RP-2000-0001 THE ONTARIO ENERGY BOARD IN THE MATTER OF ss. 44 and 45 of the Ontario Energy Board Act, 1998, S.O. 1998, c.15, (Sched. B); AND IN THE MATTER OF THE Proposed Gas Distribution Access Rule dated February 6, 2001. Hearing held at 2300 Yonge Street, 25th Floor, West Hearing Room, Toronto, Ontario, on Monday, June 25, 2001, commencing at 9:30 a.m. ---------- Volume 1 ---------- B E F O R E : F. LAUGHREN CHAIR & PRESIDING MEMBER S. HALLADAY MEMBER A. BIRCHENOUGH MEMBER A P P E A R A N C E S ELAINE WONG ) Board Counsel and Staff KELLEY McKINNON ) KATHI LITT ) PETER FOURNIER ) IGUA ROBERT HOWE ) OESC JACK SCHOENMAKERS ) JIM HAMILTON ) M. TREBILCOCK ) Direct Energy GARY DRUMMOND ) JIM CHUNN ) Coral Energy NICK FULFORD ) Centrica ELISABETH DEMARCO ) CEED I N D E X O F P R O C E E D I N G S Page No. Presentation by IGUA (Mr. Fourier) 2 Examination by Board Staff 7 Presentation by OESC, Coral Energy, 20 Direct Energy (Mr. Howe) Examination by Board Staff 63 Examination by the Board 90 Presentation by CEED (Elisabeth DeMarco) 106 Examination by Board Staff 118 Examination by the Board 129 --- Upon commencing at 9:35 a.m. THE PRESIDING MEMBER: Please be seated. Good morning, ladies and gentlemen, and welcome to the Oral Consultation on the Gas Distribution Access Rule. I'll make a few opening comments just to put the matter in context. You may recall -- I suspect most people in this room would recall that back in December of 1999, Board Staff issued an invitation to participate in a task force on the Access Rule. That task force reported back to Board Staff in the Year 2000 and then Staff prepared a Draft Rule based on that consultation in September of 2000. And then the Board proposed a Gas Distribution Access Rule and sent it out for comment in February of this year, February 2001. And now we're heading into a process in which the Board invited anyone who commented on either the Staff Draft of the proposed Access Rule or the proposed Access Rule to participate in this Oral Consultation. And the purpose of the Gas Distribution Access Rule as set out in section 1.1 1 of the proposed Access Rule is generally to establish rules concerning the conduct of the distributors and access to distribution services. And the objectives of this Oral Consultation are to allow parties to clarify and elaborate on the written submissions that they've already made in order to increase the Board's understanding of the written comments and the parties concerns and to understand the perspective of the small volume consumer in terms of how the Access Rule will affect them in terms of what consumer protection may be required. The process of this consultation will consist of each party making a presentation to the Panel and then the Staff asking questions of the parties and also the Panel Members asking any questions they might have as well. And each party has been allocated a time slot and you know what that is and I would ask you to respect those time slots so that you don't impinge on other people's time because everyone is busy and that would be unfair to them. So let us proceed with the first presentation from the Industrial Gas Users Association and if you could introduce yourselves. Mr. Fournier? MR. FOURNIER: Good morning, Mr. Chairman, Panel Members. I'm Peter Fournier. I'm president of the Industrial Gas Users Association. THE PRESIDING MEMBER: Before you start, I'm sorry, I erred in not introducing my Panel Members. I apologize. On my left is Sheila Halladay, Board Member, of course. And on my right is Art Birchenough, also a Board member. Sorry, Mr. Fournier. Presentation by IGUA (Mr. Fournier): MR. FOURNIER: First I wanted to thank the Staff for accommodating my resquest for timing. IGUA participated both in the task force and then provided comments this past February. As you correctly noted, Mr. Chairman, the main thrust of the distributor access rule is to the small consumer and we have limited our comments throughout the process to the single subject of section 3 which deals with emergency supply planning. Incidentally, I had sent 15 copies or so of our presentation to the Board secretary. I trust the Board has it. I have some extra copies here for anybody in the room who wants to have extra reading. Because when a utility would curtail an emergency situation, because it's most likely that the parties that they would curtail are industrial customers, that is why we have participated in this process. We have two principal concerns: one, the provisions in the Rule dealing with the declaration of an emergency, and secondly, the provisions for compensation for curtailed deliveries. With respect to the declaration of an emergency, in our view the wording in paragraph 3.1.1 one is too broad. And to perhaps help the situation we have provided a suggested alternative wording which incidentally was put together by our counsel, well known to you, Peter Thompson, so... We feel the wording or the provision for a utility to call an emergency should not be any broader than the provisions which one would find in the force majeure clauses of both Union and Enbridge Consumers Gas. Our principal concern is that there may well be circumstances in which the utility has failed to do or has caused a situation to arise which is its own fault, and it should not be able to relieve its obligations by declaring an emergency. For example, a situation conceivably might be where they have failed to adequately contract for needed supplies and intend to rely upon curtailments of industrials instead of purchasing the gas that they require. That would not be an emergency situation. It's just bad planning on their part. As opposed to the home owner who might otherwise get cut off, it's an emergency. So that is the thrust of what is behind our comments in the first section. I don't think I need to reread that to you. You have it there in writing and I'll answer any questions on it. Our concerns with respect to the compensation for curtailed deliveries follow from the language that is in paragraph 3.2.4. Currently 3.2.4 says: "The claimed purchase price may include..." and there are two bullets. The first bullet says: "(a) commodity costs", and second, "charges incurred to convey the gas from the point at which title is assumed by the distributor to the delivery point at which the curtailed or interruptible firm service customer would have otherwise assumed the reallocated gas volumes." We have two problems, the first dealing with the commodity cost. Commodity cost properly defined is really for the molecules only. And incidentally the definition of "commodity cost" is not included in the definitions under paragraph 1.2 and we suggest probably there should be a definition there just to avoid a legal wrangle should this ever have to be raised in court. Typically an industrial buys gas at the Alberta border. He may buy the gas upstream at the gas plant or from the producer at the wellhead. Someone buys it from the producer and moves it to the Alberta border and incurs transportation costs on Nova system or the NTTL system as we know it today. There may be storage costs at AACO. There may be some other costs involved in Alberta. So the price paid to purchase gas at the Alberta border will probably contain costs in addition to the definition of "commodity costs". So we felt that you needed to appreciate in the provisions for compensation that there may be other costs included in the price which a buyer buys gas at the Alberta border. Then secondly, the provision, the second bullet might be appropriate under some circumstances typically where somebody buys gas at the Alberta border and then delivers it to the utility who moves the gas to the customer's consumption point under a T-service contract with the utility holding the transportation on the TransCanada pipeline. But that is not all the cases. Some industrials buy their gas themselves at the Alberta border, hold their own transportation contracts and bring it down and deliver it to the distributor at the city gate. Marketers buy gas at the Alberta border, even up stream in Alberta, and move it down on TransCanada under their own contracts. And the present wording of the second bullet does not provide for the compensation either to the industrial or indeed to any other party holding the transportation on TransCanada Pipelines or indeed Alliance, Vector or whatever their mode of gas is, if it is not the distributor itself holding that transportation. So we have given you an example in page 3 of our brief, a company called ABC Industries buying gas at the Alberta border. It takes you through and describes the cost that would be incurred to move that gas down to the distributor. The present wording as I say does not pick up costs which are not incurred by the distributor upstream of the point where the distributor receives the gas. So to cover our concerns both with the definition of "commodity" and with these costs which may be incurred by the shipper on a transportation system before the distributor receives gas, we recommend that paragraph 3.2.4 be amended to provide for compensation to the industrial - or indeed you can read also to the marketer, whoever - for all other charges he legitimately incurred in the purchase of the firm gas that has been curtailed and we suggest you could solve that concern of ours by adding a third bullet. The third bullet would read as follows, any additional charges incurred by curtailed or interrupted firm service customers to gather, transport, store and/or deliver the gas from its source to the point at which title is assumed by the distributor. And if you included that, that would in our submission resolve our concerns. So we suggest three things in other words. One is that the provisions under 3.11 dealing with the declaration of an emergency be changed to the definition we have given you. Secondly, we recommend that you include in paragraph 1.2 a definition of the term "commodity cost" provided under the first bullet of 3.24. And thirdly, we recommend that you add a third bullet under 3.24 dealing with other delivery costs. And those, Panel, are our submissions. THE PRESIDING MEMBER: Thank you, Mr. Fournier. Any questions from Staff? --- Examination by Board Staff: MS. McKINNON: Thank you, Mr. Chair. If I might introduce myself at the outset, my name is Kelley McKinnon, counsel assisting Board Staff in this Oral Consultation. Mr. Fournier, if I might ask you a couple of questions in relation to your third point. I'll start there. Q. And that is, your recommended change that you just read out to clause 3.2.4., that the claimed purchase price may include any additional charges. And it's my understanding as you've explained today and in your submissions that that is to catch upstream transportation other costs relating to storage that might be incurred by the industrial user prior to title being taken by the distributor. MR. FOURNIER: A. It's not costs just related to storage but any upstream costs. Q. For gathering, transporting, storing or delivering, correct? A. Correct. Q. Now, can you tell me if this recommended change was added would that change in your view make the industrial, or as you have said, potentially other contracting parties whose gas is being reallocated in an emergency financially whole? In other words, is that an adequate change to capture any additional costs that you foresee? A. That was our objective and this is what we have attempted to capture. I'm not aware of -- well, I'm not infallible but I'm not aware of anything else that may... Q. Thank you. If I -- A. By the way, if I could just add, as this process continues and other parties have recommended enhancements or improvements to this to cover situations we haven't covered, we would not object obviously. Q. Fair enough. Mr. Fournier, have you had an opportunity to review the recommendation regarding the same clause that was made by Union Gas in its comments on the proposed Rule? A. I just saw it for the first time this morning. Q. Take a moment to look at it more closely if you like. And perhaps if I could just read it, I'd like your comments essentially on a comparative basis as to their recommended change versus yours and whether you see that they are appearing to capture the same costs. The recommended change which Union put forward to clause 3.2.4 is that the claimed costs may include transportation and commodity costs of gas landed at the distributor if reallocated. And I interpret that phrase "landed at the distributor" to essentially be the equivalent of your concept of when the distributor takes title. Do you have any comment on the applicability? A. I agree with their first bullet in that it covers essentially the same points. Q. And the second recommendation they have is that the claimed costs might also include any demand charges owing the distributor for firm service which was curtailed by the distributor. Are the demand charges referenced there captured in your recommended change in your view? A. If I take you to page 2 of our submission. Q. Yes? A. Under sub (b), transportation and delivery charges. Q. Yes? A. The first sentence we said: 'We assume that the current second bullet in paragraph 3.2.4 is intended to relieve, curtail or interrupt firm customers from having to pay any demand charges the customer would otherwise pay to the distributor.' So I don't know whether -- if I'm a firm customer and I'm curtailed because of an emergency, if I still receive a bill for my demand charges, notwithstanding the utility didn't deliver the gas to me, then the wording that Union have proposed would keep me whole. In other words, I would be able to claim demand charges that I also have to pay the utility. In other words, so it's a paper transaction I think. Q. Right. A. Alternatively, I think what I had assumed was that if I am curtailed and not receiving the gas, it's like a force majeure, I don't have to pay the demand charges because the utility could not render the service we've contracted for. So in either case, I'm kept whole and it certainly would not hurt just to avoid possible wrangling to include wording such as Union has proposed. Q. So I take it then if I understood you correctly, essentially you're saying Union has expressly stated "including demand charges" what you had assumed was included in the definition in the proposed Rule? A. Well, I had assumed if I was curtailed like in a force majeure situation, I wouldn't be paying any demand charges. If I'm still on the hook to pay demand charges, then yes, I need to get those back too. Q. Express. All right. Thank you. As to your submissions regarding the breadth of the definition of emergency and the power of a distributor to redistribute to certain customers over others in the event of an emergency, you've fundamentally claimed that the wording is too broad and that the preferable wording would reflect the force majeure provisions in some of the contracts we've seen. I think we say reasonably reconcilable with the force majeure provision. I might note that in the task force process you may recall that IGUA was unhappy with the provisions that the task force at the time came up with in terms of who could call an emergency. We wanted the powers to declare an emergency either be vested in the Minister or in this Board and it not be the utility that could call an emergency. That was to again avoid the situation where the utility has failed to do what they should have done properly and then have called an emergency to get themselves out of their own hot water and we wanted to avoid that. We felt there should be -- an emergency is a fairly serious thing. It is serious on one hand if you've got a supply problem, you can't obviously just shut off hospitals, schools, little old ladies in the middle of December. But at the same time you have a big employer, a big industrial plant with 5,000 employees, whatever else, producing goods and you can't just suddenly turn and switch off and turn him off either, that would cause hardship. So it's something that needs to be balanced carefully. We are not saying that the utilities would abuse the power but it's conceivable, and anyway, we accepted the revised, but the Staff didn't accept our recommendations to the Task Force. So be it. But we felt that the wording that you did provide in 3.11 was too broad. KELLEY MCKINNON: -- the proposed definition of emergency that you have, I tried to write parts of it down to compare it to the definition which is proposed in the Rule before us. And if we could just look at it for a moment, it's consistent that you agree emergency means a sudden and unanticipated situation. And then what you have inserted is the clause "not caused in whole or in part by the distributor". And then you agree with the definition and the proposed Rule with the language "during which a distributor is unable to." But then in your definition you have added, and just if this is of assistance, I'm looking at page 1 of the submissions, you have added the phrase "acquire sufficient gas supplies in the commodity markets or from the curtailment of it's interruptible gas customers". And then you're in agreement with the remainder of the definition from the proposed GDAR. And so the real distinction as I see it in trying to compare these two clauses, is that in your definition you have a focus on the acquisition of sufficient gas supplies; is that a fair analysis of the two? PETER FOURNIER: Well, we're talking about an emergency with respect to supply caused an emergency, not an emergency caused by a major line break. KELLEY MCKINNON: Well, that's really what I wanted to clarify. Would you agree with me that the definition in the proposed GDAR is not restricted to acquisition of gas issues. It is broad enough to cover emergencies in the distribution systems, whatever those might be, and that is because it is broadly worded in comparison to yours, which as I read your proposed definition, it speaks only to sudden and unanticipated situations in relation to not having sufficient gas supply. So it seems to me that your proposed definition is not broad enough to capture emergencies in distribution or delivery systems, which is not -- I'm not trying to be critical here, I'm just trying to make sure I understand. PETER FOURNIER: No, it does and it doesn't I suppose. I mean it does -- it's a sudden and anticipated situation. Let's assume it's caused by a major line break on say on the Dawn Trafalgar line, for Enbridge, serving Toronto, for example, suddenly finds a good portion of its supply for the Toronto area is curtailed because of the break on the Dawn Trafalgar line, I would hope that Enbridge then would suddenly and look what alternatives it has. And it has obviously still deliveries coming in on the TransCanada line down from North Bay, and -- KELLEY MCKINNON: I'm assuming -- I know Mr. Thomson's not here and I assume, Mr. Fournier your background is not as a lawyer. So I don't mean to be picky in any way -- PETER FOURNIER: No, but if there is an emergency of that kind of a nature. Then Enbridge, presumably, the first thing it would look to all right, how does it replace the supply it's lost because of the break at Dawn Trafalgar. And it should look to what it's got currently still flowing. It should look to what it could obtain by interrupting its interruptible customers. And it may find that it could get some gas back out of Niagara or something like that on supply basis. It should look first to its supply solutions. If it's only then if it's unable to meet its requirement by what it can find in the commodity markets or by curtailing interruptible customers, then it could turn to firm customers and curtail them. So I think this covers the kind of situation that might arise from a physical -- KELLEY MCKINNON: That's helpful to know your interpretation. Could I ask you one more general question, and that relates to your situation that any definitions contained in the GDAR should be compatible, I think you said, with the contractual force majeure problems -- or force majeure provisions. Those provisions I think generally interrupted to be in contracts to specify in clear terms what the contractual remedies are between parties in the event of a breach, which is either caused by a party through its negligence or otherwise, as opposed to events which are accepted by the party as being force majeure or beyond those control. And I wonder if you could help me understand a little better why you take the position that those contractual force majeure provisions, which I think generally are agreed to try to speak to rights between the parties ought to apply in circumstances where the Board is concerned with ensuring supply in the event of an emergency to certain customers who may be vulnerable without that supply, and you note there is a supply priority provision. So I think it can be fairly be said that this rule is designed to say in an emergency some difficult decisions may have to be made as to who is -- where the redistributions of gas are made. And could you help me understand why contractual force majeure are provisions that are applicable to circumstances where what we're trying to do is make some priority or allocations, decisions in difficult circumstances? PETER FOURNIER: Well I'll try. Obviously there are going to be situations and hopefully most emergency situations are going to be very clear, and there's no question that you have an emergency and all the communities should pull together. And I'm thinking Eastern and Western Quebec's ice storm several years ago, events like that cause emergencies that should everybody should just chip, but that may not always be a calamitous, nature-caused emergency of that nature. I think what we're trying to address here and avoid is that let's not forget we're talking about the curtailment of firm industrials and there is a firm contract. The utility shall deliver gas to the customer. So when you interrupt that or curtail it because of the emergency, I think what is behind our concern here is we don't have the utility then evoking the emergency clause when it's force majeure clause doesn't apply to the situation because it's a situation that was arguably within the utilities capability to have foreseen, and I can't give you, you know, a specific example of what that might be. There may be situations. I hope not. I trust in faith in our utilities. When you get down to the crunch and you have ten of millions of dollars on the line it sometimes puts you in a different perspective. Let's not allow the -- that was what was behind our concern on what utilities deemed the parties to declare the emergency rather than the government or the Board. So if they can call an emergency, they can keep their hands close to the fire and they do so only under true emergencies. That was the linkage to the force majeure. KELLEY MCKINNON: Thank you, Mr. Fournier. Mr. Chair, those are all my questions. SHEILA HALLADAY: I just have a couple of questions, Mr. Fournier. You suggested that we include a definition of commodity costs; do you have a suggested definition of commodity cost? PETER FOURNIER: I would be happy to provide one. I would have thought that was one that the Board would have itself. I certainly can. I would suspect if we went to either Union or Enbridge's tariffs, that would be defined in there too, any acceptable definition. It needs to be clear what is included under that first bullet. It may well -- you may be including some other costs other than the pure costs for the molecules such as the NOVA charges, you just need to have a clear definition. SHEILA HALLADAY: That was my next question, is that could your third bullet point suggesting the additional charges incurred by the customers be included within the definition of commodity cost. I mean how you define commodity costs, it depends upon what costs are included in -- PETER FOURNIER: But it wouldn't include storage charges for example, that's a down stream cost