as we show in other 4 jurisdictions. 5 MEMBER VLAHOS: Let me just follow that up, to 6 make sure I understand it. 7 Let's start with the scenario that you have 8 100 per cent load factor, and the price is economic for 9 you. 10 MR. AXFORD: We would be taking all the time. 11 MEMBER VLAHOS: You will take it all the time. 12 So it doesn't matter if it is non-coincident or 13 coincident peak. Whichever it may be, it doesn't matter 14 to you. 15 MR. AXFORD: That is correct, if that were the 16 case. If there was economically based power price, then 17 the coincident versus non-coincident would be a 18 non-issue; that is correct. 19 MEMBER VLAHOS: All right. Can we just 20 exclude for a minute whether the price is economic or 21 not. I assume constancy on that. Let's stick with the 22 high versus low load factor. 23 If you have 100 per cent, it just doesn't 24 matter which charge determinant this Board will decide 25 on. If you are a very low load factor customer, it 26 would matter. 27 MR. AXFORD: Yes. Again, depending on how you 28 take that power, it may matter. For instance, if you Les Services StenoTran Services Inc. 613-521-0703 2488 AMPCO PANEL 3 1 were a very low load factor but it was all during the 2 day, then it wouldn't be as important. 3 MEMBER VLAHOS: What is your understanding of 4 a load factor? Do you have a formula in mind? 5 MR. AXFORD: If you go to the absolute 6 theoretical one, it is the contract power amount times 7 the -- the actual take amount over the contract amount, 8 times the number of hours, to give you an overall 9 percentage. 10 MEMBER VLAHOS: I had in mind it was sort of 11 the highest use over the average use. Would that give 12 you the same thing? 13 MR. DON CAMPBELL: I can explain that. My 14 background happens to be electrical engineer. 15 It is the peak over the full length of time. 16 That is the maximum amount of energy that could be 17 taken. So you take that and divide that number into 18 what was actually taken, and that is your load factor. 19 MEMBER VLAHOS: That is consistent with my 20 understanding. 21 Perhaps, Mr. Axford, it gives you the same 22 result as your formula. 23 MR. AXFORD: That's fine, yes. 24 MEMBER VLAHOS: Assuming there is constancy in 25 price, then if you are a high load factor customer the 26 charge determinant does not matter; if you are a low 27 load factor customer, it does matter. 28 So 95 per cent is a high load factor. Would Les Services StenoTran Services Inc. 613-521-0703 2489 AMPCO PANEL 3 1 you agree, Mr. Axford? 2 MR. AXFORD: Yes, it is. 3 MEMBER VLAHOS: And the other two gentlemen 4 don't know what their load factor is. 5 MR. DON CAMPBELL: What our load factor is? 6 MEMBER VLAHOS: Yes. 7 MR. DON CAMPBELL: Yes, I do. 8 MEMBER VLAHOS: Oh, you do. 9 MR. DON CAMPBELL: Yes. On the firm power, we 10 are in excess of 90 per cent; and on the surplus power, 11 we are economically controlling that load factor. As my 12 cohorts said, we are economically controlling that. In 13 other words, if the price goes up for whatever reason, 14 we will choose to use it less or not at all. 15 And those choices, through the course of a 16 month, determine the load factor. So the more times you 17 are forced to choose, the lower your load factor will be 18 for that component of energy. That is the value that we 19 believe could be turned into a mutual win-win. 20 MEMBER VLAHOS: If you have sort of the 21 numerator-denominator, your denominator becomes a lot 22 larger because you use it more than -- is that how it 23 works? 24 MR. AXFORD: In the event that there is 25 economically priced power, our numerator would increase 26 and therefore tends towards 100 per cent. And what I 27 was trying to express is that we have the capability, 28 the physical capability, of running at greater than 95 Les Services StenoTran Services Inc. 613-521-0703 2490 AMPCO PANEL 3 1 per cent load factor. 2 MEMBER VLAHOS: Thank you for those answers, 3 gentlemen. 4 THE PRESIDING MEMBER: Thank you, Mr. Vlahos. 5 Mr. Smith. 6 MEMBER SMITH: When the legislation was being 7 drawn and up discussed that brought us all here, did you 8 anticipate -- I am asking all three of you -- at that 9 time, when you read it and saw it, what the impact on 10 your company was going to be? 11 MR. ARANHA: Yes, we did. And when we got to 12 understand what was in the legislation, these things 13 started to become more clear. 14 MEMBER SMITH: Did you have an opportunity at 15 that time to make your views known to the Ontario 16 legislature or the government as to the negative impact 17 on your cost? 18 MR. ARANHA: Prior to the legislation passing, 19 not; but since then we have, yes, and we are continuing 20 to do that. 21 MR. AXFORD: As a member of AMPCO, we have 22 been very involved with the entire process. And during 23 the entire process we have made our concerns known to 24 the government. 25 In addition to that, our company has also made 26 our concerns known to both the Ministry staff and the 27 Minister with regard to some of the potential impacts. 28 MEMBER SMITH: And these are ongoing Les Services StenoTran Services Inc. 613-521-0703 2491 AMPCO PANEL 3 1 discussions? 2 MR. AXFORD: Yes, they are. 3 MEMBER SMITH: So they haven't said go away, 4 we are not going to talk to you about this. They are 5 listening to what you have to say. 6 MR. AXFORD: Listening, yes. They have always 7 listened. Whether there is any action from that... 8 MR. ARANHA: From our vantage point, Dofasco 9 is continuing discussions and we think we have an 10 attentive audience in the Ministry of Energy, as well as 11 the Ministry of Finance. 12 MEMBER SMITH: And Bowater? 13 MR. DON CAMPBELL: From our aspect, we have, 14 since early 1998, expended a lot of time and effort 15 trying to convert what was proposed in the legislation 16 into what we believe will be the impact to us, both 17 through consultants, as well as internal analysis of our 18 loads and all of our flexibilities, preparing for the 19 open access. 20 It has only been literally in the last few 21 months where the extent to which this impact has been 22 more clearly understood with the proposals, for 23 instance, by OHNC as an example. I think that was since 24 October, in my understanding. It was that kind of time 25 frame. 26 So since that time we have got a much better 27 understanding. That is why we are more comfortable 28 standing here saying "this is what it will impact for Les Services StenoTran Services Inc. 613-521-0703 2492 AMPCO PANEL 3 1 this component of our cost". 2 MEMBER SMITH: And you have made that 3 understanding known to the government people as well, 4 obviously. 5 MR. DON CAMPBELL: Yes. 6 MEMBER SMITH: It may not be relevant to this 7 proceeding, or confidential. But is this the main 8 subject of your discussions with them, or are there 9 other items related to the Electricity Act, and so on, 10 that are concerning you? 11 MR. AXFORD: We look at this, or I look at 12 this as a step by step process. We are just trying to 13 take it one step at a time. We are not a large enough 14 company to have all the resources to be going out on 15 multi facets. So right now our energy has gone into 16 this particular Board hearing. 17 MR. ARANHA: Mr. Smith, just to clarify your 18 question, do you mean are we restricting it to the 19 surplus power discussion? 20 MEMBER SMITH: Yes. 21 MR. ARANHA: No. We have a broader range of 22 discussions that Dofasco is having with the government. 23 MEMBER SMITH: You have indicated here that 24 this ten-year transition to full competition is not 25 something you look kindly on; that you would like to see 26 it accelerate. 27 MR. ARANHA: Yes. 28 MEMBER SMITH: We heard Mr. Osborne the other Les Services StenoTran Services Inc. 613-521-0703 2493 AMPCO PANEL 3 1 day saying that he was trying to do exactly that. So 2 maybe you are being listened to there. 3 MR. AXFORD: Hopefully. And again, as it 4 relates to our evidence, we would like to see that and 5 we are willing to modify our proposal in accordance with 6 that. 7 MEMBER SMITH: Thank you very much. 8 THE PRESIDING MEMBER: Thank you, Mr. Smith. 9 I have a few questions as well. 10 In listening to the evidence that you have 11 given today, before market opening you have had a 12 bundled rate for power transmission, and that rate, we 13 will say, was X cents per megawatt hour on an average. 14 What you see after now is an unknown power 15 cost, and also what you can clearly see is full 16 transmission power as proposed by Ontario Hydro 17 Networks, which according to their calculation comes to 18 about 00485 dollars per kilowatt hour. That is based on 19 the average energy flow on the network. That is where 20 the number comes from. 21 The question that everybody has been asking 22 you is: How will you address the question of trying to 23 make the whole equal to the whole before and after? 