Rep: OEB
Doc: 128Rd
Rev: 0













ONTARIO ENERGY BOARD

Volume: 4

April 05, 2002


BEFORE:



P. VLAHOS

VICE CHAIR AND PRESIDING MEMBER

S. ZERKER

MEMBER

F. PETERS

MEMBER

A. BIRCHENOUGH

MEMBER



1
HEARING RP-2000-0023

2
IN THE MATTER OF the Ontario Energy Board Act, S.O. 1998, c. 15, Schedule B;

3
AND IN THE MATTER OF an Application by Hydro One Networks Inc., for an order or orders approving or fixing just and reasonable rates.


4
APPEARANCES

5

JENNIFER LEA

Board Counsel

MARTIN DAVIES

Board Staff





DON ROGERS

HYDRO ONE NETWORKS INC.

JIM MALENFANT

HYDRO ONE NETWORKS INC.

JIM FISHER

AMPCO

KEN SNELSON

AMPCO

JOHN McGEE

FOCA

COLIN McLORG

TORONTO HYDRO ELECTRIC SYSTEM

IAN MONDROW

HVAC

MICHAEL JANIGAN

VECC

YANNICK VENNES

VECC

ANDREW TAYLOR

POWER BUDD COALITION

JAMES SIDLOFSKY

BLG COALITION

TED COWAN

ONTARIO FEDERATION OF AGRICULTURE

ROGER WHITE

ECMI



6
TABLE OF CONTENTS

7

PRELIMINARY MATTERS:

[17]





HYDRO ONE NETWORKS - PANEL 3

[92]




CROSS-EXAMINATION BY MR. BATEMAN:

[95]





CROSS-EXAMINATION BY MR. MCGEE:

[163]





CROSS-EXAMINATION BY MS. LEA:

[201]





QUESTIONS FROM THE BOARD:

[243]





RE-EXAMINATION BY MR. ROGERS:

[288]





FURTHER QUESTIONS FROM THE BOARD:

[348]





FURTHER RE-EXAMINATION BY MR. ROGERS:

[363]






HYDRO ONE NETWORKS - PANEL 4

[380]




EXAMINATION BY MR. ROGERS:

[382]





CROSS-EXAMINATION BY MR. FISHER:

[396]





CROSS-EXAMINATION BY MR. MCLORG:

[415]





CROSS-EXAMINATION BY MR. BATEMAN:

[463]





QUESTIONS FROM THE BOARD:

[490]






AMPCO - PANEL 1

[532]




EXAMINATION BY MR. FISHER:

[534]





CROSS-EXAMINATION BY MR. MCGEE:

[640]





CROSS-EXAMINATION BY MR. COWAN:

[658]





CROSS-EXAMINATION BY MS. LEA:

[671]





CROSS-EXAMINATION BY MR. ROGERS:

[745]






QUESTIONS FROM THE BOARD:





[927]



RE-EXAMINATION BY MR. FISHER:

[997]






8
EXHIBITS

9

EXHIBIT NO. I.4.1: SCHEMATIC DIAGRAMS AND POWER BILL

[87]









EXHIBIT NO. I.4.2: RATE IMPACT OF ALLOCATING LV FACILITIES TO USERS ONLY

[676]









10
UNDERTAKINGS

11

12
--- Upon commencing at 9:07 a.m.
13
MR. VLAHOS: Please be seated.

14
Good morning, everyone.

15
Ms. Lea, Mr. Rogers, any preliminary matters?

16
MR. ROGERS: Yes, I do. Thank you, sir.

17
PRELIMINARY MATTERS:

18
MR. ROGERS: First of all, I can advise the Board that my client proposes to file with the court reporter an errata which are relatively inconsequential changes in the transcript. But I think in accordance with the Board's practices, we will do that, so that by the end of the case we'll have errata arranged for each day. We don't have those done yet. They are inconsequential. Any consequential changes we'll bring to your attention, sir.

19
Now, there are a couple of undertakings that were given --

20
MR. VLAHOS: Mr. Rogers, one second.

21
Is the court reporter okay with the sound system this morning? You're okay.

22
Okay, Mr. Rogers, continue. I'm sorry, continue. Your voice was dropping off, at least for one of the members.

23
MR. ROGERS: Oh, I'm sorry, it's probably just me. I'll try to remember to speak up.

24
At the close of business yesterday, Mr. Vlahos, you asked the question about the schedules for loss factors, what was approved and what was not. I think that Dr. Poray can answer that question for you now.

25
DR. PORAY: Yes, thank you. The Board approved the schedules for loss factors in an interim decision and order dated December 21st, 2001, and it was entitled "Hydro One Networks Inc. - Other Regulated Rate Submission, Board file number RP-2000-0023/EB-2001-0233/EB-2001-0689.

26

Now, there were some typographical errors in the original approved order, appendix A, with respect to the description of the loss factors. These were corrected and an amended appendix A was approved by the Board in an order dated January 29th, 2002.

27
MR. VLAHOS: Thank you. And those are interim?

28
DR. PORAY: That's correct.

29
MR. ROGERS: I think, actually, it was a letter of January 29th, 2002, not an official order. The letter amended the order. The letter is dated January 29, 2002.

30
MR. ROGERS: Thank you.

31
MR. VLAHOS: Court reporter, just to be sure on that, so there would be distribution loss factors but there were other things as well in those so-called other regulated charges

32
DR. PORAY: That is correct, yes.

33
MR. VLAHOS: And those are part of a different proceeding. The non-distribution loss factors, they are part of a different proceeding before the Board so we don't have to worry about those; is that correct?

34
DR. PORAY: That's my understanding, sir, yes.

35
MR. VLAHOS: Okay, thank you.

36
MR. ROGERS: Excuse me, sir. I want to be sure we're clear about this.

37
MR. VLAHOS: That's fine.

38
MR. ROGERS: I'm instructed, Mr. Vlahos, that, as you will see from Exhibit I.1.1, which was the list of approvals being sought which we filed at the beginning of the case, the very last bullet point on the last page indicates that a number of charges were approved on an interim basis by order dated December 21, 2001, and those will require final order in due course. They are all listed there in that final bullet point.

39

MR. VLAHOS: And that was my question, as to whether this is part of this proceeding, and I would doubt that it is. I may want some help from Mr. Davies on this and Ms. Lea. But I believe that retail transmission service rates may be a different proceeding than this. In other words, we can't provide final rates in this proceeding; it will have to be a separate process.

40
MR. ROGERS: A separate process.

41
MR. VLAHOS: It's underway, I understand. Let's see if I'm right on this.

42
MS. LEA: Yes. The matters considered under the fourth bullet point there are under a different EB number and therefore under the purview of a different panel of the Board. So if you wish to talk about this further, perhaps we can do so.

43
MR. ROGERS: Yes, all right.

44
MR. VLAHOS: But it does bring the point up, Mr. Rogers, that at some point, today is not the day, but one of the things we deal with during the end of the proceeding of an oral hearing is the implementation issues, and there may be some question on the panel's part as to some of the implementation issues.

45
MR. ROGERS: Yes.

46
MR. VLAHOS: So I don't know whether Dr. Poray would be the only person to handle those questions, or someone else. It will be totally up to you.

47
MR. ROGERS: Yes. Actually, we did anticipate that there would be some questions about that, and I think Mr. Horton who is coming back on Monday, perhaps with Dr. Poray's help, can answer questions on implementation for you.

48
MR. VLAHOS: At that stage we will want to visit Exhibit I.1.1.

49
MR. ROGERS: Yes, right.

50
MR. VLAHOS: All right.

51
MR. ROGERS: Very good.

52
Now, I also have some answers to undertakings to file this morning, Mr. Chairman.

53

The first is H.1.1, which has to do with the time-of-use customers and the display, the so-called notch that I think Dr. Zerker, among others, asked about; Mr. Peters I think as well. We have a written explanation to file today as H.1.1 and Mr. Horton can speak to that when he returns on Monday.

54
I'll give you all of these. There are three that we are doing and then perhaps we can do the filing all at the same time.

55
The second is H.3.1. This is information compiled by Dr. Poray concerning the revenue collected from transmission customers which will be foregone in the event that the position of some of the intervenors prevails in this case.

56
The third is H.3.2, which is a breakdown of the costs of the -- of the low-voltage analysis. I think it was Mr. Birchenough that asked about that yesterday. And Dr. Poray has compiled that information on a diagram for you.

57
MS. LEA: Does the panel have these filings yet?

58
MR. VLAHOS: No, we do not.

59
MR. ROGERS: I have copies here. Or do you have them?

60
MS. LEA: Could I have a couple of extra copies? In the absence of our administrative staff, I'm keeping the box of filings.

61
MR. ROGERS: Yes.

62
MS. LEA: Thanks.

63
MR. ROGERS: Finally, before we begin, I understand that Mr. Hubert has a correction he would like to make, a misunderstanding of a question of yesterday that he'd like to correct.

64
MR. HUBERT: Yes, thank you.

65
I'd like to clarify my answer to the last line of questioning by ECMI where Mr. White was asking me some questions that I answered yesterday.

66
The line of questioning may be found in volume 3 of the transcript, starting at paragraph 869, and it refers to the picture, the schematic drawing that we filed under Exhibit I.3.3, page 3.


67
Mr. White asked me yesterday where the utility takes delivery of power and the commodity under today's situation, and about the adjustments that may be made to the meter readings to convert the metered amounts to the delivered amounts today. And although Mr. White clearly stated that he was referring to today's billing situation, I obviously misheard him and my answers pertain entirely to the post-market opening situation.

68
Post-market opening, the delivery point is what's known as the defined metering point, and as I stated yesterday, there would be no LV loss adjustment required to be made to the M1 meter-reading. Mr. White implied in his questions that today the delivery point is at the boundary, and while this is not my area of expertise, I believe that is correct.

69
Thank you.

70
MR. ROGERS: Thank you. Does that complete your explanation?

71
MR. HUBERT: Yes, it does, thank you.

72
MR. ROGERS: The witnesses are available to continue the cross-examination, sir.

73
MR. VLAHOS: Thank you, Mr. Rogers.

74
No other matters, Ms. Lea?

75
MS. LEA: No, thank you.

76
MR. VLAHOS: Thank you.

77
Mr. Bateman, I believe you are taking over from Mr. White.

78
MR. BATEMAN: Yes, I am.

79
MR. VLAHOS: Go ahead.

80
MR. BATEMAN: Thank you. Good morning.

81
The first thing I would like to do is enter three items as exhibits; two schematic diagrams from yesterday, and the third document we faxed last night which was a portion of a power bill.

82
MS. LEA: Sir, did you wish these exhibits entered as a package or individually?

83
MR. BATEMAN: It doesn't matter.

84
MS. LEA: Then let's enter them all as a package, if you please. The schematic diagrams and power bill, we'll call it.

85
MR. BATEMAN: Yes.

86
MS. LEA: That will be Exhibit I.4.1.

87
EXHIBIT NO. I.4.1: SCHEMATIC DIAGRAMS AND POWER BILL

88
MR. VLAHOS: Mr. Bateman, were those given to the company yesterday?

89
MR. ROGERS: They were given to the company yesterday and the bill was faxed last night. The witnesses have had a chance to look at it and I have no objection.

90
MR. VLAHOS: Okay.

91
Go ahead, Mr. Bateman.

92
HYDRO ONE NETWORKS - PANEL 3

93
A.PORAY; Resumed

94
O.HUBERT; Resumed

95
CROSS-EXAMINATION BY MR. BATEMAN:

96
MR. BATEMAN: I wonder if there's a response to Mr. White's last question of yesterday.

97
MR. ROGERS: Why don't we repeat what the last question was.

98

MR. BATEMAN: I should mention that I reviewed the transcript with Mr. White last night, and I'm clarifying the question slightly from the question asked yesterday. The intent is the same.

99
Mr. White's question was: "Why would Hydro One not consider applying those voltage-sensitive or physical-situation loss factors to customers who, in fact, are like the remaining rural customers who do not have all the losses represented in terms of delivery?"

100
MR. HUBERT: I believe the answer was why do we not supply voltage-sensitive lost factors, and I'm not clear about the last part of the question. If you can clarify that, the last sentence in the question.

101
MR. BATEMAN: My understanding of what Mr. White meant there was that Hydro has included all the losses on their share of the LV systems but only part of the losses on the LDCs which have embedded delivery points, and therefore losses after their delivery points are not being captured. So we have an apples and oranges situation with respect to this.

102
MR. HUBERT: Okay. I can answer why we do not apply voltage-sensitive physical-situation loss factors to customers. The pre-filed evidence does actually use voltage-sensitive, physical-situation loss results from the Colaco study to derive the average 2.8 per cent loss factors for embeddeds and LDCs, and that Colaco study may be found in Exhibit G, tab 1, schedule 28 -- sorry, 68. However, we are not applying voltage-specific results to individual customers based on the individual customer's connectivity to the system. There are two reasons why we are not doing that.

103
The first one is we feel that the voltage-sensitive loss factors which ECMI quoted in the interrogatory yesterday are not necessarily represented of the physical situation across the province.

104
Secondly, we feel that the averaging approach would be preferable to the voltage-specific loss factor application. First of all, it is in accordance with the Retail Settlement Code where an average approach is recommended, and it also recognises that individual embedded customers and direct customers historically had little say about where they were connected to the system and therefore it would be unfair to penalise or reward them through the loss factor for where they are physically connected.

105
MR. BATEMAN: Would you agree that in the different access to the wires, there's a fundamental principle to permit the new electricity market to operate successfully?

106
MR. HUBERT: I would.

107
MR. BATEMAN: Would you agree that cost causality, with the appropriate price determinants, produces the best level of indifference?

108
MR. HUBERT: Taking into consideration the design of rate pools and fundamental rate design, I would agree, yes.

109
MR. BATEMAN: Hydro One is proposing a common line loss factor of 2.8 per cent for both large users and LDCs. Would you agree that this proposed loss factor applicable to all customers is nearly triple the default large user loss factor that was set?

110
DR. PORAY: I cannot speak to the default value that was proposed in the Retail Settlement Code of 1 per cent. I don't know how that was derived. It's an average value that was proposed, I would assume, in the absence of something else. The 2.8 per cent which Networks developed or calculated is more reflective of its -- of the characteristics of its system, and I believe that that is the correct factor that should be used.

111
MR. BATEMAN: Okay.

112
Perhaps we could now turn to one of the schematic diagrams. It's the one -- one of the two showing the schematic of the LDCs. This particular one has the line lengths in kilometres. That's perhaps the easiest way of identifying it.

113
It's essentially similar to the one we were shown yesterday. It shows two LDCs, LDC-1 and LDC-2, being supplied by the transformer station, TS, on the way. All the lines on the sketch are owned by Hydro One as well as the DS that's located within the boundary of LDC-1. And again it shows a number of possible meter locations for delivery, M1, M2, or M3, each of which represents the point at which the power delivered to LDC-1 is metered for determining delivered volume. At M6 is a meter of the boundary of LDC-1 and LDC-2. The supply voltage is either 44 kV or 27.6 kV.

114
My question is: Under the existing systems, is it generally correct to say that the delivery point to the LDCs supplied by Hydro One distribution LV facilities is at the LDCs boundary, or at the transfer from Hydro One LV facilities to LDC-owned facilities within the LDC's service area?

115
MR. HUBERT: I believe that is correct. As I stated earlier, I'm not familiar with today's delivery situation. But I accept that for going forward in the question.

116
MR. BATEMAN: In the situation where there's a meter at M1 and no meter at either M4 or M5, under the existing system, how are the billing quantities to LDC-1 determined?

117
DR. PORAY: My understanding is that if there is no meter at M3, we're talking now about LDC-1?

118
MR. BATEMAN: Yes.

119
DR. PORAY: And there's a meter at M1, then the -- there would be an adjustment made to the meter reading M1 to derive a delivered value at the boundary to the LDC. And I think, I don't know this, but I believe that that involves the K & N factors.

120
MR. BATEMAN: Would you agree the same situation would apply if there's a meter at M2 and no meter at M4?

121
DR. PORAY: I have difficulty envisioning what the position of meter M2 is in relation to the transformer station or the boundary of the LDC.

122
MR. BATEMAN: It happens to be a meter that's located at neither of those and is just between them, for this illustration.