when you would buy the gas at the Alberta border. The third bullet covers all those other situations, but I still think for purity and clarity it's worthwhile to put a definition of commodity cost into your list of definitions. SHEILA HALLADAY: Thank you. Following along your analogy with the break in the distribution system, I clearly understood that if there's a break in the Dawn Trafalgar system, and it's impact on Enbridge, which is what you discussed, an inability to acquire sufficient commodity, how would that relate to a break in the Daw Trafalgar system with respect to Union's ability to deliver gas? PETER FOURNIER: Well, Union could invoke force majeure for one thing. To meet its other -- it serves the Hamilton area, so it could well be affected there by that break and to meet it's firm requirements for the resolution of the commercial market, then it may, yes, also have to declare an emergency and do the same thing. It should look first to what other sources of supply it could access, but if it has to, at the last resort -- SHEILA HALLADAY: Right. PETER FOURNIER: -- but if it has to as a last resort declare an emergency curtail from firm industry. SHEILA HALLADAY: Isn't this provision, GDAR, to deal with the allocation of the distribution not dealing with the acquisition of the commodity? PETER FOURNIER: Oh, I guess an emergency is a curtailment or a interruption in the flow of gas sufficient for the utility to meet all of its firm obligations. As soon as that happens you have an emergency. SHEILA HALLADAY: That's right. PETER FOURNIER: And the provisions here deal in part with the circumstances when the utility can call an emergency. And, secondly, having done so, the compensation that would be paid for the gas. It's not just the compensation nor the allocation. SHEILA HALLADAY: I appreciate that, but fundamentally it deals with the shortage of the commodity and the allocation of that among potential customers -- among customers of that commodity. PETER FOURNIER: Yes. SHEILA HALLADAY: So the question deals with if the definition hinges on the supply rather than on the delivery aspect of it, is that not the wrong side to be concerned about? Because ultimately it's the allocation of the delivery volumes, but regardless of why there aren't sufficient volumes to deliver to customers. PETER FOURNIER: But -- well it's -- it depends what coloured glasses one is looking through at the time. Once some of the flow to the utilities distribution area has been reduced for whatever reason, it should look for remedies it has to overcome that reduction and flow, and that first step they should do is interrupt interruptibles. SHEILA HALLADAY: Right. PETER FOURNIER: Secondly, they could look to borrow gas from somebody else. So Union is in a better situation than Enbridge in terms of the Hamilton area being very close to Niagara. They could borrow gas on an emergency basis from the U.S. pipelines, Tennessee and others at the Niagara delivery point, and bring it in that way and that is commonly done when we've had interruptions. Great innovation capabilities both at the pipelines and the utilities to make quick deals on an emergency basis, swaps of gas, whatever, and gas gets replaced -- that should be the second step, only as a last resort would you then curtail firm industrials. Obviously, you have to serve your residentials and your commercials, but there should be a staged process that the utility goes through before they get to the point where they are interrupting firms. That should be the last thing they do. SHEILA HALLADAY: Right. I -- PETER FOURNIER: So it's a supply situation from my perspective. SHEILA HALLADAY: We may be arguing semantics. Mr. Fournier, I understand your comment about not wanting the utilities to be able to call an emergency or use the emergency provisions in a spurious fashion in order to interrupt their firm customers. Have the utilities as a practical matter ever done? Has that been a practical problem in the past? PETER FOURNIER: No, and I think certainly their concerns during the task force were that the calling of emergency was left in the hands of the Minister or the Board. The said inevitably emergency would happen on the July 1st weekend and when the Chairman would be off in fishing country or something like that and couldn't get a hold of him. So they still wanted to be able to declare that emergency, and I think there's arguments on both sides of the coin as to whether -- I don't expect our concerns ever to be realized that the utility has pulled a fast one or some kind of language like that. I don't expect them to do that. They're completely responsible, but it could happen and one shouldn't then leave loose ends that -- if suddenly there are tens of millions of dollars in lawsuit or whatever else, it's amazing what -- that that might lead and an otherwise responsible party to avoid that 10 to 20 million loss. It is a possibility that they could abuse this, and it's that possibility that they said they will or we expect they will. SHEILA HALLADAY: Thank you, Mr. Fournier. FLOYD LAUGHREN: Thank you. I believe that completes the questions from the staff and the panel. Mr. Fournier that completes your presentation. PETER FOURNIER: Thank you, yes. I thank you for it, and for the responses to the questions that were put to you. I appreciate it. The next presentation is from -- originally it was the Ontario Energy Savings Corporation Coral Energy and Direct, and I believe the parties have worked an arrangement whereby they are making separate presentations. Who is going to tell us about that? Presentation by OESC, Coral Energy, and Direct Energy (Mr. Howe): ROBERT HOWE: Mr. Chairman, I can tell you about that. My name is Robert Howe, and I'm counsel for Direct Energy, Coral and Ontario Energy Savings Corporation. What you will be hearing first is a joint presentation by representatives of those three companies, followed by a presentation from Mr. Trebilcock, Michael Trebilcock. He'll be in a panel on his own to speak to his expert's report. And I will introduce the representatives of each of the three companies to you in just a moment. My clients would like to thank you and the members of the Board and Board staff for an opportunity to elaborate on the submissions previously made, and also to discuss their concerns regarding certain provisions of the DAR. What you will be hearing shortly is a panel discussion, an inactive panel discussion and we encourage an interactive exchange with the members of the Board. The representatives of the companies will be discussing the business issues involving specifically two provisions: The mobility provision, which is section 6.5.6 and the billing option, which is section 8. And my role during the panel discussion will be to act as the choirmaster for the discussion that will follow. At the end of the presentation I will have a few comments on jurisdiction, and I would ask the gentleman to come forward. KELLEY MCKINNON: Do we get to hear them sing? MR. DRUMMOND: You wouldn't want to. ROBERT HOWE: Mr. Chairman, on my far right is Mr. Jim Chunn. Next to Mr. Chunn is Nick Fulford. To my immediate right is Gary Drummond. To my immediate left is Mr. Hamilton, Jim Hamilton. And to my far right is Jack Shoenmakers. Now by way of background, Mr. Chairman, members of the Board, you should have before you or you should have been presented with the following submissions from my clients. You should have the OESC submission, you should have the Direct Energy submission, you should have the Coral letter of concern. You should have Mr. Brown's legal opinion of June the 11th, 2001. And you should have Mr. Trebilcock's economic analysis and his C.V. And if any members of the panel or Board staff or anyone in the room would like an extra copy, I have copies available of all of those submissions. Why don't I begin with the introduction of the presenters beginning with Mr. Chunn. Mr. Chunn, I understand that at the present time you are the Vice-President of marketing for Coral Energy; is that correct? MR. CHUNN: Yes, it is. Mr. Drummond: And Coral is an affiliate of the Shell Group of companies? MR. CHUNN: Yes. ROBERT HOWE: And you have worked in the energy field for 21 years? MR. CHUNN: Yes. Robert Howe: And I understand that you have worked internationally for Shell in the UK? MR. CHUNN: Yes, that's correct. ROBERT HOWE: Can you tell us a little bit about Coral's market share in the province of Ontario? MR. CHUNN: Yes, currently Coral sells natural gas to about 300 industrial and commercial customers in Ontario. We all sell to resellers like Ontario Energy Savings Corporation. We currently sell and trade about a billion cubic feet a day in the Ontario region. ROBERT HOWE: Thank you. Mr. Fulford, so that I understand you: You graduated from Durham University in the UK with a BSC in Engineering? MR. FULFORD: Yes, that's right. ROBERT HOWE: And that you also have a MSC from the Royal Military College of Science? MR. FULFORD: Yes, that's correct. ROBERT HOWE: And that you started with British Gas in 1983? MR. FULFORD: That's quite right. ROBERT HOWE: And you were involved in the restructuring arising from the UK market reforms, and you played a significant part for Centrica and the demerger of British Gas in 1997; is that correct? MR. FULFORD: That's correct. ROBERT HOWE: And you are now heading up a team looking at marketing entry opportunities in North America? MR. FULFORD: Yes, that's quite right. ROBERT HOWE: And that you, Direct Energy management in August -- the Direct Energy Management team rather, in August of the year 2000; is that right? MR. FULFORD: That's correct. ROBERT HOWE: And perhaps you can just tell us about the relationship between Centrica and Direct Energy please? MR. FULFORD: Thank you very much. Well, Centrica is probably not very well known to people here. We do actually still trade in the UK under the British Gas Scottish Gas names. The company's a 20 billion dollar Canadian company listed in the London Stock Exchange. As you've heard, it was created in 1997 and the company currently has around 14 million gas customers and 4 million electricity customers in the UK as well as a significant customer base in motoring and financial services. And we just started offering telecom services as well in the European context. Around two years ago the company was looking for further growth opportunities internationally, and after patrol of North America, we were attracted by the status of market opening in Ontario and felt that this would be the best place to position the company for growth within the North American markets. As you've heard, I joined the management team of Direct Energy around a year ago after the acquisition by Direct Energy by Centrica and the plan now is to use Direct Energy as a platform for growth in markets both in Canada and in the U.S. and indeed our objective is to have around 10-million customers by the end of 2003. So that really summarizes our objectives in acquiring Direct Energy and in entering the North American market through our presence here in Ontario. MR. HOWE: Thank you, sir. Mr. Drummond, you are a lawyer by background? MR. DRUMMOND: A. Yes. Q. And you were admitted to the Saskatchewan bar in 1973? A. Correct. Q. And you practised corporate law until 1990? A. Yes. Q. And in 1990 you founded Trans Prairie Energy Corporation. Is that correct? A. Yes. Q. And you acquired Direct Energy and you went public on the TSE in 1996? A. We did. Q. That Direct Energy has been sold to Centrica, as described by Mr. Fulford, and you have remained on as president. Is that correct? A. That's exactly right. Q. Thank you. Mr. Hamilton, you're well known to this Board. You were with The Consumers' Gas Company for over 40 years? MR. HAMILTON: A. Yes, I was, Mr. Howe. Q. And you were involved in their regulatory framework for the past 15 years? A. Yes, sir, that's correct. Q. And most recently prior to your going to OESC, you were the director of policy development at Enbridge Consumers Gas. Is that correct? A. Yes, I was. Q. And I understand that you are now a senior member of the OESC management team. Is that correct? A. Yes, sir, I am. Q. And I understand that by way of background as well you are a founding director of OEMA. Is that correct? A. Yes, it is. Q. Now, perhaps you can tell us something about OESC and the market that it services. A. OESC is a recently publicly-traded company which is owned by Energy Saving Income Fund. It operates primarily in the residential, small industrial, small commercial markets. It is the second largest marketer in Ontario, serving in the excess of 200,000 customers and it's been in business since 1997. Q. Thank you. Now, Mr. Schoenmakers, you are currently the vice-president of OESC? MR. SCHOENMAKERS: A. That's correct. Q. And you were one of the founding members of that company in July of 1997. Is that right? A. That's correct. Q. And you've got a long history of active involvement in the deregulation of the natural gas marketplace? A. Yes, that's correct. Q. And you started with Union Gas as I understand in 1983? A. Yes. Q. Then you moved to TransCanada in 1988? A. That's correct. Q. Then you were a member of the engaged marketing team up until 1993? A. That's correct. At the time it was known as Unigas Corporation. Q. All right. After that you were with Enron? A. Correct. Q. And you were involved in the Eastern Region until 1997? A. Yes. Q. And you were the vice-president of Stampeder Energy. Is that correct? A. That's correct. Q. And you have been the past Chair of OEMA. Is that correct? A. Yes, that's correct. My term ended this past month. MR. HOWE: Thank you gentlemen. Mr. Chairman, Members of the Board, we thought it would be helpful to talk a little bit about the integration of the contractual arrangements among the end-use customers, the agents and the distributors and what I have distributed to the Panel and what I have provided to Board Staff are copies of the contracts that we have referred to in our submission. This is the OESC submission, and I thought it would be helpful to have the gentlemen discuss a little bit about the contractual pyramid so that the Board and others present might have a better understanding of the integration of the provisions of the various levels of the contracts. And I have copies available as well to anyone else in the room who would like them. The first contract that I would ask the Board to turn to is the customer contract. It looks like a little brochure that you have in front of you. And this is the Ontario Energy Savings Corporation contract. Mr. Chairman, Members of the Panel, these happen to be examples of the kinds of contracts that are out there. And the contract that you have in front you really is the base of the pyramid. It's the bottom of the pyramid. And I'd like to begin by asking Mr. Hamilton to look at the customer contract and make some comments about the notice of appointment of the agent. Mr. Hamilton? MR. HAMILTON: A. Yes, Mr. Howe, essentially as you have so accurately described it, this is a typical customer agreement that would be entered into between an end-use consumer and an appointed agent like OESC but there are similar types of contracts and the arrangements are similar for other companies active in the marketplace. Effectively what this does is appoint -- the customer appoints the marketer, in this case OESC, as their sole and exclusive agent and supplier for all purposes relating to the supply of natural gas to their premise or to their place of business. And effectively they appoint the agent to act on their behalf in entering into arrangements with the distributor and upstream suppliers and upstream transporters as the case may be or the case may require. It effectively authorizes the agent to act in entering into contracts with the distributor as if they were the customer and it directs effectively the distributor to accept the appointment of agent and to enter into those contracts with the agent as if they were the customer. The effect of all of this is that the agent takes on an obligation to supply for a fixed term at a fixed price. And the customer takes on an obligation to receive and purchase at that fixed price for that fixed term. On the basis of this agreement, the agent will then enter into further agreements with the distributor to give effect to those terms and conditions of delivery and sale. MR. HOWE: Now, let's talk about the next step then. Mr. Chairman, Members of the Board, you should have before you a Gas Transportation Agreement. And this agreement is among Consumers Gas, the customers and OESC, but again it's simply a representative example of a transportation agreement that OESC has entered into as agent for low volume customers. And I have distributed copies of this contract to the Panel and to Board Staff and I have available copies of this contract to anyone in the room who would like a copy as well. Now, Mr. Hamilton, since you did you such a good job on the first question I'll ask you to now tell us something about the Gas Transportation Agreement that we have in front of us now. A. Yes, Mr. Howe, this is a standard form agreement that would be entered into by the agent on behalf of each customer, and the customers are identified in an appendix to the contract and are in effect a party to the contract. I think the key to this particular agreement is the one that you have already mentioned. It is a trilateral contract which imposes obligations and rights on each of the parties, being in this case Ontario Energy Savings Corporation, each person or customer, and the Consumers Gas Company. And those obligations and rights are summarized in the body of the contract. But, particularly, it requires that the parties perform in accordance with the expectations that are set out by the chain of contracts that are triggered by the original appointment of the agent and it provides for remedies in the event that that performance does not take place. Q. Now, Mr. Hamilton, let me just direct your attention to a couple of the provisions in the contract. First of all, provision 1.6 headed "Complete Agreement". A. Yes, sir. Q. If you can direct your attention to the last sentence of that provision? A. Yes, I have done that. Q. Beginning with the words: "No additions, deletions", et cetera. A. Yes, sir. Q. Perhaps you can tell us what you understand that to mean? A. Well, it basically can be taken at its face value. The chain of contracts that are in place as a result of this transaction, this contract does not provide for any additions, deletions or modifications to those arrangements unless the parties -- all of the parties to the contracts agree to those additions, deletions, modification or changes, and they must do so in writing. Q. All right. Would you turn with me, please, to provision 8.2 entitled "Representations and Warranties of Agent". A. Yes. Q. The agents of course in this case being OESC. A. Yes, sir. Q. What is OESC telling the company? The company is defined in this case as being Enbridge Consumers Gas. A. They are telling them that they are the duly appointed agent of the customer. They are representing and warranting that they are duly authorized to execute these contracts on behalf of the customer and they are telling them that a default by the customer will be the responsibility of the agent because the agent is acting as the customer. Q. All right. Now, specifically, if I could ask you to turn your attention to 8.4, entitled "Agent's Indemnity To Company" and there's something there about a failure of the agent to perform its obligations. What's that all about? A. Simply that the agent is obligated to deliver to the company for the term of this contract the requirements of the identified customers who are parties to the contract. And in the event that they fail to perform that obligation, they have an obligation to indemnify the Consumers Gas Company for any damages or cost consequences of that inaction on their part. Q. All right. Thank you. MR. HOWE: Now, Mr. Chairman, Members of the Panel, the last contract in the contractual chain is before you. It's called "Master Purchase Sale Agreement Eastern". It's a standard form Coral Energy contract, and again you should have that in front of you and I have copies of that available to anyone in the room who would like a copy of that. Q. Mr. Chunn, I would turn to you, sir. Perhaps, first of all, if you can identify this document for us? MR. CHUNN: A. Thanks, Mr. Howe. Yes, this is the Master Purchase and Sale Agreement Eastern and essentially this is the standard form of contract that Coral would enter into for sales of and purchases of natural gas in Canada. The intention of this contract again is essentially a standard contract. It sets out the general terms and conditions under the contract and in the body of the contract - we'll speak to certain provisions in a minute or two here - and the actual transactions themselves are captured, the terms are captured on individual confirmations that are sent between the parties confirming certain transactions. Q. And just for purposes of clarification, when you say the parties, this is the kind of contract that you would -- that Coral would enter into with parties such as OESC and Direct Energy. Is that correct? A. That's correct. Q. All right. And this sort of represents the top of the supply contractual link, correct? A. Yes, I guess similarly, just to carry that one step further, Coral would then enter into similar contracts to secure its gas supply from a number of vendors in Western Canada or in Eastern Canada for that matter, for resale to companies like Ontario Energy Savings Corp. and Centrica. Q. Now, if you could turn with me to provision 5.2, "Triggering Event". A. The intention of this clause is essentially to capture the situation where an affected party, that is, a company or a party that is unable to make payment, will trigger essentially the termination of the contract. And the reason why this one is important is that if under the transportation agreement, which you've just heard, payment is not made by a utility to Coral, then that would essentially trigger a termination of the contract. And the triggering of the termination of the contract then provides for in section 5.1 a termination payment to be made between the parties. The industry norm for the natural gas industry is a hold whole provision. So that's what the intention of section 5.1 is intended to get us to. So Coral is held whole and then the contract is terminated. If, in the example that we just talked about the payment is not made, the contract terminates and the payment is insufficient, then Coral would have to find a remedy in a court of law. Q. That's a polite way of saying that you would sue the agents and marketers? A. That's correct. Q. All right. Now, let's turn to the force majeure provision which is found in Article 8. And in particular, I'd like you to address that portion of the force majeure provision that can be found at page 7. A. Yes, these are the exclusions to the force majeure clauses. Q. Yes? A. Essentially the force majeure is intended to capture general industry problems that will result in parties being unable to perform under the contract. This contract provides certain exclusions and in it are on page 7 under section sub (6), price, loss of markets or economic conditions. The important one here is - and tying us back to the issue of mobility under the Distribution Access Rule, if customer contracts disappear, customers move, then essentially that's not captured as a force majeure provision under this contract. Q. Thank you. Now, perhaps we can talk a little bit about credit arrangements as they exist in the kind of pyramid that we've just described. I'm using the word "pyramid" to describe the integration system of contracts. Let's start with the customer contract. Mr. Drummond, perhaps you can help us in just giving us an overview as to what kind of credit