24 That is the question people are asking you. 25 We are focusing here on transmission. I would 26 like to try and understand what your overall strategy is 27 in order to try and make the equation add up after 28 market opening to the same amount it did before. Les Services StenoTran Services Inc. 613-521-0703 2494 AMPCO PANEL 3 1 We know why you are here. To talk about the 2 transmission tariff, the details. 3 Other than discussing with the Ministry of 4 Energy and the Ministry of Finance, what about the fact 5 that there will now be other charges from the IMO which 6 were not previously part of the equation? Somebody has 7 variously estimated them in this hearing -- I have no 8 independent knowledge -- at about a dollar per kilowatt 9 hour. That is for, I assume, all of their charges. 10 So my question the long way around is: What 11 are you doing to try and deal with the other parts of 12 the equation other than the transmission fee? 13 MR. ARANHA: With respect to the surplus power 14 agreement that we have, if we just restrict it to that 15 for now, we think that the IMO charges will offset the 16 net income adder that we have for Ontario Hydro at this 17 point in time, and then we are into a separate 18 negotiation on energy pricing. Once we get into those 19 things, they expect to end up again whole, but we are 20 unable to actually get going on that front successfully. 21 THE PRESIDING MEMBER: You are assuming that 22 you can offset the IMO charges by the net income amount 23 with the adder on the power contract with OPGI. That is 24 the strategy. 25 MR. ARANHA: It comes up for grabs in the 26 negotiation, I guess, is what I'm saying. Once you are 27 into negotiations, that net income adder is up for 28 discussion again. Les Services StenoTran Services Inc. 613-521-0703 2495 AMPCO PANEL 3 1 THE PRESIDING MEMBER: Then there is the CTC. 2 Let's come to that. 3 MR. ARANHA: Yes. 4 THE PRESIDING MEMBER: That might be -- I 5 don't know -- we will say 1 cent. Right? 6 MR. ARANHA: Right. 7 THE PRESIDING MEMBER: What are you doing 8 about that? 9 MR. ARANHA: Other than talking to the 10 Ministry of Finance, that is our approach at this point 11 in time, to explain the impact of that particular charge 12 in our business again is what our strategy is with 13 respect to that. 14 THE PRESIDING MEMBER: Okay. I think I get 15 the general picture now. 16 Just to explain a little bit to you where we 17 are, maybe if you could find that interrogatory response 18 I referred to you before. This is G5.9. Do you have a 19 copy? 20 MR. AXFORD: Yes. Yes, sir. 21 THE PRESIDING MEMBER: You will see if you 22 just look at this -- and we are supposed to get some 23 information from the applicant regarding what the 24 impacts would be related to this in terms of the 25 transmission, so we don't know, but basically if you add 26 it up you can see there is over 2,000 megawatts of load 27 that is the subject of all these various contracts. 28 That amount times even just the network charge of $2.76 Les Services StenoTran Services Inc. 613-521-0703 2496 AMPCO PANEL 3 1 is a significant amount of money that will either go to 2 you or to someone else. 3 That is the big picture. You can look at your 4 own individual case, but this is the big picture coming 5 out from all of these contracts of one sort and another. 6 Why should the Board listen to your argument to give you 7 relief and shift this amount of money over to the other 8 customer as the applicant's proposal -- why should we do 9 that? The big picture is quite significant. It is not 10 just individual. 11 MR. AXFORD: Again, we are not asking that the 12 cost be shifted over to the other consumers. What we 13 are asking for is for a transition period for us to be 14 able to adapt and to be able to take advantage of the 15 competitive market that we are hoping to see. 16 In the long run, the final answer to our 17 transition request that we have made, we would be paying 18 the full transmission rate. It strictly comes back down 19 to the question of the rate shock that we see in the 20 short term and our ability to be able to take advantage 21 of a truly competitive market. As we see it today and 22 as I hope we have tried to put across today is that upon 23 opening in November we do not see a competitive market 24 there, therefore, we don't have the normal opportunities 25 that business would have to offset cost increases, 26 especially of this magnitude. 27 THE PRESIDING MEMBER: You will understand 28 that other classes are also seeing rate shock and they Les Services StenoTran Services Inc. 613-521-0703 2497 AMPCO PANEL 3 1 are concerned about that as well and that any shifting 2 from one class to another will exacerbate what they 3 think is the rate shock that they are facing anyway 4 under the applicant's proposal. 5 MR. AXFORD: Again, the rate shock that we are 6 seeing is what we feel we would see as compared to the 7 current situation. 8 THE PRESIDING MEMBER: I'm talking about for 9 the other classes too. 10 MR. AXFORD: And certainly I don't envy your 11 job. 12 --- Laughter 13 THE PRESIDING MEMBER: While we have this out, 14 can we just turn to the following pages and just address 15 this question of interruptibility of your surplus power 16 contract. We only have data here for years 1993 through 17 to 1997. Okay? 18 I guess, as you can see from the data, 1997 19 was much more interruptible. I would assume that that 20 was in part due to the fact that Pickering and Bruce and 21 the nuclear optimization program was started and was 22 under way and therefore some of the units were not 23 available. 24 Was that a factor that was affecting you from 25 an interruption point of view and from a cost of power 26 in 1998 and 1999? 27 MR. DON CAMPBELL: In 1997, the program was 28 somewhat changed to a buy-through option, which Les Services StenoTran Services Inc. 613-521-0703 2498 AMPCO PANEL 3 1 really -- 2 THE PRESIDING MEMBER: Yes. I saw that. 3 MR. DON CAMPBELL: -- probably allowed less 4 physical interruptions to occur and allowed you to buy 5 your way out of them if you so desired. So there was a 6 change between 1997 when the supply of energy in Ontario 7 may have -- the surplus supply may have dropped. 8 We certainly saw that as a very clear change 9 in 1997. I don't have the data available for the 10 interruptions in 1998 and 1999 from a system point of 11 view, but from a rate point of view they sure went up. 12 THE PRESIDING MEMBER: Went up? 13 MR. DON CAMPBELL: Oh, yes. Oh, yes. 14 THE PRESIDING MEMBER: What about the cost of 15 power on average as well as the number of interruptions 16 in 1998 and 1999? Was there a significant uptake in 17 that because it was being filled partly by import power? 18 MR. DON CAMPBELL: Oh, yes. The other thing 19 to be clear on is that although on average there may 20 have been a rate freeze in Ontario our company saw 21 continuous increases between 1993 and 1998. That was 22 because of the fact that the products that we were 23 buying were ratcheting down, whether it be discount 24 demand service or others, to the point now where 25 discount demand service is essentially no discount. So 26 our power was going up. Both facets. Not only surplus 27 but firm. 28 THE PRESIDING MEMBER: I would just like -- Les Services StenoTran Services Inc. 613-521-0703 2499 AMPCO PANEL 3 1 I'm sorry. If you have something to add please do. 2 MR. AXFORD: Excuse me, sir. 3 Part of the problem in 1997, also related to 4 the NAOP announcement, was that they then decided that 5 they needed to take their units out, some other fossil 6 units out, in order to do maintenance on it to ensure a 7 high effectiveness for the next winter. The actual 8 number of interruptions, I think, would have shown that 9 they decreased in 1998, but the price continued to 10 increase. 11 THE PRESIDING MEMBER: Thank you for that. 12 I would just like to come back to why in 13 general AMPCO didn't (a) propose, and (b) what you would 14 think would be the parameters for, interruptible power? 15 Okay? 16 So let's just deal with the question as to why 17 you ended up seeking the relief and maybe, as an 18 alternative, you could have proposed an interruptible 19 power rate even though the applicant did not have such a 20 rate in its proposal. Can you just deal with that one 21 first? 22 MR. AXFORD: It came down to a number of 23 reasons. Probably the most significant reason was that 24 we wanted to try to assist the Board in offering an 25 alternative that we felt would be relatively simple and 26 straightforward. I think that's about the extent of why 27 we went for that proposal, just to keep it simple. 