123
DR. PORAY: Well, then, I would imagine that an adjustment would be made to the meter M2 reading to bring it to the boundary on the LDC.

124
MR. BATEMAN: Okay. I would now like to draw your attention to the second item which is the -- it's a portion of a power bill for one of ECMI's clients, and it's headed "Detail of Electricity Used on Peak for October 1999."

125
And the thing I'd like to point out, about five lines down there's a discussion, if you could read it, it says, "Line Losses." Under the column headed "Kilowatt Loss," that's the third column, there's a little script called CAL, and underneath that, "Line Losses." And if you follow that row across to the right, the column headed "Low Voltage" is actually the utility billed on coincident demand, and the number underneath that, the negative 50, is a kilowatt demand adjustment specific to the line. That process is repeated whether there are line-loss adjustments.

126
So my question to you is, then, would you agree, based on looking at this bill, that utilities do have site-specific, line-loss adjustments?

127
DR. PORAY: I would have to agree that, in accordance with this bill, there is an adjustment being made.

128
MR. BATEMAN: So what I'd like to do now is turn to the proposed situation, having looked at the existing situation. And my first question, then, is, under the context of proposed situation is would you agree that the line-loss rate of 2.8 per cent proposed by Hydro One will apply to the metered delivery point quantities regardless of whether the power is delivered at M2 or M3 or M4 or M5?

129
MR. HUBERT: Yes, I would.

130
MR. BATEMAN: For the situation where power is metered at M4 or M5, would you agree that those meters do not measure any of the power delivered to LDC-2?

131
MR. HUBERT: That's correct.

132
MR. BATEMAN: Would you agree that if the meter is located at M3, then in that case the measured quantity does include the power delivered to LDC-2?

133
MR. HUBERT: Yes, I would.

134
MR. BATEMAN: And similarly if the meter is located at M1 or M2, it includes the power delivered to LDC-2?

135
MR. HUBERT: Yes, it does.

136
MR. BATEMAN: In determining the billing qualities for LDC-1, what would be the loss adjustment be delivered through LDC-2?

137
MR. HUBERT: Can you repeat the considerations again.

138
MR. BATEMAN: In determining the billing quantities for LDC-1, what would the loss adjustment be for the power delivered to LDC-2?

139
MR. HUBERT: Based on the meter reading at M3, is that what's proposed?

140
MR. BATEMAN: Yes.

141
MR. HUBERT: The adjustment here in per cent would be 1.028, it would be minus 2.8 per cent adjustment for the LV.

142
MR. BATEMAN: That's a credit to LDC-1, isn't it, a minus 2.8 reading.

143
MR. HUBERT: It would be charged -- LDC-1 would be charged for those losses. Are you asking about LDC-2 here?

144
MR. BATEMAN: I'm asking about the billing quantities for LDC-1 and I'm asking what would the adjustment be for the power that's delivered to LDC-2 at M6.

145
MR. HUBERT: I believe it would be credited for the losses associated with the energy delivery to LDC-2 of 2.8 per cent.

146

MR. BATEMAN: Having compared the existing and proposed system, would you agree that, on the basis of cost causality, the proposed use of the 2.8 per cent losses for deliveries is inferior to the existing system if the criteria was cost causality?

147
MR. HUBERT: No, I don't think I could make that statement.

148
MR. BATEMAN: Would you agree it's inferior in terms of its precision in determining the power delivered?

149
MR. HUBERT: I think what we're referring to here is a situation where, if we knew the information for every individual customer in the system and had this type of information on connectivity and power flow, then theoretically we could do what ECMI is proposing; however, in the approach that Networks is proposing, we could not do this. We do not have the specific connectivity, realtime power flow information and the ability to calculate this level of detail, individual losses.

150
MR. BATEMAN: Perhaps you could now turn to the third sheet, the second PowerPoint diagram. This one is similar to the others except in this case the line lengths have been replaced by losses, and we have assumed for the purposes of doing this diagram that the line losses are one quarter of 1 per cent per kilometre of line.

151
So if I'm understanding the proposed system correctly, this example would show that customers of LDC-1 would be charged 6.8 per cent for line losses on the power going through LDC-1 to supply power to LDC-2.

152
So just to develop the point a little bit further. We've noted that LDC-1, as you said earlier, received a 2.8 per cent credit for power supplied to LDC-2. So my question is: Would you agree that the net effect is that LDC-1's customers are subsidising LDC-2's customers for line losses of 4 per cent on the power delivered to LDC-2?

153
DR. PORAY: Can you explain how you arrived at the 6.8 per cent?

154
MR. BATEMAN: It would be the sum of 2.5, 1.5, for a total of 4, plus 2.8. In other words, the 4 going -- the 4 between M3 and M6 plus the 2.8 that would be.

155
DR. PORAY: I'm sorry, what was your question?

156
MR. BATEMAN: My question is: Would you agree that in this illustration, the next step of the delivery is that LDC-1's customers are subsidising LDC-2's customers for the line losses of 4 per cent on the power delivered to LDC-2?

157

MR. HUBERT: It is correct that the losses charged to an LDC-1 are 2.8 per cent, and because our loss is incurred within LDC-1, there is an apparent subsidy.

158
MR. BATEMAN: Thank you. That concludes my questions on losses.

159
MR. VLAHOS: Thank you, Mr. Bateman.

160
Ms. Lea.

161
MS. LEA: Thank you. I was wondering whether Mr. McGee had any questions for this panel.

162
MR. MCGEE: Yes, I do. I apologise if I ask a question that was asked yesterday, but I was not able to be here.

163
CROSS-EXAMINATION BY MR. MCGEE:

164
MR. MCGEE: If I could ask you to turn to --

165
MS. LEA: For the line-loss panel.

166
MR. MCGEE: This is related to line losses.

167
MS. LEA: Okay, That's fine. Sorry.

168
MR. ROGERS: We settled this issue, though.

169
MR. VLAHOS: Yes, I'm wondering if FOCA is on the list of intervenors who did not agree with the settlement proposal.

170
MR. MCGEE: We did agree, but a clarification question is what it was.

171
MR. ROGERS: I see.

172
In the agreement, FOCA is listed as taking no position on this issue. No, I'm sorry, I'm in the wrong part. FOCA is listed as taking no position on this issue in the settlement agreement so I assume they had no questions. I thought that's what that means. If Mr. McGee has couple of questions of clarification, I don't really object. I wanted to point that out.


173
MR. MCGEE: I also had --

174
MR. VLAHOS: The Board also interprets the settlement proposal. But courtesy has been extended by Mr. Rogers so go ahead.

175
MR. MCGEE: It relates to this 1 per cent versus the 2.8 per cent number that you're talking about.

176
If you turn to tab 3, schedule 2, page 5 of 10, in the Retail Settlement Code, it proposes a 1 per cent differential --

177
MR. ROGERS: Just slow down, Mr. McGee, please, while they turn it up.

178
MR. HUBERT: Which exhibit?

179
MR. MCGEE: This is Exhibit E, in the pre-filed evidence.

180
DR. PORAY: And it's schedule 2, page 5?

181
MR. MCGEE: Schedule 2, page 5 of 10, yes.

182
DR. PORAY: Yes.

183
MR. MCGEE: In the middle of the page there, it says: "The Retail Settlement Code proposes a 1 per cent differential in loss rates between delivery to primary and secondary customers." And it was my understanding that that was intended to cover the situation where the meter is on the primary side of the transformer as opposed to the secondary side of the transformer. And you have taken that and said that your opinion is that it should be a 3 per cent differential, in the next sentence. The result of the whole thing, of course, if you turn to the next page, is that the T-class customers and the G3 customers and the F3 customers end up with a 5.5 per cent loss factor and all of the other customers end up with a 8.5 per cent factor, whether or not those customers are metered on the primary side of the transformer or the secondary side of the transformer.

184
So I just wonder how you can justify that 3 per cent differential in that case? It's an opinion that's given -- it's stated as an opinion, in Networks' experience, that 3 per cent is more appropriate. I think you're comparing it to something that was not intended to be compared to in the first place.

185
MR. ROGERS: Can we just -- Mr. McGee, can we have a question and have the witness answer the question. How do you justify this; is that the question?

186
MR. MCGEE: I'll ask a very specific question.

187
These 5.5 per cent loss factors assigned to the T-class customers, the G3 customers and the F3 customers, are they only to be assigned to customers at the meter on the primary side of the transformer or customers that have their meter on the secondary side of the transformer? To be consistent with the Retail Settlement Code, you don't --

188
MR. VLAHOS: Mr. McGee, let the witnesses think about matters before -- wait for the answer and then perhaps you can follow it up.

189
MR. ROGERS: They have a lot in their mind, Mr. McGee. They have to think this through.

190
DR. PORAY: As I understood that, Mr. McGee, the 1 per cent differential is proposed between delivery to primary and secondary customers and so that what we're looking at is the differential between the primary losses and the secondary losses. That's how we interpreted that. And that's how we came about with a factor of 2.8 per cent as being the differential between the two. Our response to OEB interrogatory 6.2.9 laid that out.

191
Yes. What we are talking about here is the primary adjustment factor, and in that interrogatory we laid out how we calculated the primary adjustment factor.

192
MR. MCGEE: The primary adjustment factor you're referring to is to take account of the fact that the meter is on the primary side of the transformer as opposed to the secondary side of the transformer; is that correct?

193
DR. PORAY: The primary adjustment factor is the differential between being supplied from the primary system versus being supplied from the secondary system.

194
MR. MCGEE: And not related to the meter application itself.

195
DR. PORAY: That is my understanding.

196
MR. VLAHOS: Are you done, Mr. McGee?

197
MR. MCGEE: Yes.

198
MR. VLAHOS: Thank you.


199
Ms. Lea.

200
MS. LEA: Thank you. I have a couple of questions of clarification, please.

201
CROSS-EXAMINATION BY MS. LEA:

202
MS. LEA: Could I ask you to turn up Exhibit I.3.3. It was an exhibit filed yesterday. I'm looking at the last page of that particular Exhibit I.3.3, the last page.

203
DR. PORAY: This is the page that has existing billing arrangements?

204
MS. LEA: Correct.

205
And I just wanted to clarify the difference between the existing billing arrangements and what's going to happen after May 1st of this year.

206
Are all of the line-loss costs post-May 1st of this year going to be recovered in the total loss factor, or will some still be recovered in retail rates?

207
DR. PORAY: Before May 1st?

208
MS. LEA: Post, after.

209
DR. PORAY: After May 1st, they will be recovered as an adjustment to the energy read on the meter by the distribution loss factor.

210
MS. LEA: Okay. It's a gross-up of the metered consumption.

211
DR. PORAY: That is correct.

212
MS. LEA: But is any of that being recovered in retail rates or only in the total loss factor?

213
DR. PORAY: When you talk about metered rates, do you mean distribution rates, wire rates?

214
MS. LEA: Yes.


215
DR. PORAY: No.

216
MS. LEA: Okay. So when we look, then, at the effect of this, there will be an incremental charge for LV customers on May 1st, 2002, on top of the 38.6 million?

217
DR. PORAY: They will be paying LV losses, yes.

218
MS. LEA: Okay. And what is that amount? We understand it to be about 17 million; am I correct?

219
DR. PORAY: That is correct, based on the cost of power of, I think, 4.3 cents per kilowatt-hour.

220
MS. LEA: I understand. So it's an estimate, making the assumption of a certain cost of power.

221
DR. PORAY: That is correct.

222
MS. LEA: All right, thank you.

223
And has the impact of the way that line losses are then going to be collected been taken into account in the numbers that you are presenting in the evidence here with respect to customer bill increases? In other words, do the customer bill increase numbers include the post, after-May 1st line loss collection or the pre-May 1st line loss collection methodology?

224
DR. PORAY: Just a minute, please.

225
MS. LEA: Thank you.

226
DR. PORAY: I believe you're making reference to the comparison that we made in Exhibit G, tab 1, schedule 64, where we calculated the impact of the unbundled LV charges.

227
MS. LEA: In part. I was also looking at, for instance, the discussion of bill impacts at Exhibit D, tab 1, schedule 1, page 4. You've told us, and I just wanted to confirm, that the subsidy that you mention on the last page of I.3.3 is going to end as of market opening.

228
DR. PORAY: That is correct.

229

MS. LEA: Yes, we've confirmed that. So now I'm trying to understand the bill impacts throughout the evidence that you give us. Is that including or excluding that change in collection? If you'd rather take an undertaking and give this response later, I'm happy with that, too.

230
DR. PORAY: No, I think I have the information here.

231
If we could turn to Exhibit E, tab 1, schedule 1, page 18 of 19.

232
MS. LEA: Give me a moment to turn that up, please.

233
DR. PORAY: Certainly.

234
MS. LEA: Tab 1.

235
DR. PORAY: E, tab 1, schedule 1, page 18. There are two tables shown on there. The top table -- I'm sorry.

236
MS. LEA: I have Exhibit E, tab 1, schedule 1, page 18.

237
DR. PORAY: There are two tables. The top table deals with the unbundled distribution rates and the total bill impacts at market opening, and the bottom table deals with the bill impacts as of March 1st, 2003. You will see under both tables there is a little asterisk at line 3 and at line 7 which says "Includes losses of 7.7 per cent," so that factor has been taken into account for losses.

238
MS. LEA: One moment, please.

239
Thank you very much. Those are my questions, Mr. Chairman.

240
MR. VLAHOS: Thank you, Ms. Lea.

241
The Board has some questions.

242
Mr. Birchenough.

243
QUESTIONS FROM THE BOARD:

244

MR. BIRCHENOUGH: Referring to Exhibit I.3.3, specifically the 2.8 per cent subtransmission system, I understand that it's difficult to create customer-specific losses for the many customers on the system. But was any consideration given to zoning, in other words, creating several zones to more closely approximate user-pay?

245
DR. PORAY: In developing its distribution loss factors, the approach was to really look at the zones which are formed by the subtransmission system, the primary distribution system, and the secondary distribution system. That's as far as we took that separation.

246
MR. BIRCHENOUGH: So there was no breakdown within each of those zones.

247
DR. PORAY: No, there was no breakdown.

248
MR. VLAHOS: Thank you, Mr. Birchenough.

249
Dr. Zerker.

250
MS. ZERKER: I just need an explanation. I don't know where the 17 million figure is you and Ms. Lea were referring to. Is it on top of the 38.6? Is it part of the 38.6? I just don't understand that number.

251
DR. PORAY: The figure of 17.1 million is established by taking the losses which are attributable to the embedded entities and those are 251 gigawatt hours, multiplied by the cost of power at 2.8 per cent, and hopefully those two numbers multiplied together give you 17 million.

252
MS. ZERKER: Does that mean that --

253
DR. PORAY: And they are not included in the 38. They are separate. The 38 represents the wires-related costs.

254
MS. ZERKER: So then the LV --

255
DR. PORAY: If you like, I can point you to the exhibit.

256
MS. ZERKER: Okay.

257
DR. PORAY: This calculation can be found on Exhibit D, tab 1, schedule 1, page 4 of 4, and it's line 6.

258
MS. ZERKER: It's a simplistic question, then. The LV system will then be charged for both 38.6 -- under your proposal, 38.6 million plus 17.1 million? Is that what --


259
DR. PORAY: That is correct.

260
MS. ZERKER: Okay, that's what I wanted to know.

261
DR. PORAY: Perhaps I should just add to that, that under today's arrangement, they don't pay for the losses. The embedded directs don't pay for the losses, as I mentioned in my testimony.

262
MR. VLAHOS: Thank you, Dr. Zerker.

263
Dr. Poray, just one question. I'm looking at the exhibit that was filed today, that's a response to an undertaking, Exhibit H, tab 3, schedule 1, page 1 of 1 --

264
DR. PORAY: I'm sorry, I don't have that in front of me. Just hang on for a second. What was the number again, Mr. Vlahos?

265
MR. VLAHOS: Exhibit H, tab 3. And is this the response to the undertaking dealing with the shift -- the shift of revenues or dollars, one proposal versus another?

266
DR. PORAY: Yes, sir.

267
MR. VLAHOS: If you read the response, for example, take the response to the first point, "What revenues would Networks forego if the transmission-only-connected LDCs were not to be charged the proposed shared LV line charge of 17 cents per kilowatt per month?" and the response to that question was "The amount is 9.5 million." So that amount would be net of any losses?