arrangements are in place among the various tiers. MR. DRUMMOND: A. Well, yes I can. I think that as within a lot of issues, not only in this business but any business, it really comes down to money, to finances, to credit. I think the last four or five years in the energy business, credit is really kind of dictating the whole business. From our point of view, our ability to offer customers, retail customers, long-term fixed price contracts is totally predicated upon our being able to hedge that supply, whether it's gas or electricity. And our ability to hedge that supply is dependent upon credit. Our credit at this point is really dependent upon the fact that we are able to match long-term markets to long-term supply. And if that long-term market has the ability to fall away in a falling energy price scenario, then we cannot properly hedge and if we cannot properly hedge, then our only alternative is to not offer long-term fixed price arrangements. So I think that's borne out by our experience in the U.K. where we have 18-million customers, energy customers, and we do not offer in effect anything more than a one-month price because in the U.K. there's full mobility on 28 days' notice. So what we always have appreciated in the Ontario marketplace is the fact that with the rules on mobility, that it was amenable to companies such as ours offering customers long-term fixed price arrangements as well as short-term, month-to-month. We can't forget just the fact that there are long-term alternatives available precludes companies or individuals from opting short term. And in fact there are several offerings out today that are short term. But, you know, in comparison to any other jurisdiction in the world that I'm aware of, Ontario has in the past in the gas business offered customers long-term fixed price. In our experience worldwide, I think Ohio and Michigan were two jurisdictions where on a pilot project basis they restricted mobility for three years and in each of a those jurisdictions the market reacted and offered customers three year packages. In every other jurisdiction where full mobility exists, to my knowledge a one-year term is the longest available and in most cases it's month-to-month. So I think that, you know, from the Board's point of view and from the industry's point of view I think the whole foundation of a competitive marketplace is really predicated on being able to offer customer choice and customer choice is conditional upon really proper hedging. So in our case, you know, to date we have been able to in effect assign the proceeds from these long-term offerings to our customers to our suppliers as credit for their guaranteeing delivery over a five-year period. In the absence of that arrangement then a supplier such as Coral really have no choice but to enter into a mark-to-market type credit arrangement where if there is price volatility you have to post credit, being a letter of credit or a corporate covenant, to secure up to five years of mark-to-market volatility which, by ease -- Q. Sorry. What do you mean by mark-to-market? A. Well, I'll use the example -if we have we had 100,000 electricity customers under a fixed price five-year arrangement, one year into the term the market is 30 per cent different than when we entered into it, then we would have to post security for 30 per cent of that potential liability over the ensuing four years which in today's prices in Ontario that would mean we would be posting credit for $100-million to secure that unexpired four-year term. Q. With whom would you be posting that security? A. The security would be posted with the energy supplier. And so in realty, you know, our company -- our total revenues are dependent upon the margin between what we pay for energy and what we sell for. That's our only source of revenue, so if we -- we have 300 employees, I think, approximately in Canada and so that, you know, going forward, if in Ontario we're not able to hedge long-term, then we'll have to revert to the potential of offering only month-to-month packages and in that scenario then Ontario would become like every other jurisdiction in by view which is a noncompetitive situation. I think the deregulation, I think the whole concept of deregulation as far as I was concerned was to offer choice and foster a competitive marketplace. And fundamental to that is companies such as ours being able to offer different packages, different choices. And so in the absence of our being able to hedge, we're severely restricted in the type of package we can offer here in Ontario. MR. HAMILTON: Thank you, Mr. Howe. Could I just add to that? MR. HOWE: Please do. MR. HAMILTON: A. First of all, I agree entirely with Mr. Drummond's analysis and I think it's important to bear in mind that customers have benefited very, very significantly from the regulatory environment that has been put in place in Ontario to foster direct purchase activities. In fact, Ontario has the most vibrant direct purchase market for small volume customers in North America. The only other jurisdiction in Canada that's even close is Manitoba, and that's primarily because Manitoba's model is exactly the same as the Ontario model that's in place today. To interfere in or change the fundamental underlying premise on which those markets have been developed is something we just cannot understand what's expected to be gained from it. As you've heard from Mr. Drummond, customers have saved in this province hundreds of millions, if not billions of dollars since the early '90s when deregulation was introduced. That opportunity will be gone because they will be paying the month-to-month price which is what they can do now by staying with the utility. So there would be very little point in having had the last fifteen-year journey. It will reverse all of those benefits. I personally am saving approximately $6- to $700 a year on my home heating bill, that compared to what I would be paying to the utility if I were paying today's prices. That opportunity just won't be able available to me if I cannot find a supplier who will enter into fixed long-term arrangements. Q. Thank you, Mr. Hamilton. Mr. Fulford, I know you have some U.K. experience and perhaps you can tell us the ramifications of full mobility in the U.K market? MR. FULFORD: A. Yes, I think, before speaking particularly about the U.K. example, it's worth just underlining a couple of the points that my colleagues have made here. First of all, over the last year, my own experience in the U.S. markets in particular is such that I think just referring to Consumers' pilot scheme in Michigan, for example, Gary mentioned the customer mobility issues which affect that market where there's been I think a 43 per cent switching level which I think as far as U.S. markets is concerned is probably the highest. I think the factor that I would wish to emphasize with the Board here though is actually one of customer confidence in the market. I think in my experience I would say that is the one factor which is probably of prime importance in considering any changes or any plans in relation to the deregulated energy market. A lot of that customer confidence I think comes from stability coupled with what's perceived as value for money and good service. I think there are probably two factors there which can undermine that customer confidence. One of course is changes in the wholesale market. And on that point I would draw the Board's attention to the changes that have occurred in the North American commodity markets over the last eight months probably, both in gas and electricity, where some customers have been subjected to very severe changes in wholesale market prices. And the other very important factor in terms of customer confidence is the business rules which relate to the way the market deregulates, and particularly where those apply on a retroactive basis. One example I'd just like to leave with the Board here relates to Georgia, where a number of retroactive rules were brought in in January this year which, on the face of it, were intended to protect consumers against some of the very significant changes in market price which had occurred. Now, I think at the time the value of those rule changes were debated very heavily, but they were introduced nevertheless and the overall result of that has been to add I would say something of the order of a $50-million cost onto the marketplace in Georgia and has very severely undermined customer confidence in the market there. Now, that obviously is a very -- Q. Sorry, Mr. Fulford, maybe I can just interrupt. Why has the change to mobility resulted in a cost to the marketplace in Georgia? A. Well, the specific change which was brought in January related to consumers' ability to switch between marketers without reference to whether their bill was in credit or not in credit, and the result has been a very large amount of debt being built up in that particular market. MR. FULFORD: -- cost on to the marketplace in Georgia and has very severely undermined customer confidence in the market there. Now that obviously is a very -- MR. HOWE: Sorry, Mr. Fulford. Maybe I can just interrupt. Why has the change to mobility resulted in a cost to the marketplace in Georgia? MR. FULFORD: Well, the specific change which was brought in January related to consumers ability to switch between marketers without reference to whether the bill was in credit or not in credit, and the result has been a very large amount of debt being built up in that particular market. My estimate of the likely debt probably now unrecoverable from that markets is probably $50 million, which ultimately will spread between obviously market participants and the customer base in Gerogia. That was an example where in a particular switching rule created what I would describe almost as market chaos. Now clearly we're not looking at the same example here, but nevertheless I think that does go to demonstrate, you know, how customer confidence can be undermined. I think from a UK point of view one of the features which differentiates the UK from the North America markets has in fact been the lack of commodity price volatility so far. And in fact because of the over supply position that has occurred in both gas and electric markets over the last two to three years, typically, customers or marketers haven't been offering the range of tariffs that we've seen in North America. However, in the same way that the North America markets change somewhat this last winter, European markets have seen specific price rises particularly in natural gas. And I think one of the features which will perhaps prevent full savings and the full advantages of deregulation being fed through customers, certainly in the shorter term, is the mobility and the fact that Gary has referred to, which is currently there is a 28 day switching capability there. So I think as the tariffs being offered to consumers being offered to consumers, particularly on the gas and the electricity and in fact the dual fuel side of the business, which is now becoming more important when consumers take both gas and electricity from the same marketer, I think as those tariffs become more sophisticated, we may well see moves to change arrangements in the UK to provide for high degree of stability going forward. MR. DRUMMOND: I think at the current time in the UK, our company is losing approximately 50,000 gas customers a week and gaining about the same amount. So there's about 100,000 customers that are churning on a weekly basis, and that's, I mean, virtually totally due to the very liberal rules on mobility, but it's also the total reason why we are only able to offer short-term index-type packages. MR. CHUNN: There must be some significant costs involved in that? MR. DRUMMOND: Well absolutely. There are some costs involved, and as I say, in all business eventually those costs can only be flowed through the customer, or else, you know, we're out of business. So the customer is paying -- indirectly for that cost. MR. HOWE: Any other -- do the representatives want to make any comments about the benefits that are now accruing to the customers in Ontario as a result of the existing arrangements? MR. CHUNN: If I can just briefly -- there is a real benefit right now in the marketplace due to the shape of the gas price curve, and I think Jim Hamilton mentioned early that he'd saved $600 on his gas bill in the last year, well that's essentially because most of the utilities, although they do hedge to a certain extent, don't hedge extensively. So they're gas prices that tend to be following the market. The first year or two of the market pricing right now is very high. If a customer can lock in for a long term, then they get a very significant benefit. And I think that's something that a customer would want to have a choice to be able to do, and the current structure actually facilitates that. Mobility is something which will probably destroy that structure to a significant extent as you've heard already, because there will be a tendency for buyers to purchase their gas shorter term because of the credit requirements that companies like mine will impose upon them. This is something that we're seeing, actually a move to lower competition in some jurisdictions such as Alberta where there was an initial opening of the retail gas market, a flurry of sign-ups from a number of different marketing companies until they realized the credit structures weren't going to facilitate the same kind of environment as Ontario. There was a huge retrenchment, and, in fact, most of the customers just went back to utilities. And now it tends to be only very large credit-worthy companies that are able to get into retail gas and electricity. It's actually sort of taken competition back a step from where I think the Alberta government tried to push it, so just a comment on that. And the other one I wanted to mention was that the credit that we'd been looking for is similar to what customers -- what companies would be looking for in the power market. We call it, I guess, in the power, it's called prudential. It's a 55 -- 60 day receivable, and in addition to that the mark to market risk. If you look at the mark to market risk, what I mean by that is essentially the potential in the market over time. When you look at a long-term deal like a five-year deal we've been talking about here, mark to market is a very large component of the overall risk assessment, and typically it would be between 30 and 40 of a commodity price of gas. So if the commodity price of gas was $5, I would assess the credit on that mark to market risk 30 to 40 percent of that number over the whole term of the contract, the whole five years. And in addition to that add 55, 60 day receivable. That winds up being for companies like these tens of millions of dollars, and perhaps even hundreds of millions of dollars depending on the size of our customer portfolio. That's a very large cost that they would have to bear compared to the current situation where they're really relying on the end-user credit. MR. DRUMMOND: In our case we did an assessment in January where I'll admit that the gas prices were very high, but at that time we calculated that the customers in Ontario were benefitting against the forward price of gas in excess of $1 billion. And if we did the calculation today it would of course be less but it would still be in excess of $500 million. MR. HOWE: Thank you, gentlemen. Let's talk now about some of the existing consumer protection measures that are in place for the low volume customers. And perhaps, Mr. Hamilton, you can tell us something about that. MR. HAMILTON: First of all, as this Board will be very familiar, marketers operating in low volume markets, under 50,000 cubic meters a year, are required to be licensed by this Board, and they are subject to a Board-mandate code of conduct. They are also -- most marketers are members of the Ontario Energy Marketers Association, which also has a similar code of conduct and in fact was one of the leaders in assisting in the development of that code in its early days. Once the customer has -- the customer also has a customer bill of rights and have been developed by OEMA, and you will find a company or certainly a summary of that bill of rights clearly set out in the contract, the one we talked about earlier this morning. The customer has a ten-day rescission, cooling off period, if you will, from the date of first signing the contract. In addition, in Ontario, the customer has 30 days after the receipt of their first bill in which they can rescind their decision without penalty. And the customer has seven-day-a-week access to well-staffed and well-trained customer service representatives, who can assist them if they have any problems. They also have access to a Board sponsor complaint resolution process, which each of the marketers subscribe to and work with in resolving customer issues. I think the rights that the customer has today are quite extensive and they're quite -- they've been quite workable. And our own company experience is that the actual level of complaints and customers wanting to get out of contracts is a very low number. It would be in the range of maybe five percent, and most of that is because they're moving from one premise to another premise, it's not a complaint per se. Under the existing rules, customers -- the contract is premised specific, and so when the customer moves from one premises to other premises you actually have to actually re-sign the customers, and many, many customers do in fact want to resign. Many of them would like to take there existing contact with them, but in most cases they're not able to do that at the moment. MR. DRUMMOND: In addition, I agree with what Mr. Hamilton said, in addition, speaking for our company, since 1990 it's really been our policy that if any retail customer called and were adamant about wanting out of the contract for a reason other than purely financial, then we deem that it was in our interest to allow that customer to get out of the contract. Not that we're a charitable organization, but the practicalities are that it's not worth our while to take the time and effort and potential adverse publicity to argue with a retail customer that is adamant about wanting out of our contract. So it's not -- it's obviously not a policy that we publish, but I can tell you for sure that that's what we followed since 1990 is that -- MR. SHOENMAKERS: Ontario Energy has done the same thing since our inception. If we've had a customer come to us midway through the term with some type of hardship or whatever or feels that something inappropriate went on, we've allowed them out of the contract. So we've tried to deal very fairly with their customers, and we feel that a happy customer is a better customer. If they're not happy for whatever reason, we follow that policy. MR. HOWE: Thank you, gentleman. Now I would like to propose the next issue, and that is bringing in the mobility provision retroactively, and by that I mean the Board's adoption of the proposal 6.5 and 6.6 permitting open access mobility to existing contractual relationships, and that's what we've characterized in our submission as retroactively. And what I would like you gentleman to talk about, if you wouldn't mind, is the financial consequences of permitting mobility enacted on a retroactive basis. Gents? MR. SHOENMAKERS: Well, just to start off with, Mr. Chunn had indicated that a key measure of credit risk is mark to market exposure. We keep a close eye on what our mark to market exposure is for our portfolio. And at any given time over the past, I'd say, 6 to 12 months, our mark to market exposure has been probably in the low end $40 million and on the high end in excess of a $100 million. Those are the types of credit implications to our company should mobility be enacted on our existing customer base. So we would likely have to come up with a portion of that if customers started to leave on mass. And it would cause us great financial hardship. And in all likelihood we would be dealing with trigging events that Mr. Chunn has mentioned in clause 5.2 of the contract. So it becomes very onerous on us, because we no longer have a stable customer base that we can rely on for those credit terms that Coral has granted us. MR. HOWE: Gentleman, let me just pose the question: Presumably, the end use -- the following hypothetical question -- that is presumably the end use-customer has made a commitment to you in the form of the fixed contract that Mr. Hamilton described. That obligation continues, of course, on a go-forward basis, despite the fact that the customer might have jumped ship. Presumably, gents are in a position to enforce your contractual rights opposite that customer. Maybe you can address your comments about how that would work? MR. DRUMMOND: I think so. I mean going forward, our solution to full mobility, of course as I mentioned, is to not offer anything other than short-term arrangements, so that's our solution going forward in practical terms. On the issue of the retroactivity part of the discussion, I think that you're quite right Mr. Howe. We have a contractual arrangement with our end user. Hypothetically, we would be able to, if they default on that obligation, we hypothetically could take that matter to court and sue that end user for what would amount to the mark to market damages at that time. So in other words the difference between what we could sell the gas that we bought for that customer, and what the market is on that date, would be the crystallization of our damages. Now realistically, however, our plan would be to do a number of test cases and try to, you know, publicize the fact that our customers are obligated to meet their contractual requirements. But we really do believe that with full mobility we would in effect be withstanding that financial loss until the duration of those contracts, and simply not entering into any additional ones. So it's not a very satisfactory solution. And I would also say that if we took a hard line and chose to sue tens of thousands of customers, I think that that would be an end result that would not be very favourable for the regulators, the legislators or, in fact, our company, so ... MR. HOWE: Or the customers. MR. DRUMMOND: Or the customers, right. So I think that there would be four losers in that scenario, and that's certainly something that we would very much like to avoid. MR. FULFORD: Perhaps I could add to Mr. Drummond's comments on that. MR. HOWE: Yes, please. MR. FULFORD: In that from Centrica, retroactive rule changes, if you like, something we're particularly sensitized to, although the context is slightly different, I would draw the Board's attention to the developments within the UK market in the early 90s, early to mid-90s, where having had the company privatized on the basis of a 25-year monopoly in the residential gas supply area, those rules were then changed as a result of various proceedings, and the financial consequence of that to what was British Gas PLC was something of the order of a $6 billion post-tax liability. Now one of the reasons behind the demerger of the company was to address that problem. And subsequently, of course, the companies had a much greater focus on risk management and the ability to plan for this kind of thing. I realize that the example there is slightly different, but nevertheless my earlier comments about market stability and customer confidence equally apply here in that to go through the kind of process that Mr. Drummond has referred to of having to pursue and enforce contractual obligations, I think could potentially undermine what is currently an excellent example of a well-managed gas deregulation. MR. HOWE: Anybody else? MR. HAMILTON: I just wanted to make one comment that a lot of arithmetic is being done here and a lot of big numbers are being thrown around, but I think at the end