28 THE PRESIDING MEMBER: Okay. Les Services StenoTran Services Inc. 613-521-0703 2500 AMPCO PANEL 3 1 MR. DON CAMPBELL: I'm not fully knowledgeable 2 on the details of that particular decision, although it 3 is my understanding that the idea was to fit the present 4 market rules and it wasn't there. 5 We weren't attempting to change the rules or 6 create something that wasn't already created. We were 7 just trying to make sure that we could adapt what was 8 already there. 9 THE PRESIDING MEMBER: The concept of 10 interruptible power -- let's make sure we understand 11 it -- is that there is capacity on, in this case, the 12 transmission system. It could be a pipeline. You know, 13 we have it in gas in spades. 14 The question is: That is your concept and 15 that there is spare capacity for most of the time, if 16 not all the time -- 17 MR. DON CAMPBELL: Yes. 18 THE PRESIDING MEMBER: -- and therefore they 19 can accommodate transfers, in this case, of power to 20 customers over and beyond what the system will normally 21 run. Is that right, basically? 22 MR. DON CAMPBELL: As a surplus customer, we 23 should be of value to the transmission system when it is 24 strained. When it is at or close to or above its 25 contingency limits we should be able to be of value by 26 extracting load from it and allowing that to operate in 27 a more acceptable manner. That is the value we are 28 talking about and that is -- well, that's basically the Les Services StenoTran Services Inc. 613-521-0703 2501 AMPCO PANEL 3 1 value we are talking about. 2 THE PRESIDING MEMBER: All right. 3 You are thinking of it in terms of the network 4 as opposed to line and transformation, just network. We 5 are talking about the network. 6 MR. AXFORD: I think in terms of the system. 7 THE PRESIDING MEMBER: The total system? 8 MR. AXFORD: The total system. 9 THE PRESIDING MEMBER: Okay. I'm going to 10 come to that then. 11 Do you see the components of interruptible 12 power rate, if one was proposed, to be related to only 13 the network charges or would it include line and 14 transformation assets owned by the Applicant? 15 MR. AXFORD: I would have to be honest with 16 you. At this time I couldn't give you a good answer to 17 that question because we decided relatively early on to 18 focus on the other alternatives. 19 THE PRESIDING MEMBER: My next question was: 20 What kind of charge determinants? You haven't addressed 21 that either? 22 MR. AXFORD: No, sir. 23 THE PRESIDING MEMBER: Okay. 24 But just in a conceptual state, wouldn't it be 25 necessary to set the rates on interruptibility based in 26 part on location, congestion on the system as opposed to 27 a universal consideration. Would that be a factor as 28 well? Les Services StenoTran Services Inc. 613-521-0703 2502 AMPCO PANEL 3 1 MR. AXFORD: As we go towards a locational 2 marginal pricing system, definitely location would have 3 a very important part to play, yes. 4 THE PRESIDING MEMBER: The other thing is that 5 exports may compete for the same interruptible capacity 6 that you are looking for. Right? That's another 7 trade-off that has to be considered here and, of course, 8 imports as well. 9 But dealing with exports specifically, 10 wouldn't that be another consideration as well? Who 11 gets preference? 12 We are not talking about the intertie now, we 13 are talking about the network itself. 14 MR. ARANHA: Inside Dofasco we have had some 15 very brief discussions on this particular subject of 16 interruptibility. The complexity from our vantage 17 point, we didn't have a real clear position with AMPCO 18 and I don't understand how ultimately the AMPCO position 19 evolved. We couldn't figure out who would do the 20 interrupting in the new market or how it would actually 21 be executed. That would be a real complex matter to put 22 in place so we didn't try to go down that road, although 23 conceptually it is a desirable thing. 24 THE PRESIDING MEMBER: Right. Some of the 25 complications we have talked about and, as you know, 26 there are many others as well. Thank you. 27 Those are my questions, so those are the 28 Board's questions. Les Services StenoTran Services Inc. 613-521-0703 2503 AMPCO PANEL 3 1 If there is any redirect from your counsel, we 2 will have that now. 3 Thank you, Mr. Fisher. 4 MR. FISHER: Thank you, Mr. Chair. 5 RE-EXAMINATION 6 MR. FISHER: In aid of assisting Mr. Vlahos' 7 exchange with Mr. Axford with respect to load factor, 8 could I take you to AMPCO's Exhibit H, Tab 2, 9 Schedule 1, and it's page 33. 10 --- Pause 11 MR. FISHER: In the bottom half of the page 12 there is a paragraph starting with "The flexible Type E 13 customer". I just want to ask Mr. Axford two questions 14 on this paragraph, if I may. 15 It says: 16 "The flexible Type E customer is a 17 customer who probably has a very large 18 proportion of production costs in 19 electricity. This customer operates when 20 the cost of electricity is low enough 21 that its operation is profitable and 22 normally shuts down when electricity 23 prices are high. This customer is likely 24 on surplus power rates today. If on 25 surplus power this customer makes no 26 specific contribution to the fixed costs 27 of the transmission system and the 28 customer is completely interruptible for Les Services StenoTran Services Inc. 613-521-0703 2504 AMPCO PANEL 3, re-ex (Fisher) 1 transmission or generation constraints. 2 Only Option IV, one hour coincident peak 3 load, and Option XVI, 50 hour coincident 4 peak load, fully recognize the diversity 5 between this customer's peak demand and 6 the system peak and allow continued use 7 of the transmission system at low cost 8 when other customer loads are low." 9 (As read) 10 Mr. Axford, do you believe that CXY Chemicals 11 fits within this characterization? 12 MR. AXFORD: Yes, I do. 13 MR. FISHER: Is the ability to use the 14 transmission system when other customer's loads are low 15 important to you as permitted by Option XVI? 16 MR. AXFORD: Oh, most definitely, because that 17 relates to the overall energy costs. 18 Again, typically when the systems loads are 19 low, that is usually during the off-peak hours and that 20 is also when the energy prices are lower and that is 21 when we would be operating at our maximum level. 22 MR. FISHER: Thank you. 23 THE PRESIDING MEMBER: Thank you, Mr. Fisher. 24 Thank you very much, gentlemen, for coming and 25 giving us your testimony. Thank you very much. We are 26 glad you came. 27 Thank you. 28 MR. AXFORD: Thank you, sir. Les Services StenoTran Services Inc. 613-521-0703 2505 AMPCO PANEL 3, re-ex (Fisher) 1 MR. ARANHA: Thank you. 2 MR. DON CAMPBELL: Thank you. 3 --- Pause 4 THE PRESIDING MEMBER: Mr. Brown, where are 5 your gentlemen? 6 MR. BROWN: They are here. 7 If I could call the members of the IPPSO 8 panel up. 9 --- Pause 10 --- Off record discussion 11 MR. BROWN: Actually, gentlemen, before you 12 get too comfortable, if I can ask you to approach the 13 dais and you will be sworn in as witnesses. 14 THE PRESIDING MEMBER: If you could give your 15 name to the reporter, please. Say it loud, please, so I 16 can hear you too. 17 SWORN: ALLEN G. BARNSTAPLE 18 SWORN: PHILIPP ANDRES 19 SWORN: ROBERT M. FAGAN 20 SWORN: BRUCE ANDER 21 EXAMINATION-IN-CHIEF 22 MR. BROWN: Dr. Higgin, Members of the Panel, 23 just to introduce the panel, starting from the witness 24 closest to the Board, Mr. Bruce Ander from Toromont 25 Energy, Mr. Allen Barnstaple, the immediate 26 Past-President of IPPSO, Mr. Philipp Andres from 27 Sustainable Energy Link and since we have combined the 28 panel, I have also included Mr. Robert Fagan, who is a Les Services StenoTran Services Inc. 613-521-0703 2506 IPPSO PANEL 1, in-ch (Brown) 1 consultant from Tabors Caramanis and Associates. 2 THE PRESIDING MEMBER: Thank you. 3 MR. BROWN: For the purposes of the 4 examination-in-chief, gentlemen, which I would like to 5 keep relatively brief, with the lead of my friends, I am 6 going to lead you extensively through your 7 qualifications and limit the questions that I ask of you 8 in chief. 9 I am going to start with you, Mr. Fagan. Just 10 by way of background, I understand that you have been 11 employed by the firm of Tabors Caramanis and Associates 12 since 1996. 13 MR. FAGAN: That's correct. 14 MR. BROWN: And that's a firm located in 15 Cambridge, Massachusetts, specializing in technical and 16 economic analysis of restructuring electricity markets. 17 MR. FAGAN: That's correct. 18 MR. BROWN: In summary, over the last four 19 years you have basically spent all your time dealing 20 with issues relating to the restructuring of electricity 21 markets. 