268
DR. PORAY: That is correct.

269
MR. VLAHOS: So how would one calculate the losses on that 9.5 million? Is there some kind of pro-ration, 17.1 over 38.6? I'm not sure what the losses would be associated with the amount of 9.5 million.

270
DR. PORAY: They wouldn't be because we are dealing here with the transmission-connected LDCs.

271
MR. VLAHOS: Okay. Can you help me more?

272
DR. PORAY: Certainly.


273
Remember we were going to spread the cost of the shared line charge amongst all local distribution companies and embedded directs. And I said yesterday that there were 33 LDCs that were connected to the transmission system alone, and that is what this calculation shows. But for those 33 LDCs, if we were to forego the charge of 17 cents - that would come to 9.5 million - those LDCs would not have been charged for LV losses.

274
MR. VLAHOS: Okay. Thank you for that clarification. Does that 9.5, does that compare with the 12.9 that is in the evidence of the --

275
DR. PORAY: It's a part of, yes.

276
MR. VLAHOS: Okay.

277
MR. ROGERS: Did you say a part of?

278
DR. PORAY: A part of, yes.

279
MR. ROGERS: I think the question is, how does it compare? How do you reconcile the two?

280
DR. PORAY: Well, this only deals with the 33 transmission-connected only. Remember that we also have transmission- and distribution-connected LDCs. So if you take into account the -- if you remove the transmission delivery points and just deal with the distribution delivery points, then the difference would be 12.9 million.

281
MR. VLAHOS: Okay.

282
DR. PORAY: In other words, you're assigning the costs to only those for whom you are delivering electricity at the distribution system.

283
MR. VLAHOS: All right, okay. The answer is it's part of the $12.9 million.

284
DR. PORAY: Right, that's correct.

285
MR. VLAHOS: Thank you. Those are the Board's questions.

286
Mr. Rogers, any redirect?


287
MR. ROGERS: Yes, I do. Thank you, sir.

288
RE-EXAMINATION BY MR. ROGERS:

289
MR. ROGERS: I'd like to just deal with some of these exhibits that were put to you this morning by Mr. Bateman to make sure I understand the situation. These are Exhibit I.4.1.

290
First of all, he put to you a bill here showing -- an electrical bill for one of his clients, as I understand it.

291
DR. PORAY: That is correct, yes.

292
MR. ROGERS: Now, I notice at the top left-hand corner, this is a bill for Ontario Power Generation.

293
DR. PORAY: Correct.

294
MR. ROGERS: So Ontario Power Generation is sending out these bills and doing these calculations.

295
DR. PORAY: That is correct.

296
MR. ROGERS: And a couple of occasions you said, in answer to questions from him, that you did not have certain information available to you or you were assuming that is how it was done. Is that because you're not doing the billing?

297
DR. PORAY: That is correct.

298
MR. ROGERS: And does Networks have access to all of the information that OPG has when it calculates its bills?

299
DR. PORAY: No, it does not.

300
MR. ROGERS: Is that part of the problem on a going-forward basis?

301
DR. PORAY: That is correct.

302
MR. ROGERS: You're inheriting these customers and you don't have the information at the moment.


303
DR. PORAY: That is so.

304
MR. ROGERS: Now, let's look at this diagram that Mr. Bateman put to you, and it was the one with the percentages. I.4.1 was the last one he dealt with. It has -- you'll see, a one-quarter per cent loss factor assumed after TS on the left side of the page.

305
DR. PORAY: Yes, we have it.

306
MR. ROGERS: I didn't follow this very well so can you help me. What is the one-quarter per cent supposed to represent in your understanding?

307
DR. PORAY: I believe the way it is presented here is that the losses are expressed as a function of the distance.

308
MR. ROGERS: I see.

309
DR. PORAY: So it's a quarter of a cent per kilometre of line.

310
MR. ROGERS: I see. So for the purpose of his question to you, he assumed that one-quarter per cent loss added to a three-quarter per cent loss added to a 2.5 per cent loss added to a 1.5 per cent loss, leading to LDC-2

311
DR. PORAY: That is correct.

312
MR. ROGERS: And in that set of assumptions that he's put to you, you said that you would concede that there would be some apparent subsidy from LDC-2 to LDC-1.

313
DR. PORAY: That is correct.

314
MR. ROGERS: Do you know whether such a utility actually exists as this one, by the way, as these two?

315
MR. HUBERT: No, I do not.

316
MR. ROGERS: And if one was to assume -- let's assume that the line losses added up to less than the number that he assumed here. Let's suppose you had total line losses of, I don't know, say it was less than 2.8 per cent. You could easily assume that, I suppose, in this diagram, could you not?

317
DR. PORAY: It's possible, yes.

318
MR. ROGERS: That the cumulative losses were less than 2.8 per cent

319
DR. PORAY: Yes.

320
MR. ROGERS: And if you took those assumptions, what would be the effect concerning this cross-subsidy? Would LDC-2 be cross-subsidising LDC-1? Do you understand my question? I can't cross-examine you so I hope you do.

321
MR. HUBERT: Could you repeat the question.

322
MR. ROGERS: What I'm trying to get at is if you were to assume that these cumulative line losses were less than 2.5 per cent, the average, from TS -- from M1 to M6; do you understand?

323
MR. HUBERT: Yes.

324
MR. ROGERS: Would LDC-2 still be cross-subsidising or apparently subsidising LDC-1?

325
MR. HUBERT: Not necessarily, no.

326
MR. ROGERS: Would it be the reverse situation?

327
MR. HUBERT: Yes, it could be, sure.

328
MR. ROGERS: And is this something that's inherent in any averaging situation; that when you take an average, if you happen to fall above the average, you're contributing more than perhaps the strict application would apply, and if you're below, you're less?

329
MR. HUBERT: Absolutely.

330
MR. ROGERS: Now, why have you done it this way, and why are you proposing what you're proposing to this Board knowing that there are these cross-subsidies in the system?

331

MR. HUBERT: The picture that is shown in this exhibit is actually quite simplified and there are additional loads that could easily be taken off in various parts of the system. For example, if this is a Hydro One feeder here, there could be a retail load, our own retail load being taken off before the boundary of LDC-1. So while this is very simplified, it may or may not be the case for individual LDCs. The actual power flow on the system is much more complex and by necessity we would have to do some averaging or assumptions to allow us to calculate an aggregate loss for this system.

332
MR. ROGERS: Why don't you have all this information that OPG may or may not? Explain to the Board how this works and the problem that you have, would you?

333
DR. PORAY: Well, first of all, these are not the customers of Hydro One today so we don't have the information on their metered -- meter bills.

334
MR. ROGERS: And that's because -- why is that? Is that because they are OPG's customers?

335
DR. PORAY: They are OPG's customers, and on the basis of the reading of those meters, it applies the existing wholesale rates and bills those customers accordingly.

336
MR. ROGERS: Can you get that information from OPG?

337
DR. PORAY: We have tried but they would not release that information to us.

338
MR. ROGERS: I see. In the absence of that information, is it possible, or is it practical for you to assign costs on a more specific basis than you have in your proposal?

339
DR. PORAY: No, it is not. And I would add the other thing that we need to know is to complete the connectivity study which tells us exactly who is connected to which delivery point to enable us to assess -- to better assess what the situation was in terms of losses.

340
MR. ROGERS: All right. So on a going-forward basis, once you acquire these customers and once you do the connect studies, will you have better information when you next come before the Board to deal with this issue?

341
DR. PORAY: We will have better information, yes.

342
MR. ROGERS: All right, thank you very much.

343
Thank you. Those are my questions, thank you.

344
MR. VLAHOS: Thank you, Mr. Rogers.


345
The panel does have one question of clarification, if you don't mind. You'll be given an opportunity to re-examine again if you wish.

346
MR. ROGERS: Yes.

347
MR. VLAHOS: Dr. Zerker.

348
FURTHER QUESTIONS FROM THE BOARD:

349
MS. ZERKER: This is a follow-up, Dr. Poray, from my confusion about the 17.1 million.

350
What I understand is that Hydro One has been receiving $29.2 million for its LV system from customers that are not your customers, through OPG; is that correct?

351
DR. PORAY: We've been receiving from OPG $29.2 million, yes.

352
MS. ZERKER: But what I'm comparing now, since I received the number of 17.1, your proposal then asks for the LV system, 38.6 million plus 17.1, which is $55.7 million in total for the LV system. That's what you're asking for; is that correct?

353
DR. PORAY: No, we're not asking for the 17.1 million because that is not revenue that pertains to wires charges.

354
MS. ZERKER: Oh, the 17.1 million pertains to the commodity?

355
DR. PORAY: To the commodity, that's correct.

356
MS. ZERKER: Thank you. That's clarified things for me. Thank you.

357
MR. VLAHOS: Thank you, Dr. Zerker.

358
Mr. Rogers.

359
MR. ROGERS: Excuse me, yes, sir.

360
MR. VLAHOS: I'm sorry. Do you want to take a few minutes?

361
MR. ROGERS: I was just taking some advice to see whether I have anything further. I don't think I do.

362
Well, let me ask another question. This just deals -- comes from Dr. Zerker's question, and I hope this will help with the understanding both of you and I.

363
FURTHER RE-EXAMINATION BY MR. ROGERS:

364
MR. ROGERS: Gentlemen, help us if you would. This $17.1 million in line losses now associated with low-voltage -- is power flowing through the low-voltage system, who's paying for that now? How is that being recovered now?

365
DR. PORAY: As I explained in my testimony with the help of that diagram, that today Networks' retail customers pay for all of the distribution losses incurred in delivering power to whoever is connected to the LV system and Networks' distribution system. Those losses are accounted for in the cost of power which Networks pays to OPG.

366
MR. ROGERS: This is something within OPG's power to bill and organise?

367
DR. PORAY: They bill us for the total power which we take at the meter which is read by them, yes.

368
MR. ROGERS: Your retail customers have that included in their bill, these line losses for the LV system?

369
DR. PORAY: This is passed through them to the cost of power, yes.

370
MR. ROGERS: Thank you.

371
If anything flows from that, I don't mind. I don't know if that helps.

372
MS. ZERKER: That's fine.

373
MR. VLAHOS: Mr. Rogers, I understand that the next panel will be on policy, divestiture policy?

374
MR. ROGERS: Mr. Hubert can answer questions about the policy, the divestiture policy.

375
MR. VLAHOS: So Dr. Poray stays on the panel?


376
MR. ROGERS: I think he would like to be excused for this panel. If we don't need him for this panel, I know he'd like to be excused

377
MR. VLAHOS: Thank you, Dr. Poray. You're not totally excused, though.

378
MR. ROGERS: I'm asking him not to leave town.

379
MR. VLAHOS: Mr. Rogers.

380
HYDRO ONE NETWORKS - PANEL 4

381
H.HUBERT; Previously Sworn

382
EXAMINATION BY MR. ROGERS:

383
MR. ROGERS: You know that the applicant has filed in this case, as directed by the Board, its divestiture policy for LV assets.

384
MR. HUBERT: That is correct.

385
MR. ROGERS: And I understand that you were involved in the development of the formal policy.

386
MR. HUBERT: Yes, I was.

387
MR. ROGERS: Could you just tell us, very briefly, how the policy came to be put in place.

388
MR. HUBERT: Certainly.

389
Networks has been practising this policy for about two to three years now, since shortly after the company's inception in 1999. The need for us to formally articulate this policy was actually driven by three factors; first of all, the new commercial mandate of Networks; secondly, from the Board's direction in RP-1999-0044, which was a transmission cost allocation and rate design, at which time we were asked to clarify our policy regarding connection assets and their potential divestiture; thirdly, from the Procedural Order No. 6, where there was a request for us to file a statement of our policy in this area.

390
MR. ROGERS: Thank you.


391
It's been filed, sir, and he's available to answer clarification questions about it.

392
MR. VLAHOS: Thank you, Mr. Rogers.

393
I'll go through the list again and see who has clarification questions.

394
Mr. Fisher?

395
MR. FISHER: Yes, Mr. Vlahos, AMPCO does have three minor clarification questions.

396
CROSS-EXAMINATION BY MR. FISHER:

397
MR. FISHER: Good morning, Mr. Hubert

398
MR. HUBERT: Good morning.

399
MR. FISHER: These questions are concerned primarily with elements of the status quo, and I just wanted to make sure we understand.

400
For simplicity, can we consider the divestiture of an asset that serves only one large user and there's no expectation of this being used for another customer, additional customers?

401
MR. HUBERT: Yes.

402
MR. FISHER: Thanks. The policy doesn't mention taking into account any of customer contributions. Is it true that the cost to the customer acquiring the asset would be the same whether or not the customer contributed to the initial capital cost?

403
MR. HUBERT: It would because we would be basically on future cash flows, to a large extent.

404
MR. FISHER: Secondly, the policy does not consider the book value of an asset. Some assets may have been depreciated to a very low value but could still have some additional life. Is it true that the book value of the asset is not a factor in assessing the cost that the customer would pay?

405
MR. HUBERT: That is correct.

406

MR. FISHER: And in a related matter, when the asset has been in service for a long time, the customer may have effectively more than paid for this asset in the charges that they've paid. Is it true that the divestiture policy does not account for all the payments made by the customer for the use of this asset?

407
MR. HUBERT: If those would be sunk costs, that is correct.

408
MR. FISHER: Thank you.

409
MR. VLAHOS: Thank you, Mr. Fisher.

410
Mr. McGee.

411
MR. MCGEE: Basically I'm very pleased with the policy as it's stated so I have no questions to ask the panel. I believe it covers the -- our interests quite adequately.

412
MR. VLAHOS: Thank you, Mr. McGee.

413
Mr. McLorg.

414
MR. MCLORG: I do have a limit number of questions and I'll thank Mr. Fisher for asking a few of them for me.

415
CROSS-EXAMINATION BY MR. MCLORG:

416
MR. MCLORG: If I may refer you to the policy, I take it that you have it available to you?

417
MR. HUBERT: Yes, I do.

418
MR. MCLORG: I thought it would be expedient to ask, in order of appearance, some of my questions.

419
The first one relates to the second last paragraph of the first page of the policy itself, excluding the cover letter, and -- I'm sorry?

420
MR. HUBERT: Yes. "Any divestiture of assets," that paragraph?

421

MR. MCLORG: Yes, correct. Thank you. I wouldn't normally ask Networks about any strategic considerations, but the statement was raised specifically with respect to this policy and I wondered what Networks' strategic considerations are as they relate to this policy.

422
MR. HUBERT: In general, this statement refers to intangible or unquantifiable considerations that need to be taken into account, and if I may help by giving some examples. Those examples could relate to customer relations impact of a divestiture, impact on Hydro One Networks' brand, any issues relating to uncertainty; for example, during a period such as now where we're unbundling rates and the actual LV charges are not known with certainty, it would be difficult to quantify some of the considerations. The strategic considerations would deal with these intangible issues.

423
MR. MCLORG: Thank you, that's helpful. And so I take it from your response that you don't expect the strategic considerations would actually go to the value that would be determined for the assets in question?

424
MR. HUBERT: I don't expect that they would be explicitly quantified, no.

425
MR. MCLORG: I see, thank you.

426
Now, with respect to the last paragraph on that same first page, I wondered if you could clarify how the purchaser's value of acquiring the asset might be determined.

427
MR. HUBERT: In this situation, as in any negotiation, we would consider, as it says in the statement policy, to determine the price. There are three major considerations; one of them is the discounted cash flow evaluation, the other one is related to the actual precedence of the marketplace, and the third one you're referring to is the purchaser's value. So as in any commercial transaction, the price that would be agreed to, we'd have to look at it from the potential purchaser's perspective and assess what the cost and benefits would be to the purchaser to arrive at a mutually agreed-upon price.

428
MR. MCLORG: If I may, just a follow-up question on that. I take it that you're suggesting, then, that Hydro One would conduct its own evaluation of what it thought the asset value would be to the purchaser.

429
MR. HUBERT: That is the intent here, yes. It would be done from Hydro One Networks' perspective.

430
MR. MCLORG: I see, okay, thank you.

431

And you mentioned -- my third question or the subject of my third question, which was how will market precedence be identified and taken into account. Again, I'm referring to that same last paragraph. And I wonder if I could amplify or clarify that question just a bit by saying that it's predicated on the assumption that the particular circumstances and the physical characteristics of the assets and so on could be very different in different situations. So I'm wondering how -- if you can give any indication of how Hydro One was intending to take into account market precedence.