of the day, those numbers are very real and I think that what needs to be understood, and I'm sure it is understood but I just want to reinforce the point, is that either if those costs have to be incurred in order to make the marketplace work, the customer will pay those costs at the end of the day one way or the other, or there will not be a product offering, so the customer would not have the benefit that they have enjoyed for the last 15 years. MR. HOWE: All right, gentleman, I would like to talk very briefly now about the exception provision. As part of the proposed rule there is a suggestion that there will be an exception that is capable of being granted, and that's Section 1.6.1. Perhaps I could have some of your comments about the workability of an exception to the mobile provision. Gents? MR. HAMILTON: Well first of all, Mr. Howe, it's not perfectly clear to me that we would be even eligible to apply for an exemption. Presumably we would, but the rules propose to government conduct of utilities, but presumably we would be in a position to make an application for an exception. But that doesn't address -- that may have the ability to address the retroactive aspects of it, but it does not address any of the going forward consequences that we've talked about. And it may well be at the end of the day that the exemption might not be granted or it might be granted in different fashions to different people, because if we understand the process, and I'm not a lawyer, but as I understand the process, it leaves quite a bit of flexibility on the table and one panel may find one argument reasonable -- MR. HOWE: Sorry, you mean one panel of the Board. MR. HAMILTON: One panel of the Board and another may not. So that's my read on it. I'm sure others will have other comments. But again, I don't see it as a satisfactory remedy as it's set out now. MR. HOWE: Anybody else have any comments about the exception provision? All right, gentleman, I would like to talk about billing options for just a moment. Mr. Chairman, members of the panel, we're going to go on to discuss Section 8 of the proposal. And the billing option material is in front of you in the form of Direct Energy's submission, and Mr. Brown's opinion letter. And why don't I turn to the representatives of Direct Energy and ask them to talk a little bit about billing options. Gents. MR. FULFORD: Okay, thank you. Well perhaps the first thing to talk to offer here is that energy retailing has been and continues to be a very highly competitive industry where there are very few opportunities for differentiation between the players. I think over the next few years we will see increasing to differentiation, and perhaps in partnership with that we'll see increasing polarization between those companies whose skills and management expertise are best directed towards the safe and efficient supply of commodity, gas or electricity. And those companies such as Centrica or Direct Energy, who focus is very much upon the customer relationship and providing good value, good service in potentially both energy commodities and other home service examples. I think in the last few years there have been some quite significant steps forward in billing technology. And I'm sure the Board would have term "customer relationship management," which is a term which now has been coined essentially to encompass the whole activity of the back office, the billing engine and all the related communication with the customer, whether that be by telephone, by written letter through the Internet or whatever. There are now quite a number of companies, many of which are based in North America, who are seeking to position themselves as service providers in this area to companies like Centrica or Direct Energy and others who operate within this environment. I think it's interesting to note also that a number of utilities are also beginning to turn from their internal resources which traditionally have supplied the kind of Legacy billing system which they have to these same providers, and a number of those utilities and I can think of a number of examples in Ontario, Alberta, British Columbia who are looking to organize themselves into consortia to access that kind of technology to prepare themselves for dealing with the customer in tomorrow's environment. So I think, you know, whether it be as a retailer or as a utility, clearly it's important to give the customer access to these new and improved and more efficient systems, and indeed, it's one of the ways in which retailers will be able to offer improved service and hopefully improved value to the customer. Q. Mr. Drummond, do you have anything to add to that? MR. DRUMMOND: A. Well, I think it's really a matter of customer choice again, and if a customer chooses to nominate a company such as ours to be the billing agent for transportation, distribution and commodity charges, then I think they should have that right. I do not think that the utility should be able to lever off their regulated monopoly to ensure that their affiliate is really in practical terms the billing agent. So I think it really amounts to customer choice and it's very important that we allow the customers to have that choice. MR. HOWE: Thank you, gentlemen. Mr. Chairman, I just have a few concluding remarks in terms of jurisdiction and then I invite Board Staff and the Panel to ask the representatives questions. And I don't mean to create a legal submission and I won't go into a legal analysis. In our view, the establishment of conditions of access on a retroactive basis to existing contractual relationships is not within the jurisdiction of the Board's rule-making under section 44(1)(d) of the Act, that requiring a gas distributor to breach its contract with the agents and brokers is not governing the conduct of a distributor as envisaged in section 44.1(g) of the Ontario Energy Board Act. And those arguments are detailed in our submission that was filed a while ago. The third point is that the rules of statutory interpretation require the legislature to use the clearest language to intend that the provisions of the Ontario Energy Board Act might interfere with existing contractual obligations owed by the parties. Now, when I was thinking about this on the weekend, I thought that I could probably make this point best by comparing the retroactive effect of the mobility provision with the most recently enacted Oak Ridges Moraine legislation. Now, by way of comparison, unlike the mobility provisions in the Rule, the Moraine legislation is clear and it deals with existing contractual obligations. And I have a copy of the Act if anyone cares to go through it. But what the legislature did is it, first of all, it intentionally and explicitly effected relationships on a retroactive basis and it says that. And it goes on to deal with the results of its legislation. And it's quite clear in section 9 of the Act, it says: 'No causes of action will result from the legislator's decision.' In other words, the legislature has wiped out the ability of one contracting party to sue another contracting party based upon the legislation. The legislature has also provided that there are no remedies, no costs, no compensation or damages resulting from the enactment of the Act. And that, in my submission, is the kind of clear legislation that is required if the Province of Ontario intends to interfere with existing contractual relationships. Now, if you compare that very clear language with the mobility provision, I would suggest that a good argument can be made, and we would be prepared to make it, that the mobility language doesn't comply with the principles of statutory interpretation and is of no force and effect. Now, let me deal briefly with the exception provision, and this picks up on the point that Mr. Hamilton made in his comments to you. In the view of my clients sections 6.5 and 6.6 are a form of retroactive law making and the exception provision delegates to the Board the discretionary power to provide relief from the effect of that regulatory legislation. And we say that that is harmful for three reasons. First of all, the exception provision abrogates the contractual rights among the parties and Mr. Hamilton and others talked about the contractual pyramid. So the pyramid is abrogated. Secondly, the provision itself doesn't fix standards. In other words, it provides to this Board an unfettered discretion. In effect the Board becomes the master of the contractual relationships and the Board is then empowered to approve either conditionally or unconditionally or amend or disprove existing contractual relationships. Now, we say that was never intended by the legislature. And the third point was the point that Mr. Hamilton made, and that is, there is a potential of an unequal application of the law. Because of the fact that there's unfettered discretion with the Board, it raises the possibility of abuse because it invites uneven application. And OESC's application may be treated somewhat differently than Direct Energy's application looking for the same relief. Different conditions may apply and because there is no precedent value among decisions, one Panel of the Board, properly constituted, is not bound by another decision. So that at the end of the day you could end up with a series of potentially inconsistent decisions dealing with the exception. So for all of those reasons we say the exception provision is inappropriate. In terms of the billing option, Mr. Brown in his letter to the Board sets out in some detail the jurisdictional basis for the billing options and I won't deal with that other than to say that a summary of his excellent presentation can be found at page 3 of his letter which is dated June the 11th, 2001. Mr. Drummond would like to add something. MR. DRUMMOND: I'm a little slow this morning, but there are two things I would like to say. The first is to complement the Board on fostering the type of environment that we have here in Ontario, particularly in the gas side of the business. I think without question it is the most competitive, best administered marketplace in North America. And I would just sort of urge the Board to, given that fact, to not try to emulate other jurisdictions where full mobility is in place because I think the way that we have treated mobility in the past is probably without doubt the most important element of that competitive marketplace that we currently have. The second thing is that Board Staff or somebody might mention that we have an electricity proposal out which is for a five-year fixed price which we have been marketing for about a year and that's true. The underlying supply to that -- that is the hedge to that proposal was negotiated a year and a half ago when we convinced our supplier that the gas experience had been so successful that we were certain that the electricity mobility issue would be dealt in a similar manner and they sort of believed that to be the case as did we. But since that time and since the mobility rules in electricity rules have come into force, we have not been able to negotiate any additional electricity supply under those sort of terms and conditions, so very quickly we're going to be faced with a decision of whether we can continue to offer the five-year electricity proposal that we currently have out marketing. So thank you very much. THE PRESIDING MEMBER: Anything else, Mr. Howe? MR. HOWE: No, thank, Mr. Chairman. The representatives are available for questioning. THE PRESIDING MEMBER: I think this would be a good time to take a short break. I believe we should try and restrict it to about fifteen minutes because we still have questions and I suspect there will be some and then we want to hear from Mr. Trebilcock as well, and wrap it all up by twelve-thirty. So let's keep the break to as short as possible. Thank you very much. We're adjourned until twenty minutes to twelve. --- Recess taken at 11:25 a.m. --- On resuming at 11:42 a.m. THE PRESIDING MEMBER: Please be seated. Thank you for your promptness. I am getting nervous about time since we had hoped to hear from Professor Trebilcock as well and wrap by 12:30 and that's going to be awkward in view of the length of time that the last presentation took. But let us proceed. I don't know, perhaps Staff could check with Professor Trebilcock about his afternoon availability. MR. HOWE: Unfortunately, I have spoken to Professor Trebilcock about that, and unfortunately he has a funeral to attend this afternoon so he must leave by lunchtime. Now, we're in the Board's hands. If you feel it would be helpful to have Professor Trebilcock come up now, and I mean frankly I have nothing by way of questions of him and we can ask him to join the existing Panel and then perhaps that may accommodate the schedule and move it along quicker. THE PRESIDING MEMBER: Professor Trebilcock, does that suit you? PROFESSOR TREBILCOCK: That would be fine with me. THE PRESIDING MEMBER: Okay, why don't we do that. Thank you for that. Do you want to make some opening remarks first though? PROFESSOR TREBILCOCK: I could speak very shortly. THE PRESIDING MEMBER: Okay. Why don't do that to be fair and then we can have the Staff questions that would include questions to you as well as the others. MR. HOWE: He needs no introduction, Mr. Chairman. He's well known to the Board. He's been a witness before this Board and his very distinguished bio has been prefiled with the Board, and as you say, perhaps he has a few opening comments to make about his economic analysis. Mr. Trebilcock? PROFESSOR TREBILCOCK; Called. THE PRESIDING MEMBER: Welcome, Mr. Trebilcock. PROFESSOR TREBILCOCK: Thank you very much, Mr. Chairman. In my written submission which follows an earlier submission to this Board on the issue of billing arrangements in the natural gas industry, I support the concept of consumer choice as to billing arrangements, and in particular, the menu of options set out in the proposed Gas Distribution Access Rule at paragraph 8.3.1, which would allow customers essentially three choices of billing arrangements, either distributor consolidated billing, or marketer consolidated billing or split billing where distributors would bill for distribution charges and marketers for commodity and other charges. The reason I support these options is first of all, I think this will generate efficiencies with respect to the billing function by essentially rendering it competitive evidenced from other jurisdictions that perhaps are further along in gas and electricity deregulation than Ontario, in particular electricity deregulation, suggests that retailers marketing to the small volume market will typically market both gas and electricity in order to realize economies of scale and scrope, not only with respect to billing but a variety of other marketing costs as well as maximizing the value of the relationship with customers by providing a range of non-commodity non-distribution services, demand management services, various other energy-related services, and often a range of goods and services that are not energy related. We've had examples of this noted this morning, home insurance, auto insurance, travel services, appliances, et cetera. So I believe that these choices will improve efficiency in the billing function by rendering it competitive, and in the competitive environment I assume that both customers and marketers will have incentives to choose the most efficient billing arrangement which may or may not be the lowest cost arrangement but the arrangement that maximizes net benefits to them, including costs. Of course I'm looking in the bailiwick of the services provided in the billing function. If I could just comment on why I think maintaining a distributor consolidated billing arrangement is not likely to be efficient, as independent marketers expand the range of offerings that they make available to consumers, it seems to me that we will quickly get to a situation where consumers will receive two bills, even under a distributor consolidated billing arrangement where there's one bill from the distributor for distribution and commodity charges and another bill from the marketer for all the proliferating range of services that independent marketers are offering the customers. So I think this will lead to a -- even contributor consolidated billing and increasingly to a two-bill regime. I think it's unrealistic to expect distributors to bill for an expanding range of service options that marketers will want to offer consumers, like home insurance, travel services, appliances, auto insurance and so on. So it makes sense for customers to have the option of getting a single bill from their marketer that includes the commodity charge, the distribution charge from the LDC and all these other goods and services that the marketers may choose to offer consumers. I believe that it's efficient in terms of maximizing value to consumers that they should have these three options available to them. In my written report, and I won't expand on this unless the panel or stall want to ask me questions on this, I address the issue of whether there are a duplicate of costs involved in LDCs or distributors having to maintain standby billing capacity in case customers with marketers return to the system of gas, and whether that entails excess cost or inefficiencies in the system. I don't believe that to be the case. Most of these bills costs are variable and not fixed. The percentage of fixed Costs is, as best I can judge low. And experience in other jurisdictions suggest that most of these billing functions can be outsourced to third parties, who themselves, can realize economies of scale and scale in providing these functions. So I see no reason why LDCs can't expand or contract their billing capacity in the light of the customers that they are directly serving. So I don't see inefficiencies associated with this. I think I'll leave my initial comments at that. In short I support the proposed rule in the VAR. MR. LAUGHREN: Okay. Thank you very much for your comments. We'll turn now to staff questions. --- Examination by Board Staff: MS. MCKINNON: Thank you, Mr. Chair. Dr. Trebilcock, can you tell me if there's a mechanism that we could use perspectively to identify the desired billing options for the public apart from implementing a change in the billing options, letting the market forces do their work and then telling us whether we were right or not? In other words, is there another means for us to know whether these additional billing options are wanted by the public and are likely to be taken up as a good competitive force? PROFESSOR TREBILCOCK: I have no way of predicting under a, let's call it prechoice system, which of these options is likely to dominate. I would expect most customers, and this seems to be evident -- there seems to be evidence of this from other jurisdictions, who prefer to get one bill. So I think the split bill option is unlikely to be popular. And as between distributor/consolidator billing and marketer consolidated billing, I would expect the latter over time would dominate, as marketers come to offer a range of nondistribution, non commodity goods and services. And the relationship between the customer and the marketer becomes more important to both of them. MS. MCKINNON: Do you have any views whether a distributor could reasonably be expected to be harmed if distributor consolidating billing -- sorry, distributor consolidated billing is not used in future to the degree it is today? In other words, if marketing consolidating billing, as you predict, becomes the common billing option? PROFESSOR TREBILCOCK: Well, this really relates to this question of whether because of the obligation of distributors to provide system gas this would entail excess billing costs in the system by virtue of having to maintain on a standby bill capacity. In the event of customers returning from marketers to system gas, I would just reiterate my point that I think most of these billing costs are variable; that is they vary with the volume of customers. Both marketers and utilities increasingly outsource these to specialized firms that provide all or sub components for these billing functions. So billing capacity can be varied quite easily by LCDs in the light of changing customer volumes. MS. MCKINNON: Any other harms to distributors that you can foresee apart from those potential costs? PROFESSOR TREBILCOCK: I can't think of any. MS. MCKINNON: If on the hand, Dr. Trebilcock, marketer consolidated billing was not made available to the consumers, are there other market means in your view by which marketers could both differentiate their offerings and build their relationships with customers and potential customers? PROFESSOR TREBILCOCK: I think without a regular monthly or quarterly interaction between the supplier and the customer through the billing process, additional costs would be entailed in building and maintaining these relationships. That is to say the regular billing communication will not be available as a mechanism by which marketers can build this ongoing relationship with customers. MS. MCKINNON: Is it fair to say there's no doubt those things can be accomplished, but they will be at an added cost? PROFESSOR TREBILCOCK: Yes, that has to be said. MS. MCKINNON: Do you have a view, Dr. Trebilcock, whether marketer consolidated billing is preferable to the split billing option, which had been proposed as an option? You have said that it's your view that most customers would prefer a single bill rather than two. Are there any other comments you have on that point? PROFESSOR TREBILCOCK: Well, the split billing option necessarily entails two monthly bills rather than one, so they'll just be a duplication of costs there. And survey evidence from a range of jurisdictions, not only in gas but electricity and telephone for example, suggests that consumers prefer to get one bill. They find it confusing and annoying to get a bill for distribution charges and then another bill for commodity and other charges. MS. MCKINNON: Dr. Trebilcock, on one other area, I just have a couple of more questions. Are you familiar with the provisions of the proposed Rule 6, which deals with service transaction requests and the processing of a consumer's choice to either change a billing option or change an address or to change a marketer; have you reviewed those provisions? PROFESSOR TREBILCOCK: I have, but not closely recently. MS. MCKINNON: Let me ask you this one question: To the extent that you're opinion regarding the billing options is based on your view that consumer choice and competition are value things, do you have any views as to whether or not the proposed provisions, the proposed STR provisions which would allow a consumer to choose a marketer, are complimentary to the marketer consolidated billing in respect of facilitating competition and consumer choice? PROFESSOR TREBILCOCK: Well, I sat through the earlier presentation before the break where a number of comments were offered on the customer mechanisms. I have not studied these mechanisms closely, and I would prefer not to express an opinion on this. MS. MCKINNON: Mr. Chair, those are all my questions. I'm in your hands whether the panel would like to ask any questions of Dr. Trebilcock now, in which case he could leave and then I could ask my questions of the other presenters, or I can carry on with my questions if you prefer. MR. LAUGHREN: I had one question; I don't know whether the panel has or not. My question had to do with a matter of principle which I'm sure you can deal with, and that has to do with split billing is an efficiency in the system for, I think, obvious reasons, perhaps customer annoyance, I don't know, but if that's the case -- but at the same time it offers the ultimate in customer choice, which of those two principles should prevail? PROFESSOR TREBILCOCK: Well, that's a very good question. I can imagine a minority, a