22 MR. FAGAN: That's correct. 23 MR. BROWN: As part of your experience, you 24 are no stranger to Ontario and when the Market Design 25 Committee was up and running, I understand you were a 26 member of the MDC's wholesale market design technical 27 panel. 28 MR. FAGAN: Yes. Les Services StenoTran Services Inc. 613-521-0703 2507 IPPSO PANEL 1, in-ch (Brown) 1 MR. BROWN: And you attended the meeting of 2 that panel throughout its life. 3 MR. FAGAN: Yes. 4 MR. BROWN: Prior to joining Tabors Caramanis, 5 you were an associate with another consulting firm down 6 in Boston, Charles River and Associates. 7 MR. FAGAN: Yes. 8 MR. BROWN: Before that you had some 9 experience on demand side management implementation in 10 Rhode Island and before that you worked in the 11 transmission and distribution department of New England 12 Electric system. 13 MR. FAGAN: Yes. That's correct. 14 MR. BROWN: Which was a transmission company 15 in part. 16 MR. FAGAN: A vertical integrated utility 17 company. 18 MR. BROWN: Now, sir, you have by way of 19 educational background, I understand, a Bachelor of 20 Science degree in Mechanical Engineering from Clarkson 21 University in New York State. 22 MR. FAGAN: That's correct. 23 MR. BROWN: And a Masters degree in energy and 24 environmental studies from Boston University in 25 Massachusetts. 26 MR. FAGAN: Yes. 27 MR. BROWN: You have participated in providing 28 consulting services in respect of a number of regulatory Les Services StenoTran Services Inc. 613-521-0703 2508 IPPSO PANEL 1, in-ch (Brown) 1 matters including, I understand, the most recent 2 hearings involving the ESBI Alberta Limited before the 3 Alberta Energy Utility Board. 4 MR. FAGAN: Yes. That's correct. 5 MR. BROWN: That having been said, this is 6 your first time testifying before a regulatory body. 7 MR. FAGAN: Yes. 8 MR. BROWN: You were responsible for the 9 preparation of the report that we have marked as Exhibit 10 H10.6, Schedule 1. 11 MR. FAGAN: Yes. That's correct. 12 MR. BROWN: Were you assisted by anyone in 13 preparing that report? 14 MR. FAGAN: A couple of members of my firm 15 assisted me in preparing that report. 16 MR. BROWN: In particular, who? 17 MR. FAGAN: Dr. Richard Tabors, the President 18 of the firm, and Mr. Rick Hornby, a senior associate at 19 the firm. 20 MR. BROWN: Now, I understand that you have 21 reviewed the report and there are a few changes which 22 you wish to make to some portions of the report. Is that 23 correct? 24 MR. FAGAN: Yes. That's correct. 25 MR. BROWN: I'm just going to take you through 26 what I call two typos before we get to more substantive 27 ones. 28 Page 3 of the report, the last line of the Les Services StenoTran Services Inc. 613-521-0703 2509 IPPSO PANEL 1, in-ch (Brown) 1 text, there's a reference to Attachment 5.5. I 2 understand that should be 5.1. 3 MR. FAGAN: Yes. That's correct. 4 MR. BROWN: Then if we flip ahead to page 5 of 5 your report, under the paragraph where there is a 6 heading "Net load billing", in the third line from the 7 bottom, the sentence reads "Efficient mixed investments 8 in and new --". That "and" is a typo and should be 9 taken out. 10 MR. FAGAN: That's correct. 11 MR. BROWN: Now, more substantively, if you 12 could turn to page 11 of your report, there is a table 13 there. You had provided me two days ago now with a 14 corrected version of Table 1 to your report. My friends 15 are far ahead of us and they have already had this 16 marked as Exhibit G11.1. Am I correct that the change 17 that you have made on that table, which is shown on 18 Exhibit G11.1, is in respect to column "M" of your 19 table. 20 MR. FAGAN: Yes. That's correct. And also 21 the line towards the bottom that indicates a 22 computation. 23 MR. BROWN: Can you explain to the Board 24 members, please, why you made that change. 25 MR. FAGAN: Yes. In the original column 26 computation, column "M" used column "I" as a divisor. 27 That was incorrect. The correct divisor is column "F". 28 MS LEA: And the correct divisor was? Les Services StenoTran Services Inc. 613-521-0703 2510 IPPSO PANEL 1, in-ch (Brown) 1 MR. FAGAN: The correct divisor was column "F" 2 as in Frank. 3 MR. BROWN: As a result of recomputing those 4 numbers, are there any changes to the text of your 5 opinion that you wish to make? 6 MR. FAGAN: Yes. 7 MR. BROWN: Where will we find those? 8 MR. FAGAN: On the previous page, that's page 9 10 of the exhibit, the fifth bullet down from the top, 10 the last line states: "decline from 501 to 465". It 11 should read "decline from 501 to 490". 12 MR. BROWN: Is there any other change that 13 arises? 14 MR. FAGAN: There is no other change that 15 arises in respect of the change to Table 1. 16 MR. BROWN: Finally, on page 19 of your 17 report, I understand that you have got a graph there. 18 The text under that graph, in particular the second 19 sentence, there's a modification which you wish to make 20 to the language in that sentence to clarify it. 21 MR. FAGAN: Yes. The sentence currently ends 22 "nonetheless reach their own peak during true peak 23 intervals," -- 24 MS LEA: Sir, could you repeat that. I 25 couldn't quite hear. 26 MR. FAGAN: Sure. 27 MR. BROWN: I will show you the reference too. 28 I'm sorry. I didn't dig it out. Les Services StenoTran Services Inc. 613-521-0703 2511 IPPSO PANEL 1, in-ch (Brown) 1 MR. FAGAN: This referenced is page 19 of my 2 evidence. On the second line below the graph, the 3 second line begins "nonetheless reached their own peak 4 during true peak intervals". It should read 5 "nonetheless reached their own peak during the 7:00 a.m. 6 to 7:00 p.m. period". 7 MR. BROWN: And that concludes the changes 8 which you wish to make to your report. 9 MR. FAGAN: Yes, it does. 10 MR. BROWN: And subject to those changes, do 11 you adopt the report which we have marked as Exhibit H, 12 Tab 6, Schedule 1, as your evidence in this proceeding? 13 MR. FAGAN: Yes, I do. 14 MR. BROWN: I'm not going to take you through 15 the report to highlight things, Mr. Fagan, because I 16 think you have set them out fairly clearly. However, 17 there are one or two points of clarification that I 18 would like you to make as a result of some questions 19 that have arisen during the course of this hearing. 20 In section 3.3 of your report -- actually it 21 begins back on that page 19 -- you are talking here in 22 the net load, gross load billing issue and in particular 23 you are dealing with the proposal for net load billing 24 for connection transformation service with historical 25 load as minimum charge determinant. 26 When the OHNC panel was before us, they 27 indicated that they didn't quite understand what you 28 meant by an historical load as a minimum charge Les Services StenoTran Services Inc. 613-521-0703 2512 IPPSO PANEL 1, in-ch (Brown) 1 determinant. Perhaps you could briefly explain your 2 proposal and in particular explain how what you 3 suggested here differs from what OHNC is proposing, that 4 is gross load billing. 5 MR. FAGAN: Yes. What I propose for the 6 charge determinant for transformation and connection 7 services was essentially a net load billing based on 8 non-coincident peak, but with a minimum charge based on 9 representative historical load. That type of a rate 10 structure achieves what OHNC was trying to achieve with 11 the gross load billing charge determinant for connection 12 and transformation, but it does it without as many of 13 the inefficiencies that could arise using gross load 14 billing. 15 Just to add that there were a couple of 16 interrogatories on just what this is. I think it is 17 fairly straightforward. It's if a transmission 18 customer's load is reduced below historic load as a 19 result of that customer installing embedded generation, 20 that customer's connection and transformation charges 21 will be based on historical load and not the lower 22 number after embedded generation would be in place. 23 In terms of which historical load parameters 24 could be used, I don't have a strong opinion on that. 25 It could be something representative of recent 26 historical load, the year 2000, the year 1999, the year 27 1998. There are a number of different ways that that 28 could be computed. Les Services StenoTran Services Inc. 613-521-0703 2513 IPPSO PANEL 1, in-ch (Brown) 1 MR. BROWN: Thank you, Mr. Fagan. 2 Those are all the questions I have for you in 3 chief. 4 If I could turn to the other members of the 5 panel and I will ask you certain questions in turn. In 6 this proceeding some written evidence has been filed and 7 marked as Exhibit H, tab 6, Schedule 2. Mr. Ander, I 8 would like to start first with yourself. 