432
MR. HUBERT: The type of market precedence consideration would be to examine any other transactions that are happening in the marketplace, which would really be a reflection of the supply and demand and interest in divestitures of assets in general in the electricity marketplace. And we would intend to fall in line to the -- to match that supply and demand. So in a case where there's significant divestitures and acquisitions going on in the marketplace, we would include the pricing of that in our consideration for the negotiated price.

433
MR. MCLORG: I see, okay, thank you. May I take you to the second page, then, Mr. Hubert.

434
MR. HUBERT: Certainly.

435
MR. MCLORG: At the top of that page, if I count correctly, there are eight bullet points and my questions will refer to the items comprising those bullet points.

436
Is it Hydro One's assumption that it is entitled to load and revenue growth, I guess, that's mentioned in the fourth bullet point with respect to existing plant, or that might be associated with existing plant? I just wanted to distinguish existing plant as being different from any requested capacity expansion or enhancement that Hydro One might be discussing with an LDC at any given time. But just with respect to the existing plant, is Hydro One entitled to that load growth?

437
MR. ROGERS: I'm sorry, I'm not sure I understand the question. You mean legally entitled?

438
MR. MCLORG: Well, I could rephrase the question to ask whether Hydro One is aware of any instrument or ruling or policy that it relies on in saying that, in its DCF analysis, it will include some sort of estimate, I take it from this information, of revenue growth, particularly the policy says here, "any Networks loss of revenue growth --"

439
MR. ROGERS: It seems we're getting beyond clarification questions now. The witness is here to explain the policy. This goes beyond that, with respect.

440
MR. MCLORG: Well, I'm prepared to pass if Mr. Rogers is of that view.

441
May I just ask, though, I hope, a question that will be of a clarifying nature. Can you tell us how revenue growth would be quantified by Hydro One for purposes of the DCF analysis that it's suggesting here?

442
MR. HUBERT: Certainly. The revenue growth would be a function of our estimates of the load forecast and utilisation of the asset and the rate revenue that would be derived from the customer's use of that asset.

443
MR. MCLORG: I see. And can you tell us how the matter of stranding of assets would be determined and valued?

444
MR. HUBERT: There could be certain investments that Networks may have made in the past which would be stranded in the event of a divestiture. Examples of those could be land rights; for example, there could be equipment or other electrical assets that may have no use after the divestiture, and that loss of use would be quantified at market value.

445
MR. MCLORG: Thank you.

446
And can you tell us again how -- not again, but similarly, how loss of business efficiency would be determined and valued.

447
MR. HUBERT: An example there would be in the case of our labour force, for example, where we have limited flexibility with our own labour. We may have service centres, staff available to service certain assets, and certainly within the short term there may be limited flexibility to adjust to the divestiture. So there would be reduced business efficiencies as we divest of assets. So what this reflects is a synergies that Networks has from its current asset base and meeting its operations and maintenance fees to pay for them.

448
MR. MCLORG: I see. Thank you.

449
I really just have two further questions that don't refer to any specific material in your filed policy.

450
Does Hydro One intend the filed policy to be the complete statement of Hydro One practice with respect to asset divestitures, or are you contemplating a further document that might be produced later that would provide more exact description of the DCF process, for example?

451
MR. HUBERT: In accordance with the procedural order that we filed here is a statement of Networks' policy, this is not the detailed policy. There is a policy that is used for internal management purposes within Networks. This is an accurate and abridged version of that policy. So at this time the two are completely in line.

452
MR. MCLORG: I see. That's helpful. Is it Hydro One's intention to make that available to any of its customers, that detailed policy?

453
MR. HUBERT: No, that is not. It is a confidential and internal document used for management decision-making.

454

MR. MCLORG: I see. Thank you.

455
My last question. Does Hydro One contemplate any sort of dispute resolution mechanism in association with its divestiture policy? I think perhaps particularly in the case where, hypothetically, even the facts of ownership could be in dispute, or that there would be some other matter that couldn't be successfully negotiated between the parties, do you have a dispute resolution process to try to address those kind of issues?

456
MR. HUBERT: I do not foresee any dispute resolution process for commercial mutually agreed-upon deals. Your question implies in the case of legal dispute with regard to ownership, that is beyond my ability to speak to. I assume those would be dealt with in a normal legal context. But for commercial, voluntary deals such as this, I do not foresee a dispute resolution.

457
MR. MCLORG: I see. Thank you, Mr. Hubert, and thank you, panel.

458
MR. VLAHOS: Thank you, Mr. McLorg.

459
Mr. Cowan, do you have any questions?

460
MR. COWAN: No, sir, thank you. Mr. Vlahos, no.

461
MR. VLAHOS: Mr. Bateman, do you have any questions?

462
MR. BATEMAN: Just a few questions.

463
CROSS-EXAMINATION BY MR. BATEMAN:

464
MR. BATEMAN: On the first page, the paragraph towards the bottom of page, says "shall not result in material loss." What is a material loss?

465
MR. HUBERT: I'm not quantifying what a material loss is. That would be a management decision.

466
MR. BATEMAN: That paragraph describes two situations where a material loss may occur, and I was wondering whether you could give me an example, please, of a situation where material loss of currently available non-discriminatory access referred to might potentially occur.

467
MR. HUBERT: I could try, certainly.


468
In the event that a Hydro One Networks distribution asset is sold to an entity that does not hold a distribution license, that entity may choose not to allow access to other customers to those assets. And in particular, as I understand it, there's a recently amended Ontario regulation, I believe it is 161/99, that does not require certain entities to hold a distribution license.

469
So in a case where such an entity would buy one of our assets and our customers would not be able to connect to that asset, despite the fact that it is in proximity to them, that would in fact drive them to connect to our system and the cost would probably be significant and cause a significant capital contribution by that customer to connect.

470
While that was not having any impact on our own bottom line, we feel that would be an adverse impact to the customer, and, as stated in the policy, that is not the intent of any divestiture. I hope that is helpful.

471
MR. BATEMAN: I see.

472
The second question applies to the second half of that paragraph. Could you give an example, please, where "material loss of currently available system operating flexibility" might occur?

473
MR. HUBERT: In general, the distribution system is obviously operated as an integrated system, and no single asset operates completely independently of the others, so the -- I think the suggestion here is that there may be load transfers, for example, that may be required at certain times to deal with planned or unforeseen outages on a system, and we may need to make use of certain assets at certain times to ensure reliability to our customers. If we divest such assets, then we may have a problem meeting our system reliability requirements.

474
MR. BATEMAN: Okay. Moving on to the second page of the list of factors in the DCF analysis. Would you agree that the list would include return on assets, depreciation, electrical losses, and customer care costs?

475
MR. HUBERT: I'd like to clarify that the DCF analysis would be done on an incremental cash flow basis, and some of the items that Mr. Bateman has mentioned are not actually cash flow items. So depreciation, for example, is an accounting cost and it would not be included in the DCF analysis; it would, however, be included in the calculation of the rate impact to customers.

476
MR. BATEMAN: Does your answer apply to the other items I mentioned as well?

477
MR. HUBERT: I'm sorry, I may not have caught them all.

478
MR. BATEMAN: I mentioned return on assets, depreciation, electrical losses, and customer care costs.


479
MR. HUBERT: Return on assets is also a consideration of the -- reflected in the rate impact. We do not need to include return on assets here because it would be covered in the revenue component which is reflected in our rates.

480
I'm sorry. I'd have to ask Mr. Bateman to take them one by one. Customer care costs, probably not going in order, customer care costs are also an incremental cost associated with -- customer care costs would be included in the analysis on an incremental basis as part of the discounted cash flow.

481
MR. BATEMAN: The other item I mentioned was electrical losses.

482
MR. HUBERT: Electrical losses are a pass-through and as such I do not see that they would be included in the calculation.

483
MS. LEA: Sir, you're turning yourself away from the microphone.

484
MR. ROGERS: We didn't hear the end.

485
MR. HUBERT: As being explicitly included -- I stated I do not foresee electrical losses as being part of this calculation. I would have to clarify that.

486
MR. BATEMAN: Thank you. Those are my questions.

487
MR. VLAHOS: Thank you, Mr. Bateman. There is no one else in the room for the intervenors.

488
Mr. Rogers, will you allow the Board just one question.

489
Dr. Zerker.

490
QUESTIONS FROM THE BOARD:

491
MS. ZERKER: I notice, of course, that you had not mentioned possible environmental implications. Is there any possibility of environmental effects from such divestiture, or have you not mentioned them because there is no possibility of such an event?

492

MR. HUBERT: You're correct, there could be environmental implications. The test for us in the DCF was where we refer to applicable liabilities relating to the assets being divested. A specific example of that could be an asset that has contaminated land associated with it and we would be taking that very seriously into consideration, both from a liability perspective and also from an environmental stewardship perspective.

493
MS. ZERKER: Thank you.

494
MR. VLAHOS: Thank you, Mr. Rogers and Mr. Hubert.

495
I don't think you have any questions, do you, Mr. Rogers?

496
MR. ROGERS: No, I don't.

497
MR. VLAHOS: Just to remind the parties, there will be no argument because the Board will make no finding on this issue. We certainly appreciate the company coming forward with this policy and providing a witness to clarify the policy.

498
MR. ROGERS: All right, thank you.

499
MR. VLAHOS: So I guess it's time for a break. Now, let's see where we're going to go next after we come back.

500
Mr. Hubert, you are excused, and I'm not sure whether you're coming back or not. I forget now.

501
MR. HUBERT: I don't believe I am, Mr. Vlahos.

502
MR. VLAHOS: Well, you're not going to be totally excused, then. You're excused for the day, not from the hearing. You never know.

503
MR. HUBERT: So it seems.

504
MR. VLAHOS: Thank you.

505
My understanding, Ms. Lea, is we're going to go with AMPCO's panel, which will be Mr. Snelson; is that correct?

506
MS. LEA: That's my understanding, yes.

507
MR. VLAHOS: So that would take the balance of the day, then.


508
MR. VLAHOS: So it is, according to the clock on the wall, twenty to eleven. We'll return at 11:15.

509
--- Recess taken at 11:15 a.m.
510
--- On resuming at 11:20 a.m.
511
MR. VLAHOS: Please be seated.

512
Mr. Rogers, Ms. Lea, one of the things we were discussing over the break with my fellow panelists was the possibility of sitting the whole day Monday, the reason being that with the looming potential TTC strike, it will not happen on Monday but perhaps on Tuesday, there's going to be a strike, and then reviewing the schedule, what remains to be done, we felt that maybe it's quite likely we can complete the whole thing Monday if we were to sit the full day.

513
So with that in mind -- I haven't checked with the court reporters, and I anticipate it's okay; if it's not, we'll hear soon from them.

514
But with that in mind, is that doable, Mr. Rogers?

515
MR. ROGERS: Yes, it is. I was going to request that the Board not start until 10:00 on Monday morning for the reasons -- and this would work well, then. If we can start a bit later, we can finish on Monday. We might even finish in the morning.

516
MR. VLAHOS: You wish to start at 10:00 on Monday?

517
MR. ROGERS: If the Board would grant me that accommodation, I'd be grateful. There are some witness scheduling problems. If we can do that, it would be most appreciated.

518
MR. VLAHOS: Ms. Lea, with respect to the BLG evidence.

519
MS. LEA: I haven't heard back from them yet. My understanding was that they were available Monday. I put in a call to Mr. Taylor -- Power Budd, rather, the Power Budd Coalition. It's the Power Budd Coalition that was going to give evidence.

520
MR. VLAHOS: I'm sorry, I stand corrected.

521
MS. LEA: I can't remember if it was yourself my myself.

522
MR. VLAHOS: It is Power Budd Coalition. I apologise.

523
MS. LEA: In any event, I've put in a call to Mr. Taylor to confirm that, but the last time I spoke to him, Monday was going to be fine for his witnesses.

524
MR. VLAHOS: We are going to start on Monday at 10:00, and we'll schedule the full day for it, with the objective of finishing Monday so we don't have to worry about getting here on Tuesday if there is a strike. And this is all subject to the court reporter's availability to sit a full day on Monday.

525
So I would ask the parties, though, to check with the hotline - again the number is in the transcript - just in case there are any changes. But unless we hear otherwise before then, so today, it's Monday at 10:00, full day.

526
We just received word that it's fine with the court reporters. And the court reporter is speaking with authority as she's the president of the company. I guess the only issue she brought up was that the transcript will not be ready until perhaps the next day, or much later than usual, and I don't think that will be an issue with anyone.

527
So that's great. 10:00 on Monday.

528
With that, Mr. Fisher.

529
MR. FISHER: Thank you, Mr. Vlahos.

530
I'd like to present Mr. Ken Snelson as AMPCO's witness. Do you want to --

531
MS. LEA: I think he needs to be sworn, then.

532
AMPCO - PANEL 1

533
K.SNELSON; Sworn

534
EXAMINATION BY MR. FISHER:

535
MR. FISHER: Could you state your name, for the record.

536
MR. SNELSON: My full name is John Kenneth Snelson, and I provide consulting services under the business name of Snelson International Energy.

537

MR. FISHER: I understand that you have a bachelors degree, with first class honours, in mechanical and electrical sciences from Cambridge University in England, and that you are a registered professional engineer in the province of Ontario?

538
MR. SNELSON: Yes, that's correct.

539
MR. FISHER: I understand that you provide consulting services on matters of electricity, utility restructuring -- electric utility restructuring, transmission and distribution rates, as well as regulatory and planning aspects of these matters through Snelson International Energy?

540
MR. SNELSON: That is correct.

541
MR. FISHER: Also, Mr. Davies has copies of Mr. Snelson's CD if you don't already -- CV.

542
MR. ROGERS: I didn't know that he was recording.

543
MR. FISHER: Multitasking.

544
MS. LEA: Let's give the curriculum vitae Exhibit I.4.2 --

545
MR. VLAHOS: I thought it was part of the evidence already.

546
MS. LEA: Oh, I'm sorry, then we don't need to give it an exhibit number. I beg your pardon.

547
MR. FISHER: Mr. Snelson, your CV indicates that you have consulted for AMPCO since 1993.

548
MR. SNELSON: That's correct.

549
MR. FISHER: Could you briefly tell the Board about your consulting experience and your professional experience prior to your consulting career?

550
MR. SNELSON: Yes. I've been involved in the electricity industry for more than 40 years, in distribution, transmission, generation; involved in both planning, research, and more management matters of electric utilities in the United Kingdom and also for Ontario Hydro.

551

Since 1993 I've been providing consulting services to a variety of clients through my business Snelson International Energy. These clients have included industrial power consumers, generators, utilities, government departments. I think that pretty much covers the list. And AMPCO has been a client throughout that consulting period.

552
MR. FISHER: Thank you.

553
Approximately how many times have you appeared as an expert witness before the Ontario Energy Board?

554
MR. SNELSON: I don't have an exact tally, but I believe it's somewhat in the order of six or seven times, for both Ontario Hydro and also for AMPCO.

555
MR. FISHER: Based on this information, would the Board accept Mr. Snelson as an expert witness for purposes of this proceeding?

556
MR. VLAHOS: The Board does so. Mr. Snelson is known to the Board for a while.

557
MR. FISHER: Thank you.

558
AMPCO filed the written evidence of Mr. Snelson with the Board in January. It's been given Exhibit J.1.1. I will be referring to two tables in the body of this evidence during my examination, and it might be convenient if we just turned up this exhibit now.

559
Mr. Snelson, did you prepare this exhibit, including the tables and the appendix?

560
MR. SNELSON: Yes, I did.

561
MR. FISHER: Is this evidence accurate, to the best of your knowledge and belief?

562
MR. SNELSON: It is.

563
MR. FISHER: Do you accept this evidence and its attachments as your evidence -- sorry, this exhibit and its attachments as your evidence?

564
MR. SNELSON: Yes, I do.

565
MR. FISHER: Mr. Snelson, what were the sources of the information used for the calculations in this exhibit?


566
MR. SNELSON: For the information on the rates for large users of LDCs, other than Hydro One, the source was the approved rate orders of this Board as they existed early in January of this year. The Board file numbers are referenced in the detailed tables attached to the exhibit.