small minority of customers and they may prefer to get two bills and deal with the utility and the distribution charges -- the market over the commodity and other services charges. As I say, survey evidence tends to suggest a large majority of consumers, but that's not a hundred percent. A large majority of consumers prefer one bill, but a small minority may prefer two. And I see no reason why they should be denied that option, even if that entails additional costs that they're prepared to bear. MR. LAUGHREN: Thank you. Ms. Halladay? MS. HALLADAY: Thank you. First, Dr. Trebilcock, who should bear the cost of customer choice? PROFESSOR TREBILCOCK: The customer. MS. HALLADAY: Not the marketer? PROFESSOR TREBILCOCK: Well, I assume the marketer will simply bill these costs into his service offerings. MS. HALLADAY: The customers who chooses or the one who doesn't choose the cost? In other words, should a system gas customer bear the costs of other customers having a choice? PROFESSOR TREBILCOCK: That raises an important issue, which I don't address here, and that is how to cost the provision by the distributors of information necessary for the preparation of marketer consolidated billing arrangement. I know there's been debates before this Board, not only in gas but electricity, about how to price that service so to speak. In general I take the view that the distribution companies should not be compensated for long run avoidable cost from the billing function. That is to say the marketers assumes these costs, the distributor should not be compensated for them. So I see these costs being allocated to the actual cost of distributors in providing billing information to marketers, the customers who chose marketer consolidated billing being properly compensated and completely passed on to the customers that exercise that choice. And customers who chose to remain with system gas, presumable pay whatever billing costs are associated with the distributor, providing a consolidated bill to them. So I don't see why there should be any cross subsidies in the system. MS. HALLADAY: Thank you. MR. LAUGHREN: I can't let you go without asking you, your paper deals with basically billing. Had you put your mind to the issue of customer mobility? PROFESSOR TREBILCOCK: I have in the past, and this is the question that counsel asked, and as you're aware, Mr. Chairman, I was the research director of the electricity marketing designing committee, where we spent an enormous amount of time debating many issues, including customer mobility in the electricity sector. In this case I think I have to acknowledge a conflict of interest in that I have advised another retailer in this sector I think may not share in every respect the views presented this morning. So I'd avoid it if I can answer that question. MR. LAUGHREN: Certainly you can. Okay, thank you for that. And thank you for accommodating the panel with your schedule too. PROFESSOR TREBILCOCK: Thank you very much for having me. MR. LAUGHREN: Okay we'll go back to Ms. McKinnon. MS. MCKINNON: Thank you, Mr. Chair. If I can clarify a few things raised from your presentation this morning. Mr. Fulford I believe it was who spoke of what you referred to as "the churn factor" in the English experience. MS. FULLERTON: It could well have been. It's a term that we apply to retain markets. MS. MCKINNON: I'm afraid I didn't catch the details, but you made reference to a certain number of consumers migrating from the system when mobility was introduced, but additional consumers, of course, moving in to the system. And I believe effectively the numbers came close to netting out in terms of consumers. MR. HOWE: It was actually Mr. Drummond who spoke about that. MR. DRUMMOND: I think that's exactly right. It's not really a system, I guess, it's Centrica's customers. Were losing about 50,000 a year. And through our marketing efforts through other marketers, we're gaining back about the same numbers. MS. MCKINNON: So is there a -- to the extent that there may be costs incurred from the people who are migrating from you, those must, to some extent, at least be mitigated by the benefits of new customers coming in. MR. DRUMMOND: Well, the new customers coming in would have sort of a fixed incremental cost, so there's really no tie between the two. I mean, you can't sort of designate those 50,000 new customers as opposed to the other 14 million that we have. I mean its -- MS. MCKINNON: Why not? MR. DRUMMOND: Why would you? MS. MCKINNON: Well, maybe I'm approaching it too simplistically, but if your concern is losing customers and incurring costs, there may nonetheless be -- MR. DRUMMOND: But the hedging costs would be-- I mean here in our environment the hedging costs would not be recoverable because our marketing efforts have to be in the contexts of the market. And the people living us through mobility, would be in the context of the market that they signed up with so ... MS. MCKINNON: Right. And so what you're saying is the costs that you get of the ones who depart contrasted with the benefits that you get from the ones that come on is going to be dedicating by what you pay for gas and what you're hedging positions are -- MR. DRUMMOND: The market forces which are not related. I mean the gas -- MS. MCKINNON: They're not always static. I recognize that. MR. DRUMMOND: Right. MS. MCKINNON: Well, it may be stating the obvious, but let's see if you agree. The market forces may be such that you get a greater advantage from those coming on to the system -- MR. DRUMMOND: Yeah, the problem -- MS. MCKINNON: -- than what you have lost from the ones who've departed. MR. DRUMMOND: The problem with that is that with mobility and attrition, obviously if the commodity price is in a rising market and the attrition is a lot less, for obvious reasons, so the attrition problem is far -- is magnified in a falling market, because people -- if they have the right to, without financial recourse, go through another marketer in the context of that market, then they will. MS. MCKINNON: Okay. I do have some questions about the financial recourse that I'll probably get to in a moment -- MR. DRUMMOND: Sure. MS. MCKINNON: -- things like what some of the other panel members have discussed with you pursing people for breach, but just one more question on the churn factor. Do you have any reason to believe that the net effect of customers migrating away versus new customers coming on in response to marketing efforts is going to be any different in Ontario than it was? In other words, there may well be, at least in terms of number of customers, a net effect. MR. DRUMMOND: It would be far different, because we have written -- there is the 28-day mobility rule so that everybody in essence were marketing in that environment. Here, you can look at a circumstance where if gas prices should fall 30 or 40 percent let's say, and we have, you know, 500,000 customers that have three years or more remaining on their contracts, it is possible that other marketers could target those customers simply by asking at the door or on the door for particulars of the billing information which we require. And in that process they would know pretty much exactly what the existing program is, and they cold say to the customer, you know, "We can offer you a package at 20 percent less than what you're paying today," without, of course, explaining the potential financial fall out. But then from their point of view why would they get into that if they're not really required to. In other words, that would be sort of the worse case scenario, that marketers would target our customers when they we're out of the money in effect and would then be left to pay for the energy supply without having to market. MS. MCKINNON: But let me ask you this: Do you not agree that the proposed clause 6 of the Rule does provide you, as the existing marketer, an opportunity to essentially remarket yourselves or provide clarifying information to your customers so that they have full information available to them before they make a final decision? MR. DRUMMOND: If we get the information from the distributor in a timely fashion, then that would certainly be a tool that we would try to use to advantage to educate the customer as to the potential fall out of switching. I mean, without question that provision provides some -- without having the market. MS. McKINNON: Q. But let me ask you this, do you not agree that the proposed Clause 6 of the Rule does provide you, as the existing marketer, an opportunity to essentially re-market yourselves or provide clarifying information to your customers so that they have full information available to them before they make a final decision? MR. DRUMMOND: A. If we get information from the distributor in a timely fashion, then that would certainly be a tool that we would try to use to our advantage to educate the customer as to the potential fallout of switching. I mean, without question, that provision provides some comfort. It doesn't go nearly as far as we would like but it provides some comfort. MR. HAMILTON: A. Also it should be noted the Rule as proposed requires the raiding marketer to provide the information to the new guy. MR. DRUMMOND: A. Yes, that's why I mentioned the information should come from the distributor in a timely fashion and we have to have time to prepare sort of what the financial fallout would be to that particular customer because it would be different in each case. Q. Now, you have given me the example that in a time of falling prices in the market you expect of course there to be the greater activity by competitors to try and persuade customers to leave you for better prices. A. Right. Q. But apart from that sort of market-based hypothesis, do you have any other information to support either you or the other Panel members what you expect the potential migration away from you or to you by contrast to be or are we dealing with absolute hypotheticals and unknowns at this time? A. Well, it's hypotheticals but it would be directly related to, as the Professor was indicating, if you have a relationship with the customer where you're providing other services or products and you're doing the billing function, then migration, the attrition numbers would be a lot less. Here in Ontario for the most part, and in our case exclusively, we're at this point only providing electricity -- well, only providing natural gas. One energy product is all that we're doing in Ontario so we would expect that our attrition rates here would be at the very high end of -- sort of the spectrum at this point, and we'll do whatever we can to improve on that through other means. But allowing mobility would certainly be the biggest factor. MR. FULFORD: A. If I could just add a little bit of clarification to Mr. Drummond's answer there, I think a lot of the customer mobility attrition and churn potentially could be a feature of what the wholesale markets are doing. I mentioned the Georgia example earlier on where you've probably got between seven and ten marketers there who all offer a different price every month for various reasons but which all broadly follow the wholesale market. And one of the reasons for the very high degree of churn over these last few months has been people literally switching every month between one offering or another for what appears to be short-term savings. So in the sort of wholesale scenario that we've seen over the last six to eight months on both gas and electricity in different parts of North America, you could envision very different levels of customer churn and attrition. Q. Let me ask some slightly different questions. The first is to clarify something that I think has arisen in your written submissions and as well in a comment of Mr. Howe and your comments about the legal analysis. You have spoken repeatedly of the new Rule as proposed requiring a distributor to breach its contract with the marketers and you take the position that that's beyond the Board's jurisdiction. But what I want to do is clarify the contract you're speaking of when you say that, when you say it would require the distributor to breach its contract with marketers. And the reason I'm seeking clarification - I'm not sure who's the right person to answer. It may even be Mr. Howe - we've seen some of your contracts which are contracts between the distributor and the consumer and they are entered into clearly by the marketer as agent of the consumer. But that is clearly a contract - correct me if anyone disagrees - between the distributor and the consumer. MR. HOWE: I disagree with that. Q. On a legal basis? MR. SCHOENMAKERS: A. We have the obligation to deliver on that contract. If we fail to deliver then we are subject to penalties and indemnities that are covered in the contract, so we are definitely a party to the contract. We're representing ourselves as the agent for the consumer as well as the principal to supply the gas which gives us our firm obligation to deliver. Q. So if we take the OSC contract that you gave to the Panel this morning where you're identified as the agent of the customer acting as agent on behalf of the customer in executing this agreement, you're nonetheless saying this gives rise to separate contractual obligations. 8.4 is the indemnity provision. A. I think Mr. Howe referred to it, or it might have been Mr. Hamilton, as the tripartite agreement where we are signing it on behalf of customers and as a principal and it lists each of those in the... Q. Let me ask this to clarify then, would I be correct that there is also a separate agreement between your customers, the consumers, and take OESC as an example? A. Yes, that's correct. Q. Would I be right that in that agreement to the extent that you were ever obliged to save the distributors harmless, you in turn pass on that obligation to the consumer, your contracting party? MR. HAMILTON: A. You would be wrong about that. MR. SCHOENMAKERS: That would be very difficult to do. We have an obligation to deliver to the customer as well. We've made an obligation both to the utility and to the customer which is why we're entering into the contract, the transportation agreement as well. MR. HAMILTON: A. And we have an obligation to take from the supplier. Those are our obligations. MR. SCHOENMAKERS: A. Those are all the links that Mr. Howe was trying to refer to. We've made a firm obligation to our suppliers. Q. Well, that's a different contract. I'm trying to clarify -- A. No, I understand but I'm just trying to clarify the contractual link between all the agreements. If you want to start at the bottom, we've made a contractual commitment to our customers to supply gas. It's the requirement's contract. Whatever they use at their facility, we've got to supply it. Q. I understand that. A. Okay. And then there's an agreement between the utility, the customer and ourselves which ties up that part of the agreement to supply and then there's an agreement between us and our supplier. We've got a firm commitment to take, a firm commitment to deliver to both parties, the utility and the customer. Q. But there's no doubt when you're entering into this agreement with consumers that you filed, notwithstanding you may as agent be undertaking some liabilities, this is nonetheless on its face an agreement whereby you're acting as agent for the individual consumer who you sign up. A. As well as acting as principal to the contract, yes. Q. Well, I'm cognizant of the time. We could probably explore this in great length, but frankly if you're able to point me to sections where you're a principal in this contract, that would be helpful. MR. HOWE: Perhaps I can do so. You'll note that the agreement begins identifying the tripartite arrangement, and in this case OESC is identified and defined as the agent. Then you'll see at section 1.6 the fact that the agreement can't be modified unless all the parties, including OESC, agree with that. You'll also see in the portion that you've just highlighted, Ms. McKinnon-- Q. 8.2, 8.4. MR. HOWE: --8.2 and 8.4 and elsewhere, the fact that the agent is on the hook as a result of the failure of the agent to perform the obligations under the terms of the agreement so that this agreement in our view forms a part of the tied-house arrangement among the three parties. Now, those are portions of the agreement that I can point you to right now, but there is no doubt that the LDC can look to the marketer agent for a failure to perform. And there is also no doubt that the supplier can look to the marketer agent for failure to perform. Q. And could I just clarify, Mr. Howe, when you say the distributor can look to the agent for failure to perform, you're speaking to Clause 8.4 of this agreement? MR. HOWE: That's the one I can point you to right now. I mean there may be others as well, and you're right, we could probably go through this in more detail, but the easy answer is yes, among others. Q. Then could you clarify for me when you say that Rule 6 is going to require a distributor to breach its contract with the marketer, could you tell me what contract you're referring to? MR. HOWE: I could probably handle that question. The gas transportation agreement in first instance would be the agreement that would be breached as a result of the mobility provision. And it's an interesting issue as to whether or not the distributor could be alleviated from liability by reason of the section of the OEB Act that provides a distributor with a full defence for responding to Board orders. And, in our submission, I've distinguished between a rule promulgated by the Board and a Board Order. And arguably a distributor may not be protected in the event that the distributor responds to a Rule as opposed to a Board Order. But I say that that's moot, because for the purposes of the discussion we're engaging in right now, there's no doubt that even if the distributor is alleviated by reason of the Board Order, the distributor could look to the agent marketer. MR. HAMILTON: A. If I could just add, the other piece of the puzzle that's not on the table here is that along with this gas transportation contract that we're talking about, there is usually an ABC T-service collection agreement which is directly between the utility and the agent in which the utility undertakes to collect, act as the marketer's agent for billing and collection purposes, and by removing customers from that agreement they may they well be in breach of that agreement. Q. Thank you, Mr. Hamilton. I was aware of those other agreements. That's why I was trying to clarify. Could I ask Mr. Howe, not to labour the point but I think it's important, given your position on the jurisdiction. You have said that it's the Gas Transportation Agreement that the distributor would breach if the distributor followed a consumer's direction to switch marketers. Could you tell me what obligation of the distributor in this agreement is breached if they do follow that consumer's direction? That's not clear to me. A. I can tell you. It's an obligation the receive and redeliver gas supplied by OESC to a specific end-use location. That obligation is contained in the Gas Transportation Agreement. Q. But here's my further question and I don't want to bog us down in overly legal questions, but again a lot of the dispute is of a legal nature. Am I not correct, would you not agree with me that the obligation of Consumers to deliver the gas is an obligation as between Consumers and the customer? A. No, I would not agree. MR. HOWE: No. Q. So that's where we have a fundamental issue that is going to dictate the legal responsibilities among the parties? You don't agree that the obligation to deliver gas is an obligation between the distributor and the consumer, and that the agent is merely facilitating the agreement for that purpose? MR. HOWE: With respect, I think we're talking two different concepts. Under the Act, the distributor is obligated to deliver gas to the end-user. That shouldn't be confused with the Transportation Agreement which is a contractual common law mechanism that's entered into among three individuals. It's entered into by the marketer as both principal and as agent for the consumers. And if you look -- that point is I think probably best made if you look at the place for a signature is at the end of the document. Actually in this agreement it's about halfway through. You'll see that there is a place for Consumers Gas to sign, there's a place for OESC to sign and there's a place for OESC to sign on behalf of the customers as agent for the customers. So it's our position that OESC is both a principal in law acting in its own capacity and acting as agent for the customers. And Mr. Hamilton points out that that's exactly what it says. It says on its own behalf and on behalf of and as agent for each customer. So I don't disagree with you, Ms. McKinnon, that there is a separate statutory obligation on the part of the distributor to deliver. But what we're saying is independent of that there is a contractual obligation that Mr. Hamilton has talked about on OESC. And Consumers Gas could look to OESC in the event that it failed to perform pursuant to the Gas Transportation Agreement. MR. HAMILTON: A. And my experience tells me that they have in fact have in previous circumstances where there were a failure by an agent to perform. Q. I'm sorry, just is clarify, you've told me that you have no provision in your agreements with the consumers that obliges them to compensate you for any such costs that the distributor might look to you for, other than suing your consumers for breach of contract? MR. SCHOENMAKERS: A. Exactly. That would be our only redress. Q. If I can clarify one other point because it's relevant I think to your position on grandfathering. You've spoken to the need to grandfather the current rule, that the distributors won't switch at the consumer's request. But again to clarify, there's certainly no Rule promulgated by this Board that you're speaking of. It's my understanding that this is a custom or practice which the distributors have followed. Is that correct in your view? MR. HOWE: Well, we so far today haven't used the term "grandfather". It comes in the context of the OESC submission in the exception provision. And what we say is that presumably section 1.6.1, the exception provision, is intended to accommodate grandfathering arrangements. Now, we don't know that because as I said before there is no standard set out in the exception provision. But presumably the Board could attempt to squeeze in grandfathering through that exception. Q. But you have taken the position that it would be unfair and would have additional costs if this new rule applied to existing contracts? MR. HAMILTON: A. Yes, I think to be fair our position is the new rule shouldn't apply to any contracts, but it certainly shouldn't apply to existing contracts. MR. HOWE: What we're saying in a nutshell is insofar as the retroactive effect of the Rule is concerned, the Board can't do it and shouldn't do it. Insofar as the prospective grandfathering is concerned, in other words, if the Board were to decide on a go-forward basis to bring in mobility, if it's properly set out, the Board we think has the ability to do that. By properly set out, I mean clear and unambiguous, et cetera, for the reasons set out in our brief. So the Board could do that on a prospective basis but shouldn't do it for the reasons provided by the representatives of the three companies. Q. But nonetheless part of my point at the outset of this line of questioning was that there's no current Rule capital 'R' Rule promulgated by this Board or coming from any other source that denies distributors the right to respond to a consumer request to switch marketers. It is my understanding that that is a practice that has been in place over time. MR. HAMILTON: A. There's no rule that I'm aware of but there certainly is a contract that says the distributor will only enter into one