9 I understand, Mr. Ander, that currently you 10 are the Director of Business Development with Toromont 11 Energy? 12 MR. ANDER: That's correct. 13 MR. BROWN: And Toromont Energy is a developer 14 of distributed generation projects? 15 MR. ANDER: Yes. 16 MR. BROWN: Generally, projects under the 17 level of 50 megawatts? 18 MR. ANDER: Yes. 19 MR. BROWN: You have had extensive experience, 20 I gather, in dealing with independent power projects in 21 Ontario, experience of about 20 years or so? 22 MR. ANDER: That's correct. 23 MR. BROWN: And for the last 10 years you have 24 been a director of IPPSO and, indeed, during that period 25 of time you served as President of IPPSO 26 MR. ANDER: Yes. 27 MR. BROWN: And by way of educational 28 background you are a registered professional engineer in Les Services StenoTran Services Inc. 613-521-0703 2514 IPPSO PANEL 1, in-ch (Brown) 1 the Province of Ontario? 2 MR. ANDER: Yes. 3 MR. BROWN: You got your degree in mechanical 4 engineering from the University of Western Ontario and, 5 in addition, you hold a business degree from the 6 University of Toronto? 7 MR. ANDER: Yes, sir. 8 MR. BROWN: Mr. Ander, you were involved, were 9 you not, in the preparation of the IPPSO evidence which 10 we have marked as Exhibit H, tab 6, Schedule 2? 11 MR. ANDER: Yes. 12 MR. BROWN: And to your knowledge the 13 information set out in that evidence is accurate and 14 complete? 15 MR. ANDER: Yes. 16 MR. BROWN: I take it you adopt the evidence 17 as your own for the purposes of this proceeding? 18 MR. ANDER: I do. 19 MR. BROWN: Mr. Barnstaple, if I could turn to 20 you, sir. You were from 1997 to 1999 the President of 21 the Independent Power Producers Society of Ontario? 22 MR. BARNSTAPLE: That's true. 23 MR. BROWN: And in that capacity is it fair to 24 say that you were involved extensively on behalf of 25 IPPSO in the various stakeholdering processes relating 26 to transmission rate design which preceded this hearing? 27 MR. BARNSTAPLE: Very true. 28 MR. BROWN: By way of work background you have Les Services StenoTran Services Inc. 613-521-0703 2515 IPPSO PANEL 1, in-ch (Brown) 1 had or you had a long history at Ontario Hydro, some 26 2 years? 3 MR. BARNSTAPLE: That's right. 4 MR. BROWN: You started in various engineering 5 positions at Ontario Hydro since you are an engineer by 6 training? 7 MR. BARNSTAPLE: Right. 8 MR. BROWN: And in 1986 you were given 9 responsibility for setting up Ontario Hydro's 10 non-utility generation program. 11 MR. BARNSTAPLE: That's true, yes. 12 MR. BROWN: And you ultimately headed up that 13 program. Is that correct? 14 MR. BARNSTAPLE: I was the Manager of Business 15 Development. 16 MR. BROWN: You continued in that capacity for 17 a number of years and then towards the end of your 18 tenure at Ontario Hydro you began to work for its 19 affiliate, Ontario Hydro International Inc.? 20 MR. BARNSTAPLE: Yes, that's true. 21 MR. BROWN: And then in 1995 you went out and 22 started your own consulting business, which is where you 23 are currently employed? 24 MR. BARNSTAPLE: That's true. 25 MR. BROWN: Mr. Barnstaple, you too were 26 involved in the preparation of the IPPSO evidence? 27 MR. BARNSTAPLE: Yes. 28 MR. BROWN: To your knowledge the information Les Services StenoTran Services Inc. 613-521-0703 2516 IPPSO PANEL 1, in-ch (Brown) 1 set out in that evidence is accurate and complete? 2 MR. BARNSTAPLE: Yes. 3 MR. BROWN: And you adopt the evidence as your 4 own for this proceeding? 5 MR. BARNSTAPLE: Yes. 6 MR. BROWN: Finally, Mr. Andres, if I could 7 turn to you, sir, you are the owner of an energy 8 consulting firm called Sustainable Energy Link? 9 MR. ANDRES: That's correct. 10 MR. BROWN: I understand that firm consults 11 primarily in the area of renewable energy sources, in 12 particular wind technology? 13 MR. ANDRES: Yes. 14 MR. BROWN: And you have as a major client one 15 of the premier wind technology firms, Vestas American 16 Wind Technology? 17 MR. ANDRES: Yes. 18 MR. BROWN: You have worked, have you not, in 19 the wind technology area for the better part of seven or 20 eight years? 21 MR. ANDRES: That's correct. 22 MR. BROWN: And prior to that you had 23 extensive experience on the agricultural industry front? 24 MR. ANDRES: That's correct. 25 MR. BROWN: Indeed, in terms of your 26 education, you got your diploma in agriculture from the 27 Agricultural College, Ebenrain in Switzerland? 28 MR. ANDRES: That's correct. Les Services StenoTran Services Inc. 613-521-0703 2517 IPPSO PANEL 1, in-ch (Brown) 1 MR. BROWN: In addition to your qualifications 2 on the agricultural and more recently on the wind 3 technology front, I understand you have taken a number 4 of different courses and certifications relating to 5 financial planning and different financial aspects of 6 business? 7 MR. ANDRES: That's correct. 8 MR. BROWN: In terms of your involvement with 9 IPPSO, you are currently a directly of IPPSO? 10 MR. ANDRES: Yes. 11 MR. BROWN: As far as the IPPSO evidence that 12 has been filed before the Board, you were involved in 13 the preparation of portions of that evidence, were you 14 not, sir? 15 MR. ANDRES: Yes. 16 MR. BROWN: In particular, did you take 17 responsibility for those portions we see primarily in 18 paragraphs 26 through to 29 that touch upon the issue of 19 wind generation farms? 20 MR. ANDRES: Yes. 21 MR. BROWN: So to the extent there are any 22 questions on wind technology you are the guy to ask the 23 questions of? 24 MR. ANDRES: Yes. 25 MR. BROWN: To your knowledge is the 26 information set out in IPPSO's evidence accurate and 27 complete? 28 MR. ANDRES: Yes. Les Services StenoTran Services Inc. 613-521-0703 2518 IPPSO PANEL 1, in-ch (Brown) 1 MR. BROWN: And do you adopt the evidence as 2 your own for the purposes of this proceeding? 3 MR. ANDRES: Yes, I do. 4 MR. BROWN: Again, the IPPSO evidence sets 5 things out in detail. Therefore, I am only going to ask 6 the panel a few questions, but perhaps I could turn to 7 you, Mr. Barnstaple, and perhaps sort of paint the 8 broader picture, since you are the immediate 9 Past-President of IPPSO and explain to the Board why 10 IPPSO has been so active in the stakeholder proceedings 11 and in this proceeding and why IPPSO places so much 12 importance to the outcome of this proceeding? 13 MR. BARNSTAPLE: Yes. Thank you. 14 IPPSO represents a large number of industry 15 players. Among our more important members are those who 16 are involved in actually investing in power generation 17 facilities. IPPSO members cover a broad range of the 18 types of facilities that might be invested in in a 19 province, from large merchant facilities right down 20 through to the smallest type of green project you might 21 envision being put in the province. 22 As such, IPPSO has been very active in the 23 restructuring effort in Ontario and has participated in 24 virtually all of the forums. We do that, essentially, 25 because to represent our members there is an opportunity 26 here to ensure that what comes into place in Ontario is 27 an extremely good proposition for our industry, in that 28 if we can create sort of a level playing field, it's a Les Services StenoTran Services Inc. 613-521-0703 2519 IPPSO PANEL 1, in-ch (Brown) 1 term that is widely used, but it certainly applies in 2 this case, for the generation sector in the competitive 3 market, we go a long way to meeting the overall 4 objectives of electricity restructuring, not just for 5 our industry but for the customers that ultimately are 6 supposed to benefit from what is going on here. 7 Basically, we are very keen to ensure various 8 forums are made aware of the interests of our members 9 and our views on how generation competition needs to 10 come into place so that people will invest in that 11 industry and the objectives of restructuring are largely 12 met. 13 Transmission tariffs are a very vital element 14 of that whole restructuring process. Even though they 15 need to be viewed as an element that the customer sees, 16 they are an essential component of what an investor 17 considers when he decides to make an investment. You 18 can't make an investment, particularly in small 19 projects, if you can't find a customer who will take an 20 interest in what you are proposing to do and in 21 particular the smaller segment of the industry is not 22 the merchant segment. 23 MS LEA: I'm sorry, I couldn't hear you, sir. 24 MR. BARNSTAPLE: The smaller segment of the 25 generation industry, the smaller types of projects, are 26 not the merchant end of the business. They are going to 27 be dependent in large part on bilateral sales. So what 28 the customers think about how competitive that type of Les Services StenoTran Services Inc. 613-521-0703 2520 IPPSO PANEL 1, in-ch (Brown) 1 offering is to them is vitally important to us and 2 transmission tariffs are going to be a very important 3 component. 