567
For the proposed rates of Hydro One, the sources were the various exhibits of this proceeding.

568
MR. FISHER: What are the purposes of this exhibit?

569
MR. SNELSON: There are two purposes. The main purpose is to show the comparison between the distribution rates of the large users of the local distribution companies and the bills that the large users of the local distribution companies will pay, and the comparable bills that will be paid by the embedded direct customers of Hydro One. And these embedded direct customers are really the large users of Hydro One and so it is to compare the rates and bills of the large users of the LDCs for the use of distribution services with the rates and bills of the embedded direct customers of Hydro One.

570
The secondary purpose is to show the comparison between the rates and bills that will be charged to existing over-5-megawatt embedded customers of Hydro One, and the rates that Hydro One proposes to charge to new customers, over 5 megawatts, who are otherwise similarly situated.

571
MR. FISHER: What are the similarities and differences between the supply situations of large users and embedded directs?

572
MR. SNELSON: Both large users and embedded directs have to be over 5 megawatts of demand to qualify for the rate. In most cases they will both be supplied from distribution lines that are at 44 kV or 27.6 kV, and in many physical respects, they are very similar.

573
What differentiates them is that some are customers of former municipal utilities and some were direct customers of Ontario Hydro, and the determining factor on whether an over-5-megawatt customer, connected at distribution voltage, becomes a large user or becomes an embedded direct is primary is whether they are located within the service territory of a municipal utility or whether they were located in the service territory of the old Ontario Hydro distribution system.

574
MR. FISHER: I'd now like to ask Mr. Snelson to explain the results of his comparison of the distribution bills for large users and embedded direct customers. The results of his analysis are presented in table A, in the main body of the exhibit. And I believe that's on page 4.

575
MR. VLAHOS: Just one second, please.

576

MR. FISHER: Mr. Snelson, I see that the table has columns for customers of 5 megawatt, 10 megawatt, and 20 megawatt size. Why is it necessary to consider the comparison for a range of customer sizes?

577
MR. SNELSON: The distribution rates that have been approved for the local distribution companies consist of both a customer charge, which is a fixed charge per month, and also a volumetric charge of so much per kilowatt per month. The comparison of the bills depends upon the size of the customer, with the fixed charge obviously being a bigger proportion of the bill of a small customer than it is of a large customer.

578
MR. VLAHOS: Mr. Fisher, if I could interrupt for a minute. Just give us a second. We're having a bit of trouble locating some of the exhibits.

579
MR. FISHER: Yes, sir.

580
MR. VLAHOS: I guess we're somewhat victims of the strike by the civil service. Our binders are not as complete as they would have been usually, so is it possible to have an extra copy? Mr. Davies is giving us one here.

581
MR. ROGERS: We have another one -- we can share. My advisor, Mr. Rodger, who has joined me, has a copy and I'd be happy to give our copy.

582
MR. VLAHOS: We have one here. It's whether Mr. Davies has his own copy.

583
MS. LEA: I have another set in my office that I can go and get.

584
MR. ROGERS: Ms. Lea.

585
MS. LEA: That's all right, then, thank you.

586
MR. VLAHOS: Okay, we're all set now. Sorry, Mr. Fisher.

587
MR. FISHER: I see that the first row of the table is labeled "Embedded Direct." How are these numbers calculated?

588
MR. SNELSON: This is the easy row to explain. This is the amount of money that the embedded direct will be charged at the rate of 17 cents per kilowatt per month for the use of Hydro One's distribution facilities. So you'll note that the 10 megawatt customer pays $1,700.

589

MR. FISHER: For now I'll skip over the row for rate class T and ask you to explain the line "Large User (Average)."

590
MR. SNELSON: The details of this calculation are in the tables that are attached to this exhibit. But the general steps taken to determine the number, to determine the numbers in this row, are that I identified as many LDCs as I could that have large users, I reviewed the rate orders for those LDCs in the Board's file room and tabulated the approved large distribution rates. I then used those rates to calculate for each utility the monthly distribution bill for the three different sizes of customer, and I made an assumption that the customer would own his own stepdown transformation and receive transmission credit for that. And then having done that for each individual utility, I took an arithmetic average for all the utilities that were in my list.

591
MR. FISHER: Thank you.

592
Were the numbers for the different utilities within a narrow range?

593
MR. SNELSON: No. There was a very wide range of results, and it was necessary to exclude two small utilities from the average because the results were not meaningful.

594
MR. FISHER: I'd like now to move to the row labeled "Large User (Weighted Average)." How does this differ from the "Large User (Average)" row?

595
MR. SNELSON: The local distribution companies with large users have widely varying numbers of large users. Most utilities in the list would only have one or two large users. A few utilities in the list would have ten or more, and these would include utilities such as Windsor, Ottawa, and Toronto.

596
So the arithmetic average could be given too much weight to the small utilities and not enough weight to the large utilities where most of the large users are. And so I calculated a weighted average by weighting the result for each utility by the number of large users in that utility, and that's how this answer -- this line was determined.

597
MR. FISHER: In both the sections on the average and the weighted average there is a line labeled "LV Line Added." What is this, and how is it calculated?

598
MR. SNELSON: The assumption is that if Hydro One charges all utilities for low-voltage lines at the rate of 17 cents per kilowatt, that those utilities will pass that on to all their customers, their residential customers, their commercial customers, and their industrial customers.

599

I have assumed that it's passed on to the large-use customers at the rate of -- same rate of 17 cents per kilowatt per month. When the pass-through calculation is done by each utility, there will be some slight deviation from that as the utilities adjust for losses and diversity within the utility. I have then added the LV line adder to the large-user bill to come up with the total large-user bills on both an average and a weighted-average basis.

600
MR. FISHER: What is your conclusion with respect to the comparison between the distribution bills of large users and embedded directs?

601
MR. SNELSON: The conclusion is pretty obvious from the table, and that is that the proposed distribution bill for an embedded direct customer is a very small fraction of the average distribution bill of a similar large user in a different -- in another LDC. And this conclusion does not depend upon whether you look at it on an average basis or a weighted average basis. After you add in the LV line adder charges for Hydro One's bills, then that further exacerbates the difference, and on the total basis the distribution bill for an embedded direct customer will be in the range of 7 per cent to 16 per cent of the average total charge to a large user.

602
MR. FISHER: I now want to ask some questions about table B, which is a little further down the page.

603
How does table B differ from table A?

604
MR. SNELSON: Table B examines the situation where the low-voltage line charges of Hydro One are not charged to transmission-connected LDCs. Those are the LDCs who did not use the Hydro One low-voltage facilities.

605
The data in the table is the same with the following exceptions: I have assumed that the LV line charge charged to embedded directs would be substantially higher than the 17 cents. The table is based on 54 cents per kilowatt per month, which is given in the evidence as the average cost of those facilities. I believe that Mr. Poray testified that if they did the calculation, I think they come to a rate of 56 cents per kilowatt per month. I don't think it greatly affects this argument, which number you use. So that number is obviously higher because the same amount of cost is being recovered from a smaller pool of customers.

606
So with this assumption, then, the bill for the embedded direct customers obviously goes up substantially.

607
The other difference in table B is that there are no LV line adders, and this is based on the assumption that the LDCs that we're looking at are in local distribution companies -- sorry, that the large users in the local distribution companies that are -- whose bills are tabulated are in utilities that wholly or largely are transmission-connected and would not have to pay a LV line charge when the LV line charges are charged to a user-only pool. It is possible that there could be a few large users who are in utilities that are distribution-connected. I don't know how many. And the result would be different for cost, obviously.

608
MR. FISHER: Thank you.

609

What is your conclusion with respect to the comparison between the distribution bills of large users and embedded directs with LV line charges recovered from the pool of LV line users?

610
MR. SNELSON: The conclusion is that even with the LV line rate set about three times higher than the proposed rate by Hydro One, then the distribution bills of the embedded direct customers will still be significantly less than the average distribution bill of the large users. However, with that adjustment, the bills are now much closer together and the embedded directs would be paying in the range of 23 per cent to 60 per cent of the average bills of the large users.

611
MR. FISHER: I now want to turn to the situation with respect to new, over-5-megawatt customers in the Hydro One service territory.

612
What is your understanding of the rate that will be charged, according to the Hydro One proposal, to a new, over-5-megawatt customer connected to the Hydro One LV lines?

613
MR. SNELSON: AMPCO asked that question as an interrogatory. For the record, the interrogatory is Exhibit G, tab 4, schedule 3, page 1, part B. And the answer was that the new, over-5-megawatt customer would be charged the T-class rate, and I believe that this week Mr. Poray -- Dr. Poray has confirmed that that is still the policy of Hydro One.

614
Now, according to the Hydro One evidence, the class T distribution rate on market opening will be a monthly charge of $225.80 plus a volumetric charge of $6.52 per kilometres per month. For the record, again, my reference for that is Exhibit E, tab 1, schedule 1, page 16, revised 2001-09-06.

615
MR. FISHER: If we look at table A, could you please explain the significance of the line labeled "Rate Class T."

616
MR. SNELSON: The line labeled "Rate Class T" is a charge that the new, over-5-megawatt customer would pay for distribution services if charged the class T rate that I've just described. I have assumed that the customer would own his stepdown transformation and receive a credit for that of 60 cents per kilowatt per month.

617
You will note that this line is about 30 times higher than the line for embedded direct customers. New, over-5-megawatt customers under Hydro One's proposal would be required to pay a very high rate, much higher than the existing rate to over-5-megawatt embedded directs. It is also much higher than the charge to over-5-megawatt large users of LDCs.

618
MR. FISHER: If we could look at table B, could you please explain the significance of the line labeled "Rate Class D" in table B.

619

MR. SNELSON: This is exactly the same numbers as the line in table A. It is included for comparison on the assumption that LV line charges are passed through only to the users of LV line facilities. In fact, if the LV line costs are passed through at 54 or 56 cents instead of 17 cents per kilowatt, then the rate class T-rate would have to go up slightly to accommodate the change and that is not accounted for in the table.

620
Even with the increase in the LV line charge to 54 cents per kilowatt per month, the distribution bills for new, large users on rate class T will be about ten times higher than the charge to existing customers who are embedded direct customers.

621
MR. FISHER: Thank you.

622
I have a few questions regarding the rate handbook and cost allocation.

623
How does the process for establishing the LV line costs compare with the unbundling process as required by the rate handbook?

624
MR. SNELSON: The process of unbundling in the rate handbook has been described this week as a process of unbundling of costs. The more appropriate description of the process required under the rate handbook is that it is an unbundling of revenues. The 1999 revenues are separated into those for the cost of power and the remainder is put in for distribution. It is then assumed that the unbundled revenues are a good proxy for unbundled costs, and that may not always be the case.

625
For most local distribution companies, the unbundling of costs would only come when cost-allocation studies are done for second-generation PBR rates. In contrast, Hydro One has done a cost-allocation study for the shared low-voltage facilities. This cost allocation has determined that the existing $29.2 million of revenue received by Hydro One from OPG for the shared facilities, for the shared LV facilities, does not match costs. The costs have been re-estimated through a cost-allocation study as $38.6 million. Dividing the allocated costs of the LV system by the usage of the LV system will result in a cost-based rate for shared LV facilities. This rate will have a better cost allocation basis than most other unbundled distribution rates.

626
MR. FISHER: Hydro One has stated that they need to do a series of connectivity studies, including the effects of the acquisitions and mergers for a cost-allocation study of LV costs. In your view, should the Board wait for the results of these studies before setting a user-based rate for LV facilities?

627
MR. SNELSON: No, I don't believe it's reasonable to wait. Undoubtedly these cost-allocation studies will produce refinements in cost allocation; I'm sure the numbers will come out slightly different to what we have today. And those numbers can be used to adjust rates in the next rate hearing, just as they will be used to adjust all other distribution rates that are approved through this process. I don't see any reason not to use the cost-allocation study we already have.

628

MR. FISHER: I'd just like to ask you a last question regarding new, over-5-megawatt customers. How do you recommend that new, over-5-megawatt customers should be treated?

629
MR. SNELSON: In principle, they should be treated as close as possible to the treatment of existing over-5-megawatt customers. I can see that Hydro One would have concerns about connecting new, over-5-megawatt customers and charging them 17 cents per kilowatt per month for the use of low-voltage facilities, given that that is less than the average cost of the LV facilities based on the usage of those facilities. So if the rate is lower than the average cost, then I can see some reluctance to connecting new customers on that rate.

630
However, if the LV line rate is determined by dividing the estimated costs of the LV system by the usage of the LV system, I see no reason why new customers should not be connected on that rate. If, for some reason, the cost of connecting a new customer is significantly higher than average, then I believe there are processes defined in the Distribution System Code by which that customer can be asked for a capital contribution to cover a part of those costs.

631
MR. FISHER: Thank you.

632
And in summary, what are your conclusions?

633
MR. SNELSON: Well, my two main conclusions are that charging the low-voltage line costs to a user-only pool would greatly improve the equity between similarly situated, large users of local distribution companies and the embedded direct customers who are really the large users of Hydro One.

634
And my second conclusion is that new, over-5-megawatt customers, large users, should be charged the same rate as the existing embedded directs who are the large users of Hydro One. And that can -- I see no reason why they should be put on the T-class rate as a very substantially higher rate.

635
MR. FISHER: Thank you, Mr. Snelson, those are my questions.

636
Mr. Snelson is now available for cross-examination.

637
MR. VLAHOS: Thank you, Mr. Fisher.

638
Mr. McGee.

639
MR. MCGEE: Yes, I have a couple of questions here.

640
CROSS-EXAMINATION BY MR. MCGEE:


641
MR. MCGEE: Is AMPCO suggesting this rate applies only for the embedded directs, or also suggesting it for the embedded LDCs that Hydro One supplies?

642
MR. SNELSON: I believe that this rate would apply to all the users of the low-voltage facilities which would include embedded directs, embedded LDCs, some of whom are now owned by Hydro One, and that there would also be an allocation of costs to the retail customers of Hydro One on that basis.

643
MR. MCGEE: And would the same -- at the same time, the LV costs, I would presume, would be removed from the transmission-connected utilities that you speak of?

644
MR. SNELSON: Well, there would not be a charge to the transmission-connected utilities, yes.

645
MR. MCGEE: Okay. In table 1 of appendix A, there's a very wide variation in the monthly service charge among the municipal utilities that you looked at; I guess the lowest being Ontario Hydro, being zero, and the highest being West Coast Huron (Goderich) at about $16,500. Did you do any analysis on the reason for these vast variations in monthly service charge?

646
MR. SNELSON: West Coast Huron (Goderich), I happen to know from other client's use that there's a significant error in -- I believe there's a significant error in the calculation of the rates for West Coast Huron, and that's the subject of a different proceeding in front of this Board.

647
But generally speaking, there is a wide variation for a number of reasons, and it is partly because of the variability in the old large-user rates that were in existence prior to unbundling. Also, the utilities have a considerable amount of choice as to how much of their revenue to recover from the fixed charge and how much to recover from the volumetric charge. But overall, there is still a very wide range of variation, and I believe that it's a -- largely a result of the inconsistencies of the rate handbook with respect to large users.

648
Under the old system, local utilities were allowed to charge by Ontario Hydro a 3 per cent add-on for local costs to the cost of power. So in the rate unbundling process, you take the total revenue from the large-user customer class and you subtract the cost of power from the large-user customer class and you're looking for the difference as being the amount that is presumed to be distribution revenue. In the large-user class case, that difference is about 3 per cent of the total bill. Any slight variation in how the cost of power was calculated and how the rates were determined that would affect one versus the other shows up as an exaggerated amount in that difference.

649
Mathematically, scientists know this as being the unreliability of the difference between two large numbers, and I believe we have a substantial degree of that effect in the large-user mix. It is not as apparent in other classes because the difference is marginal.


650
MR. MCGEE: Another question. In your table 3, you've identified some utilities for which -- which the rates resulted in a negative distribution bill, and you've excluded them from your average. Have you inquired of the members of AMPCO that are served by those utilities as to whether they are, actually, paying a negative distribution bill?

651
MR. SNELSON: Those results look very strange. I have checked that they're not tabulation errors; I've been back to the rate orders and checked the numbers. But other than that, I have not done any further checking of the significance of those numbers.