Gas Transportation contract at a time for an end- user, and that's been around for ten years probably. Q. Right. And so presumably then in the current circumstances if a consumer directs the distributor to change contracts, one contract is terminated and a new one entered, so there wouldn't be a violation of what you're talking about, there wouldn't be two contracts at the same time? A. I don't know. For a period of time there would because this Rule has a waiting period in it. Q. I don't think there's any doubt, certainly it's recognized in the comments, the written comments of OESC, and I take it Direct Energy agrees, that there is available to your companies when a consumer decides to transfer to another marketer, the remedy of going to the courts and suing them for breach of contract for all the damages, whatever those may be. There's no disagreement about that? MR. HOWE: Well, that's true. In law the clients that I represent, particularly the marketers, Direct Energy and OESC, could sue the end-users for the differential as articulated by Mr. Drummond. And frankly you may be talking about $1,000 or $1,500 and we don't think it's wise to create the situation where potentially tens of thousands of people may be sued in small claims courts throughout the province for $1,000 here and $1,500 there. I mean it's true in law my clients have that remedy available to them. They don't want to do it for the reasons articulated by Mr. Drummond, and we don't think that they should have to do that. MR. DRUMMOND: A. Well, more important I think is that we're really talking about go-forward strategies and we would not build a business model that was predicated upon suing retail householders for $500 or $700. You know that would not be a business case that we would try to perpetuate in the future. So our choice would be to not market long-term products, not to go into a situation where we know full well we're going to have to sue tens of thousands of householders. So the answer is it doesn't work. Q. Are there any views on any other means by which you can mitigate the potential losses? A. The only way to mitigate it is to not offer the product which is what everyone has done in every other jurisdiction in the world. Q. What about, for instance, as an alternative to suing for breach of contract? I don't believe your current contracts have any exit penalties because of course you contemplate the contracts going for the full term. Are exit penalties something you've contemplated as a possible means to deal with these costs? A. Well, that just goes to the issue of proof of damages and perhaps that makes it easier, perhaps it doesn't, but it's not a solution going forward. MR. HOWE: I know that penalty clauses are usually anathema to courts, and I can anticipate a situation where many judges would be reluctant to enforce penalty clauses on residential customers. Again I think that that's simply unworkable. MR. HAMILTON: A. I think the other comment that needs to be made again is that the Ontario marketplace has been well served, well regulated, well administered and it's a model for a number of other jurisdictions. It works. And I know that there are some kind-hearted people who think they can tweak one little aspect of that functioning marketplace and nothing else will happen, but we're here to tell you that that can't happen that way. If that fundamental underlying principle is altered, the market will collapse. You've heard it from the largest marketer in Ontario, the largest marketer in Great Britain and of the most significant marketers in other North American jurisdictions. Q. Let me ask you this then, there are other marketers as I'm sure you're all well aware who would like to see the opportunity to enter this market or who are not the largest or the second largest, and they are of the view that allowing consumer choice and opening up competition in this area would be beneficial to the market and to them. Do you have any views which will assist the Board in reconciling their perspective on this versus your perspective on it? MR. SCHOENMAKERS: Well, it's pretty obvious that they probably don't have the market share that's represented at the table here and they want access to that. Q. I think that's obvious. A. I think that's one. And number two is that they haven't made long-term supply commitments to any customer base that matches what's represented here, so it's very easy for them to come in with a new product that's geared to the prospective Rules that might come into play. But we've been marketing and it seems patently unfair that we had to stand by our customers when gas prices -- with supplying gas in the three to four dollar range per gigaJoule when gas prices were ten dollars but when they fall back down below three or four dollars, those same customers can walk away from us and go be supplied by someone else and we've got the risk and the credit implications of that higher price gas in a lower price market. I just don't think that anybody is going to build a business case to stay in that kind of market. And those new players will get in only for those short-term periods, either one month or a year maximum and you won't have any customer choice. That's what you'll be left with. MR. DRUMMOND: A. I agree. I mean I'm opposed to the concept that to force a marketplace into a series of short-term packages or proposals to the customer is more competitive or open. It's quite the contrary. To do that precludes, as we've said several times today, precludes long-term fixed price alternatives which are fundamental to a competitive free-market place. And if everybody is forced to go to -- packages or proposals to the customer is more competitive or open. It's quite the contrary. To do that precludes as we've said several times today, precludes long-term fixed price alternatives which are fundamental to a competitive free marketplace. And if everybody is forced to go to monthly index, the deregulation has failed. The utility under today's market can buy natural gas or electricity as good or better than we can on a monthly basis. But what they're not able to do is hedge long term and offer long-term packages. That's what makes a competitive marketplace. Q. My final question relates to the concerns you've raised about interference with the contractual rights existing between the parties. And I expect you're familiar with the Retail Settlement Code which contains a provision that relates to earlier provisions in the Code setting out rules and it says as follows: 'Nothing in sections 10.5 to 10.55 should be interpretted as in any way interfering with the contractual rights or obligations of retailers or consumers or the remedies available to retailers or consumers to enforce those contractual rights or obligations.' Do you have any position as to whether language such as that, if added to the GDAR, would solve some of your concerns about interference with contractual rights? A. It would have no effect whatsoever. MR. HAMILTON: A. None whatsoever. All that says is somebody has written in the Retail Settlement Code that it's not intended to interfere. If the practical effect of implementing the Code is that it does in fact interfere, whether it was intended or not, doesn't really matter. MR. SCHOENMAKERS: A. And that is also -- it's an untried Code. We haven't had open market in electricity as yet. Q. I said it was a final question but I apologize, one more. Do you agree or disagree with me that the current circumstances as they're operating where a distributor refuses to process a customer's change of agreement, is one in which the distributors are effectively acting as police of the contracts between the consumers for their gas arrangements, and that that is in fact a circumstance which may deny a consumer their right to breach a contract and they may have a legal right to breach. MR. HOWE: Well, there are a lot of underlying assumptions such as the last caveat that the consumer has the right to breach. And that's an interesting and a loaded question, and I'm certainly prepared to have the gentlemen answer it as best they can without buying into the underlying assumptions because I know time is of the essence. But I guess the question is: At the present time is the distributor acting as the police agent for the market and is that a good thing or a bad thing? And, gentlemen, have you got any views on that? MR. HAMILTON: A. We're not asking you to police our contract. We're asking you to basically to honour the contracts that we've entered into as part of that total... MR. SCHOENMAKERS: A. I think the point is what there are two parties to the contract and the distributor at the present is recognizing that one party can't request that contract be breached, so it's got to be an agreement by both parties. And so when there's a customer request and if that happens, they're simply saying we want to see if the other party complies. If they don't, you two should sit down and try to work it out. And that's basically a system to me that works. MR. DRUMMOND: A. Yes, I think if it were a system where the distributor had some discretion, then I don't think that would be proper to put that onus on them. The way it's currently structured, the distributor is the facilitator for the fostering of a free marketplace and that's the important thing. MS. McKINNON: Thank you. Those are all my questions. THE PRESIDING MEMBER: Thank you. Any questions? --- Examination by the Board: MR. BIRCHENOUGH: Q. You did mention along the way this morning that there have been a number of contracts where you have allowed consumers to leave contracts for various reasons. I'm just wondering whether these were numerous and in fact whether penalties were imposed or negotiated on any of these. MR. DRUMMOND: A. Yes, sir. That's a good question. First of all, they have not been numerous. My experience over the last eleven years is that there's no groundswell of sort of desire by retail customers to get out of their contracts. So we have -- let's say, if anything aside from sort of an organized financial approach to attrition, we have honoured the request of customers to leave their contractual relationship with us without financial penalty. But in the future what I fear under the rules proposed is that there could be a very well-financed well-marshalled marketing effort to market against our specific supply arrangement where there's that arbitrage between our price which is hedged and the current market price. So it's really the future. In the past it's been a trickle of, you know, six or eight or ten sort of things a month which is very manageable. Probably a hundred a month would be manageable, but if it gets to be thousands, then that's an untenable position and that's what I fear if the rules as proposed would go ahead. MR. HAMILTON: A. OESC's circumstance would be very similar to Direct in terms of -- it's not a lot of customers, and yes, we have accommodated the customers when we can, and no, there have not been financial penalties. MS. HALLADAY: I just have a few questions. The basis of your pyramid is this pamphlet. Is that fair to say? MR. HOWE: Yes, it is, ma'am. MS. HALLADAY: And is in fact the italics words that the customer is appointing you as their sole and exclusive agent. I must say I have been fighting having to wear glasses and this pamphlet may be the one that puts me over having to get glasses. But that's a basic foundation of your pyramid. Is that correct? MR. HOWE: Yes, it is. MS. HALLADAY: Okay. And I notice the appointment of agent is not irrevocable. Is that correct? It doesn't say it's revocable. MR. HOWE: It doesn't say it's revocable, but the flip side is in this particular instance I think this is a four- or five-year deal and so although there is no specific provision with respect to irrevocability, it would be my position that the arrangement lasts for the four or five years, whichever menu is chosen and that the agency lasts for the same period of time. MS. HALLADAY: Now, my knowledge of agency lie is a little dim from the past, but it seems to me as though I recall that an agency relationship is generally revokable unless the parties specifically say it's irrevocable and/or it's coupled with an interest. Would you like to comment on that from a legal perspective? MR. HOWE: I must say I haven't dusted off the Principal and Agency Act in a while so I'm really not in a position to comment about whether or not a specific revocation provision is a condition. MS. HALLADAY: Okay. Fair enough. Let's just leave it at that point. Secondly, your assumption is based on the fact that this is a valid contract? MR. HOWE: Yes, it is. MS. HALLADAY: Okay. Now. there may be reasons why this is not a valid contract. Misrepresentation, for example, of entering into this contract by the consumer, misrepresentation on the part of the agent could be a grounds for the customer saying this is not a valid contract. Is that fair to say? MR. HOWE: That's fair to say. MS. HALLADAY: And as a matter of fact, the Board has a number of complaints from customers and gas marketers as far as misrepresentations made upon entering these contracts. So therefore there is an argument, number one, that the customer has the right to terminate an agency because it's not irrevocable, number one. And number two, that there isn't a valid agreement to start with. Are those fair to say? MR. SCHOENMAKERS: A. With all due respect though, in that same sentence that you're referring to, it says that it's appointing OESC in this case as my sole and exclusive agent but it also says "and supplier", and they do further on agree to buy gas at a specific price, so there's a contract for the supply and the agency. MS. HALLADAY: Fair enough. But you were talking before about acting as agent in this tripartite agreement where you represent you have the right to represent the customer. And it seems to me as though there's also an argument that if the customer terminates that right or revokes that appointment of agency, therefore there's a whole issue about the validity of this customer because the customer's argument is that you no longer have the right to represent them. Is that fair to say? MR. HOWE: Well, Ms. Halladay, I suppose we could debate the legal principles for most of the afternoon. There's no doubt that the pyramid assumes that at the basis there is an enforceable contract. I certainly agree with that proposition. And if the customer can show that the agreement is unenforceble, it's the customer's right either before this Board or before the court to have the Board or the court say the customer is right. In other words, before there is a ruling as to the efficacy of the agreement, the customer must prove his or her case before the Board or the court. And if they do so, then obviously insofar as they're concerned, they are removed from the pyramid. But I would respectfully submit that until that time, the customer doesn't have the unilateral right to terminate the contract on his or her say so. They can't say, "I'm no longer bound by this and I'm not going to deal with OESC or Direct Energy." They have to go forward and prove their case, and if this Board or the court agrees, then that is the case obviously. MS. HALLADAY: Well, excuse me, Mr. Howe, you're saying that there's an obligation on the customer then to prove that there is not a valid or a new contract, not the other way around for the marketer to prove that there is a valid contract. MR. HOWE: That's the way the common law is set up, ma'am. If a complainant comes forward, whether it's in front of this Board or before a court, the complainant, the plaintiff, bears the onus of proof. That's the common law and the complainant has to demonstrate that on the balance of probabilities the contract is unenforceable. We don't require defendants or respondents to come forward and disprove the situation or prove the fact. In other words, the onus is on the party coming forward to make the complaint. MS. HALLADAY: Well, we have a different view and interpretation of the law then, Mr. Howe. I guess my next question deals with are you not by preventing a distributor from exercising or enforcing an STR, are you not in fact granting -- would we not in fact be granting the marketer specific performance of that contract? The specific performance of a contract is something that courts are very reluctant to grant. MR. HOWE: Well, first of all, starting with the last proposition first, I agree that generally courts are very reluctant to grant specific performance and it's usually under very fixed scenarios where the court will grant specific performance. And what I can think of in particular is a real estate transaction where the court will grant specific performance. That in my view is very different than Enbridge or Union Gas honouring the terms of a contract that it entered into. The parties aren't asking the Board to enforce the contract. The parties, one of the parties to the agreement is saying there is an agreement that is enforceable. We're not asking the Board to enforce it because it was freely entered into. If one of the parties breaches this agreement, then there are remedies available before this Board and before the courts. The situation I suggest right now is, as these gentleman have said, is working very well, and I'm sure there are some people who are not happy with their arrangements and they come forward and make complaints and they are provided relief, but that's very different than the Board promulgating a Rule that permits the distributor to break the agreement. And that I say is an entirely different situation. That isn't specific performance. It is the board permitting or obligating the distributor to back out of this Transportation Agreement as one of the agreements. I mean Mr. Hamilton mentioned others. MS. HALLADAY: Well, we can agree maybe to disagree on that. My next question I guess goes to Mr. Drummond and that's the fact that if there is a major coup by - I think Mr. Hamilton described them as the raiding marketer - would that not lead to the marketer have a cause of action against the raiding marketer for inducing breach of contract? MR. DRUMMOND: A. Potentially likely very difficult to litigate, very costly and very time consuming. And again I go back to the point that that's not a business case that we would perpetuate. MS. HALLADAY: I'm just talking about the legal arguments here. You had spoken before about difficult it would be to go after each individual customer and you wouldn't do that. Then on the other scenario, you said that you're vulnerable to -- A. No, under the present scenario a marketer could simply go to the door, ask for the billing information, see that they are on a Direct Energy agreement, note from the time and the price on the bill and then offer a 20 per cent discount. I'm not sure that that marketer would be interfering with the relationship really. MS. HALLADAY: Well, presumably they would then know that you've got a contract with the other marketer. But there is a possible cause of action that you would have under those circumstances? MR. HOWE: I would agree with the proposition that there is a possible cause of action. The case law makes a big distinction between knowing of a contract and inducing a contract. The cause of action is a tort. In other words, the plaintiff, presumably the marketer, would have to come forward and prove through evidence that there was a concerted effort to induce representations, a course of conduct that the court would find objectionable so as to award damages under an inducement cause of action. That's very different from a situation where a person knows of another contract, knows of a contract that is inconsistent with the contract that one is proposing be signed. And under that situation, there may be no opportunity at all for relief. MS. HALLADAY: Well again, I guess we can agree to potentially disagree under those circumstances. Mr. Hamilton, you look..... MR. HAMILTON: A. I did. I'm fascinated with all the legal ramifications and discussion here, but the practical matter is the market works. When customers have the kinds of problem that we're apparently trying to avoid, in other words, for whatever reason they're not happy, the evidence is that customers are accommodated, they're released from their agreements, there are no financial penalties levied against the customer and it hasn't been a large problem. Yes, there will be some times when customers, in any service industry, cannot be made entirely happy, and it will be for any number of reasons. And they will fabricate any number of stories to get their way. But in most cases they are accommodated and they are accommodated at no cost to them. MS. HALLADAY: Final question -- well, maybe not a final question. If the Board were to maintain the system transfer requirements that are in the Code, are there any changes that you would suggest, aside from getting rid of the whole thing and saying that utilities have got to honours STRs, are there changes that you could suggest in the Code that would help to mitigate against the potential damages to the market? In other words, is it more time that's required to notify the first marketer of an STR? Is the fact, Mr. Hamilton, I think that you mentioned that the rating marketer shouldn't be the one to notify. Are there specific changes that you could suggest? MR. HAMILTON: A. We have not turned our mind to that specifically because quite frankly what we're focusing on is that we believe that if this Rule was promulgated as proposed, we won't have to worry because the product will disappear from the marketplace. Everybody will be on one-month or two-month or three-month contracts. And the only people who will be having their feet held to the fire are those marketers who acted responsibly in a rising market, went out and locked up five years' supply and are now obligated to meet the terms and conditions of that contract while on the other side the customer can change their mind whenever that contract is out of money, so they just won't be in the business. MS. HALLADAY: I guess this is the problem that I've got. The way I read this rule is that the Board is not advocating customer mobility. The Board is dealing with service transfer requests and we keep on talking about customer mobility and other jurisdictions having complete customer mobility. That's not what this Rule says. This Rule -- in fact the system transfer requests and by saying that the utility cannot honour what the ultimate customer has to say, may in fact facilitate customers to breach whether it's a valid or invalid contract to move. And I understand what you're saying. I understand that you've gone out and you've marketed the long-term contracts against your long-term risk and you've hedged it. I also realize that if customers start breaching their contracts and wanting to go someplace else then that really causes you problems as it does in any business when you've got the potential for your customers to breach the contract. But what I'm trying to say is that any different from any other business that we don't have customer mobility, we don't allow customers to get out on so may days' notice, if there is a five-year agreement, we've said that they're bound by it, that there are remedies available, be it small claims court, be it inducing breach of contract for the other marketer? And I guess that was a speech rather than a question. I'm not sure. MR. HAMILTON: A. Well, I would like to try and respond to it. In our view the appropriate remedy would be when the utility receives a second STR from the customer, that they notify the existing marketer and that that marketer has a period of time in which to resolve the dispute with the customer and it doesn't get processed until that dispute is resolved, one way or the other. And I think that's probably the most workable scenario. I mean if it's a rising market and it's very few customers, we'll probably say have a