4 To the extent that they are fair and 5 non-biased, then I think that small segment of the 6 industry can contribute to what's going on to Ontario to 7 the benefit of everyone. 8 MR. BROWN: Now there are two terms used in 9 your evidence -- and I will direct this to you, 10 Mr. Barnstaple -- distributed generation and embedded 11 generation. 12 Are we talking about the same things when we 13 are using those terms, or are we talking about different 14 projects? 15 MR. BARNSTAPLE: Certainly for the purposes of 16 this hearing, this rate application, they are one and 17 the same. And they are basically generation, in the 18 broadest term, that is located on the load side of the 19 wholesale meter. 20 MR. BROWN: Mr. Ander, if I could ask you, 21 since you indicated Toromont dealt primarily in the 22 under 50-megawatt market, when one looks down the road 23 the next one to eight years, in what load segments of 24 the market do you see realistic opportunities for 25 investment in embedded or distributed generation? 26 MR. ANDER: Well, our expertise is under 50 27 megawatts. And more precisely, our expertise is under 28 20 megawatts. Our forecast for the next eight years Les Services StenoTran Services Inc. 613-521-0703 2521 IPPSO PANEL 1, in-ch (Brown) 1 sees pretty well all of the opportunities in the 2 probably five to 20-megawatt range. 3 MR. BROWN: Do you see any opportunities in 4 the under one-megawatt range? 5 MR. ANDER: Not at this time. It is limited. 6 MR. BROWN: Why do you say that? 7 MR. ANDER: What you will find is that the 8 smaller the projects get, you get to the point where the 9 economics are becoming very difficult to implement. All 10 I can tell you is that in all the projects we have on 11 our radar screen, there are none currently under one 12 megawatt. 13 MR. BROWN: In the IPPSO evidence, on page 8, 14 as part of paragraph 21 there is a table. I understand, 15 Mr. Ander, that you were primarily responsible, although 16 not solely responsible, for the authorship of that 17 table. 18 MR. ANDER: That is correct. 19 MR. BROWN: Could I ask you very briefly to 20 take the Board through the information recorded on that 21 table and explain what it represents and how you arrived 22 at it. 23 MR. ANDER: The purpose of this table -- and 24 it is clear; it is a very simple table. The purpose is 25 to try to give the Board a high-level indication of what 26 the economics of these under 20-megawatt projects are. 27 What you can see, if you look at the 10 28 megawatts by way of example, when you get into projects Les Services StenoTran Services Inc. 613-521-0703 2522 IPPSO PANEL 1, in-ch (Brown) 1 of this size range, the cost per kilowatt to install 2 these projects is higher than the typical large merchant 3 plants or central generation; certainly over $1,000 a 4 kilowatt. 5 So in the 10 megawatt example, we have 6 suggested $1,000 to $1,500 a kilowatt. Also for these 7 small projects, the operating costs on a per-megawatt 8 hour/per-kilowatt hour basis are higher than the much 9 larger plants. 10 The other side of the equation, when you are 11 looking at what sort of typical net cash flows can 12 result from these projects, is that we have very high 13 efficiencies. The projects run in the 70 to 85 per cent 14 overall thermal efficiency. So we have more revenue 15 coming back from thermal sales to the host that this 16 generator is embedded or attached to. 17 The typical net cash flow from a 10-megawatt 18 investment, if I were to add another line to the way we 19 expressed the return, if you simply look at it the way a 20 customer would look at it, a small hospital or 21 institution or industrial customer looking at this 22 investment -- and the folks implementing these projects 23 are instructed to look at simple paybacks as a first 24 screen as to whether they would invest in 25 self-generation. 26 The sort of returns end up, in this example, 27 in the six-to-eight year payback range. 28 I can tell you that the customers in this Les Services StenoTran Services Inc. 613-521-0703 2523 IPPSO PANEL 1, in-ch (Brown) 1 class of business, given that generation isn't their 2 core business, what they are told is that anything over 3 five years is a very tough sell for their capital. 4 Under five years, or two to three years, they will look 5 at. Above five years is very difficult. 6 So the purpose of this table was to 7 demonstrate that the gross load issue is a direct cash 8 issue per project. Aside from what the right thing to 9 do is, it is a direct cash issue for the investment 10 decision, whether it is a customer deciding to 11 self-generate or whether a third party is going to 12 invest for that institution. 13 MR. BROWN: Mr. Ander or Mr. Barnstaple, I 14 would like to shift my question a bit and deal with the 15 issue of net load billing, briefly and in this way. 16 There have been strong suggestions by some participants 17 in this proceeding that net load billing is nothing more 18 than a subsidy to large industrial loads using embedded 19 generators, and net load billing would not make for a 20 level playing field amongst generators. How do you 21 respond to that suggestion? 22 MR. BARNSTAPLE: One of the premises that we 23 started with when we began to prepare for this hearing 24 is based on the fact that we have, as we mentioned, a 25 broad spectrum on membership. For some of our members 26 who are prepared to invest in large projects that are 27 connected to the high voltage system, gross billing is 28 fine, for obvious reasons. Les Services StenoTran Services Inc. 613-521-0703 2524 IPPSO PANEL 1, in-ch (Brown) 1 As Mr. Andres has mentioned, those that are 2 smaller and likely to be embedded generators, it is not 3 fine at all. 4 MS LEA: Mr. Barnstaple, the court reporter is 5 repeatedly having trouble hearing you. You have to keep 6 your voice right up, sir. Thank you. 7 MR. BARNSTAPLE: Okay. For the smaller types 8 of projects, the gross load billing concept is not fine 9 in that it imposes a burden that wasn't there before on 10 projects. Basically, that drove us to a premise that 11 said we have to approach this rate hearing on the basis 12 of what is fair and equitable from a ratemaking point of 13 view. 14 It was very easy for us to conclude very early 15 on that the concept of gross load billing was not fair 16 to those members that we have who want to invest in the 17 smaller types of projects, because in the final analysis 18 it appeared to be a tax being imposed on the customers 19 who take supply from that type of project. In effect, 20 it is charging those customers for transmission service 21 that they don't use. 22 That is probably the main part of what we are 23 trying to get across here on net load billing. We are 24 not asking for a subsidy; we are looking for an 25 equitable rate treatment here where some of our 26 customers are not taxed and therefore they have the same 27 sort of level playing field with others of our members 28 who are going to connect at the high voltage -- Les Services StenoTran Services Inc. 613-521-0703 2525 IPPSO PANEL 1, in-ch (Brown) 1 MS LEA: I'm sorry, sir, I can't hear you. 2 MR. BARNSTAPLE: Do these things work? 3 MS LEA: Yes, they do, but you have to get 4 very close. 5 MR. BARNSTAPLE: Okay. Basically, the premise 6 of rate fairness in the gross load billing, in the final 7 essence, is a tax imposed on a customer of an embedded 8 generator, because he is being charged for transmission 9 service that he is not basically getting. 10 MR. BROWN: Mr. Ander, do you have anything to 11 add? 12 MR. ANDER: I guess I would add two things. 13 Again, for the projects that we are dealing 14 with in the under 20-megawatt class we are not attached 15 to large industrial loads. The sort of projects that we 16 are pursuing, a five-megawatt project which is up in 17 Sudbury -- it is a district energy project -- the 18 thermal load that is serving the YMCA, a large 19 residential building and a provincial building, those 20 are the thermal load customers. Or another 21 five-megawatt project, a second project, we have up in 22 Sudbury is directly serving a hospital. 23 So although we do have some industrial 24 customers on the thermal end of our projects, they are 25 smaller industrial customers. 