652
MR. MCGEE: Okay. These are my questions.

653
MR. VLAHOS: Thank you, Mr. McGee.

654
Mr. McLorg.

655
MR. MCLORG: Thank you, Mr. Vlahos. Toronto Hydro has no questions.

656
MR. VLAHOS: Thank you.

657
Mr. Cowan.

658
CROSS-EXAMINATION BY MR. COWAN:

659
MR. COWAN: If you feel that this is opinion outside your area, I understand you wish to disqualify yourself. But given the rate differentials that you outline for new users, new, 5-megawatt-plus users, what do you anticipate the investment decision of such people would be when confronted with their locational choices and their rates?

660
MR. SNELSON: Directionally, a very high electricity rate is going to tend to inhibit new customers connecting to the system. As to the degree to which that effect would take place, it will be very variable between different customers who have different proportions of their cost and electricity usage, and I couldn't speculate as to the degree of that effect. But directionally, obviously, unreasonably high rates tend to discourage investment.

661
MR. COWAN: And could you, without the aid of a map of Ontario, just set out the parts of Ontario which you think might be most affected by this, either by county or general areas.

662
MR. SNELSON: I don't believe I could do that.

663
MR. COWAN: Okay, thank you.

664
Those are all my questions.

665
MR. VLAHOS: Thank you, Mr. Cowan.

666
Mr. Bateman.

667
MR. BATEMAN: Thank you, Mr. Vlahos. ECMI has no questions.

668
MR. VLAHOS: Thank you.

669
Ms. Lea.

670
MS. LEA: Thank you.

671
CROSS-EXAMINATION BY MS. LEA:

672
MS. LEA: Mr. Snelson, I have two issues I would like to ask you about.

673
The first is, what would be the impact of adopting your recommendations or conclusions on Hydro One's retail customers? We have some understanding from your tables in your evidence of the impact on LV customers. What would be the impact of the shifting of some of these costs to the retail customers?

674
MR. SNELSON: Mr. Chairman, Ms. Lea gave me advance notice that she was going to ask this question, and I have prepared a simple exhibit relevant to that. Mr. Rogers has a copy. Perhaps it could be made an exhibit at this time.

675
MS. LEA: Thank you. I'm just passing those along now. The exhibit is entitled "Rate Impact of Allocating LV Facilities to Users Only," and we'll give it Exhibit I.4.2, please.

676
EXHIBIT NO. I.4.2: RATE IMPACT OF ALLOCATING LV FACILITIES TO USERS ONLY

677
MS. LEA: Mr. Snelson, perhaps you could take us through this exhibit and indicate the assumptions you have made and the results that flow from your analysis.

678

MR. SNELSON: That would be okay. That's fine.

679
On the first page, the first number is the $38.6 million of costs that have been identified as the costs of the shared line -- shared LV facilities. Under the proposal of Hydro One, 14.7 per cent of those costs, and that's about the fourth number down, 14.7 per cent of those costs would be charged to Hydro One retail customers, and I have given the reference, which would be $5.67 million.

680
With the smaller user-only pool, 48.5 per cent, which is the second number down, would be allocated to Hydro One retail customers, which works out to 18.72 million. And so the increase in the allocated cost, and this is a very simple basis but I think it gets to the heart of it, is about $13 million; 13.05 is the number on the table. I think it is roughly comparable to the number of $12 million that has been mentioned in previous evidence.

681
MR. FISHER: Can I just interrupt for a second there. Apparently there's a typographical error in that middle exhibit. It should read E, tab 2, schedule 2, page 22, table 9, not 8.

682
MR. FISHER: That is correct. I'm sorry, I missed that.

683
MS. LEA: Thank you. So that is on the first page of Exhibit I.4.2, the second evidence reference, instead of table 8, it should be table 9.

684
MR. SNELSON: That is correct.

685
MS. LEA: Thank you.

686
MR. SNELSON: The second page allocates that cost, that increase in cost to the R1 customer class, and I have done this for the R1 customer class because that is the largest class of Hydro One. A similar calculation could be done for other customer classes.

687
MS. LEA: And what does R1 represent?

688
MR. SNELSON: I believe that it is urban residential customers.

689
MS. LEA: So residential, high density? Sorry, I should know this offhand, but there are a fair number of those classes.

690
MR. SNELSON: R1 is defined in the rate schedule as year-round residents in a high-density zone.

691

MS. LEA: Thank you, that's helpful.

692
And you've indicated that you chose that class because there's a high -- that's the class with the highest membership.

693
MR. SNELSON: It's the largest proportion of load, and I believe it would also have a very large proportion of -- number of consumers.

694
MS. LEA: Thank you for that clarification. Go ahead, please.

695
MR. SNELSON: I've taken -- if we assume that the low-voltage charges will be allocated among customer classes according to non-coincident peak load, and I believe Dr. Poray agreed that was a reasonable way to do it, then the total billing non-coincident peak load of the Hydro One retail system is 5698.27 megawatts, taken from their application on Networks other regulated charges as indicated. Of that 5698.27 megawatts, 1591.74 is for the R1 class, so 27.93 per cent of the costs would be allocated to the R1 class. If you take the 13.05 million determined on the first page and you take 27.93 per cent of it, then it comes up with an additional cost to the R1 class of 3.64 million.

696
MS. LEA: Okay, sorry to interrupt you. And the remaining percentage would go to other retail classes?

697
MR. SNELSON: That's correct.

698
MS. LEA: Go ahead.

699
MR. SNELSON: And the R1 class generally does not have demand meters. They are generally on kilowatt-hour meters. And so the rate has to be stated in so much per kilowatt-hour rather than so much per kilowatt. If you divide 3.64 million by the energy use of the R1 class, you end up with an increment to the energy rate of $.00104 per kilowatt-hour, which is approximately one-tenth of a cent per kilowatt-hour. It is roughly comparable to the charge that is being made for rural rate protection, which I think is a tenth of a cent per kilowatt-hour.

700
The third page takes that and calculates that -- and calculates the increase for different sizes of customers on the R1 rate.

701
The first box that is outlined in double lines shows the distribution bills for R1 customers based on the rates that are currently proposed by Hydro One.

702

The second box that is outlined has the volumetric charge increased from 1.81 cents per kilowatt-hour to 1.921, and that is the increase of .104 to account for the LV line charges, increased LV line charges. A new monthly bill is calculated and the increase on the monthly bill is between 26 cents and $2.09 per month.

703
The right-hand box gives the bills -- of the bundled bills, including energy and cost of power, everything that's in the bundled bill today, and I believe this was taken from a rate schedule that was supposed to be applicable on March the 1st this year. The reference is given. And that calculates a monthly bill, and that's the total bill, including energy, transmission, distribution. And the right-hand column shows the increase in the monthly bill as a percentage of the current bundled bill, and that percentage ranges from 0.68 per cent for a very small customer up to about 1. -- well, to 1.03 per cent for the largest customer indicated in the table.

704
MS. LEA: Thank you.

705
Just to be clear, then, the difference between the two unboxed columns labeled "Increase," the increase column that is to the right of the two boxes is the increase in the distribution portion of the customer's bill.

706
MR. SNELSON: It's the increase in the distribution portion of the customer bill attributable to going from effectively a 17-cents per kilowatt per month LV line charge to the 54 or 56 cents that would come about by charging to the user-only pool.

707
MS. LEA: Thank you.

708
And in creating the bundled bill results here, what did you assume with respect to the cost of the commodity?

709
MR. SNELSON: Well, this is a bundled bill prior to market opening and so you don't have to make an assumption about that.

710
MS. LEA: That's fine.

711
MR. SNELSON: Obviously, depending on the price of the commodity, the total bill, including energy transmission and distribution, may be different to this number after market opening. It would be very surprising if it was exactly the same.

712
MS. LEA: Thank you, that's helpful.

713
Now, as I understand this exhibit, it shows the difference resulting from a change in cost allocation which you have described in your own evidence, and you've just described now, a 17-cent charge to a 54.56-cent charge; is that correct? In other words, it's a cost allocation shifting here that we're looking at.

714

MR. SNELSON: It is certainly the result of a decision to recover a pool of costs from a different pool of customers; in this case it's the result of taking the costs as the allocated costs of the low-voltage system and recovering it only from the users of the low-voltage system rather than recovering it from a much bigger pool of customers which includes the transmission-connected LDCs and their customers. So that if -- the $38.6 million, I believe, is the result of the cost-allocation study. So I haven't changed that, all I've done is have said, let's recover that from a smaller pool of customers who actually use the system rather than a much larger pool of customers, many of whom do not use the system.

715
MS. LEA: Thank you, I understand that. That's kind of a step down from what I was asking you.

716
So the full $38.6 million cost will be recovered through the 54.56 cent charge here?

717
MR. SNELSON: I haven't calculated -- in this particular calculation it wasn't necessary to actually calculate the rate. But I believe that Dr. Poray's evidence is that the rate would be about 56 cents per kilowatt per month.

718
MS. LEA: About 56.

719
Now, I understand there's also -- what assumptions did you make, perhaps, with respect to charge determinants in coming up with this exhibit?

720
MR. SNELSON: I assumed that the low-voltage charges would be recovered based on essentially a non-coincident peak charge determinant.

721
MS. LEA: And if there was a change in the charge determinant, then, there would also be a change in the impact calculation that you have provided here.

722
MR. SNELSON: I believe so, but I believe that Hydro One has accepted that the non-coincident peak is a suitable charge determinant for the LV charges.

723
MS. LEA: Thank you. Going back to the selection of the R1 class, you've indicated that it has the greatest load within the retail class; is that correct?

724
MR. SNELSON: I believe so.

725
MS. LEA: Yes. But of course we do not know whether the R1 subclass, if I can call them that, will have the highest bill impact within the retail classes or the lowest bill impact in the retail classes as a result of the proposal you are making.

726

MR. SNELSON: I don't know which class would have the highest impact.

727
MS. LEA: Yes, okay. So it could be higher or lower than this. This is a sample.

728
MR. SNELSON: This is a sample, yes.

729
MS. LEA: Thank you, one moment. Okay, thanks.

730
The other aspect I wanted to ask you about, Dr. Snelson, is relating to your proposal to the Board that it not wait for Hydro One's further studies with respect to connectivity and so on.

731
As I understand the proposal, Hydro One is indicating that in the next proceeding there will be a cost-allocation study, and then also would be able to incorporate information about acquired MEUs into their calculations. Would it not be better for the Board to wait for this better information in order to make any changes to the rates as they are? And if not, can you tell me, please, what is the problem with waiting?

732
MR. SNELSON: Well, as to the merits of waiting, if it was likely that the cost-allocation study were to lead to a rate for the use of low-voltage facilities that was closer to the 17 cents per kilowatt per month than the 54 or 56 cents per kilowatt per month, and so we'd raise it to 56 today and in a year's time or two years' time, we'd raised it somewhere closer to 17, then obviously waiting would be a very reasonable option. However, my judgment is, and the comparison with other rates would lead me to support that, that it is more likely that the result of the cost allocation will lead to a rate in the order of that 54 cents or higher, then it would go back to the 17 cents.

733
So in that circumstance, making a major step in the right direction now is much better than waiting because -- saying we can't do anything because we haven't got all the information now.

734
There was another part to your question.

735
MS. LEA: There is. Before you answer it, I want to ask you something else. Is there any merit in suggesting that we move by a smaller increment in the direction that you have proposed?

736

MR. SNELSON: I have a view on the appropriateness of phasing in increases, and I believe that the appropriate process is to say, where do we think we want to end up if we're going to do things right, and the Board has done this, for instance, on the return on equity for distribution utilities. You look at where you want to end up; you say, is the impact of going there now unacceptably large. If it isn't, then you go to an end state where you want to be now; if the impact is unreasonably large in doing it in one step, then you say, how can I phase it in. That's a much better process than saying, well, there might be an impact and we'll wait until we've got all the information, but we really don't know where we're going. We have to decide that.

737
MS. LEA: The second part of my question was, what's the problem with waiting?

738
MR. SNELSON: I guess the one problem with waiting is that you're going -- Hydro One is going to have to issue distribution bills to entities that are no longer distribution customers. There seems to be a problem with respect to new customers. If you have a rate that is unreasonably low, then clearly a utility is going to be very reluctant to connect new customers at that rate. Those are a couple of the problems that do come to mind.

739
MS. LEA: Thank you.

740
Thank you very much for your answers, sir.

741
Thank you, Mr. Chairman, those are my questions.

742
MR. VLAHOS: Thank you, Ms. Lea.

743
Mr. Rogers.

744
MR. ROGERS: Thank you very much, sir.

745
CROSS-EXAMINATION BY MR. ROGERS:

746
MR. ROGERS: As I indicated earlier, I have with me Mr. Michael Rodger, who is a manager of strategic planning with my client, Hydro One Networks Inc., who will assist me if Mr. Snelson takes me into water that is too deep.

747
Mr. Snelson, can we go back to basic principles here. You say that you are an advocate of user-pay.

748
MR. SNELSON: Generally, yes.

749
MR. ROGERS: And user-pay can be defined in several ways, I suggest, but the essence of user-pay is you look at cost causality.

750
MR. SNELSON: That is one aspect of it, yes.

751

MR. ROGERS: You'd agree that's the essence of it, wouldn't you?

752
MR. SNELSON: Cost causality is a very important principle for ensuring that correct economic decisions are taken and giving people the correct incentives in doing that. I wouldn't define it as the essential part of user-pay, no.

753
MR. ROGERS: What do you consider to be the essential part of user-pay if it isn't cost causality?

754
MR. SNELSON: The simplest definition of user-pay is if you use the services, you pay for them. If you use them, you pay for them.

755
MR. ROGERS: Yes, that's the simplest, I agree. But it's not the essence of the concept, is it?

756
MR. SNELSON: I'm not quite sure what you mean by essence. We've defined the concept, and I agree that cost causality and economic efficiency are very important objectives which are closely linked.

757
MR. ROGERS: Well, I suggest to you that the essence of the so-called user-pay principle is you try to impose the cost of facilities on those who give rise to them or cause them.

758
MR. SNELSON: And that is a principle that encourages economically efficient decisions.

759
MR. ROGERS: You won't agree with me that that is the essence of why we want to have user-pay-based rates.

760
MR. SNELSON: I think it's an important aspect but I don't see it as the essence of --

761
MR. ROGERS: The most important aspect?

762
MR. VLAHOS: Sorry, Mr. Snelson, sometimes we're losing you

763
MR. SNELSON: My answer to that is I see making cost causality a very important part of encouraging economically efficient decisions, and that is a part of the user-pay idea. I don't see it as the essence of the user-pay concept.

764
MR. ROGERS: I see. That's interesting. You would say, then, that if a customer did not cause a cost but nevertheless, because of the decision of someone else, is using the facility, that he should pay the cost.

765

MR. SNELSON: I can think of circumstances where customers who did not cause a cost but use the facilities are required to pay for those facilities because they use them, and I believe that in many of those circumstances that is accepted as being a fair way to do things.

766
MR. ROGERS: I agree with you, that is done often; in fact, you find it all over the place. But, Mr. Snelson, you, as an expert witness, surely are not advocating to this Board that that would be an appropriate way to set rates.

767
MR. SNELSON: Your question said that would be an appropriate way to set rates, and I'm not sure what "that" is.

768
MR. ROGERS: Let me take an example from your own evidence. As I understand it, your complaint here, and indeed perhaps your chief complaint, is that members of AMPCO who are situated within local distribution companies pay more than comparable companies, members of AMPCO, who are located outside a municipal utility.

769
MR. SNELSON: That is a part of our evidence, yes.

770
MR. ROGERS: All right. Now, the company that's located within the municipal utility, you said this morning, I think, really, is there not by any choice of it but rather by the fact that it happens to fall within a geographic boundary.

771
MR. SNELSON: It may have had some choice on location. But once the location decision had been made, then whether it's a large user of an LDCs or a direct customer of Ontario Hydro is largely out of the hands of the company, once its location decision had been made.

772
MR. ROGERS: Right. Its geographic location and the definition of the system around it is beyond its control; right?

773
MR. SNELSON: Yes.

774
MR. ROGERS: And yet it's by that accident, the cost of providing electricity to it that varies.

775
MR. SNELSON: Yes.

776
MR. ROGERS: And now -- but they're using that system; you'd agree with that? They're hooked up to the system.

777
MR. SNELSON: A large user of a municipal system is connected to the municipal system, yes.

778
MR. ROGERS: I see. So under your user-pay concept, it's quite appropriate that that large user should pay the costs of that municipality because it's hooked up to that system.