happy day. If it's a falling market, we'll probably say you can get out but you owe us, well, $1,200, but we'll work it out. I mean that's the way other businesses function. If I enter into a five-year mortgage and I want to go into my bank and I say, "Whoops, you know. Rates have gone way down. I'd like to wind this mortgage up and take out a new one." I can do that. I can do it for a price. But by the same token, if I signed at, say, five per cent and rates have gone to eight, I expect the bank to perform at that five per cent until I tell them they don't have to any more. And that's all we're asking for in this market is we're going to be obligated to supply at the agreed upon contracted price provided we have a reasonable expectation that the customer has a similar obligation to take the gas. MR. HOWE: Ms. Halladay, just to address your point about the proposed Rule. What my clients find most objectionable about the Rule is that it imposes on the distributor an obligation, and specifically section 6.5.5 says, among other things: "If the distributor does not receive notice to terminate STR processing, the STR shall be processed." In other words, the gas distributor must follow the direction upon receiving the STR from the customer, and we say that represents a huge change in the way business has been done, and it flies in the face of the existing contractual arrangements. MR. DRUMMOND: A. I think it was a good speech incidentally, and I think I probably agreed with it. The problem is that you have the benefit of real facts throughout North America, and the fact is the Ontario gas market is the most mature, competitive. The take-up -- without mandating that everybody has to choose an independent marketer, it's the best take-up anywhere in North America. It is working, as Jim Hamilton has said several times. And believe me, without question the mobility rules that have been in place for fifteen years are a fundamental reason why that market is functioning, and if we change those rules as proposed, there will not be a competitive market in two years. That is as close to factual as you can get. So we can have all kinds of whimsical legal discussions, but that's the end result, and there's no way to get around that. MS. HAMILTON: But, in fact, as a practical matter and you were talking about practicalities, customers who had locked in for a gas supply at the rates have in fact benefited from it, and therefore no one is moving and no one wants to move because, of course, they've locked in at a good price. So therefore to say now -- I mean we know that if the commodity goes up, the price of the commodity goes up, then you won't have STRs, and if the price of the commodity goes down, there's a risk - there's no doubt that there's a risk - that customers will look to other gas marketers and say, "There's a better price. I'm going to switch." And then the problem is for the original contractor, for the original marketer to convince the client or the customer that they've entered into a binding agreement and they're bound to it. MR. DRUMMOND: A. But that's a short-term view of the problem. I agree with that assessment short term, but long term you won't have a marketplace here, and that should be more of a concern of the Board than short term in my view. MR. SCHOENMAKERS: A. And we've had no experience with a falling price market like we have on the rising side which would give us any indication of how many requests we would get in that kind of instance. We haven't received many. And it's pretty obvious we've had a good market for that because it has been rising and there's been tremendous benefit to the customers. But when it reverses itself, as it has started to do, we will get the indication then. And I think it will happen if the Rule is put in as it's proposed. And it'll cause tremendous hardship. MR. DRUMMOND: A. If somebody could point out to me another jurisdiction other than Ontario where deregulation is working, I'd be interested because we would certainly be there marketing. But no, we're not aware of any. MS. HALLADAY: Thank you. Those are my questions. THE PRESIDING MEMBER: Thank you, Ms. Halladay. The one question I had which continues to bother me and it's been raised before in other contexts of the distributor acting as the police, the way it is now if there's an STR, request for a transfer, the distributor basically is the policeman at that point. And it doesn't matter whether it's a valid contract, doesn't matter if as Ms. Halladay said if it was obtained through misrepresentation, it doesn't matter. And how do you get around that if you don't have the mobility and the right of the customer to say, "I'm going to move. I want to move.", and nobody has the right to say no except that I may have breached a contract, but then there's means for resolving that. So how do you get around the spectre of the distributor enforcing a contract that shouldn't be enforced? MR. HAMILTON: A. Mr. Laughren, they're not enforcing a contract that shouldn't be enforced. All they are doing is if I submit, if OESC submits today, an STR for a customer who is already being served by another marketer, what I get back is a report saying we cannot process your STR because of whatever reason, there's another marketer involved or the customer has moved or they're no longer at the address, whatever, we get that report back. At that point if the customer really wants to proceed with a move, nothing stops them from contacting us directly and saying, "I don't want your service anymore." And then we go to the scenario that we talked about with Mr. Howe before, that the customer says, "I don't want your service anymore. I want to get out of this contract." And we have to have a discussion as to whether the customer says, "Well, I was misrepresented. I didn't understand what I was signing," or whatever. And we deal with that. We deal with those - I'm not say hundreds of them - but we deal with them. And that's the way it ought to be. So I don't see the distributor as being the policeman. They are simply saying I cannot accommodate your request - you being OESC or Direct - to process this customer because there's already an existing arrangement in place. Nothing in that transaction prevents the customer from seeking whatever remedy they've got to get out of the contract that they don't want to be into. The utility is not preventing them from doing any of those things. MR. DRUMMOND: A. I think also we acknowledge that there are no perfect scenarios, and you know, the misrepresentation or, if we're not shy, I guess fraud is something that I don't think it's any more of a problem in our industry than some other industries. It's something that we're constantly working at to alleviate. But I think more importantly our company provide energy to almost 20-million customers and fraud and misrepresentation is no part of our business plan going forward or in the past. I think that a more important -- you know sometimes we have to weigh sort of the benefits of the weighty decisions that you people have to make. And I think -- my personal opinion is that for the sake of a few problems, we should not materially change the dynamics of a marketplace that are working. And again I go back to the same point, that if we materially change the dynamics of the marketplace because of a few misrepresentations or alleged misrepresentations and in the process take away the entire gamut of customer choice, long-term fixed price contracts, customers being able to plan for five years as to what their electricity or gas are going to be cost them, I don't think the cost benefit or the risk reward is there. I think it's far, far weighted on the wrong side. THE PRESIDING MEMBER: Thank you for that. Are there any other questions or comments? If not, Mr. Howe, thank you and your colleagues for your presentation, for the exchanges that we've had with you. This Oral Consultation was to resume at 1:30. I think that if there's an ability to talk to the CEED folks between now and then, if we could come back at two o'clock, that would make a lot more sense, and commence our afternoon hearing then. All right. Thank you very much. We are adjourned. --- Luncheon recess taken at 1:05 p.m. --- On resuming at 2:05 p.m. THE PRESIDING MEMBER: Please be seated. Okay. We're here this afternoon to hear from the Coalition for Efficient Energy Distribution, CEED. And if you would introduce yourself, you could proceed. --- Presentation by CEED (Ms. DeMarco): MS. DEMARCO: Thank you, Mr. Chair. I'm Elisabeth DeMarco on behalf of the Coalition for Efficient Energy Distribution and/or CEED. And CEED for the purpose of this consultation consists of Suncor Energy Inc./Sunoco Inc., Dynegy Canada Inc., Pan Canadian Petroleum Limited and Mirant America's Energy Marketing Canada Limited. I should just note by way of a preliminary matter that I am appearing on behalf of CEED. We do not have a panel for you, so in the event that I can't answer anything directly, I will certainly undertake to take the matter away and get back with a decision or some form of an answer for you. Mr. Chair, Board Members, once again we're at a critical step in the Ontario energy's transition to competition. Once again those that are resistant to change, those that are resistant to competition are urging you to maintain the status quo or something remarkably similar to it. Once again, you're being called upon to affirm the spirit, intent and provisions of the law that mandates the transition to competition, the Energy Competition Act. Mr. Chair, Board Members, in discharging these duties, CEED urges you to continue along the course that the Board has charted in the proposed Gas Distribution Access Rule in requiring distributors to facilitate both customer mobility and marketer consolidated billing. In addition, CEED urges you to continue to limit the distributors' use of customer information and limit the marketing materials that distributors may include in a customer's system gas bills. By doing this in a manner that is consistent with the course that it has charted in electricity, the Board will act within its jurisdiction to facilitate competition in both the Ontario natural gas industry and the Ontario energy industry as a whole. To this end, CEED will be making four basic submissions. These submissions are meant to be taken in conjunction with CEED's prior written submissions to the Board on both the Draft Gas Distribution Access Rule which was -- those submissions were made in October of 2000, and the Proposed Gas Distribution Access Rule. Those submissions were made in February of 2001. CEED's four basic submissions are, number one, that customer mobility must be facilitated by distributors in order to facilitate competition in the natural gas industry. Number two, that customers must have the choice of their preferred billing option through their vendors. Number three, the distributors' use of customer information must be limited to insure fair competition. And, number four, distributors should be prohibited from including third-party marketing or promotional materials in the bills to system gas customers. So first, commencing with customer mobility and CEED's position that customer mobility must be facilitated in order to ensure competition, section 6.5 of the proposed GDAR requires distributors to facilitate customer transfers from one gas vendor to another. CEED supports this integral provision on the grounds that, first, customer mobility is necessary as a condition for competition; secondly, that electricity distributors are also required to facilitate competition through customer mobility; and thirdly, other jurisdictions require distributors to facilitate customer mobility. And in support of these arguments, I will be relying upon largely paragraphs 6 through 8 of CEED's supplemental provisions; paragraphs 9 through 33 of CEED's February 26th submissions; and paragraphs 27 through 42 of CEED's October 18th, 2000 submissions. The National Regulatory Research Institute in the United States, or the NRRI, indicates that one of the two crucial factors in a development of energy competition relates to making it convenient for customers to switch suppliers. CEED submits that section 6.5 as currently written does exactly that. The need for customer mobility has been well established with the Board for quite some time now. Specifically, in 1996 this need was enunciated in the Ten Year Market Review Report. In 1997 the Board report on legislative change also alluded to this need. Currently gas distributors do not facilitate customer mobility. In effect, they use their monopoly over distribution services to prevent customer mobility. The ultimate effect is to prevent customers from exercising freedom of choice pertaining to gas vendors, freedom of choice that is the cornerstone of competition. If customers are currently unhappy with their current service providers, the distributors' status quo prevents customers from firing that gas vendor and moving to another service provider. It prevents the customer from exercising a freedom of choice. Distributors inhibit customer choice of a gas vendor in this manner on the basis of a strained interpretation of contract law which would have distributors and not the courts enforcing customer and gas vendor contractual rights. This distributor position and the position of some of the marketers on this point, therefore interferes with a customer's right to exercise common law contractual remedies by preventing the customer from firing the gas vendor. The Rule in section 6.5 as written correctly restores the customer's rights to, first, exercise its freedom of choice over gas vendors; second, exercise its common law and contractual remedies, and some stakeholders specifically have suggested that these rights should be limited to only a certain class of customers, that customer mobility rights should be provided to only new customers and certain customers should be grandfathered. CEED respectfully submits that the creation of two classes of customers, those that have rights and those that don't, is not acceptable. In addition, the Proposed Rule on customer mobility provides natural gas customers the same rights that are afforded to electricity customers. If the Board were to confer divergent rights on gas customers and electricity customers, it would interfere or cause confusion and interfere with the convergence and efficiencies gained from the convergence of the gas and electricity markets. It is also noteworthy that several other jurisdictions in the process of transition to competition facilitate customer mobility. These jurisdictions include, but are not limited to, Pennsylvania, Ohio, Alberta, Illinois and Iowa. Moving on to the issue of marketer consolidated billing, CEED specifically submits that customers must have a choice of their preferred billing option through their vendors. And in support of this submission, I will be referring to paragraphs 10 through 25 of CEED's supplemental submissions; paragraphs 34 through 56 of CEED's February 26th submissions; and paragraphs 6 through 26 of CEED's October 18th, 2000 submissions. Section 8.3.1 of the Proposed GDAR provides that the distributor shall offer three billing options, one of which is marketer consolidated billing. Marketer consolidated billing or MCB allows customers to receive only one bill for the commodity and delivery portion of the service and to receive that bill from their gas vendor. CEED supports this provision as a necessary requirement in the evolution of competition in the Ontario natural gas electricity and energy markets. CEED's support is specifically based on the grounds that, first, marketer consolidated billing increases customer choice, and therefore competition. Secondly, billing options are also provided to competitive electricity customers. Third, many other jurisdictions provide customers with marketer consolidated billing options. And, fourth, the Board has the authority to provide customers with billing options. On the issue of choice and competition, section 2(1) of the Ontario Energy Board Act 1998 indicates that one of the Board's central objectives is to facilitate competition in the sale of gas to customers. In order to achieve this objective, customers must be provided with true choice, not initial choice but true choice. This choice must be pertaining to who provides the energy services and who provides their bills. Specifically, customers choosing to access distribution services through a gas vendor must also have the ability to choose whether or not their gas bill should be wholly or partially provided by that gas vendor. The proposed GDAR crystallizes the importance of customer choice in gas distribution access by indicating that a billing relationship may not be uniformly imposed on customers. Customers through their choice in gas vendor must be left with the ultimate choice of which billing option is best suited to their needs. If this option is not provided, full competition will not be facilitated through informed customer choice. It's very curious that until as recently as early 2000 or the end of 1999, a broad range of billing choices, including marketer consolidated billing, were unanimously agreed to by parties including utilities. Again in the Ten Year Market Review, it was indicated that customers should be able to choose their billing options, one of which was marketer-consolidated billing. This was echoed in the Market Design Task Force. Moreover, in recent rate case evidence, Enbridge in its RP-1999-0001 rate filing in May 1999 advocated the customer driven choice of billing options, including marketer consolidated billing and indicated that this would be discussed in the DAR process. MS. DeMARCO: Similarly, Union in it's RP 1999 - 0017 rate filing in December of 1999 proposed a marketer consolidated billing service. Such billing options, including marketer consolidated billing, are currently provided to electricity customers. Section 7 of the Retail Settlements Code requires electricity distributors to accommodate customer choice of these three billing options, one of which again is marketer consolidated billing. Again, the proposed rule in Section 8 of GDAR provides natural gas customers with the same rights that are afforded by electricity customers. Parity in these rights of gas and electricity customers provides considerable opportunity for efficiency and customer choice for convergence billing for greater than one energy commodity and/or similar services. Again, it's noteworthy that many other jurisdictions also, in the process of transition to competition, provide billing options that include marketer consolidated billing. These jurisdictions include but are not limited to New York, Ohio, Maryland, California. And in Alberta there is draft regulation to facilitate marketer consolidated billing that is currently proposed. While it is not binding on this Board the process arguments encountered by the New York Public Service Commission in its attempt to mandate customer choice of billing options, are particular persuasive, specifically, in ultimately requiring that marketer consolidated billing be provided as a billing option, the New York PSC found that, first, New York customers preferred a consolidated bill. In Ontario, the fact that Ontario customers prefer a consolidated bill has been established in the customer surverys of Enbridge, of Union, and in the most recent customer survey of the Convergence Group. Secondly, in New York, a major utility argued that providing marketer consolidated billing as a billing option to New York customers prohibits or precludes distributor billing and thereby customer choice. In finding that it did not, I'd like to refer the Board specifically to the case that you should have beside you at tab 2, the second page in, second paragraph under "Constitutional and Statutory Issues." Second sentence where the New York PSC indicated -- and I apologize that this isn't highlighted in your copy: "Because we were only requiring that utilities allow customers a choice of their billing entity, the remaining legal issues raised by Niagara Mohawk are almost completely beside the point. We are not precluding customers from choosing service from a utility, but are giving customers a choice between either the utility or ESCOs`-- where ESCOS are defined Energy Service Companies`-- that might offer billing services. Contrary to Niagara Mohawk's claims, we are not restricting competition or denying it a chance to market its billing services. We are responding to customers' expressed preferences for a single bill, and encouraging development of the energy services market by giving customers other options in addition to the choice of energy supplier." Now the balance of this book of authorities has been the judicial treatment of this case. As you can see there have been considerable utility challenges to portions of it. The case stands as good law. So that was in New York. In Ontario, Enbridge and Union also argue that providing customers the ultimate choice of billing option constitutes a prohibition and precludes them from distributor billing. In Ontario, the same reasoning applies as was applied in New York. Providing Ontario customers with a choice of billing options does not preclude distributors from billing customers. Thirdly, in New York, New York PSC also faced a challenge to its statutory jurisdiction to require marketer consolidated billing as the billing option. The New York PSC found that it was not statutorily barred from acquiring marketer consolidated billing to be offered to customers, and also found that it had the requisite jurisdiction to mandate this option. In Ontario, the Ontario Energy Board is also facing a similar jurisdictional challenge by Ontario utilities. For the following reasons the Ontario Energy Board is also not statutorily barred from requiring marketer consolidated billing to be offered as a billing option, and specifically has the requisite jurisdiction to do so. Section 44(1)(b) and 44(1)(d) of the Ontario Energy Board Act expressly provide the board with the legislative authority to require that distributors offer customers the choice of who provides their bills through marketer consolidated billing. Section 44(1)(b) provides the Ontario Energy Board with jurisdiction to pass rules relating to the conduct of distributors as it relates to gas vendors and marketers. Section 44(1)(d) provides the Ontario Energy Board with the jurisdiction to pass rules relating to the conditions of access to distribution services. In CEED's submission, the proposed Gas Distribution Access Rule falls squarely within this jurisdiction. And in support of this position, we refer the board to the legal opinion of David Brown, which was filed in support of Direct Energy submissions, and also the submissions of George Bague on behalf of the Energy Convergence Group. Contrary to the utility's position in this regard, marketer consolidated billing does not make gas vendors into distributors. Marketer consolidated billing does not make gas vendors into consumers. Marketer consolidated billing does not interfere with distributor's right to change consumers -- to charge consumers for the consumers' obligation to pay. The arguments of the utilities in this regard unnecessarily constrain the Board's jurisdiction. They result in an over-broad interpretation of the term "delivery", and they contravene the spirit and intent of the Energy Competition Act. Moving on CEED's third submission, which is that distributor's use of customer information should be limited. Subject to small clarifications, CEED supports the limits imposed by Section 7(1)(1) of the proposed Gas Distribution Access Rule. Specifically CEED submits that Section 7(1)(1) should be amended to indicated that distributors may only collect unused customer data or information for the corresponding list of itemized purposes that are included in