26 On the issue of subsidy -- and I have seen 27 this testimony and the word "subsidy" being used -- it 28 depends which side of the argument you are on, I Les Services StenoTran Services Inc. 613-521-0703 2526 IPPSO PANEL 1, in-ch (Brown) 1 suppose. If net billing is considered a subsidy to 2 embedded generation, then you would have to say gross 3 billing would be considered a subsidy for OPGI assets. 4 It just depends which end of it you come at it from. 5 MR. BROWN: Again, Mr. Barnstaple and 6 Mr. Ander, we have also heard in this proceeding some 7 alternatives put on the table. The Applicant, OHNC, has 8 indicated that its 50 per cent gross load billing 9 proposal is a short-term one, and they anticipate it 10 will be replaced in several years by a contract system. 11 One of the intervenors in this proposal, OPGI, 12 has put on the table a ten-year phase-out proposal, 13 under which gross load billing would fall from 100 per 14 cent to zero in ten years. 15 Would you comment on those proposals from 16 IPPSO's point of view? How do you view them? 17 MR. BARNSTAPLE: Maybe in the broader context. 18 As I mentioned, one of the things we are trying to do 19 here is create an environment that encourages generation 20 investment. If we don't do that then this whole 21 exercise of restructuring is going to be a dismal 22 failure. 23 We need that investment now. We need those 24 decisions on those investments sooner not later. Even 25 if an investment is made today, you are not going to see 26 a facility in place that is competing in the marketplace 27 for probably 48 months, something like that. 28 So we need to have an outcome from this Les Services StenoTran Services Inc. 613-521-0703 2527 IPPSO PANEL 1, in-ch (Brown) 1 hearing that is extremely durable. It tells people who 2 are prepared to invest what the transmission rate 3 environment is going to be, that it is fair and that it 4 is going to be durable for a long time. Having 5 mechanisms that prolong subsidies like gross billing, 6 it's not going to help at all. It is going to be a very 7 strong deterrent to investment in generation. 8 MR. BROWN: Finally, Mr. Andres, I would like 9 to -- 10 MR. ANDER: Sorry -- 11 MR. BROWN: Sorry. Mr. Ander? 12 MR. ANDER: Could I add? I'm not sure if you 13 directed that to me as well. 14 MR. BROWN: I did indeed. I apologize. 15 MR. ANDER: In the under 20 megawatt class, 16 our forecast, in a net billing regime over the next 17 eight years, is something in the neighbourhood of 18 400 megawatts we believe could be developed in the 19 Province of Ontario. Actually, that forecast, which was 20 done independently, is consistent with OHNC's 21 consultant's conclusion roughly and some other 22 intervenors who did similar work. 23 It is our view that in either case, of OPGI's 24 ten year phase-in proposal or OHNC's current 50 per cent 25 network relief proposal, that would do enough damage -- 26 that there would be some activity because new load 27 exists and there would be other circumstances of 28 projects like there has been in the past that would go Les Services StenoTran Services Inc. 613-521-0703 2528 IPPSO PANEL 1, in-ch (Brown) 1 forward, but that forecast would drop to something in 2 the neighbourhood of 100 megawatts. 3 I will let my colleagues, you know, discuss 4 the appropriateness of -- the impact of the 400 megawatt 5 or 500 megawatt forecast. That is our view of what 6 would happen if any one of these proposals went forward. 7 MR. BROWN: Thank you. 8 Finally, Mr. Andres, if I could change topics 9 and ask you the last question that I will ask, and this 10 is on the issue of charge determinants. You come from a 11 wind farm technology background obviously looking to try 12 and promote that as a source of energy generation in 13 this province. Could you describe the potential impact 14 of OHNC's proposed charge determinant on wind farm 15 development? 16 MR. ANDRES: Yes. Yes, I can. 17 Just to give a little bit of background to the 18 Board, fairly extensive studies have been done in this 19 province on what kind of a wind resource we have, 20 especially along the lake shores of Lake Huron. Those 21 studies indicated that at a better location a capacity 22 factor in the area of around -- net capacity factor -- 23 of around 30 per cent can be achieved for those wind 24 farms. 25 Now, wind turbines or wind energy has a 26 particular feature that it is an intermittent producer 27 of electricity in that during times when the wind 28 doesn't blow obviously they are not producing. But Les Services StenoTran Services Inc. 613-521-0703 2529 IPPSO PANEL 1, in-ch (Brown) 1 overall, based on the wind studies conducted here in 2 Ontario, the production falls pretty evenly between 3 on-peak and off-peak hours. So about 50 per cent of the 4 production is during on-peak hours. 5 Now, with the charge determinant or the 6 methodology which has been proposed by OHNC, basically 7 we would get caught under that charge determinant where 8 the 85 per cent of monthly non-coincident peak use 9 during any weekday hour is between 7:00 a.m. and 7:00 10 p.m. That would mean that during a month, at any point 11 in time, there will be times where the wind farm will 12 not be producing. For that reason, even though 50 per 13 cent of our energy is going to be delivered during peak 14 hours, the customer which would have wind energy at its 15 embedded generation would see absolutely no reduction in 16 their network transmission service charge on their bill. 17 Basically, we would have a zero impact even though we 18 are actually producing benefits to the system overall in 19 terms of line losses and producing during peak hours. 20 So that is the inherent problem, the way I see 21 it, that basically there would be no reduction in costs 22 even though we provide a benefit, and at least I feel 23 that wouldn't be giving fair consideration to the 24 benefits the wind farm actually provides to the 25 transmission system as such. 26 MR. BROWN: Thank you, Mr. Andres, and thank 27 you panel. That concludes my examination-in-chief. The 28 panel is available for cross-examination. Les Services StenoTran Services Inc. 613-521-0703 2530 IPPSO PANEL 1, in-ch (Brown) 1 THE PRESIDING MEMBER: Thank you, Mr. Brown. 2 Yes? 3 MS LEA: I just have a preliminary statement. 4 I have been asked to put on the record that, 5 heeding the Chairs remarks of early yesterday morning, 6 Mr. Warren for the CAC and Mr. Janigan for the VECC are 7 not intending to cross-examine this panel and will rely 8 on the record. 9 THE PRESIDING MEMBER: Thank you. 10 I think we will take the break before the 11 cross-examination part. We will come back after the 12 lunch break at five minutes to 2:00. How about that? 13 Thank you. 14 You had a concern? 15 MR. BROWN: No concern, an inquiry. I had 16 made some comment to Board staff before we resumed this 17 morning inquiring as to how long we were going to sit. 18 The reason I did that is that we do have some 19 constraints with respect to two members of the panel. 20 Of course ideally we would like to finish the evidence 21 today because there are constraints on Monday. So my 22 inquiry is whether the Board intends to sit until five 23 o'clock or beyond five o'clock this afternoon. 24 THE PRESIDING MEMBER: We are prepared to go 25 to five o'clock. Beyond that I don't know. Okay? 26 Thank you. 27 So we will come back at five minutes to 2:00. 28 Thank you. Les Services StenoTran Services Inc. 613-521-0703 2531 IPPSO PANEL 1, in-ch (Brown) 1 --- Upon recessing at 1238 2 --- Upon resuming at 1403 3 THE PRESIDING MEMBER: Good afternoon. Please 4 be seated. 5 Are there any preliminary matters? No? 6 I would assume maybe you were going to start, 7 Mr. Fisher? 8 MR. FISHER: Yes, Dr. Higgin. Your assumption 9 is correct. 10 THE PRESIDING MEMBER: Thank you. Please do. 11 MR. FISHER: Thank you. 12 CROSS-EXAMINATION 13 MR. FISHER: Mr. Barnstaple, I understand that 14 you worked at Ontario Hydro and were a senior member of 15 the department involved with non-utility generation 16 group. Is that correct? 17 MR. BARNSTAPLE: That's correct. 18 MR. FISHER: I'm not going to ask you anything 19 related to confidential information on that, but I just 20 have a few questions related to policies with respect to 21 NUGs, as they are known. 22 First, is it true that during the 1980s and 23 early 1990s Ontario Hydro expected a shortage of 24 generation and Ontario Hydro encouraged the development 25 of NUGs? 26 MR. BARNSTAPLE: Yes, that's true. Our load 27 forecast -- or our demand forecasts were showing 28 possible shortages past the two years down the road. Les Services StenoTran Services Inc. 613-521-0703 2532 AMPCO PANEL 3 1 MR. FISHER: And that if a manufacturing plant 2 built an on-site NUG the plant would be billed at net 3 load billing? 4 MR. BARNSTAPLE: Yes, that's correct. 