779
MR. SNELSON: Yes.

780
MR. ROGERS: Oh, I see. Notwithstanding the fact that the rate may be unfair because the large user didn't cause many of the costs that are being imposed on it.

781
MR. SNELSON: The LDCs have generally not done their cost-allocation studies yet and it's not clear how well-based the large user rates are of the LDCs in cost allocation at this stage.

782
MR. ROGERS: Yes. But as I understand your evidence here, you're advocating that when this is done by these municipalities, you look to see who's hooked up to their facilities, and who caused the costs to be incurred is of relatively minor importance.

783
MR. SNELSON: Mr. Rogers, let's just take a very simple example.

784
MR. ROGERS: Well, I'd like you to answer my question first.

785
MR. SNELSON: Well, I can't -- the answer to your question is that cost causality isn't the entire issue. I can perhaps explain with the help of an example.

786
MR. ROGERS: Please do.

787
MR. SNELSON: If you have a customer who is connected by a line from a transformer station, then the first customer connected to that line can be said to have caused that cost. The second customer may come along and connect to the same line at a later date. Now, both customers are users of that line. Only the first one caused it but both end up, under normal rate-making processes, paying for it.

788
MR. ROGERS: And that's what we mean by pooling of costs, isn't it?

789
MR. SNELSON: That is one aspect of pooling of costs.

790
MR. ROGERS: Now, under the old Ontario Hydro -- you worked there for many years, didn't you?

791
MR. SNELSON: Twenty-four and a half.


792
MR. ROGERS: And you used to come to the Board and justify the rates, did you not?

793
MR. SNELSON: I was a witness for Ontario Hydro.

794
MR. ROGERS: Under the old Ontario Hydro system, when you had generation, transmission, delivery, all co-mingled together, you would agree that decisions were made about transmission facilities with the whole pool of customers in mind, that is, the efficiency of all the customers in the pool.

795
MR. SNELSON: Decisions on transmission were made for lowest cost, right.

796
MR. ROGERS: On the pooling basis. Costs are all pooled and all customers using the transmission system paid for them.

797
MR. SNELSON: Yes.

798
MR. ROGERS: And I think you'd also agree that the low-voltage system that is so troublesome for us all here now was, in part, constructed by Ontario Hydro as a quasi-transmission facility, to serve a quasi-transmission function, at least cost.

799
MR. SNELSON: Perhaps you can define what you mean by "quasi-transmission."

800
MR. ROGERS: Well, that the low-voltage transmission -- the low-voltage system was put in place, in some significant respect, in lieu of additional transmission facilities.

801
MR. SNELSON: There were times when there were alternatives to provide the service by means of transmission lines, and there were alternatives of providing it by 44 kV lines; in some cases, the transmission line would be chosen and in some cases the 44 kV option would be chosen.

802
MR. ROGERS: Thank you. So the answer to my question would be yes, in some cases, low-voltage facilities were a lower cost substitute for transmission facilities.

803
MR. SNELSON: In some cases, lower cost -- low-voltage facilities were used as an alternative to providing transmission facilities, yes.

804
MR. VLAHOS: Mr. Snelson, I'm sorry, when you do provide an answer, try to look towards us, this way.

805

MR. SNELSON: Thank you.

806
MR. ROGERS: I'll try to throw my voice and try to encourage him.

807
And under your concept, then, of user-pay, you would say that anybody who isn't hooked up to that low-voltage transmission system, even though they were the beneficiaries because the transmission system costs are less, shouldn't pay for it, or help to pay for it.

808
MR. SNELSON: Yes. This is one of a number of cases in the new system where, when you start to divide things up, costs fall a little bit differently to the way they did in the past.

809
MR. ROGERS: In the past, when you worked at Ontario Hydro, these costs were all pooled, the low-voltage and the transmission costs; right?

810
MR. SNELSON: They were pooled and divided up among customers which did not include all customers.

811
MR. VLAHOS: I'm sorry, did not include?

812
MR. SNELSON: All customers.

813
MR. ROGERS: And we've agreed that part of the low-voltage transmission system serves a transmission-type function.

814
MR. SNELSON: No. I've said that in some cases, low-voltage facilities were used instead of transmission facilities.

815
MR. ROGERS: And had transmission facilities been installed instead of low-voltage facilities, the costs would have been higher?

816
MR. SNELSON: That's correct.

817
MR. ROGERS: And those higher costs would be borne by all customers in the system.

818
MR. SNELSON: Yes.

819

MR. ROGERS: Including the AMPCO members you seek now to relieve from obligation to contribute to those costs.

820
MR. SNELSON: Yes.

821
MR. ROGERS: I see. And what we have, then, is a redefinition of the pool.

822
MR. SNELSON: I believe in the new paradigm we have the redefinition of many things with respect to the electricity system, and yes, the concept of the pool no longer exists in the same form.

823
MR. ROGERS: Under your proposition, these costs of the low-voltage system which have benefited all customers will be left to be paid for by a much smaller pool of remaining customers who, by accident, happen to have been hooked up to it.

824
MR. SNELSON: It will be charged to a smaller pool of customers who are connected to that system. And if you mean by "accident" that in many cases or most cases they didn't have a choice, then you're correct.

825
MR. ROGERS: That's what I meant. I meant these customers, who are much like your constituents who are in municipalities, they had no control over the geographic boundaries, just as the customers you want to leave behind -- just as you wish for the customers left behind on the low-voltage system will have to bear the costs. Do you not see the -- isn't that just an inept parallel situation?

826
MR. SNELSON: It's a case of carrying forward, in my view, it's a case of carrying forward thinking that was based on the paradigm of the old Ontario Hydro municipal electric utility structure, carrying that paradigm forward inappropriately into the new marketplace.

827
Under the old paradigm, Ontario Hydro had the responsibility to transmit power to the border of a municipality. Now, very often many of those municipalities were very tiny. You wouldn't consider the line that went to that particular municipality as a transmission line in any physical sense of being towers and 230 kV, 115 kV. It's only considered to be serving what Mr. Rogers wants to call a quasi-transmission function, because it was defined that Ontario Hydro had the responsibility of transmitting power to the boundary of a municipality, no matter how small, and that was then deemed to be transmission. And that way of thinking is no longer relevant to the new marketplace.

828
MR. ROGERS: So you say. Those left behind have a different view of how you handle these costs.

829
Can we just look at your Exhibit J.1.1, page 4, please. And here you've set out this table, Mr. Snelson.

830
MR. SNELSON: There are two tables.


831
MR. ROGERS: I want to discuss the one you discussed with Mr. Fisher.

832
What this shows, among other things, I suppose, is that, as you point out, the cost to embedded direct customers on Networks' system are substantially lower, or at least the rates, I guess, of those customers is substantially lower than similar customers in a local distribution utility.

833
MR. SNELSON: Yes.

834
MR. ROGERS: You also indicated that the charges to your potential AMPCO constituents in various municipalities varies significantly.

835
MR. SNELSON: That is correct.

836
MR. ROGERS: Now, that suggests that the -- and that's true after you unbundle the cost of power, isn't it?

837
MR. SNELSON: The numbers in here are unbundled rates, yes.

838
MR. ROGERS: So that implies one of two things; either the costs of providing that service to your constituents varies greatly from municipality to municipality, or there are different degrees of cross-subsidisation going on within each municipality.

839
MR. SNELSON: I think those are the two alternatives, yes.

840
MR. ROGERS: What is it that you think is the cause of this?

841
MR. SNELSON: I don't think that we'll know until we get to the phase 2 rates submissions of the LDCs, when we have cost-allocation studies.

842
MR. ROGERS: Do you not in your heart of hearts, Mr. Snelson, suspect that there's a lot of cross-subsidy going on, you know, in your AMPCO heart?

843
MR. SNELSON: The one that I have mentioned in response to Mr. -- to the FOCA questions is West Coast Huron.

844
MR. FISHER: Could you speak into the Mike, please.


845
MR. SNELSON: The one I mentioned previously is in relation to West Coast Huron. And in that case, then, there is a significant error in the calculations. But other than that, I don't have the information to be able to say whether or not there is cross-subsidisation within the municipal utilities.

846
MR. ROGERS: The only -- you're saying, then, the only evidence that we have in this whole electricity system in Ontario at the moment about cross-subsidy is in the low-voltage system of Ontario Hydro Networks.

847
MR. SNELSON: No, I don't say that.

848
MR. ROGERS: But that's the only one that you're asking this Board to address.

849
MR. SNELSON: That's the issue that we're taking -- that I'm taking issue with, yes.

850
MR. ROGERS: And would you agree that within Hydro Networks' system, there may be other areas of cross-subsidy which will be revealed as more cost-allocation work is done in the next generation of unbundling, in PBR?

851
MR. SNELSON: I expect that there will be different cost allocations, and to the extent they don't match the revenues with the existing rates, then that would imply cross-subsidisation. And I presume that one of the objectives of setting future rates will be to look at cost allocation.

852
MR. ROGERS: Right. And the customers who will be left behind under your proposal to bear the cost of the low-voltage system, they may be the beneficiaries of some cross-subsidies, might they not?

853
MR. SNELSON: They could be. And now I will point out that I believe the most significantly affected customers with the proposal that we're making are the embedded direct customers, many of whom are also AMPCO members. AMPCO is not a clear winner from this. There are AMPCO members who are large users of the municipal system, and with the proposal I'm talking about, those AMPCO members will avoid a 17-cents-per-kilowatt charge. The embedded direct customers of Hydro One, many of whom are also AMPCO members, will see an increase in their charge from 17 cents to 54 cents.

854
So a large part of this cost shifting will go to the embedded direct customers who are also AMPCO members. This is not an issue between large customers and small customers.

855
MR. ROGERS: Well, I am worried about the AMPCO members, but I know you are so I'm more worried about those that you're not thinking of. And isn't it so that the non- AMPCO members, too, may be cross-subsidising, as Mr. McGee suggested in his question.

856

MR. SNELSON: The other group that benefit from this are the residential and commercial customers -- the other group that benefit from a user-only pool are the residential and commercial customers of all the transmission-connected and substantially transmission-connected utilities. They will see the reduction in -- they will not have to pay this charge if there is a user-only pool. So again it's a question, really, of equity between the transmission-connected utilities and between the Hydro One distribution system and all its customers, residential, commercial, and industrial.

857
MR. ROGERS: Thank you. I want you to answer my question, though, and that is might it not be the case that there are cross-subsidies that are existing now that will encourage the benefit of the low-voltage customers who you want to absorb the cost of the system?

858
MR. SNELSON: When cost-allocation studies are done, then the readjustments to remove cross-subsidies could go either way for any customer class.

859
MR. ROGERS: And would you not concede that there is at least some merit in considering whether it might not be more prudent to wait until all of the cost information is available so that the bulk of the cross-subsidies which may or may not exist in Networks system are complete so that some customers won't be singled out first as the object of this exercise.

860
MR. SNELSON: I think I already gave my answer on why not to delay, both in my direct evidence and also my answers to the questions from Board counsel.

861
MR. ROGERS: I didn't ask you what your recommendation was. But you'd at least concede that it's not unreasonable for someone to hold that view.

862
MR. SNELSON: In terms of setting a rate based on a cost allocation that has been done, even if it's an imperfect cost allocation, then, as I said before, I don't believe it's reasonable to wait unless you think that the result of all the information is likely to bring you back closer to the proposed 17 cents per kilowatt per month for the LV line charge than the 54 or 56 cents per kilowatt per month that would result from charging it on a user-pay basis.

863
MR. ROGERS: But if there were costs -- forget low-voltage for a moment. In the balance of the Networks system which need adjustment in the next phase of this process, those costs might go the other way, might they not?

864
MR. SNELSON: As I've said, they could go either way; they could go up or they could go down.

865
MR. ROGERS: We just don't know at the moment.

866
MR. SNELSON: We don't know.

867
MR. ROGERS: My only point is, and I won't flog this any more, is that the low-voltage customers left behind here, under your proposal, may well be cross-subsidising other customer classes at this very moment but they are going to have to wait for two years until that's sorted out, aren't they?

868
MR. SNELSON: Other re-allocations as a result of further cost-allocation studies will take place in the next hearing that will go either way, and I can't say any more than that.

869
MR. ROGERS: This user-pay concept that you advocate, I understand better now your point of view, the customer that uses the facility, regardless of why it is that he or she or it is on that system, whether they had anything to do with the choice that led them to be hooked up in that way, is irrelevant. If they use it, they pay the cost.

870
MR. SNELSON: That's the straightforward application of the principle, yes.

871
MR. ROGERS: I see. And what would you say about an industrial customer at the very periphery of the Networks' system, who had a line stretching up to a mine up in northern Ontario with a long feeder to it, do you say that they should be responsible for all the costs of that line?

872
MR. SNELSON: In many cases, they have been held responsible for all those costs, yes.

873
MR. ROGERS: So AMPCO advocates somebody like Placer Dome should pay all the costs because of interruption to supply problems.

874
MR. SNELSON: You've made the question somewhat different than the general proposition.

875
MR. ROGERS: No, I haven't.

876
MR. SNELSON: I'm not familiar with the particulars of the Placer Dome supply circumstances.

877
MR. ROGERS: Fair enough, because there may be unique circumstances. But as a general proposition, if a mine exists at the end of a long line and it has problems with interruption of supply that's going to cost a lot of money to improve, user-pay that you advocate says that they alone should pay the cost of it, provided nobody else is using that line.

878
MR. SNELSON: I believe that the Transmission System Code and the Distribution System Code have got laws providing the capital contribution that can be made.

879

MR. ROGERS: Yes, thank you, I'm not interested in that at the moment. I want Mr. Ken Snelson's evidence before this Board and AMPCO's position on user pay. Do you say, under the proposition that I put to you, that that user should pay all of the costs associated with improving the quality of service for that line?

880
MR. SNELSON: First of all, I'm speaking -- giving my technical opinion, it isn't necessarily AMPCO's policy. But generally speaking, customers are being held responsible, in the new regime, for their own connection costs to the system.

881
MR. ROGERS: But any -- would you agree -- are you -- does Ken Snelson say -- I'm not speaking for AMPCO now --

882
MR. VLAHOS: Mr. Rogers, we can't hear you.

883
MR. ROGERS: I'm not asking you to speak for AMPCO just now, Mr. Snelson. But do you, as an expert witness, offering yourself up here as an expert in this case, say that a mine at the end of a long line should be solely responsible for all of the costs of that line, and that none of those costs should be shared with other users who don't use the line?

884
MR. SNELSON: As a general principle, customers are responsible for their connection costs, and I support that.

885
MR. ROGERS: So is the answer to my question yes?

886
MR. SNELSON: Well, you're making it specific with "solely responsible," and the particular circumstances, perhaps, around the Placer Dome situation which I'm not familiar with. So I'm answering the general question that customers are generally responsible for their connection costs to the system.

887
MR. ROGERS: And maintenance costs?

888
MR. SNELSON: To the extent they're not covered by transmission revenues that the customer will pay, yes.

889
MR. ROGERS: Thank you.

890
You don't believe in any special rates, do you, for customers that would deviate from costs?

891
MR. SNELSON: I believe there are circumstances where rates that deviate from cost are justified.

892

MR. ROGERS: So in certain circumstances it's all right to leave the user-pay principle?

893
MR. SNELSON: Can I finish my answer?

894
MR. ROGERS: I'm sorry, I thought you had.

895
MR. SNELSON: I'm sorry, I was going slow for the court reporter.

896
Generally speaking, if the rates deviate from cost-based rates for other public policy reasons, that's primarily a business -- the business of government to make some adjustment in that nature. So, for example, there has been a judgment made that, for certain social reasons, rates to rural customers in low-density areas should not be fully cost-reflective, and there are provisions in place such as rural rate protection to help to correct that perceived inequity. So there are circumstances when rates can deviate from costs. I think it's primarily the business of government to direct that rather than the business of electric utility.

897
MR. ROGERS: And you wouldn't -- are you telling us, then, that you would never recommend to a Board that it imposed special rates for certain customers?