Sections 7.1.1. And in addition to the wording, the final clause 'and for no other reason', should be added to clarify. These limitations are consistent with what is required in the electricity sector, and ensure that distributors will not be permitted to use information gained for monopoly purposes to support commercial activities. CEED's last submission is that distributors should be prohibited from including third-party marketing or promotional material in bills to system gas customers. Section 8.5 of the proposed Gas Distribution Access Rule provides restrictions on the materials that may be provided with system gas bills. The purpose of this provision is commendable, in that it attempts to prevent distributors from using their default supply obligations for leverage commercial marketing opportunities for non -regulated entities. In paragraph 58 of CEED's February 26th submissions, CEED outlines its concerns regarding the current wording of section 8.5 and it's ability to achieve that objective. Specifically, the second bullet point of Section 8.5 is meant to prevent distributors from providing different promotional materials to different system gas customers; i.e. it is meant to be an additional restriction on the general prohibition. However as currently drafted, the second bullet may be read as an exception to the rule by allowing distributors to provide promotional or marketing materials to all system gas customers. CEED believes that this was not the intent of the Board and nor should it be. As a result, clarification is required on Section 8.5, and in particular, in relation to the second bullet of that section. The language currently used in the standard service supply code may provide some assistance in this regard, specifically Section 2.7.3 indicates that bills for standard service supply customers shall only include the distributor's marketing information or promotional materials and any materials that the distributor is obliged to send as part of its regulated distribution function. In conclusion, CEED respectfully submits that both customer mobility and marketer consolidated billing are fundamental to customer choice. They're are also fundamental to the development of a truly competitive Ontario natural gas, electricity and energy market. CEED, therefore, urges the Board to first continue along the course that it has charted since the commencement of the GDAR process in 1999. Secondly, stop the shell-game tactics that the utilities are employing to move this issue from one proceeding to the next. And, third, issue a final gas distribution access rule that is consistent with the provisions that are currently included in the proposed Gas Distribution Access Rule. We thank the Board for the opportunity to make submissions on this matter. THE PRESIDING MEMBER: Thank you, Ms. DeMarco. Any questions? MS. MCKINNON: Thank you, Mr. Chair. Ms. DeMarco, first if I might ask you a few questions on the billing issue. --- Examination by Board Staff: Q. Does your client CEED have any information as to whether their customers want the billing options beyond the distributor consolidated billing that is available now? A. CEED would rely on the evidence, particularly the customer survey evidence associated with the Convergence Group position, which actually supports that, I think, that only 12 per cent of customers do not want the choice of who bills. Q. Does CEED have a position as to what the impacts there would be on its relationships with customers if marketer consolidated billing was not made available? A. CEED would submit that competition, true competition cannot occur. You will not see the development of a truly competitive market where customers receive the efficiency, the benefits of competition without that form of billing relationship. Q. I understand that at a very general level. Do you have any information as to any more specific harms or disadvantages they foresee to their business in the event marketer consolidated billing is not made available? A. Certainly I would be happy to consult with CEED members on this point. Are you looking for financial impacts or -- Q. To the extent they foresee that as an issue, yes. But I'm not necessarily asking you to go do more homework with your client. I'm interested in knowing what information you have as to their information or their views at this point? A. Certainly the thrust has been that there are considerable efficiencies and economies of scope and scale to be gained from marketer consolidated billing and convergent billing for more than one commodity. So to the extent that market impacts are addressed, I refer you to Professor Trebilcock's evidence in this regard. CEED certainly supports his position relating to that. In terms of specific CEED member specific financial impacts, I can't currently provide you with any information. Q. If the proposed GDAR with respect to billing is passed in its current form, will there be a need to specify consumer protection mechanisms in your client's view? And I'm speaking, for instance, about ensuring that adequate information is available to customers who might receive marketer consolidated bills or provisions regarding the appropriate and most useful layout of information, are those things your client's considered? A. Anything to inform and increase the education of customers and empower them to make informed choices on competitive service offerings is something that CEED would be in support of specifically. In this regard as to what information should be provided or should there specific protectional elements, if the market is truly competitive, that is if the customer has the right to move if it's not happy with it's current service provider, we feel that the market will provide the protection of the customers. Q. Let me just ask one more question on that point, and it may be, Ms. DeMarco that it's not within your information here. I appreciate your perspective generally that the market will decide what's good information, but do you know at present whether your client has given consideration to the prospective need for certain kinds of details or certain sorts of formats to ensure that there is adequate protection from the outset as opposed to potentially over time as market forces may sort it out naturally? A. As a principle? Absolutely. And CEED's position in the Enbridge case may be particularly instructive in this regard. They advocated that customers in order to make informed choices need specific information to be posted, primarily the price, and advocated successfully that certain information should be posted on websites and provided to customers to facilitate their informed choices. In terms of a specific format in the bill or specific elements that must be included in specific places, we haven't gotten to that detail, or it's not to my knowledge. Q. Thank you. Has your client considered, and again I'm speaking more specifically than the concept of general lack of competition is bad and more competition is good, has your client considered what business or financial risks may be faced in the event that the GDAR is not passed in it's current form with the billing options and consumer choice regarding those billing options? A. Only to say that they considered it as mission critical. Certainly it's a necessary precondition for them continuing to function in this market. Q. Well that's a very ominous and sweeping statement. Do I take it your underlying foundation for that is a financial viability issue, are you saying there is a financial viability issue if marketer consolidated billing is not available to them? A. I think I'd be saying specifically that they would have to re-evaluate their continued function in this particular market if marketer consolidated billing was not available. Q. And is that based on actual assessment of the cost issues in the event only distributor consolidated billing continues to be available? A. I would say it's based broadly on business considerations. Q. Now a further question, which again may be too specific for your knowledge today, if the GDAR is passed as proposed, are you aware of whether your client will be in a position to comply with the billing requirements of Section 8 essentially right away? A. I'll have to get back to you on the timing. I think certainly think that given the position that they have taken to date, they would make every effort to be as ready as possible, as early as possible. Q. Now Ms. DeMarco, I'm not sure whether you had the benefit of being here earlier today. I don't think you did, for presentations by OESC and Direct Marketing. And I have a question for you regarding the potential risks associated with Section 6 of the GDAR, and that is the provisions that would require distributors to act on a consumer's request to switch marketers. And you've made it clear in your written submissions and in your oral submissions that you believe that it is a positive rule that will have benefits, because there would be mobility. But the panel was informed this morning of a concern that in the event distributors do act on consumer requests, and consumers are free to migrate as they wish as often as they wish, there will be sufficient financial consequences and risks that marketers who currently offer long-term fixed-price contracts would no longer be willing to offer to offer those because of the costs and the financial risks, and the cost particularly associated with hedging. Do you have any knowledge of your client's views on that position. A. Certainly CEED members feel that this particular market should be customer driven and not marketer driven. Q. I - I -- A. Marketer-specific. Q. Thank you. Ms. DeMarco, on the issue of grandfathering which you have raised in your written submissions but I don't believe you mentioned this afternoon in your oral submissions, you have taken the position that there is a real harm from the potential of grandfathering, and by that I'm talking about the possibility that the rule -- some parties have proposed that the rule be modified such that it not apply to existing contracts only to new contracts entered into after the rule. And you have indicated in your written submissions that the harm associated with grandfathering would be that it would create two classes of customers and that, as a matter of principle, it would be a bad and unfair thing. Do you, on behalf of your client, have any observations as to the potential benefits of grandfathering, given that those in favour of grandfathering have spoken about both the actual costs they anticipate and the risks associated with uncertainty of the current customers remaining with them if the new rule applies to existing contracts? A. I have to think about that for a minute. Net benefit or particular elemental benefit. I can see a particular elemental benefit to incumbent or utilities that have a particular contract they that that do not want to have to address, that they do not want subject to market forces. There may be a benefit to them but the net benefit of that to the overall market and to customers is something that certainly cannot be substantiated. Q. All right. Let me ask you another question related to concerns about distributors acting on STRs. Does your client have any position as to whether responding to the customer's request as the proposed GDAR would require, whether that adds any risk or liability to either the distributor or the marketer and, in particular, from the marketer's perspective, does it have any potential liabilities associated with contracts with upstream suppliers? A. In terms of -- there are several parties that are integral in that question. Let me first deal with the distributor. If the distributor was acting in accordance with the rule, which is again supported by legislation, I cannot see particular additional liability that could result from those actions. Q. Let me give you a hint because I don't mean this to be sort of hidden test, the concern expressed by parties who are not in favour of section 6, have expressed concerns that compelling the distributors to respond to these requests for change may place the distributors in a position of breaching contracts which they have with marketers. Does your client have any views on that as a potential liability? A. The service level agreements -- the specific requirements that the distributors are required -- or contracts that the distributors are required to have with marketers must again be subject to the laws, the laws including the gas distribution rule, stipulate that they are required to process these requests, and again the distributor will be substantiated in its actions. In terms of the propensity for litigation -- is that what I'm gathering or getting from the...? Q. That is certainly one of the factors that has been raised as a concern. A. There's also propensity for litigation arising for not allowing customers to exercise their rights from mandating customers to certainly having a contract imposed upon them. Contracts are broken and made on a regular basis. There are contractual remedies and legal remedies associated with entering or getting out of any contract and all parties will have to consider that before moving forward in a competitive market subject to both the common law and statutory law, whether or not that creates a particular additional liability, I'd hesitate to speculate. Q. Do you foresee any specific added liability associated with contracts that marketers may have with their suppliers of gas in the event their consumers switch away and they're then left in a position of perhaps having obligations to their suppliers that are unmet otherwise than through financial penalty. A. There's an underlying assumption in that question that I would like to first address, and that is that customers will only switch away. A competitive market works two ways. Q. I recognize that. I'm trying to concentrate for the moment on the liabilities that may arise in circumstances when customers do move away. A. Based on that assumption, then particular contractual provisions in contracts will have to be entered into with the new rules in mind. Exisiting contracts may have be to be revisited based on rules. Whether or not that might result in liabilities depends on what happens between the negotiating parties, i.e. the supplier and the particular marketer in question. Q. Excuse me for one moment. --- Board Staff confers Q. Ms. DeMarco, one question regarding the security arrangements which are provided for under Section 9 of the GDAR. And as you are no doubt aware, those rules -- that rule provides that the distributor may require security from both customers and gas vendors or marketers. Again, to the extent that you've considered this, does your client foresee the potential for duplication of security arrangements from both the distributor and the marketer given that it is also possible that marketers may seek some sort of security from their consumers? So in other words, is there real potential in your client's view for a customer to have to pay duplicate security to the two different parties? A. Very unlikely given that marketers must be competitive. The more competition they're going to double-ding customers, so to speak, for that portion of the contract for security costs, so its unlikely that they will into competitive with other suppliers or other marketers who are not requiring that double payment from customers. The market should correct for that. Q. And I have one question to gauge your client's views notwithstanding this is not an issue to which your client objects given that you have accepted the jurisdiction of the the Board to pass Section 6 of the rule, but I suspect you may be familiar with the Retail Settlement Code which has a provision in respect of the rules or the provisions in that code that says as follows: "Nothing in Sections 10.5 to 10.55 should be interpreted as in any way interfering with the contractual rights or obligations of retailers or consumers or the remedies available to retailers or consumers to enforce those contractual rights or obligations." So in other words, it's an express provision to say 'don't interpret these rules as affecting the legal rights and remedies of the parties'. Does your client have any views, to your knowledge, about the value of a clause such as that being inserted to make it clear that the proposed GDAR is not intended to interfere with whatever the existing contractual rights and remedies may be as between distributors and marketers or distributers and consumers or marketers and consumers? A. Subject to the specific wording in the provision as drafted, I think clarity is good point and certainly that the law functions -- the common law functions in addition to what's contained in the GDAR we see as is implicit and to the extent that Board has to make that explicit. Subject to check with by clients I don't anticipate that they will have a specific difficulty with that. Q. One final area Ms. DeMarco. Again in your written submissions, you made reference to a concern about the complaint process set out in the proposed GDAR, which I think is Section 10, but you did not reference it in your submissions this morning. I just have a couple of very brief questions. In your written submissions - no, I'm wrong, it's Section 11, sorry - you have suggested that the complaint procedures as currently drafted raise concerns because they do not set out the penalties or the consequences, if you will, of a complaint that's found to be valid; and secondly, a concern about inadequate transparency of complaints. Could you be a little more specific as to what you envision with respect to the prospect of identifying penalties or consequences and whether, to your knowledge, there is any precedent before this Board of that sort of process? A. Certainly in terms of the complaint and the Board needing to address it, I guess I'd refer you to the HVAC Coalition complaint regarding violation of I believe it's the Affiliate Relationships Code and the unfortunate aspect of that complaint is that while the Board found an express violation of the code, it provided for no penalty, no enforcements, no disincentive to the utility from making that same violation again. So I point in relation to enforcement to certainly that there needs to be teeth to make this work. Q. Does your client have any views as to the possibility that there are other mechanisms to encourage compliance without the use of explicit consequence or penalaty? A. As I said, the point is meant to be taken just as generally some form of teeth need to be applied in conjunction with the GDAR in order to make it work. MS. McKINNON: Those are all my questions. Thank you, Ms. DeMarco. Thank you, Mr. Chair. THE PRESIDING MEMBER: Thank you, Ms. McKinnon. MS. HALLADAY: Thank you, Ms. DeMarco. I have just have is a couple of questions. --- Examination by the Board: Q. Do any of your clients have long-term supply arrangements with customers? A. Yes, I can't give you the exact nature, but yes. Q. I guess what I am trying the understand is the nature of the constituency of the group you represent. Would they be classified as - this may not be fair and it's not meant to be pejorative in any sense of the word - but are they the johnny-come-latelys who want to come in and scoop the existing customers with the other groups like Direct Energy and Ontario Energy Savings Corporation? A. Certainly not. In particular, I believe Sunoco's been in the market, now I hesitate to guess but if not as long, almost as long as some of the other players. Q. Do you have any idea what market percentage your client group represents in the overall market? A. I could undertake to get back to you with some information in that regard. I can't give you the total percentage currently. Leaving aside the corporations that we're dealing with, there are significant gas marketers both in Canada and the U.S. -- I may have to undertake to get you some information on that. Q. That might be helpful to understand the nature of your clients, at least from my perspective, because we did hear this morning concerns about the viability of gas marketers with respect to the FTRs and obviously the Board is concerned about the financial viability of gas marketers and it doesn't want to enact a rule that is going to in any way cause undue problems to the gas marketers. On the other hand -- so they're saying that there's terrible problems, that there will be no long-term gas supply contracts because of the approach to STRs and you're saying that there won't be. So I guess I'm trying to judge, you know: Is the sky falling? Is it not falling? Is it going to be a legitimate concern or is not a legitimate concern? A. Certainly take from the mere fact that I can appear here before you and indiate that we are most in favour of customer mobility and all CEED members are marketers and feel that this is integral to competition that, as a matter of course, the sky is not falling. But in terms of numbers to substantiate that, I will certainly undertake to -- Q. I'd appreciate that. Ms. DeMarco, is it your view - and you may not be able to express a view - but if one of your members were to in fact actively solicit a customer who has an existing contract with a marketer, could it be then that your clients would then be -- may be liable for inducing breach of contract, that there may some liability attached to going after customers with existing contracts? A. I'm very reticent to provide a legal opinion on that point on the spot. Q. It wasn't meant to the form of legal opinion; I guess I'm just trying get your general views as to whether there could be potential liability for raiding existing customers. It was obviously a concern of the parties this morning. A. Certainly as a general proposition CEED members feel that the common law, including any form of misrepresentation and inducement of breaching, contract law remedy would apply. MS. HALLADAY: Thank you. Those are my comments. Q. My concern was similar to Ms. Halliday's that if one group of marketers has a major problem with complete customer mobility, if that's the right term, because of the danger to long-term contracts, especially if the price comes down, why wouldn't all marketers have that problem? Do you know why? I mean, why is it that some would be worried about that to the point of worrying about the viability of the market even existing after that and no long-term contracts being available? Why would it be so different for different marketers, do you know? A. It could depend largely on the individual business position of the parties making that submission. Certainly there would be a financial benefit conferred by regulatory rules that enforce individual businesses' contracts. Q. Hmmm. Do you know if your clients in their long-term contracts have penalties for getting out of those, breaching those contracts, getting out of them, canacelling them? A. I cannot speak directly to that, but again, subject to check, I would be happy to try and get some specific information in that regard. THE PRESIDING MEMBER: That's all the questions I have. Any more questions from Ms. McKinnon, Panel members? If not, thank you very much Ms. Demarco for appearing before the Panel and giving us your views, responding to the questions. Thank you. MS. DeMARCO: Thank you. THE PRESIDING MEMBER: I believe that's the last appearance of the day. Tomorrow we begin at 9:30 again with a presentation from Natural Resource Gas, then we also have presentations in the afternoon as well. So until that point we are adjourned. Thank you. --- Whereupon the proceedings adjourned at 3:00 p.m., to be reconvened on Tuesday, the 26th day of June, 2001, at 9:30 a.m. Presentation by IGUA Page 7 Examination by Board Staff Page 20 Presentation by OESC Page 62 Examination by Board Staff Page 89 Examination by the Board Page 106 Presentation by CEED Page 117 Examination by Board Staff Page 128 Examination by the Board Page 134