5 MR. FISHER: I understand that from about 1992 6 onward Ontario Hydro saw a reduction in load growth and 7 started to predict a surplus of generation capacity and 8 at this time Ontario Hydro moved to the deferral of 9 installation of embedded generation. Is that correct? 10 MR. BARNSTAPLE: Yes. We essentially stopped 11 writing up new contracts. 12 MR. FISHER: Would you agree that the 13 expectation of that time was that the policies to 14 encourage NUGs would be resumed when the surplus 15 generation capacity ceased to exist? 16 MR. BARNSTAPLE: That was what we were telling 17 people, yes. 18 MR. FISHER: Just one point of clarification 19 related to your testimony in-chief. When you mentioned 20 that gross load billing was appropriate for merchant 21 plant, what did you mean by that? 22 MR. BARNSTAPLE: I'm going to ask that -- by 23 merchant plants I mean somebody who is in the merchant 24 power business, whether they are an embedded generator 25 or they are connected to high voltage system. In other 26 words, they are essentially offering power for sale to 27 the spot market. 28 MR. FISHER: Thank you, sir. Les Services StenoTran Services Inc. 613-521-0703 2533 AMPCO PANEL 3 1 Those are my questions. 2 THE PRESIDING MEMBER: Thank you, Mr. Fisher. 3 We will go to Mr. Stephenson, please. 4 Thank you. 5 MR. STEPHENSON: I think Mr. Campbell is going 6 to precede me. 7 THE PRESIDING MEMBER: Okay. 8 Mr. Campbell. Thank you. 9 I couldn't see you there. You were hiding 10 behind Mr. Brown. 11 MR. CAMPBELL: We are miraculously organized. 12 THE PRESIDING MEMBER: Right. I will remind 13 you later. All right. 14 --- Laughter 15 CROSS-EXAMINATION 16 MR. WHITE: Mr. Fagan, based on your 17 experience with distribution systems as well as 18 transmission systems, and I take it from your integrated 19 utility comments that you have experience in that area? 20 MR. FAGAN: Yes, that is correct. 21 MR. WHITE: Based on that experience, if I 22 were to suggest that the coincidence factor for general 23 service customers who are, say, above 50 kilowatts and 24 below 5,000 kilowatts might be somewhere in the order of 25 .85, would you find that a reasonable number, based on 26 your experience? 27 MR. FAGAN: You are talking about the 28 coincidence factor of their load to the system peak? Les Services StenoTran Services Inc. 613-521-0703 2534 AMPCO PANEL 3, cr-ex (White) 1 MR. WHITE: I'm talking about their coincident 2 factor on the distribution system. 3 MR. FAGAN: On the distribution system. 4 MR. WHITE: Yes. 5 MR. FAGAN: Coincident to the peak load on a 6 particular distribution feeder? 7 MR. WHITE: Yes, sure. That will do. 8 MR. FAGAN: For general service customers it 9 would probably be a range of factors. Some of them 10 could be at 85 per cent, yes. 11 MR. WHITE: What would you think the average 12 would be for fairly large general service customers? 13 MR. FAGAN: I have no specific knowledge on 14 that. It depends on the utility service company that 15 you are talking about. 16 If there is a utility that distribution system 17 is heavily loaded with particular types of commercial, 18 industrial, institutional customers it could be a little 19 on the high side, but if that is not the case, if it's 20 more heavily loaded with smaller commercial customers 21 it's going to be on the lower side. It depends on what 22 the general service classification detail is at any 23 particular utility company. 24 MR. WHITE: So that on the distribution side, 25 if I were to suggest 85 per cent, your view is that 26 might be considered to be a little on the high side? 27 MR. FAGAN: You would have to tell me what -- 28 that's a question of fact and it depends on -- you know, Les Services StenoTran Services Inc. 613-521-0703 2535 AMPCO PANEL 3, cr-ex (White) 1 tell me which distribution system you are talking about 2 or which customers groups and which particular feeder 3 that you are talking about and then let me go and look 4 at the data and I will see. I mean, it's going to span 5 a range. 6 MR. WHITE: Okay. What would the typical 7 range be? 8 MR. FAGAN: The range could be anywhere from 9 15 per cent to 98 per cent. I mean, it's -- 10 MR. WHITE: If I were to suggest to you that 11 the Ontario retail pricing design was based on an 85 per 12 cent coincidence factor for general service customers, 13 would you find that to be a reasonable number? A little 14 on the high side maybe for a broad use for all 15 distributors. 16 MR. FAGAN: When you talk about the retail 17 price design what are you referring to? 18 MR. WHITE: I'm talking about the existing 19 pricing design for demand cost allocation as you flow 20 through from wholesale prices to actual retail 21 distribution rates. 22 MR. FAGAN: You are not referring to anything 23 specific to the evidence that I have submitted? 24 MR. WHITE: Not at all. 25 MR. FAGAN: Would you repeat the question, 26 please? 27 MR. WHITE: Okay. If I were to suggest to you 28 that the coincidence factor for retail pricing in the Les Services StenoTran Services Inc. 613-521-0703 2536 AMPCO PANEL 3, cr-ex (White) 1 Ontario market were based on a coincidence factor of 2 .85 for general service customers, would you find that 3 to be a high number or a relatively low number to what 4 you would expect if I say that that number were applied 5 to all the distributors across the province? 6 MR. FAGAN: Well, with the caveat that I have 7 not looked in detail at the types of customers across 8 all of Ontario, I would say 85 per cent sounds like it 9 is a little bit high. You know, I think about general 10 coincidence factors, load factors associated with the 11 small commercial customers, I tend to not think up at 12 85, I tend to -- 13 MR. WHITE: I said coincidence factor, not 14 load factor. 15 MR. FAGAN: You are talking about the 16 coincidence factor of a particular customer -- 17 MR. WHITE: The average coincidence factor of 18 a pool of customers on a feeder. 19 MR. FAGAN: Please define "average coincidence 20 factor", the context of that question. 21 MR. WHITE: If you look at some of the demands 22 on the feeder and the non-coincident demands imposed by 23 the customers and you compare that with the aggregate or 24 the coincident demand on the feeder, would you think 25 that the 85 per cent is reasonable or not reasonable? 26 MR. FAGAN: It could be reasonable, it could 27 be high, it could be low. It's likely to not be low, 28 but it could be high. Les Services StenoTran Services Inc. 613-521-0703 2537 AMPCO PANEL 3, cr-ex (White) 1 MR. WHITE: Thank you. 2 Okay. If you then look at distribution 3 systems, based on your knowledge of what goes on in the 4 marketplace, is non-coincident demand an appropriate 5 allocator for distribution system costs? 6 MR. FAGAN: It could be. Distribution system 7 costs comprise a range of costs and to think about it 8 right you have to really break up those costs and say 9 which ones you are referring to. 10 If you are referring to specific fixed costs 11 associated with the wires and the transformers and the 12 circuit breakers, yes, you might consider doing that. 13 If the system tends to be more radial in nature you 14 could say that non-coincident peaks could be an 15 appropriate allocator for certain portions of 16 distribution system costs. 17 MR. WHITE: Isn't it true that most regulatory 18 agencies in North America use non-coincident demand to 19 allocate distribution system costs? 20 MR. FAGAN: I have no specific knowledge of 21 exactly what most regulatory commissions do in regards 22 to distribution system costs. 23 MR. WHITE: Would you agree with me that if 24 you had one customer whose demand was not coincident 25 with the system peak and they were on a distribution 26 system line, that that line would have to be built for 27 the capacity or the draw of that customer, therefore the 28 only way that the costs could be recovered for that line Les Services StenoTran Services Inc. 613-521-0703 2538 AMPCO PANEL 3, cr-ex (White) 1 in an equitable fashion would be to use it on the 2 customer's non-coincident demand? 3 MR. FAGAN: Yes. I think the situation you 4 described, that customer's non-coincident demand would 5 also be the coincident demand for the -- 6 MR. WHITE: Only for the feeder, not for the 7 system. 8 MR. FAGAN: No, you said it was just one 9 customer. 10 MR. WHITE: Yes, on a feeder. 11 MR. FAGAN: On the feeder. With the feeder 12 that's correct. For the system that's right. 13 MR. WHITE: Okay. Thank you. 14 If you then look at what is happening in the 15 Ontario marketplace, we are moving to generation which 16 is going to be priced out on an hourly basis. That's 17 what you understand to be the situation? 18 MR. FAGAN: Yes. Generally