898
MR. FISHER: Mr. Vlahos, we're dealing here with the LV evidence and I think my friend is getting a little too hypothetical and getting away from the evidence provided by Mr. Snelson.

899
MR. ROGERS: Well ...

900
MR. VLAHOS: I do get that from you, too, Mr. Rogers.

901
MR. ROGERS: Very well. It's cross-examination, sir. But the point is, Mr. Snelson -- I'll try to adhere to your direction.

902
The point is that in certain circumstances, it might be acceptable, indeed prudent, to phase in a switch from an old rate to a new rate?

903
MR. SNELSON: Yes.

904
MR. ROGERS: And it might be appropriate in the case of low-voltage rates, for example, to do it in a two-step process?

905
MR. SNELSON: If it's deemed that the impact of doing it in a one-stage process is too large, yes.

906
MR. ROGERS: And that as a matter of principle, you would not disagree if this Board was to conclude that the low-voltage shift that you propose should be deferred until 2004 as a mitigation measure.

907
MR. SNELSON: I think it's important, having had this debate as an active debate of public discussion for over four years, that we come to a conclusion on where we want to get to. Then we can decide, having decided what is the appropriate place to go to, whether we can get there in one step. I don't think it's appropriate to say we're not going to decide this issue now and put off the decision until some future date.

908
MR. ROGERS: I see. Is that the principle that you adopted when you recommended to this Board in the transmission case that large users should have their special rates phased out over a ten-year period?

909
MR. SNELSON: That was based on cost causality only, an entirely different set of arguments. In those cases, the transmission customers who were asking for a phase out of the special rate were on a special rate because they had been initially put on that rate only on the basis that new facilities would not be provided for them. And they are now being asked -- so the old special rate did not require them to pay towards the facilities -- the costs of the facilities they were using; that they were only put on that rate on the basis that they did not cause new facilities. If the new facilities were required, then they would be required to get off. So it was quite a different set of circumstances

910
MR. ROGERS: In other words, you did recommend that, didn't you?

911
MR. SNELSON: Yes.

912
MR. ROGERS: And now you say that was based on cost causality?

913
MR. SNELSON: That was based on cost causality and also on different --

914
MR. ROGERS: The same type of cost causality which I suggested to you gave rise to the low-voltage costs in this case.

915
MR. SNELSON: It's not the same.

916
MR. ROGERS: Different kind of cost causality, is it?

917
MR. SNELSON: The customers who were on these special rates we're talking about, surplus power customers, were there strictly on very -- a very strict basis. They were only connected to the system on the basis that they not require new generation facilities, that they not require new transmission facilities, and in many cases there was a condition there that the load would not exist if the special rate were not provided.

918
MR. ROGERS: Okay.

919
MR. SNELSON: So they were receiving an entirely different category of service in the previous system.

920
MR. ROGERS: Excuse me one moment, please.

921
Mr. Snelson, one last question. You haven't examined any of the other costs in Networks to see whether or not there are any benefits of cross-subsidies being enjoyed by AMPCO members, have you?

922
MR. SNELSON: No, I have not.

923
MR. ROGERS: Thank you. Those are my questions.

924
Thank you, sir.

925
MR. VLAHOS: Thank you, Mr. Rogers.

926
The Board does have some questions of Mr. Snelson.

927
QUESTIONS FROM THE BOARD:

928
MS. ZERKER: My question is having to do with economics, and I wonder if you have any direct or indirect evidence with regard to the economic significance of new, over-5 megawatt customers being put into the T-class or not being put into the T-class.

929
MR. SNELSON: I believe I answered a similar question from one of the previous cross-examiners, and clearly directionally the impact of putting them on a much higher rate would be to discourage investment. The actual magnitude of that effect is quite hard to estimate. It would be very industry-specific.

930
I believe that total electricity costs, on average, of industry is something in the order of 5 per cent of costs. But that obscures the variability. There are some industries where electricity costs may be 30 per cent or higher, and there are some industries where electricity costs might only be 1 or 3 per cent of cost. And so I can't be of any more help than that, I think

931

MS. ZERKER: You said something that I'm not sure about. You said that under the new regime, indeed everything would change. But then you pointed to small utilities. Now, I wonder if you could elaborate on the existence of new -- of small utilities in the new regime and what that -- where your point was about the old regime and the new regime and its impact or its relationship to the smaller utility.

932
MR. SNELSON: Under the old regime, I believe the language of the Power Corporation Act, and I'm not a lawyer, but I believe the language of the Act talked about Ontario Hydro transmitting power to the border of each municipality who wished to join the Ontario Hydro system. And that lends itself towards thinking of anything that delivers power to the border of a municipality as being a transmission system.

933
Now, under that old regime, and I don't know whether this utility still exists but it did five or ten years ago, there was a utility that I believe had about 200 residential customers and two or three commercial customers.

934
MS. ZERKER: Yes.

935
MR. SNELSON: And it's a pretty hard stretch of the imagination to consider what power line supplies that municipality as being a transmission line rather than a distribution line.

936
Now, in the new regime --

937
MS. ZERKER: That's what I want to know.

938
MR. SNELSON: Now, in the new regime, we have a definition of transmission that transmission has to be of systems over 50,000 volts, 50 kV. Now, admittedly this is drawing a line among the gray, right, which I think is one of the problems of this whole business, and that is that it is hard to say with complete certainty and conviction that above this level is only transmission and above -- below this level is only distribution. But we have got a definition and we're working through that as consequences. And what we're talking about is implementing the consequences of that definition.

939
MS. ZERKER: Okay, thank you for that.

940
MR. VLAHOS: Thank you, Dr. Zerker.

941
Mr. Birchenough.

942
MR. BIRCHENOUGH: In one of the examples cited by Mr. Rogers, he asked the question whether a load at the end of a long line actually should pay the total cost of that particular line. I think your answer was that, in general, there were instances where, for social reasons, costs -- actually, rates and revenues derived could be lower than cost-based rates.

943
MR. SNELSON: Yes, I did say that.

944
MR. BIRCHENOUGH: I can think of other instances where there might be reasons other than cost-based rates, and a similar example of where a large load industry that had the option of generating its own power were tying into the transmission submission could cause the owner of the transmission system to go in with lower rates to match the competition of self-generated power. In that particular instance, in your opinion, would it be justified to charge lower cost-based rates?

945
MR. SNELSON: Well, first of all, the transmission company would have to recover at least its incremental costs, the incremental cost of supplying the customer. And there's been debate over many, many years as to incremental cost-based rates versus average cost-based rates. And incremental cost-based rates are generally seen as encouraging economic efficiency but they don't always recover enough money to keep the financial integrity of the utility home. And so there come some very difficult decisions as to where to place a rate in that circumstance between incremental cost and average cost, and that can be quite a difficult issue.

946
MR. VLAHOS: Thank you, Mr. Birchenough.

947
Mr. Snelson, just a couple of questions.

948
You've read the evidence of the applicant and you've been here in the last several days. I get the sense that, in the long run, your objectives as a witness here and the company's as a witness are not different in terms of where you end up on the LV issue. It's a question of timing, how soon you get there, and it's a question of refinement, isn't it, whether the cost-allocation study that is presented in this hearing is adequate to set initial rates. Did I get that right?

949
MR. SNELSON: I don't think that Hydro One -- I've been listening. I don't think that Hydro One has been consistent in accepting that the user-pay approach to the allocation of these costs is appropriate in the long run. I believe that we have heard that at times, but I think we've also had questions from Mr. Rogers saying that other options will be considered at the time.

950
And so I think that essentially I'm recommending that we solve a -- it's a relatively small problem, that we grasp the nettle now and deal with it now rather than put it off and deal with it later.

951
MR. VLAHOS: All right. Your sense is that the user-pay concept has not been espoused by the Hydro witnesses on this specific issue, the LV issue, in the long run.

952
MR. SNELSON: I don't believe they have committed to that.

953
MR. VLAHOS: All right.

954

Just the last area. This T-rate, now, maybe you can use a bit of history if you're aware of this rate, is it a new rate? Is there history behind this rate? What is it? I need some help to understand. I should have asked that question of the Hydro witnesses.

955
MR. SNELSON: Hydro One can correct me if my wrong, and I have a very general understanding of it, I don't have a detailed understanding of it, but I believe that it is a rate for customers who are collected at sub -- what they call subtransmission voltage, and that these customers are less than 5 megawatts. If they were more than 5 megawatts, they would be direct customers. So they have to be less than 5 megawatts.

956
MR. VLAHOS: My question is: Is this a proposed new rate, or has it existed before today?

957
MR. SNELSON: I believe it exists today, but Hydro One can correct me if I'm wrong.

958
MR. VLAHOS: It exists today?

959
MR. ROGERS: Yes, it does.

960
MR. VLAHOS: So the customers are being served in that rate?

961
MR. ROGERS: Yes.

962
MR. VLAHOS: All right.

963
Mr. Snelson, the suggestion -- basically your proposal, any new customers, no need to go to the T-rate, they would simply take advantage of what exists for the other customers.

964
MR. SNELSON: No, that is not my proposal.

965
MR. VLAHOS: It isn't.

966
MR. SNELSON: My proposal is that new customers over 5 megawatts should be allowed to connect to the T-class -- at the embedded customer rate.

967
MR. VLAHOS: Right, I'm sorry.

968

MR. SNELSON: Would not be required to go to the T-class rate. The T-class rate, I don't know how it's designed, I don't know very much about the customers who are on it, but clearly it is designed for customers who are smaller than 5 megawatts. It's not reasonable to require new customers who are over 5 megawatts to connect to that rate. This is a similar situation to the municipal utilities who have different rates for their over-5-megawatt customers to the rates for their under-5 megawatt customers.

969
MR. VLAHOS: I think that's what I meant. I may have misspoke myself. The greater-than-5-megawatt customers should not be forced to go to the T rate, that's the new customers I'm talking about now, but rather go to the large-use customer, because the current T-service rate only serves smaller customers, not greater than 5 megawatts.

970
MR. SNELSON: That's correct.

971
MR. VLAHOS: And it's a lot more expensive rate.

972
MR. SNELSON: It's a more expensive rate.

973
MR. VLAHOS: Do you happen to know how long this rate has been in existence, Mr. Rogers?

974
MR. ROGERS: I don't know, but I can find out if you give me a moment, sir.

975
If I go back to Mr. Snelson's day, I'll find out. Excuse me.

976
Its origins are lost in the mist of antiquity. It's been around for a long time, I think.

977
MR. VLAHOS: I guess I was wondering. Perhaps I can go into the evidence. But usually when there's a rate, there's a description around the rate as to qualification -- who qualifies for this rate. There may be a minimum/maximum volume. I'm just wondering whether there's anything like this in this T-rate.

978
MR. ROGERS: Can I help? I might be able to help more. I have a filing which -- it has been filed with the Board, and I have extra copies today, containing all of these rates. This T-rate is included in the package. And it -- can we maybe --

979
MR. VLAHOS: That's fine. My assumption is that nothing will prohibit Hydro One to attach a new customer over 5 megawatts to the T-service rate. Nothing there in the description of the rate that would prohibit that.

980
MR. ROGERS: No, not as I reed it. Do you want the definition, or would you rather look at it yourself?

981
MR. VLAHOS: It's somewhere in the evidence so we can look it up. Thank you for that.


982
Mr. Snelson, one last question. This business about the use of the rate handbook, and you spoke to it a couple of times, you've framed it as this is an unbundling exercise, i.e., a revenue unbundling exercise, and the cost allocation might as well follow it in due course, and you were referring to the former MEUs, current LDCs. But the LV issue is something that is not necessarily contemplated in the handbook and therefore it should be a fresh treatment, a fresh approach to the LV as to what we do with it.

983
MR. SNELSON: I agree with that, it is not covered in the handbook. I was merely making the point that rates that are based on cost allocation generally have a better basis than rates that are based on some other basis; and that this LV rate that we would get by taking the cost allocation to LV facilities and dividing it by the use of LV facilities is a cost allocation-based rate, whereas all the other rates that have been determined as a result of the rate handbook are really determined through revenue allocation, with the assumption that revenue allocation is a good proxy for cost allocation.

984
MR. VLAHOS: So the -- as rough as the cost allocation may be, that's the best we have.

985
MR. SNELSON: Yes, and it is a cost allocation.

986
MR. VLAHOS: All right. And so if one cannot use the handbook as a guide, is there anything else in the Board's work in the last while that the Board can go to for some assistance, some precedence? For example, the transmission rates proceeding, is there anything that the Board can use from that proceeding?

987
MR. SNELSON: I don't know. But my impression is, and I'm drawing on sort of a memory here of the rate handbook, that the rate handbook does, I believe, have language saying that if you have cost allocation, it is better than going with a revenue allocation.

988
MR. VLAHOS: But in terms of the principle of allocation, the principles of allocating costs and design rates, is there anything in the transmission rates proceeding that would give some lessons to the Board in addressing the issues with respect to the low-voltage?

989
MR. SNELSON: I can't point you to anything specific. There is an enormous literature around cost-allocation practices and methods. And the Board obviously has to deal with cost allocation in many different rate hearings, some for gas utilities as well as electric utilities.

990
MR. VLAHOS: I was thinking more in line as to what the Board may have decided as to gross versus net, for example, who is responsible -- you know, if I have proposed some costs some time ago, do I continue to be responsible?

991

MR. SNELSON: Well, I think that directionally, the Board has moved substantially in the direction of user-pay for connection facilities, both line connection and transformation connection, and that the Board has set rates for both transformation connection and a line connection that are to be charged only to the users of line connections and transformation connections, and customers who are served directly from the network and on their own transformation wouldn't be liable for those connection charges. And I see that as having directionally -- not necessarily the same direction, but being in the same direction as making the users of facilities, users of transmission-connection facilities, pay for them rather than pooling them with all customers.

992
MR. VLAHOS: So you see this LV issue closer to the connection issues that we addressed in that hearing as opposed to the transmission grid issue?

993
MR. SNELSON: The grid issue, there was no question that in the grid that can't be separated, that all users are -- all electricity customers are users of the grid. And in the transmission connection and the line connection, an attempt was made to say these are the users of these facilities and these are the ones that should pay for them. And I see the proposal we have made with respect to the low-voltage facilities as being similar to that.

994
MR. VLAHOS: Okay. Those are the Board's questions.

995
Mr. Fisher, any redirect? I apologise. We have gone over the time, but that's not to say that you cannot take the time that you need.

996
MR. FISHER: Thank you, Mr. Vlahos. I just have one area.

997
RE-EXAMINATION BY MR. FISHER:

998
MR. FISHER: Mr. Snelson, Mr. Rogers was asking you about the benefits of using LV facilities in lieu of transmission facilities and how that minimised or made a lower overall pool cost to the consumers.

999
In the Hydro One proposal, if a transmission-connected LDC is charged for LV costs based on the 1999 revenues, and there's a large user within that LDC who becomes a wholesale customer and hence leaves, what is going to be the impact of that sort of abandoned cost that the LDC will absorb on its residential customers versus the retail customers of Hydro One distribution?

1000
MR. SNELSON: I don't think you could answer that question specifically with numbers. But my understanding is that in some utilities, the transmission-connected large users are a significant proportion of the load of that municipality and so if that transmission-connected large user leaves, then it would end up with the charge for LV facilities being charged by Hydro One, based on 1999 loads, including the transmission-connected large user, but being paid by the remaining customers of that utility, a smaller pool, presumably at a higher rate.

1001

Unless this Board were to direct that the LDC, in passing on its costs for LV charges, can also charge its ex-customers as well as its current customers, which of course raises all sorts of interesting possibilities. And by dividing the costs among a smaller pool, then presumably you could end up with a higher impact.

1002
MR. FISHER: And what about the retail customers of Hydro One distribution?

1003
MR. SNELSON: I don't believe it would affect the retail customers of Hydro One distribution in addition to the impact that we've already talked to.

1004
MR. FISHER: Thank you.

1005
MR. VLAHOS: Is that it, Mr. Fisher?

1006
MR. FISHER: That's it.

1007
MR. VLAHOS: Okay, thank you.

1008
Mr. Snelson, thank you very much. You're excused.

1009
Any other matters before we adjourn? So we are adjourned until 10:00 on Monday, and again a reminder that Monday will be a full day, 10:00 to whatever it takes. But hopefully not after 5.

1010
--- Whereupon the hearing adjourned at 1:17 p.m.